Fraud is an age-old problem that has plagued every industry since businesses began trading. It takes many forms and guises and is a constantly evolving threat, as the perpetrators adapt to the ever-changing business environment they seek to disrupt. Perhaps
one of the most well-known examples of fraud is money laundering.
On one end of the spectrum, money laundering involves small-time criminals, constantly on the lookout for genuine businesses to pump money through, who pollute the hard-work and money of legitimate businesspeople to hide their own criminality.
On the other end white collar criminals, from major fraudsters through to sanction-busting oligarchs, use the major banks of the world alongside credible auction-houses and brokerages to hide their money. Their actions, whilst they are no less devastating,
have a different impact. They have the capacity to severely damage our trust in global institutions.
This effect has become all too real a prospect in the aftermath of the leak of the so-called FinCen files. This leak makes it clear that large, and even systemically important banks have been drawn into money laundering that has infiltrated every industry
from financial services to Premier League football.
Now it is clear across all these different sectors of the economy, and across the broad spectrum of activities that constitute money laundering, that action is needed. True digitization of the financial services is the way forward. Investing in legacy systems
to bring much needed transparency and consistency will allow financial institutions and governments to take swift action, both to prevent money laundering from happening in the first place and to identify its source.
One such technology which is ideally suited to enable cross-industry fraud prevention is blockchain. The transparency inherent to distributed ledger technology means that you can decentralize the regulatory function, with every participant within a ledger
able to review the actions of other users, and flag suspicious transactions. In sectors where there is a regulatory body, they become far less obtrusive in their actions as the regulator can be included as a node on the ledger, able to review all transactions
in real-time without having to slow processes up. Or, when irregularities are detected, can act swiftly instead of weeks or months down the line when filings are made. Shortening this time can be all the difference when the whole point of money laundering
is to move money quickly and efficiently through a system, obscuring where it came from in the first place.
Alongside the regulatory benefits of digital transformation of legacy systems, digitization can also reduce the risk of physical assets used for laundering money. Distributed ledger technology is one way of enabling financial institutions to intercept suspicious
transactions, provide a guarantee of the provenance of capital entering into a system, as well as track assets through tokenization. With tokenization, the asset can be represented on a ledger allowing for a fully transparent record of its provenance available
to anyone interested in procuring it.
Furthermore, just as with the addition of regulators into the ledger via a node, this sort of tokenization is entirely unobtrusive when it comes to the processing of a transaction, and is likely faster, in comparison to the sort of verification that would
be required currently by legacy AML systems.
Money laundering, and the criminals that perpetrate it, continue to become increasingly sophisticated. The best way for us to fight this evolving threat is by harnessing state of the art technology, more sophisticated than that of the criminals. Genuine
digital transformation of trade fraud systems is vital in this fight. New technologies enable our financial services to ensure frictionless, consistent, transparent verification, both of the origin of funds and the ownership of assets. The honesty that technologies
such as blockchain provide are an invaluable asset in the fight against money laundering. The fraud we are fighting has levelled up – it’s time our AML systems did too.