How Blockchain helps in AML Compliance

This blog discusses how reporting entities, particularly tranche 2 entities, can capitalise on compliance with regulatory obligations through operational efficiency. With features like transparency, immutability, and decentralised nature, blockchain technology aligns seamlessly with Australia’s AML/CFT regulations. The blog explores key aspects of blockchain technology in an Australian context by explaining:

What is blockchain, and what are the unique features that help combat money laundering, terrorism financing, and proliferation financing (ML, TF, and PF)?
The Role of Blockchain-Enabled KYC Process and its role in reshaping the AML compliance landscape in Australia.

What is Blockchain?

Blockchain is a process of tracking and recording transactions over a blockchain network. Each transaction is recorded as a data block and forms a chain of data. It is not possible to edit, temper, tweak, or modify data that has been entered once in a blockchain. Hence, blockchain provides a ledger of transactions that cannot be altered.

Blockchain is a shared database where transactions are recorded and tracked. It differs from traditional databases as data cannot be changed once entered. If a wrong data entry is made, then a reversal entry must be passed to nullify the effect. The salient features of blockchain transactions are discussed below:

Trusted Data Sharing – The data of a blockchain network is shared amongst the members only. It helps in keeping confidential data safe and protects it from being misused. Only those members who have access to blockchain data can access the information stored.

Decentralisation of Data – Blockchain data is not stored at a centralised location. It is captured over different computers on a network. When new information is added to the block, it is difficult to alter because other computers will reject it.

Easy Tracking – Multiple transactions are recorded in real time. It helps keep track of transactions easily.

Tamper-Proof – Data over a blockchain network is safe and secure from tampering. When new transactions are recorded, they are validated by other computer devices over the network based on a hash key of the current and previous transactions. After validation, the information is added to a block. No one can change or delete the transactions recorded, making the transactions immutable.

Efficient Record Keeping – Manual record-keeping is time-consuming and often leads to duplication. Blockchain helps in reducing the record-keeping process and eliminates the issue of duplicate records.

Accurate Information Retrieval – Data stored on a blockchain network is validated automatically, eliminating the chances of errors due to manual input in the data validation. This helps with accurate information retrieval.

Configurable Accessibility – There are various types of blockchains which can be customised and configured according to requirements. If a blockchain is public, anyone can view the data stored. Some businesses use private blockchains to keep the transactions and information within the organisation. It is accessible only to members who are part of a blockchain network.

Auditability – Blockchain, due to its tamper-proof security, efficient record-keeping, and accessibility, helps track transactions backed by blockchain. The transactions are recorded in a chronological manner, with all the information, like who did what. Since everything is captured online, the audit becomes easier and faster, providing easy auditability.

Blockchain-Enabled KYC

Blockchain helps in storing and tracking customer data. Moving from paper-based KYC to digital KYC helps in reducing costs. With all information saved on a decentralised network, it is not possible to tamper with customer data.

Legal Basis for Blockchain-Enabled KYC in Australia

The Australian AML laws administered by Australian Transaction Reports and Analysis Centre (AUSTRAC) require reporting entities to verify customer identities, assess risks, and monitor transactions to prevent financial crimes. Traditional KYC methods often have high costs, data security, and inefficiency issues. Blockchain-enabled KYC solves these concerns by streamlining compliance enhancing security and transparency.

Under the AML/CFT Amendment Act, 2024, tranche 2 reporting entities are required to conduct initial customer due diligence (CDD) before providing designated services to customers. This replaces the previous ‘applicable customer identification procedures’ (ACIP) with the initial CDD, which focuses on knowing the customer and understanding the risks of money laundering, terrorist financing, or proliferation financing while providing designated services to them.

Benefits of Blockchain-Enabled KYC

Security – Blockchain enabled KYC solutions provide security to customer information. The customer data is stored on a decentralised network, which is only accessible to participant members. Thus, criminals find it difficult to breach the system and get confidential customer information. With public and private keys in blockchain, people who do not have the key cannot access confidential data.

No tempering – One of the inherent properties of blockchain is that the data stored cannot be altered. A blockchain KYC system allows information to be validated by different network systems. If the data entered is changed, it will be validated by other systems. The majority of systems will reject the changes if validation fails. Hence, the altered data will not become part of a block. Data quality can be maintained as the log is created when an attempt is made to alter data.

Consistent & Efficient – Blockchain makes the KYC process efficient. It prevents making duplicate entries. The risk of error and inconsistency can be avoided.

Data storage – Blockchain helps in storing the customer data. AML laws require to keep customer data for several years. When data is stored in a database, it can be easily accessed as and when required. Huge amounts of data can be stored easily by reducing the size without compromising the authenticity of data.

Real-Time Update – The KYC information is stored on a decentralised network. It can be shared within the network. With this, other businesses that are part of the network can use the information, saving time and the cost of collecting the same information again.

Blockchain is Reshaping the AML Compliance

Blockchain technology has revolutionised AML compliance in Australia. It provides solutions to the concerns posed by traditional compliance methods. This technology has enhanced the customer due diligence process through blockchain-enabled KYC, providing secure and efficient identity verification and reducing the cost of operations and duplication. This empowers tranche 2 reporting entities to meet AUSTRAC’s reporting requirements and retain the records accurately.

Low cost – Blockchain helps a business reduce the cost of AML compliance. When transactions are stored and kept in a digital ledger, fewer human resources are required, also removing the element of human error. It also increases efficiency when the AML compliance team can dedicate more time to matters related to AML compliance. Cross-border transactions need more intermediaries. Blockchain can help reduce the involvement of intermediaries and related expenses.

More transparent – Public blockchain networks give transparency of information. Law enforcement agencies can leverage this information to investigate suspicious activities. As a log of each activity is maintained digitally, it is easy to investigate any transaction. Smart contracts help in identifying suspicious transactions. For example, if a threshold is exceeded in a financial transaction, the system will flag and alert the compliance team.

More secure – A blockchain network is decentralised. It does not allow changes in the data entered in a block. Criminals find it difficult to alter data in a blockchain database. Private blockchain networks are only accessed by members who have the right to access them. It prevents financial information from going into the hands of criminals. Thus making it safe and secure.

FAQs on Blockchain in AML Compliance

How does blockchain help in KYC?

KYC is a process of identifying a customer by collecting personal information. Blockchain is a database that helps collect, verify, and store confidential data, including customers’ KYC details and transactions. Blockchain makes the KYC process transparent and secure and reduces the overall cost of the process. With blockchain technology, customer data is securely stored on a decentralised network. Alteration of customer identification information is not possible by non-members who don’t have access to the network.

It streamlines the onboarding process by reducing the information collection time and verification. The KYC questionnaire is sent to the customer and is not accessed by anyone else. The customer will provide information and supporting documents, which can be viewed by users who have access to them, making the KYC process fast and secure. It protects the integrity of customer information, data privacy and alteration of data.

About the Author

Jyoti Maheshwari

CAMS, ACA

Jyoti has over 9+ years of hands-on experience in regulatory compliance, policymaking, risk management, technology consultancy, and implementation. She holds vast experience with Anti-Money Laundering rules and regulations and helps companies deploy adequate mitigation measures and comply with legal requirements. Jyoti has been instrumental in optimizing business processes, documenting business requirements, preparing FRD, BRD, and SRS, and implementing IT solutions.