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.

• Placement is the initial stage of money laundering, in which the illicit funds are introduced into the financial system. This can be done through a variety of methods, such as depositing cash into a bank account or purchasing high-value items.
• Layering is the second stage, in which the funds are moved around in a complex web of transactions designed to confuse authorities and make the money difficult to trace. This can include transferring money between accounts, investing in various businesses, and purchasing assets.
• Integration is the final stage, in which the laundered funds are put back into the economy so they can be used without detection. This can include using the money to purchase real estate, businesses, or other assets.

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:

• Secretly moving large amounts of cash across borders
• Paying employees with illegal funds
• Using gambling, especially in cricket, as a cover
• Manipulating international trade transactions
• Re-investing money back into the country using shell companies or trusts.

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:

• Opening a bank account: Blockchain can be used to verify an individual’s identity and conduct KYC (Know Your Customer) due diligence to determine any terrorism or money-laundering risks when opening a bank account. This can eliminate data silos, improve risk classification, and provide time-stamped records.
• Loan application: KYC is crucial in the loan application process to ensure creditworthiness, and evaluate money laundering and financial crime risks. Blockchain ledgers can allow various departments within financial institutions to quickly access the customer’s records and complete the loan application process.
• KYC remediation: Financial institutions can use blockchain to avoid having to ask existing customers to share their documents for KYC remediation again. Blockchain ledger can store all the required documents, data, actions, and analysis. An automated KYC remediation process can extract license expiration dates and auto-send reminders to the customer to upload newly updated documents.

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.