blockchain, AML and KYC

Blockchain in AML and KYC Verification: Importance and Functions

While technological development and globalization have improved business operations, money laundering and other digital financial crimes have also benefited from these developments. Around $2 trillion per year is thought to be laundered around the world. This sum is nearly equal to Italy’s entire GDP, the eighth-largest economy in the world. Several banks annually invest between $900 million and $1.3 billion to manage and enhance their AML and KYC procedures. The benefits of implementing blockchain in AML/KYC are covered in the article, along with how it helps solve the problem of money laundering and streamlines the KYC procedure.

Money Laundering: What Is It?

Making large sums of money through criminal activity, such as funding for terrorism or drug trafficking, is known as money laundering. Money laundering can be done in many different ways. The simplest method provided the amount is within a reasonable range of expectation, is to record these illicit earnings as sales by a legitimate business. Other ways to launder money include:

  • mass smuggling of cash
  • racial wages
  • Cricket wagering
  • Laundering based on trade
  • Round tripping

Why is KYC a crucial component of AML?

To evaluate customer risks and adhere to AML regulations, KYC (Know Your Customer) is a crucial function. Customers’ identities, threats they pose, and financial activities are all included in KYC. Any company or financial institution must take the following actions for KYC:

  • Identifying the customer
  • examine customer behavior
  • Analyze the potential for money laundering associated with each customer

By storing data and information about KYC and AML on a decentralized ledger, creating a blockchain-enabled AML/KYC platform can streamline AML/KYC procedures. The information entered into a blockchain ledger cannot be changed or deleted and is always visible to all network participants. AML/KYC data management on the blockchain can therefore aid financial organizations in maintaining data smoothly.

Blockchain: Can it stop money laundering?

The inherent properties of blockchain technology have the potential to stop money laundering. Every transaction carried out over the blockchain leaves a permanent paper trail of records that cannot be changed. As a result, it is simpler for the authorities to find the money’s original source.

Each transaction’s full history can be monitored, verified, and recorded in a public blockchain ledger. Crypto miners and readers of the public ledger are alerted as soon as a transaction takes place. The transaction is immediately blocked if any of the transaction phases—including the destination wallet, departure wallet, currency type, and amount—are left unverified. Analysis of money laundering risk and reporting mechanisms are also made possible by blockchain. It enables system-wide analysis as opposed to just focusing on entry and exit points. These are some of the benefits-

Unchangeable ledger for regulatory monitoring

In a decentralized network, the Blockchain requires each user or node to validate changes. The network is extremely secure thanks to this feature. Each node maintains a copy of the entire ledger and is capable of comparing any modifications and identifying any unapproved changes. Blockchain gives data integrity and immutability by removing unauthorized changes.

Develops trust

The ledger automatically incorporates user trust because it is verifiable and immutable. Blockchain makes establishing trust for any transaction, facilitating the international transfer of money or other sensitive data, incredibly simple and secure.

Tracking transactions

A Blockchain-based AML platform that incorporates smart contracts automates the system’s fraud detection process. Built-in algorithms continuously monitor every transaction, instantly block any that appear suspicious, and automatically generate an alert. By using blockchain in AML, it is possible to gain control over all transactions.

Functions of Blockchain in AML

So it makes sense that a solution to simplify the KYC process is needed. In this situation, blockchain technology can offer the necessary solution and serve as a single source of truth. Here are some of the applications –

Opening a bank account

Every bank must perform KYC due diligence to open a bank account and confirm the person’s identity in order to assess the risk of terrorism or money laundering. Working with blockchain has many advantages, including getting rid of data silos, risk categorization, and time-stamped records. The AML/KYC platform verifies whether the authorized owners of the business are individuals or legal entities when a business account is opened. To complete this verification, personal identification documents are necessary.

Borrowing request

According to regulations, KYC is essential when requesting a loan. Risk assessments for financial crime, money laundering, and creditworthiness are performed. The institution’s various service departments can access the customer’s records quickly and finish the loan application process thanks to the Blockchain ledger.

KYC correction

Financial institutions don’t have to ask returning customers for their documents again to complete the KYC remediation process. The ledger will be used to store all necessary information, including documents, data, actions, and analyses. The automated KYC remediation process extracts the dates of license expirations and automatically notifies the concerned customer to upload newer, updated documents.

Final Words

Blockchain aims to reduce regulatory risks, of which severe fines are an expression due to incomplete or sluggish KYC due diligence. Algorithms for risk classification, smart contract analysis, and fraud detection are supported by the blockchain platform. In the end, it aids FIs in the administrative KYC procedures needed for business and personal accounts, international payments, and significant financial transactions. The automated DLT-based KYC platform significantly lowers the annual cost growth of the AML department.

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