The Wolves Aren’t Just in Wall Street Anymore: Why Technology Is Our First Defence Against Money Laundering

By Jesse Chenard, CEO of MonetaGo.

Money laundering is one of the most insidious forms of crime. With its effects felt by individuals and communities regardless of the scale of the operation, it is a criminal enterprise that damages all of us.

On one end of the spectrum, it is small-time criminals, constantly on the lookout for genuine businesses to pump money through, who pollute the hard-work and money of legitimate businesspeople to hide their own criminality.

On the other end white collar criminals, from major fraudsters through to sanction-busting oligarchs, use the major banks of the world alongside credible auction-houses and brokerages to hide their money. Their actions, whilst they are no less devastating, have a different impact. They have the capacity to severely damage our trust in global institutions.

This effect has become all too real a prospect in the aftermath of the leak of the so-called FinCen files. This leak makes it clear that large, and even systemically important banks have been drawn into money laundering that has infiltrated every industry from financial services to Premier League football and luxury art.

Now it is clear across all these different sectors of the economy, and across the broad spectrum of activities that constitute money laundering, that action is needed. Blockchain is one such way forward. Blockchain technology provides the transparency needed to identify risks of money laundering. This technology enables companies and governments alike to take swift action, both to prevent it from happening in the first place and to identify its source.

Blockchain-powered solutions have a broad appeal because not only can they provide rigorous AML protections, they also have the advantage of being able to be implemented without the need for global or even national regulators. In the art industry attempts to set up a global regulator for auction houses have never taken off, despite the best efforts of many individual auction houses. There remains a real and genuine concern that fine art, as a subjective store of value, can be used to move large sums of money around in a clandestine manner.

The transparency inherent to distributed ledger technology means that you can decentralise the regulatory function, with every participant within a ledger able to review the actions of other users, and flag suspicious transactions. In sectors where there is a regulatory body they become far less obtrusive in their actions as the regulator can be included as a node on the ledger, able to review all transactions in real-time without having to slow processes up. Or, when irregularities are detected, can act swiftly instead of weeks or months down the line when filings are made. Shortening this time can be all the difference when the whole point of money laundering is to move money quickly and efficiently through a system, obscuring where it came from in the first place.

Blockchain’s potential use-cases in fighting fraud are particularly exciting. Alongside being able to intercept suspicious transactions and providing a guarantee of the provenance of capital entering into a system, blockchain can also be used to reduce the risk of physical assets being used for money laundering via a process known as tokenisation. With tokenisation the asset can be represented on a blockchain ledger allowing for a fully transparent record of its provenance available to anyone interested in procuring it. For fine art, of which a significant amount is held out of public view and often in the opaque world of freeports, this would be a game-changer. Tokenisation would allow the assets to maintain their advantageous tax-exempt status, whilst guaranteeing that the art is not being used to move illicit capital around the world.

Furthermore, just as with the addition of regulators into the ledger via a node, this sort of tokenisation is entirely unobtrusive when it comes to the processing of a transaction, and is likely faster, in comparison to the sort of verification that would be required currently by legacy AML systems used by major auction-houses or brokerages.

It’s clear that digital transformation is vital to fight money laundering. As criminals become increasingly sophisticated, the best way to fight them is with better technology than they themselves are using. We stand a chance of fighting back if major art dealers use blockchain, to provide for frictionless and transparent verification of the origin of funds. The fact that it can also be used to check the current ownership status of assets is only further proof that in the fight against the wolves at the door, the honesty that blockchain provides is absolutely the best policy.