The rise of new payment methods, from e-wallets and Apple Pay to blockchain cryptocurrencies, has transformed the way in which we pay for goods. The digitisation of cash is part and parcel of the new ‘trust economy’, but it is not without its risks, writes Alex Ktorides, partner at Gordon Dadds.
Digitisation provides opportunities for crime syndicates to withhold money from the financial system, and transfer assets from allegedly legitimate sources to criminal enterprises.
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While many businesses are vigilant of the costs posed by this threat, they must apply extensive measures to mitigate the risk of money laundering, or face the fury of HMRC
or other authorities.
A 2015 report for the British Bankers’ Association noted four key trends emerging from the payment revolution:
• Growth in the regulatory burden of anti-money laundering (AML) and other crime regulation;
• Increased liabilities for compliance failures;
• Move towards greater collaboration between banks, regulators and the law;
• Rapid pace of change in technology, product innovation and criminal practices.
These trends will affect those inside and outside the financial sector, and the UK’s regulatory regime is working hard to keep up with the criminal groups that seek to exploit the new, cashless economy.
While extra regulation may be burdensome, it is necessary for all types of business to
undergo due diligence to tackle criminal activity or face equally onerous consequences.
Regulation provides crucial protection, but breaches can ruin businesses through financial penalties, and damage their reputations.
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By GlobalDataAML compliance requires strong know-your-client (KYC) processes and, with further digitalisation of the economy, businesses must employ enhanced due diligence methodologies to tackle criminal syndicates that are poised to exploit technologies.
It is not all doom and gloom in the digitisation era: digital cash and blockchains will offer businesses and the financial sector new avenues to scrutinise clients, comply with
regulations and safeguard their reputations.
The open and transparent potential of blockchains and distributed ledger technologies enable greater transparency and opportunities to apply KYC protocols.
Blockchains are distributed-ledger based systems that operate as database and verifcation systems for financial transactions. This type of technology uses a public ledger to note and track transactions, such as payments. Parties are provided with a
cryptographic key and transactions must be approved by all participants in the network. Credentials are verified before the transaction can be completed and an encrypted block is created. While this block is inserted into the public ledger, cryptographic keys conceal the block’s transaction information.
Blockchain networks allow various actors, including criminal syndicates, to transact
directly with no fnancial oversight, or regulatory or law-enforcement involvement.
Nevertheless, blockchain creators can set these networks to open or closed, enabling
businesses and the fnancial sector to tackle money-laundering activity through greater
oversight of identity or transaction data, or by preselecting a group of known participants.
Blockchain technology offers enhanced data transparency and robust KYC protocols. The openness of shared blockchain ledgers means the data recorded is readily available and can be simply monitored, providing a direct link between regulators and risk ofcers, so compliance failures can be reported rapidly. Information in a blockchain ledger is difficult to alter, and any changes will be tracked to prevent criminal activity.
Due to the openness of blockchain ledgers, KYC processes can be supervised across businesses and sectors. Information on client activity, identities and end-to-end transactions can be easily scrutinised and communicated between enterprises and regulators. While blockchains can be used for criminal purposes, their inherently open and immutable nature offers businesses and regulators improved and unique opportunities to monitor, collaborate and report on criminal activity.
I encourage businesses to carry out best practice and to protect themselves sufficiently.
Tere are a number of measures that can be put in place, these include:
• Staff members will be the first line of defence. It is important to that they are all trained and can therefore ensure fraudulent activity does not take place;
• Apply the three Ws: Why are customers coming to you? Who are you acting for? What are you being asked to do?
• Review your customer base and types of transaction, and evolve what you do. What types of customer do you have, and where are they coming from? Monitor
riskier clients closely;
• Register with HMRC, the FCA or other supervisor, and the National Crime Agency. If you have a suspicion, file it and tell those with power to enforce action;
• Identify the risks to your business.
Businesses should not shy away from asking customers as to the source of their funding as part of the AML process. They need to take a risk-based approach and consider the
characteristics of the customer, the product and its distribution, and the jurisdictions
involved in determining the lengths to which they have to now go in terms of conducting due diligence on their clients.
Money laundering is challenging the financial well-being of businesses and the wider economy. Vast amounts are laundered through banks and other regulated businesses, including money from international criminal activity and corruption.
Companies have to get to grips with the digitisation of cash, and the risks it poses from money laundering. The consequences for failing to comply could be a hefty – potentially
unlimited – financial penalty, or worse.
