There is no doubt the cost for anti-money laundering compliance is increasing at an exponential rate. Financial crime is becoming highly sophisticated while the global banking ecosystem and regulators are playing catch-up to technology.

The purpose of this blog is to highlight the challenges facing the banking industry in combating financial crime. It offers a discussion on the effectiveness of the efficiencies banks are building into their anti-money laundering processes, including the social implications of some of the drastic measures taken.

The article discusses solutions blockchain technologies offers to anti-money laundering compliance as it begins to transform the banking industry and highlights some of the friction delaying its world-wide acceptance.

What is the estimated volume of money laundering globally?

The International Monetary Fund (IMF) and the United Nations Office on Drugs and Crime (UNODC) estimate the global volume of money laundering at approximately US$ 2 trillion annually. To put matters into perspective, the IMF is projecting Canada’s GDP to be $1.5 trillion in 2016. In fact, the collective GDP of the lower performing 117 countries is $1.9 trillion. [Source]

How successful is the fight against money laundering?

Unfortunately, in spite of tremendous global coordination efforts by the Financial Action Task Force (FATF) on money laundering since its establishment in 1989, less than 1% of the global volume is detected according to the UN. This is a grave concern to the stability and security of the global financial system.

How much is it costing financial institutions?

Financial institutions are under increasing pressure to comply with pertinent regulations for preventing and detecting suspicious transactions. Regulators across the globe have raised compliance expectations as laws continue to be tightened to combat money laundering.

According to Goldman Sachs, annual compliance spend on AML is in the region of US$10 billion in 2014 compared to US$7 billion in 2009. In addition, regulatory penalties have increased ten fold since 2009 to over US$8 billion annually. All these procedures have also substantially increased the turn-around time for customer onboarding.

What are financial institutions doing the manage compliance costs?

There is an overwhelming need for financial institutions to find greater efficiency and effectiveness. However, implementation of stringent customer onboarding, account monitoring and reporting is a highly manual process requiring specialized skills. Financial institutions are continuously finding ways to adopt new technologies and streamline their respective processes.

And what about the negative social impact?

Financial institutions are also increasingly taking drastic steps towards ending long-term relationships with their corresponding banking partners and customers deemed high risk as part of their “de-risking” strategies. This wholesale process is taking place without fully appreciating the social impact it would have on the lives of the people, especially in the developing countries who rely on remittances through these financial institutions for their most pressing needs including food, water, shelter, education and healthcare funding.

What really is the root cause for these ever increasing compliance costs and social turmoil?

The root cause however lies in the fact that the financial system and regulations are antiquated and out of sync with today’s sophistication of financial crime and technological opportunities. Furthermore, the data quality can be poor increasing cost for investigation of false positives.

  1. Antiquated regulations Financial institutions are required by law to individually perform thorough customer due diligence and know your customer on-boarding procedures. However, these vetting procedures are already performed by another bank where the customer may have an account. This lack of data sharing between banks leads to duplication of efforts contributing to significant costs and time delays.
  2. Data quality Furthermore, although today’s transaction monitoring software have intelligent behavioural algorithms to detect suspicious transactions, a significant amount of time is spent by compliance experts to manually review such transactions to determine whether money laundering has actually occurred. The rate of false positive is in the region of 99%.The problem may not be with the monitoring software but more likely to do with the quality of data that is being reviewed. Data tends to have missing and/or incomplete information or errors and therefore reconciliation efforts is time consuming, onerous and very costly
Can the internet provide a win-win-win solution?

The internet is a tool primarily for online communication where information is readily available. But here lies the problem; if one wants to send an asset via the world-wide web, identities between the two parties in a transaction have to be authenticated and record keeping should be complete, accurate and secured.

The transfer of value has thus far been within the domain of traditional financial intermediaries like banks, in an inefficient, insecure and highly costly manner. Furthermore, extensive risk aversion has locked out tens of millions of individuals and small businesses from the banking system.

What is Blockchain technology?

It can be described as an ‘internet of value’.  It is a new digital medium where assets e.g. money, shares, title deeds, music, art, intellectual property and anything that has tangible value can be moved, stored and managed securely and privately. Trust is not established though a financial intermediary, but is based on protecting proof of transaction records through highly sophisticated encryption.

Blockchain is synonymous to a digital ledger of accounts, database or even a clearing house that is not stored in one place but across tens of thousands of computers around the globe. Everyone authorized in the network has real time access to an up to date version of the ledger, ensuring transparency and collaboration.

How can a shared Blockchain-based registry transform AML compliance?

There are three distinct areas:

  1. Real time and encrypted updates to customer account information, considerably reducing false positive rates
  2. Shared and secured database of customer records and the compliance activities undertaken. This can reduce duplication in customer onboarding and limit manual intervention
  3. Maintenance of audit trail of records allowing financial institutions and regulators to work more effectively

Goldman Sachs estimates Blockchain technology could drive substantial cost savings between US$ 3-5 billion annually by reducing compliance personnel, technology expenses and AML penalties as well as substantially increase capture rates.

So is blockchain a reality? 

The use of blockchain technologies is growing but it will take time for its widespread adoption. The technology is rapidly evolving, challenges are significant and no one knows with absolute certainty what will occur in the future with respect to blockchain related technologies.

Some of the key areas affecting its widespread adoption is data privacy and security, globally acceptable technical standards for implementation of multiple blockchains, regulatory acceptance, speed and performance.

However, we see encouraging collaboration and consensus building between technologists, incumbent banks, subject matter experts and regulators towards developing the next generation financial ecosystem that will enhance equitable trust, efficiency and inclusiveness.

Blockchain technology will significantly reduce the risk of illicit money entering the global financial system and ultimately drive economic growth.


This post has been written by members of Securefact’s AML Advisory and Financial Crime Risk Management division, consisting of industry experts, committed to managing your Financial Crime Risks and ensuring that you are compliant with the latest AML regulatory requirements. 

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