11 January 2018, edited By Floyd DCosta, Co-Founder at Blockchain Wor

Review by Bachir El Nakib (CAMS), Senior Consultant Compliance Alert LLC 

The global impact of money laundering is staggering; with related transactions estimated at 2 to 5% of global GDP – amounting to up to $2 trillion. The IMF defines money laundering as a process of conducting financial transactions in a manner that obscures the link between funds and their origin. However, money laundering is more than just a financial crime – performed by criminals and terrorists to finance their illegal activities, it not only hampers the global economy but also poses a threat to security.

Even though anti-money laundering (AML) solutions and regulations are in place across the world, less than 1% of illicit financial flows are currently seized by authorities due to the complex nature of the activity. Global spend on AML compliance is expected to cross $8 billion by 2017, but countries as well as financial institutions are unable to enforce these policies effectively enough to plug the holes in their systems.

Could the blockchain concept, in its extended application – more precisely, distributed ledgers, do better?

Sure there are some big breakthrough cases and record penalties inflicted on some of the world’s largest financial institutions. But these cases are the products of painstaking detective work undertaken over a long period of time and often involving insiders / whistle-blowers. Despite the AML controls that must be complied with and exemplary punishments, global money laundering flows are estimated to be as high as 5% of the world’s GDP – just over $2 trillion.

Critics claim that Anti-Money Laundering (AML) rules and regulations are outdated and pretty much ineffective. The approach favoured by regulators is to encourage banks and other financial entities to hire more people and invest more money to implement AML controls and impose penalties. Yet the effectiveness of these controls has never been empirically established. No serious studies have been undertaken to determine the results these procedures produce. 

A blockchain is essentially a database that records transactions of companies/institutions. For example, all transactions made by Company A are grouped together into a ‘block’ and these are ordered chronologically to form a blockchain. This allows blockchains to be used like a ledger, which can be shared and corroborated by anyone with the appropriate permissions. Once the information contained in a Blockchain is verified it cannot be changed, only updated. It essentially provides users with a digital public record of Bitcoin transactions (the digital currency through which these transactions are conducted) that have been executed by a particular entity. It is inherently difficult for hackers to manipulate. Copies of the Blockchain are distributed across potentially thousands of participants in the database, meaning that the hackers would have to individually access and manipulate every single copy of the distributed Blockchain. The certainty this creates is hugely beneficial to regulators, banks or law enforcement agencies because they can instantaneously verify the credentials of parties involved in a transaction and identify any discrepancies in the information. Not only is this cost-effective, but it enables regulators to quickly target criminal activity.

It’s clear that traditional AML solutions are unable to keep pace with the growing volume and complexity of financial transactions that need to be monitored for laundering activities. Meanwhile, money launderers are constantly discovering more innovative ways to conduct illicit financial transactions, while the institutions attempt to catch up with these increasingly sophisticated criminals. The need of the hour is an innovative technology which can combat money laundering in a scalable, cost-effective and comprehensive manner.

Challenges of Existing AML Solutions

Aging AML solutions are inadequate to meet today’s business challenges and are unprepared for tomorrow’s needs. The existing transaction monitoring systems, based on traditional technology, are unable to keep pace with the growing wave of new digital financial services, including cryptocurrencies. Criminals have begun leveraging these emerging channels for their money laundering activities, making it even harder for authorities to trace them.

Unlike traditional financial transactions that require financial institutions as intermediaries, crypto and other digital routes are faster, encrypted for greater security, often anonymous and in most parts of the world, remain unregulated by governments till date. Existing AML solutions are not equipped to investigate these highly encrypted and P2P forms of financial transactions yet.

Secondly, most AML efforts that are currently implemented are highly individualistic in nature, with each financial institution deploying its own solution and every country having its own laws to prevent money laundering. There is also not enough standardization and the lack of collaboration makes money laundering more challenging to detect and act against.

Rising globalization has caused an exponential increase in cross-border financial transactions. The volume and complexity of financial transactions have increased manifold. Without automation, end-to-end analytics and limited visualization capabilities, traditional transaction monitoring tools and solutions are being rendered ineffective. 

Blockchain for AML Transaction Monitoring

Blockchain is essentially a cryptographic ledger comprising of a digital log of transactions which can be shared across a public or private network. The technology, by its very nature, lends itself to integrated decentralized monitoring efforts of financial transactions.

An anti-money laundering system built on the blockchain can leverage the cryptographically secure, decentralized and immutable nature of the technology to identify and stop suspicious transactions effectively. A distributed blockchain-based system using ‘smart-contracts’ with inbuilt algorithms, will allow financial institutions to securely parse data through an AML engine on the blockchain; with the automation providing high efficiency and ensuring minimum friction.

Each financial institution which would be part of this system would serve as a node within the private permissioned blockchain network, and would use the network directory and smart contracts to record transactions on the blockchain.

Since relevant information would be stored in the blockchain and be made available to each node, suspicious activity can be detected and highlighted to all related participants. Alerts can then be issued to stakeholders and the transaction can automatically be flagged and stopped for further investigation. The blockchain network is immediately updated with the record of such an alert in an immutable and tamper-proof manner.


A blockchain-based AML platform makes it possible for regulatory authorities, risk officers, auditors and other relevant stakeholders to monitor complex transactions in an automated and effective manner, as well as immutably record audit trails of suspicious transactions across the system.

The design of the blockchain can ensure compliance with data sovereignty laws while complementing existing legacy AML solutions, enhancing their effectiveness by adding an additional layer of scrutiny and visibility. The overall platform based on blockchain can be used by participating financial institutions to instantly alert each other about any potentially fraudulent transactions and flag them for further investigation.

Getting started – harnessing the potential of Blockchain for AML transaction monitoring

Any risk executive looking to harness the potential of blockchain for AML within a financial institution, auditory or regulatory authority should consider the following methodology to get started: 

1.Understand application of Blockchain for AML and secure executive sponsorship – Before embarking on a blockchain project, it is imperative to get a good understanding of distributed ledger technology and how it can be leveraged for AML transaction monitoring. 

2. Form a working group, validate hypothesis and design a PoC engagement to get started with – Identify a core team with representation from across stakeholder groups to collaboratively work on the initiative. Engage external experts to form a well-rounded and well-informed team. 

3.  On-board participants and kick-off the project – Set up a lab-like environment. Start small. Begin with a few select cases/red flag triggers that can be showcased to a wider audience to highlight benefits and prime adoption. 

4. Develop the prototype for select use cases – Use the experimental environment and a technical team to set up the blockchain network, develop the application and deploy the smart contracts. 

5.  Evaluate the prototype(s) and pick the ones most promising for mainstream deployment – Once the prototype(s) are developed, tested rigorously by the team and validated by the stakeholders, select winners that can be adopted and piloted on an enterprise-wide level. 

Considerations for Mainstream Deployment of Blockchain-based AML Solution

 The technology is still in its early days and use cases exploring the potential of blockchain are isolated and limited. However, to truly realize their potential, implementations of blockchain based solutions for AML need to be integrated into the core IT landscape within each participating institution.

If deployed within a bank to connect its various globally dispersed branches, the decentralized system will complement existing legacy AML applications and add an extra ring of scrutiny and visibility.

Leveraging a blockchain platform for AML nationwide or across a geographical region will give regulators, auditors and other stakeholders an effective and powerful set of tools to monitor complex transactions and immutably record the audit trail of suspicious transactions across the system. However, this will need cross-industry participation and require buy-in from leaders across regulatory authorities as well as the participating banks and other financial institutions.

Either way, it’s only a matter of time before financial institutions and regulators adopt distributed ledger technology to connect, gain visibility and collaboratively prevent money laundering. 

Fintech’s role in preventing money laundering is also interesting from a commercial perspective. Failing to adequately maintain AML procedures can be hugely costly businesses, for example, Deutsche Bank was recently fined £163m for such non-compliance. But maintaining AML processes are also incredibly expensive for companies and the checks required are often lengthy (Know Your Customer requests can often take up to fifty days to complete to a satisfactory level). The speed and ease that Blockchain allows participants to obtain information has the potential to reduce costs and delays (e.g. to transactions) and, given the wide distribution of the data, diminishes the likelihood of banks duplicating their efforts to track and verify information.


It is evident that in an increasingly digital commercial landscape, the role that platforms such as Blockchain will play in facilitating AML procedures is an inevitability rather than a possibility. The efficiency and transparency with which discrepancies concerning client data can be detected should be commended. The recent alleged involvement of major UK banks such as HSBC, RBS and Barclays in a Russian scam concerning the movement of approximately £65m highlights that any Fintech developments that can help to expose other crimes of a similar nature should be endorsed. However convincing more cautious companies to engage with this technology in the knowledge that their sensitive transactional information is distributed so openly is a major challenge. Finally, whilst there are hundreds of different Blockchain networks, protocols and cryptocurrencies available, the benefits of Blockchain are partially undermined until standardisation can be achieved, as different networks will not be able to communicate with each other simultaneously. Though perhaps idealistic, achieving standardisation and resolving privacy concerns will be key to Blockchain’s long term success.



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