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Blockchain answers, part 3: can blockchain assist in the fight against financial crime?

A man talks on the phone in his office (top L) at Greece's Ministry of Foreign Affairs as the Greek parliament is reflected on the building in Athens March 12, 2015. Greece has promised its lenders to reform its state sector, to implement labour reforms, such as opening up closed professions, to make its economy more competitive, improve its tax administration and fight tax evasion and corruption, which have been widely blamed for the debt crisis. REUTERS/Yannis Behrakis (GREECE - Tags: POLITICS BUSINESS TPX IMAGES OF THE DAY) - RTR4T504
REUTERS/Yannis Behrakis

The race is on to harness the power of blockchain. In the final part of our series, we consider its potential role in the fight against crime and examine the outlook for this FinTech phenomenon.

The potential for blockchain to help understand global transactions in real-time could prove to be invaluable for regulators as well as financial institutions.

The way that the distributed ledger technology works means institutions would potentially be able to address regulatory requirements around financial crime, such as Know Your Customer (KYC), Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT) and Politically Exposed Persons (PEPs).

For other industries as well, blockchain introduces transparency at every stage of the supply chain by revealing the provenance of each component to everyone involved.

This could drastically reduce fraud and simplify all the paper documentation from invoices through to warehouse receipts and letters of credit.


Single client view

Blockchain’s ability to provide a centralized store of data or information has led the financial services sector to explore the use of this technology for meeting their KYC, AML, CFT and PEP requirements.

For financial institutions that operate across multiple entities and jurisdictions, the possibility to create a single view of each client is blockchain’s most attractive feature.

Blockchain could avoid the fragmentation and duplication of due diligence data by recording customer data centrally, and then making this record available across the entire organization.

Deutsche Bank told the European Securities and Markets Authority that there is scope for the technology to be deployed by banks to secure and to meet regulatory requirements on KYC and AML registries and surveillance.

Goldman Sachs added: “Counterparty risk, if processing times improve, can be near instantaneous, allowing accurate, in real-time, feedback on risks and exposures.”

In the UK, the Financial Conduct Authority is engaged in discussions with government and industry about whether blockchain technology can help firms meet KYC and AML requirements “more efficiently and effectively”.

Digital passport

Commodity markets, trade finance and supply chains could also benefit from blockchain technology.

In a world where supply chains are increasingly becoming a complex three-dimensional web, organizations need to ensure that they are not exposed to risk by having their supply chain tainted by modern day slavery or financial crime.

The diamond trade, for instance, is a market highly susceptible to criminal activity as gems are small and easy to transport in a covert manner and transactions tend to be confidential.

Diamonds also retain their value for many years, which means they can be involved in money laundering and terrorist financing on a global scale.

Leanne Kemp, chief executive of Everledger, believes that by providing a digital passport for each diamond, blockchain potentially reduces fraud by making attribution more efficient.


Nimble start-ups

Anju Patwardhan, Global Chief Innovation Officer at Standard Chartered Bank, believes that trade finance has traditionally been a paper-intensive process but that blockchain technology can digitise and authenticate records.

She added: “This can result in trade transactions that are secure with digital records of related data visible to various participants in the trade transaction.”

Historically dominated by banks, trade finance is an attractive business that is changing rapidly. Accenture foresees that nimble start-ups “will probably be the first to leverage blockchain technology for trade finance, further adding to the threat for traditional banks.”

Fluent, one of these FinTech startups, recently received funding from Thomson Reuters. It developed a custom-built federated blockchain for financial institutions and global enterprises.

Its solutions and applications on the network are designed to increase efficiency, provide flexibility, and enhance collaboration across global supply chains.

Blockchain outlook

Although blockchain’s potential in KYC is vast, so is the uncertainty in the early days of this technology.

The full extent of the ripple effect of its application is yet to be understood, as well as its long-term resiliency to coordinated cyber attacks, or how it could be abused to launder money by organized crime groups or terrorist organizations.

Marcelo Garcia Casil, chief executive of DXMarkets, said that even if the technology could soon be applied for know your customer purposes, he doesn’t foresee its use in KYC in the coming years as the required changes to regulation will take some time.

PwC adds that “distributed ledger technologies are so new, so complex, and evolving so rapidly that it’s difficult to predict what form they will ultimately take — or even to be sure they will work”.

In the meantime, how can financial institutions and corporates leverage existing FinTech solutions to address the challenges inherent with the onboarding process?

Alternative solutions

Until blockchain technology matures and the regulatory environment advances, the best option for market participants is to upgrade existing legacy systems and automate manual KYC processes.

Thomson Reuters provides a suite of Risk Management Solutions that facilitates compliance with regulatory demands by offering detailed background checks, screening for heightened risk individuals and entities, as well as the automating of the onboarding of new clients with ongoing refresh cycles.

Can a managed service be the answer to KYC?

One of our solutions is  KYC as a Service, a managed service that by one estimate can cut internal KYC costs by 30-40%. At the core of KYC as a Service is the Thomson Reuters Permanent Identifier (PermID), a machine readable, 64 bit number used to create a permanent and unique identifier.

According to Phil Cotter, Managing Director Risk, if a particular individual “has been involved in money laundering activities in the past; his PermID — unchanging and unique to him — will guarantee that a bank has identified the correct person, despite the many millions of people with that name.”

And with an increased regulatory focus on Ultimate Beneficial Owner, the same is true of organizations: by mapping PermID to the parent organization and its whole supply chain, previously hidden linkages between organizations can be revealed, understood and acted on.

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