Blockchain Could Be a Powerful Tool for Shrinking Pervasive Global Money Laundering
Few instances in history have altered our perception of the global economy like the release of the Panama Papers in April 2015 -- 11.5 million leaked documents detailing instances of offshore money transfers and tax avoidance from a staggering 214,448 entities in more than 50 countries. In an instant, the curtain shielding hundreds of thousands of potentially illegal financial transactions was stripped away and the general public realized our offshore financial ecosystem is not as ethical as we once may have thought.
The Panama Papers are a wake-up call that fraud is an elusive and precarious threat to global commerce. Armed with the latest technological advancements, bad actors continuously find new, cunning ways to circumvent regulatory enforcement, leaving government agencies struggling to keep up. It’s estimated by the UN Office on Drugs and Crime that money laundering annually equals between 2 percent and 5 percent of global GDP, or up to a staggering $2 trillion USD. It’s a nuanced problem that requires a tailored and innovative solution. Thankfully, recent advancements in blockchain, the technology underpinning Bitcoin, Ether and others, have the potential to put an end to a generation’s worth of fraudulent practices that have, for far too long, allowed bad actors to live above the law.
Blockchain technology is best described as a decentralized and immutable ledger of information digitally stored across an entire network. If you own a computer, and you’re an active participant in the system, then you can access an entire record of interactions -- from wire transfers to bank deposits to tax filings -- that occur within the confines of a given commercial infrastructure. When a transaction is placed on the blockchain, its authenticity is verified by participants known as “nodes,” which work to ensure that the network remains tamper-proof, while also mitigating the risk of falsified documents making it onto the exchange. Once approved, the transaction is viewable to the entire community.
Historically, inadequate communication between regulatory bodies has impeded international enforcement of fraudulent activity. Blockchain technology, however, is unrestricted by jurisdiction, making information sharing, money transfers and cross-border traceability a seamless process. I spoke about this topic with several industry experts, and they provided some very valuable insight. Antonio Romero, co-founder and Technology Solution Architect of Orvium, argues blockchain will soon facilitate an open dialogue between government agencies regarding how to synchronize efforts in a post–Panama Papers world, instituting international protocols to flag fraudulent behavior regardless of jurisdiction.
While this transparency certainly bodes well for progress in global enforcement, many industry experts argue that blockchain’s anonymity prevents it from being an unequivocal answer to many of the problems highlighted by the Panama Papers. Yes, blockchain transactions are viewable to the general public, but only under the guise of public or private "key," which is a long, indecipherable collection of letters and numbers with no distinguishable correlation to the user it references. This presents a serious obstacle to widespread integration of the technology. How can regulators possibly institute ethical compliance on the blockchain when they can see but not identify instances of fraud?
The answer to this question has multiple parts. In the pursuit of substantive change in our financial ecosystem, the margin for success is wide. You don’t necessarily need to solve the problem altogether, but rather, implement small-scale initiatives that put us in the right direction. While user identity may remain anonymous, myriad criteria, from time to location to monetary amount, are all universally accessible on the blockchain, and precautionary measures can be implemented to account for inconsistencies in the system. If an outsize amount of capital is flowing from the United States to Panama, for example, blockchain companies can institute compliance protocols to require further information before transfers between those two countries can occur.
Arnold Spencer, former U.S. federal prosecutor and currently general counsel for Coinsource, cautions that avoiding taxes or concealing the nature, source, location, ownership or control of finances (elements of money laundering under U.S. law) is still entirely possible with blockchain technology. Both the government and the general public can use the blockchain to support their agendas, but neither can use blockchain to conquer the other. We need to remember that a government’s power to investigate is only as strong as its power to compel or collect information. Although a government can obtain a copy of a decentralized blockchain, it cannot obtain the identity of a blockchain participant in a foreign country that refuses to cooperate (e.g., a tax haven).
While some of the finer details of this potential use case (alongside embedded AML processes) must be ironed out before blockchain can be used to combat fraud, it’s certainly a worthwhile endeavor. The Panama Papers have showcased that certain privileged members of society simply do not play by the rules. However, through blockchain, we do have a unique opportunity to level the playing field by increasing accountability and transparency for all. Nicholas Gilot, CEO of Ultra, put it like this: Blockchain technology can make it clear what tax havens are being used, as well as who those assets belong to. Due to the fact that every transaction has to be immutably written to the blockchain to validate it, we could see a meaningful reduction of tax evasion in our lifetime. There is still progress to be made, but it’s possible. The world is watching.