This article first appeared in Digital Edge, The Edge Malaysia Weekly on August 12, 2024 - August 18, 2024

Money laundering, the process of disguising illegally obtained funds as legitimate income, is a crime that financial institutions are struggling to keep at bay. Virtual currencies such as cryptocurrency that operate on decentralised networks make the process of money laundering even more difficult to track.

While illicit players use technology to enable their crime, regulators too can utilise technologies such as blockchain to counter it.

Malaysian banks are already taking measures to encourage the development of blockchain in the country. The Malaysian Industry-Government Group for High Technology has expressed its intention to adopt blockchain by 2025. CIMB Bhd and Maybank Bhd are already working with fintech companies to implement blockchain-enabled services.

The blockchain is a decentralised database where transactions and information are exchanged on a peer-to-peer basis. Each transaction forms a block with information such as customer name, financial history, transactional data and asset information stored within.

This can be verified only with consensus across the network, replacing the role of an intermediary, such as a bank, in traditional transactions.

Thanks to these properties, blockchain technology has the potential to prevent money laundering, with its benefits to anti-money laundering (AML) being identified in five key ways:

In traditional investigations, tracing the intricate transactions of money across networks is often time-consuming, confusing and challenging. Blockchain data analysis enhances the efficiency and accuracy of this process, as all transaction information is stored within a single block for easy visualisation and tracking.

This allows investigators to spot potential money laundering schemes or illicit activities. Blockchain technology can also automate and centralise this screening and monitoring process.

With the blockchain acting like a decentralised ledger that holds a clear and public record of all transactions across the network, there is an inherent transparency in its implementation, as old transactional data is preserved for viewing and validation.

This increased transparency can help financial institutions reduce the risk of reputational damage by providing records of transactions to show regulators, customers and the public that the necessary steps are being taken to protect the money from potential money-laundering schemes.

This decentralised nature has the added benefit of establishing a more efficient, speedier digital ecosystem as well as lower transaction costs, especially for cross-border payments, since transactions are not bound to traditional intermediaries such as banks.

A key feature of the blockchain is its security, as manipulating or tampering with the blockchain is difficult to impossible. This is because blocks in the blockchain are linked by cryptographic validation, which results in all new transactions being added irreversibly.

Each block is highly encrypted and can be altered only with permission from the whole network. This structure allows for a permanent trail of records as every transaction on the blockchain cannot be altered.

This prevents cybercriminals from messing with or stealing sensitive information from the system, as well as ensuring financial institutional records are secure and accurate.

Integration of smart contracts in a blockchain-based AML platform automates the process of fraud detection in the system. In-built algorithms keep a continuous check on every transaction, automatically generate an alert for a suspicious transaction and immediately block the transaction.

Thus, implementing blockchain in AML enables financial institutions to gain oversight over all transactions.

This automation allows AML processes, such as flagging suspicious transactions, to reduce human error and increase AML efficiency.

As transactional data is stored and analysed within the blockchain, the AML system can identify transactions that are linked to unsanctioned or suspicious accounts. This means that absolute anonymity through online transactions becomes impossible, as the blockchain is able to track purchases from e-wallet to e-wallet.

It does this by finding suspicious transaction patterns or wallet addresses that have an association or history with illicit activities, limiting or even addressing the exposure of these suspicious accounts.

Coordinating the blockchain’s utility in AML with auditors, regulators and other stakeholders can extend to regulation reporting and due diligence in wealth and asset management.

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