The growth of technology and the global market has led to improvements in business operations, but it has also enabled digital financial crimes such as money laundering. The amount of money laundered globally is estimated to be around $2 trillion each year, which is nearly the same as the GDP of Italy, the 8th largest economy in the world. To combat this, financial institutions spend a significant amount of money, between $900 million and $1.3 billion each year, to improve and manage their KYC and AML processes. However, these processes can be slow and manual, which can negatively impact the relationship between financial institutions and their clients as it slows down their business operations. It will be interesting to see how blockchain will block money laundering.
Money laundering is the process of making illegally-gained proceeds (i.e. “dirty money”) appear legal (i.e. “clean”). It typically involves three steps: placement, layering, and integration.
Money laundering is a serious crime that is often associated with organized crime, corruption, and terrorist financing. It allows criminals to profit from their illegal activities and undermines the integrity of the financial system. Money laundering can be done in a variety of ways. One of the easiest methods is to make the illegal funds appear as legitimate business sales, as long as the amount is not excessively large. Other ways to launder money include:
Blockchain technology has features that can potentially prevent money laundering. Because every transaction on a blockchain leaves a permanent and unchangeable record, it makes it easier for authorities to trace the origin of the funds.
A public blockchain ledger can oversee, validate, and document the entire history of each transaction. Anyone who can access the public ledger, including crypto miners, will be immediately informed of the transactions as they happen. If any aspect of the transaction, such as the destination wallet, departure wallet, currency type, and amount, is not verified, the transaction will be immediately blocked. Additionally, blockchain allows for the analysis and reporting of money laundering risks, and it enables the monitoring of the entire system, not just specific entry and exit points.
Blockchain technology has several potential use cases in Anti-Money Laundering (AML) efforts. These include:
In summary, Blockchain technology is being seen as a way to reduce regulatory risks and fines associated with inadequate or delayed KYC due diligence. Blockchain can support financial institutions in administrative KYC processes required for business and individual accounts, cross-border payments, and large financial transactions. The use of a blockchain-based platform can significantly reduce the expenses associated with AML departments which tend to increase year on year.
Co- founder at Ecosleek Tech Research and Branding at MythX. Talks about #gaming, #metaverse, #blockchain, and #softwaredevelopment
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