Money laundering continues to be a significant global challenge, costing governments and financial institutions billions annually. KPMG estimates that, “The average bank spends around US$48 million per year on AML compliance. In the US alone, banks are spending more than US$25 billion a year.” Yet many current transaction monitoring tools are falling far short. AML systems generate an alarmingly high rate of false positives and fail to effectively capture illicit money flows. The underlying issue often stems from insufficient data sharing between financial entities, as bank secrecy and data protection regulations prevent the exchange of critical information about transacting customers.
Blockchain-based financial applications face similar hurdles. While blockchain technology offers transparency, it also introduces challenges for identifying and verifying participants without exposing sensitive information. Addressing these issues requires innovative solutions that enable collaboration and compliance without compromising privacy.
The Problem with Traditional AML Systems
AML systems are designed to detect suspicious transactions, but their effectiveness is hindered by limited access to comprehensive data from a wide variety of trusted sources. Financial institutions tend to operate in isolation, unable to share customer information due to strict privacy laws and regulations. This results in systems flagging a high volume of false positives, creating unnecessary workload and costs for compliance teams and vastly reducing the systems’ effectiveness.
False positives, in turn, lead to inefficiencies and missed opportunities to identify real threats. The vast majority of illicit money flows go undetected, with crooks exploiting the gaps in current systems and the inability of institutions to collaborate securely and effectively. These challenges are even more pronounced in blockchain-based financial applications, where decentralisation and pseudonymity add complexity to the identification and monitoring of participants.
Sedicii’s Game-Changing Approach to AML
Sedicii tackles these challenges head-on by employing Zero Knowledge Proofs (ZKP) and Secure Multiparty Computation (SMPC) technology to enable secure collaborations within transacting groups of organisations. SMPC enables multiple parties to process information collaboratively without sharing or exposing the underlying data that each party holds. This approach allows institutions to perform critical AML checks while maintaining compliance with privacy regulations like GDPR.
How Sedicii’s SMPC Algorithm Works
Sedicii’s SMPC algorithm operates on a collaborating network, which is a distributed system, where the individual nodes securely process personal information from entities involved in a transaction. The SMPC algorithm processes information from both the sender and recipient organisations relating to a transaction, enabling comprehensive compliance checks without any party revealing any sensitive data.
Key features of Sedicii’s SMPC-based system include:
- KYC Verification: The system can verify key attributes of both the sender and recipient in a transaction, ensuring they meet the required level of assurance. It also checks whether their KYC (Know Your Customer) status is valid and up to date.
- AML Checks: Sedicii’s supports advanced AML checks that consider multiple data points:
- KYC Information: Verifies details such as nationality, address, email address and phone number checks.
- Login Activity: Analyses login behavior, such as whether login times align with typical patterns for the account.
- Account History: Identifies alerts or red flags associated with the account.
- Transaction Data: Monitors transaction frequency, volumes and patterns.
By verifying these key attributes, it is possible to identify known money laundering and fraud patterns that are typical of money-muling schemes and social engineering fraud.
Examples of Sedicii’s Advanced AML Checks
Preventing Social Engineering Fraud
Social engineering fraud, often referred to as authorised push payment fraud, is a rapidly growing financial risk for banks and consumers alike. For example, a crook impersonates a legitimate recipient and contacts the sender with fraudulent payment information, redirecting funds to their account. Sedicii’s system prevents this by confirming that the recipient’s name matches the name provided by the sender without ever disclosing it. This critical verification step stops fraudsters in their tracks and mitigates what is currently a multibillion-dollar issue in the fiat financial world.
Evaluating Economic Purpose of Transactions
Another key AML check involves confirming the economic purpose of a transaction. For example, it makes sense for a jeweler to send tokens to a mining company, as it aligns with their business activity. However, if the same jeweler sends funds to a company specialising in the sale of agricultural heavy machinery, the transaction raises red flags. Sedicii’s system ensures such anomalies are identified, allowing for timely intervention.
The Benefits of Sedicii’s Approach to AML
1. Reduced False Positives
By incorporating richer data sets through secure processing of data from multiple trusted sources, Sedicii’s solution significantly lowers the rate of false positives, allowing compliance teams to focus on genuinely suspicious transactions.
2. Enhanced Collaboration
Sedicii enables banks to share and process critical information without violating privacy laws or exposing sensitive customer data. This collaboration fills the gaps left by traditional AML systems.
3. Comprehensive AML Monitoring
The system’s ability to analyse data from multiple sources without any sharing taking place—including transaction history, login activity and account behavior—ensures a more holistic, robust and accurate detection of illicit activity.
4. Privacy and Compliance
Advanced cryptographic techniques, like SMPC, mathematically guarantee that data remains private and secure throughout the process. The system complies with stringent regulations, including GDPR, while enhancing transparency and accountability.
5. Adaptability to Blockchain Applications
Sedicii’s approach extends beyond traditional banking, addressing the unique challenges of blockchain-based financial systems. Its solutions also enable secure, privacy-preserving verification in decentralised environments.
Shaping the Future of AML Compliance
The increasing sophistication of money laundering schemes demands equally advanced solutions. Sedicii’s SMPC technology addresses the core limitations of current AML systems by enabling secure, collaborative and privacy-preserving transaction monitoring which is driven across a network rather than within a single institution.
As the financial landscape continues to evolve, Sedicii’s innovative approach paves the way for a new era of compliance, security and efficiency. By reducing false positives, enhancing collaboration and ensuring robust data protection, Sedicii empowers institutions to stay one step ahead in the fight against financial crime.
In a world where privacy and security are paramount, Sedicii’s solutions set a new standard for collaborative AML compliance, offering a powerful tool for the safeguarding of a financial institution’s customers, systems and reputation, while also upholding core values such as trust and transparency.
This article is part of Sedicii’s ongoing thought leadership in support of Project PHACKS, an initiative focused on building collaborative communities to address complex cybersecurity and data privacy challenges. PHACKS is funded by the European Union and brings together organisations to explore new approaches to secure data collaboration utilising privacy enhancing technologies. Through this work, Sedicii contributes its expertise in advanced cryptography, secure data collaboration and digital identity to promote safer, more transparent digital ecosystems across Europe. The views expressed herein reflect the author’s perspective and do not necessarily represent those of the European Union. Learn more about Project PHACKS.