money laundering
Technology,  United States

Financial institutions fighting money laundering warm to blockchain technology

Storing Know Your Customer data on a secure blockchain can simplify an expensive and frustrating legal process

Enterprise blockchain software firm R3 recently completed a proof of concept test of its Know Your Customer (KYC) application built on its Corda blockchain platform, French financial institution RCI Bank and Services announced on Dec. 3.

KYC requirements are part of the due diligence needed to meet Anti-Money Laundering (AML) regulations, an important but time- and money-consuming process used in the financial industry.

Twenty-six firms participated in the test of CordaKYC, including insurer Allianz France and banks BNP Paribas and Societe Generale. In June, R3 announced that a group of 39 firms in 19 countries, including Deutsche Bank, ABN AMRO, and the Federal Reserve Bank of Boston completed KYC transactions on its Corda platform.

The RCI Bank release quoted David E. Rutter, CEO of R3, saying that its platform “enables users to have full control over their data, safe in the knowledge that it won’t be shared with other parties unless they have given their express permission, and they have the ability to revoke that permission at any time.”

In a March 2018 report by KPMG International, Could blockchain be the foundation of a viable KYC utility?, the international audit, tax, and advisory firm said:

“Know Your Customer processes provide the backbone of financial institutions’ anti-money laundering (AML) efforts to combat the financing of terrorism, helping to detect and prevent criminal behaviors over the world. According to current estimates, in excess of $25 billion is spent each year on financial crime risk management in the banking sector, the majority of which is due to KYC. However, despite the critical importance of these processes, KYC at many financial institutions is extremely inefficient, mired with time-consuming and labor-intensive manual processes, duplication of effort and risk of error… At the same time, the tiresome process, repetitive questioning and long processing times create a frustrating experience for customers.”

KPMG in 2017 carried out its own KYC proof of concept test with the Singaporean government and several banks, including HSBC.

The KYC verification process, which can take weeks to complete, can cost the largest institutions as must as $500 million, according to a 2017 study by Thomson Reuters. It also found that 89 percent of the corporate customers surveyed had not had a good experience, and 13 percent even changed financial institutions as a result. Beyond that, clients often go through the process repeatedly with different institutions, and financial institutions are required to update the data regularly.

Collecting and storing KYC information gathered by financial institutions like banks and insurers in a secure blockchain would allow other institutions to cut costs and administrative burdens to rely on previously verified information without having to repeat it, according to the journal of ICASA, an international organization that offers guidance, benchmarks, and certification for information systems governance, security, audit, and assurance professionals.

“Once a bank receives a KYC from a new customer, it can then put the same information in a blockchain that can then be used by other banks and other accredited organization,” the article said. “As the customer identification documents would have been independently checked and verified, these organizations need not carry out their KYC checks again. They can simply rely on the verification performed by the blockchain itself.”

That said, ICASA did highlight some security concerns about a blockchain KYC solution, such as participants’ ability to keep private encryption keys secure, and the need to verify the trustworthiness of the institutions participating in the blockchain.

Leo Jakobson, Modern Consensus senior editor, is a New York-based journalist who has traveled the world writing about meeting and incentive travel, as well as the consumer and employee loyalty business. He also covered the East Coast side of the Internet boom and bust, small businesses, and New York City crime, nightlife, and politics. Disclosure: Jakobson owns no cryptocurrencies.

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