AML transaction monitoring on Blockchain

6 December 2019

AML Transaction Monitoring isn’t just a case of being compliant. It’s about going above and beyond the minimum standard. Here’s why.

Transaction Monitoring is becoming increasingly important as AML regulations get tighter and tighter.

It’s a term used when a financial institution chooses (or is required) to track its customers’ transactions to learn more information about them. Having a robust Transaction Monitoring system in place enables them to effectively identify money laundering operations, illicit activity and other financial crimes.

Transaction Monitoring is a compliance cornerstone for financial institutions, payment service providers and trust offices.

Under the EU’s original AML (anti-money laundering) directives, transactions were assessed on an individual basis. While the results were very accurate, trying to use this process on a larger scale, simply wouldn’t work.

That’s where automated AML Transaction Monitoring systems come in. Using specific reliable software is the best way for crypto-businesses and financial institutions to stay compliant.

However, doing the bare minimum to remain compliant is no longer enough. In fact, if a crypto-startup wants to establish themselves as an industry leader, they must consider its long-term strategy as well.

AML transaction monitoring for cryptocurrencies

Cryptocurrency is built on its anonymity. The only problem is that it encourages criminals to use cryptocurrencies like Bitcoin for fraudulent purposes.

One of the most common forms of laundering Bitcoin and Altcoins is to use currency tumblers. In layman’s terms, this is where the coins are passed on to a third party, like an escrow. These coins will then be mixed with other unlawful coins in the third party’s wallet.

The coins are passed in small chunks to another wallet owned by the original fraudster. Several other wallets may be used, courtesy of the third party, to further disguise the direction the funds are taking. This makes very hard for crypto-businesses and financial institutions to identify the entities.

Nevertheless, this doesn’t mean that rectifying the issue is impossible. To successfully combat the illicit use of cryptocurrency and stop any incoming fines, ongoing AML Transaction Monitoring is imperative. Just recently, ABN Amro has been ordered to review all existing retail clients to check against various financial crimes.

The Dutch bank stated that they wanted to improve its approach to money laundering by increasing the number of staff working on the files. This suggests that ABN Amro wasn’t previously checking customer files.

Last year, ING had to pay out € 775mln for not having its client files in order and for failing to provide enough information. Without adopting an automated Transaction Monitoring system, banks and crypto businesses are running the risk of making mistakes and being non-compliant.

Seize the opportunity

The idea of automated Transaction Monitoring is to have procedures in place that make it possible to carry out ongoing checks. If a local regulator audits a competitor’s accounts and they not only meet the standard, but also demonstrate innovative processes to decrease the likelihood of money laundering activity and SARs, they’re already one step ahead. The competitor is setting the bar higher, meaning a financial institution or crypto-business that simply does the minimum will be left straggling behind.

Regulators and advisory bodies will turn to the exemplary to help set future regulatory requirements, forcing the others to simply follow suit.

It was this idea that resulted in the FATF issuing an extensive amount of advisory guidance, whereby, Automated Transaction Monitoring is considered an essential of any efficient AML system.

The days of getting crypto-forensic experts to manually check and process information are at an end. Automation is a part of everything we do nowadays, so it’s hardly surprising that it’s becoming a prominent feature in the innovative world of cryptocurrency and Blockchain. For a crypto-business or financial institution to pave the way for future regulation and reduce illicit activity, they must be proactive, instead of reactive.

Hiring more and more compliance officers isn’t the answer, in the same way, that compliance shouldn’t be treated as a tick-box exercise. The future of AML Transaction Monitoring is automation and the keyword is “ongoing”.

The underlying issue with hiring an army of compliance officers is that maintaining the same high level of “ongoing” consistency just isn’t possible due to fatigue and natural human error. Furthermore, to keep up with the growing scalability demands of a thriving crypto business, hiring multiple officers is neither feasible or sustainable.

This isn’t to say that the role of a compliance officer is rendered redundant. On the contrary, it’s the complete opposite. By automating ongoing Transaction Monitoring duties, they’ll have more time to focus on proactively developing processes. They’ll spend less time handling dull tasks, get a more holistic understanding of entities via streamlined information and will have any red flags promptly presented to them.

Looking ahead

AML Transaction Monitoring is not only the present, but it’s also the future too. Without

implementing it, a crypto business or financial institution won’t be able to complete “ongoing” checks to reduce money-laundering and other financial crimes. Sticking with manual methods of checking entities alone historically results in more errors – as we saw with ING. It simply isn’t sustainable, scalable or smart.

The key is to get the crypto-business or financial institution in a position where it can prosper in a highly volatile and tightly regulated environment.

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