Trade-Based Money Laundering in SMEs: Blockchain Solution

“Money laundering” was coined during World Wars I and II, when the volume of illegal funds obtained through financial crimes increased dramatically. Most people choose banks as a safe place to keep their money, but criminals know that risks are involved if they decide to rob one. As a result, they opened low-capital enterprises like launderettes and car wash where cash transactions gave the impression of being entirely above board. There are typically three phases to a money laundering operation: placement, stacking, and integration. The proceeds from financial crimes are laundered through numerous transactions involving numerous parties and then distributed into the economy as if they were earned legally.

Regulation and Compliance: Overcoming Challenges in Preventing Fraud

Due to the nature of wire and transfer transactions, detecting fraudulent activity is now more challenging than ever. Signals such as incomplete or inconsistent customer onboarding or know-your-customer (KYC) data can be used to spot these kinds of deals. Because of the widespread nature of money laundering, a concerted international effort is necessary to prevent it. Combating this problem requires cooperation between law enforcement, financial institutions and regulatory bodies. Case studies, hypothetical situations, and warning signs are some content they provide on AML regularly. Financial institutions like credit unions and banks must implement an AML compliance policy and cooperate with these watchdog agencies. Yet, there are obstacles to uncovering fraud, such as a lack of comprehensive data, restricted access to relevant data, and ever-changing policies and regulations.

Cracking Down on Financial Crime: AML Blockchain Solution

Taking advantage of the opacity, fragmentation, and laborious processes that define global supply chains, trade-based money laundering has become one of the principal techniques utilized by criminal organizations to launder illicit proceeds. It is estimated that up to 2 trillion dollars are laundered every year worldwide, making money laundering a significant problem on a global scale. Whereas many resources have been poured into anti-money laundering (AML) initiatives, banking institutions still only catch 0.1% of illicit funds.

Combating Money Laundering

Phantom shipments, numerous invoices for the same products, and falsely characterized goods are the main kinds of money laundering in trade identified by the FATF (Financial Action Task Force). These practices leverage paper-based procedures, which hinder efforts to identify trade misinvoicing and contribute to developing a disjointed and obscure trading system.

Strengthening Supply Chains

Supply chain vulnerabilities for money laundering could be addressed by blockchain technology. A decentralized, distributed ledger can improve transparency throughout the trade network, making it simpler to identify instances of trade misinvoicing and trace the precise provenance of data and the origins of physical commodities along supply chains. Blockchain’s ability to create a transparent, centralized ledger over all the activities in a trade network means it can be used to detect fraudulent behavior in sectors where banks have little oversight. Financing for duplicate Bills of Lading is just one type of trade-based risk that could benefit significantly from the blockchain.

Cutting Costs & Workload

Banks devote billions of dollars a year to detect illegal behavior, and the need to do so is constant due to stringent regulatory oversight. Blockchain technology can lessen regulators’ workload by allowing banks to streamline compliance operations. By digitizing and automating many of the administrative steps involved in facilitating commerce, blockchain has the potential to substantially reduce transaction costs.

Overcoming Disparate Networks

Blockchain technology can revolutionize inefficient procedures and provide substantial cost reductions to any industry imaginable. Blockchain can outrun trade-based money laundering by offering a collaborative solution to financial fraud and compliance, allowing businesses to transact confidently and anonymously. Because of its decentralized and distributed character, blockchain is well-suited to address the independent entities that make up today’s trading systems.

Shield Your Business from Financial Crime: Expert Tips You Can’t Ignore

The sophistication, prevalence, and difficulty of identifying financial crimes are significant reasons for worry in the modern world. No matter your industry, things are different now, says the CFCS. Companies must therefore take preventative measures to safeguard themselves against the dangers posed by financial crime. This post will give you three guidelines to keep your business safe.

Tip 1: Perform KYC Verification to Confirm Business Partners

First, it’s essential to Know Your Customer (KYC) checks to ensure you’re conducting business with people you can trust. This is especially true in the banking industry, where doing business with someone you don’t know is illegal. These inspections are necessary, but they can be time-consuming and expensive to carry out. One helpful piece of advice is conducting pre-KYC checks to rapidly screen out undesired individuals and reduce associated costs. Risks can be better monitored if data is collected beforehand.

AI tools can be used to ease the process. They work with know-your-customer (KYC) and anti-money laundering (AML) experts to provide businesses with valuable customer data and help weed out fraudulent applications. It also helps with Know Your Customer (KYC) costs and automates the vetting process to weed out fraudulent applications, allowing firms to acquire better information for customer-proper research processes. In order to improve and standardize Know Your Customer (KYC) checks and processes, an end-to-end fraud protection solution is required.

The risks of crime, noncompliance fines, and brand damage can all increase significantly if KYC checks are not implemented. Financial institutions around the world paid a total of $10.4 billion in penalties for breaking anti-money laundering regulations in 2020. Loss of licences and a tarnished reputation are possible consequences of noncompliance.

Also Read: Navigating MSME Loan Schemes & Tax Incentives for Business

Tip 2: Stay Compliant With Privacy Laws

Businesses that deal with customers’ personal information must take precautions to protect their customers’ privacy. Regulations and rules pertaining to privacy have undergone substantial revisions in recent years, making it mandatory for businesses to safeguard their customers’ data. The California Consumer Protection Act (CCPA) of 2018 is one such law that mandates compliance with requirements for for-profit firms that collect private details from California residents, regardless of where the organization is physically located.

Keeping up with the ever-changing legal landscape is challenging, but doing so is essential for success. Data privacy software offer a suite of tools to handle data privacy issues, including the ability to collect consent, keep track of it, document it, conduct risk assessments, create privacy notifications, handle requests for access, deletion, and correction, and manage contracts with third parties.

Tip 3: Keep Abreast of Regulatory Requirements

Regulation and compliance standards that apply to your firm will depend on the type of your operations. It is essential to be aware of and, if required, locate loopholes in all regulations that may affect your company. If you make more than four weekly transactions in your margin account, you’re subject to the PTD (Pattern Day Trader) rule, which mandates a minimum $25,000 balance. Traders can avoid this restriction by never employing leverage again, switching to a prop trading company, or limiting their weekly trades to fewer than four.

The Bottomline

A growing number of companies are worried about financial crime worldwide. It’s getting sneakier, more widespread, and harder to spot. Firms must take preventive steps against financial crime. Take the precautions mentioned above to protect your company’s finances effectively.

The MSMEBlog provides expert solutions and guidance for financing small and medium-sized businesses. Visit for more information on MSME finance.

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