Worldwide, there are 645 cryptocurrencies like Bitcoin—issued virtually, devoid of any central bank—with a $12.5 billion combined market cap many AML professionals will struggle to come to terms with. Having only been in existence since late October 2016, it is uncertain whether Zcash w ill succeed in maintaining a sustainable, anony mous blockchain. However, there are several cryptocurrencies currently available that offer less advanced forms of anonymity. Monero and Dash are just two of many crypt oc u r rencie s t hat of fer a nony mou s transactions. Neither one utilizes zeroproof technology. AML professionals must begin to envision a future where cryptocurrencies are exchanged anonymously and operate similarly to physical, fiat cash transactions. Furthermore, it would be prudent to take this concept one step further and visualize what it would take to effectively monitor existing banking products on a blockchain that utilizes zero-proof technology. International wire payments, trade finance, and trading product settlement are just a few of the many products that may incorporate blockchain and zero-proof technology in the near future.
Staying ahead of the curve AML professionals must begin preparing to address the imminent threat of cryptocurrency misuse. Preparation will contribute to the creation of a new framework for more complex uses of blockchain technology on a larger institutional scale. Here are two recommendations for staying ahead of the curve: 1. Review any previously reported suspicious activit y repor ts that involve cryptocurrencies. Determine what similar characteristics they display. When overarching trends are noted, compile them for distribution throughout the bank’s investigative group or groups. Identifying common traits will assist in minimizing false positives while increasing investigative efficiency. 2. Consider a unified approach: cryptocurrency compliance collaboration. A ML groups need to follow in the
footsteps of other departments within financial institutions and begin to leverage the advantages of collaborative approaches, such as the R3 CEV and Digital Asset Group consortiums. Group ventures or consortiums can be cha lleng ing for competing businesses. However, when coming together to discuss emerg ing A ML trends or typologies for the purpose of increased regulatory adherence, the outcome is usually positive. A unified approach can assist in establishing a stronger knowledge base and standardized terminology. This approach also can help to form critical partnerships that can be leveraged to explore additional AML possibilities. An example of an AML consortium approa ch would be the Blockcha in, C r y p t o c u r r e n c y, a n d A n t i - Mo n e y Laundering event held in August 2016 in Toronto, Canada. This conference included over 100 attendees from major financial institutions, law enforcement, regulatory bodies, and the blockchain industr y. A mong the spea kers were M ic h a el Perk l i n of L e dger L ab s , a blockchain consulting, forensic investigation company hired to investigate the $70 million Bitfinex hack, and former White House Deputy Press Secretary Spokesperson Jamie Smith, now of Bitcoin infrastructure provider BitFury. Also at the event was Alan Cohn of the Blockchain Alliance. Previously, Cohn served for almost a decade in senior policy positions at the U.S. Department of Homeland Security. The Blockchain A lliance is a U.S.based, public-private forum consisting of a broad coalition of companies and organizations that have come together with a common goal: to make the blockchain ecosystem more secure and to promote further development of this transformative technology. The alliance aims to increase blockchain and cryptocurrency knowledge in the hopes of increasing investigative effectiveness among law enforcement agencies.
This year saw blockchain, and to a lesser degree cryptocurrencies, emerge from the shadows of the internet, with one being more celebrated than the other. However, while the excitement of blockc h a i n t e c h nolog y t r ic k le s t h r oug h banking and nonbanking institutions alike, AML professionals continue to be directly affected by both. The f ina ncia l cr isis of 2008, a nd it s increa sed focus on reg ulator y requirements, has transformed A ML professionals into the metaphorical gatekeepers of growth and opportunity for international financial institutions. Successful regulatory AML adherence allows for any proposed changes, by way of blockchain technology, to be responsibly realized. This heightened sense of responsibility requires AML professionals to be thinking ahead, and critically, as they will be on the front line of the blockchain revolution, should it take hold. However, the role of A ML professiona ls, w ith respec t to blockcha in technolog y, does not stop at thought leader. AML professionals have faced the task of mitigating material risks posed by blockchain technology for the better part of the past five years, as the rise of blockchain technology’s first use case, cryptocurrency, continually intersected with traditional financial institutions. The AML community will be able to build on the cryptocurrency experience to find ways to accommodate compliance necessities to the broader blockchain risk management framework and to accommodate new technologies.
Joseph Mari is senior manager of major investigations in the Anti-Money Laundering Financial Intelligence Unit at Bank of Montreal. He is responsible for coordinating complex, cross-compliance investigations on an international client base, and leading risk intelligence initiatives on money laundering and terrorist financing.
December 2016/January 2017 BANKING EXCHANGE