Blockchain: Supporting Compliance Officers with Fraud Cases

Blockchain: Supporting Compliance Officers with Fraud Cases

Distributed ledger technologies (DLTs) are increasingly being adopted by financial service providers as part of their long-term business strategy in the midst of the emerging disruptive technologies that now form a central part of our world. Eventually all compliance and financial crime officers will be using this software as a matter of course, so this piece will act as a reminder of how it functions.

DLTs such as blockchain have a great many benefits and these have been explored quite extensively by many writers. This article, however, takes a look at some of the less well-known possibilities for the use of blockchain technology within the sector. It particularly considers the way in which these tools could assist in situations where fraud and/or corporate insolvency have taken place.

Defining blockchain

Don and Alex Tapscott from Blockchain Revolution defined the blockchain technology most clearly and precisely as “an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”

Traditionally, financial ledgers recording transactions required a centrally verified authority to authenticate or audit information like the existence, origin and ownership of assets. Blockchain has no such requirement as each operation is verified by a range of unrelated nodes, often known as ‘miners’ who are participating in the process. The system is therefore democratised and stands as a peer-to-peer network with all information being shared equally and no privilege positions being held.  Each node maintains its own copy of the register and the internally established and accepted rules enable consensual accord and authenticity of the data.

Both public and private networks are contained in this arrangement. Public blockchain ledgers are ‘permissionless’ and therefore permit anyone to join the network. This is the type of ledger where Bitcoin operates. Private ledgers can be used by any group of autonomous businesses to create a completely clear and open record-keeping system between interlinked participants, such as a provider, distributor and end-user. These private ledgers are ‘permissioned’ and therefore have restrictions to entry.

Within a blockchain each block holds data which is encrypted, or ‘hashed’ as a digital fingerprint and built on the previous block in a chain. This means that the blockchain is permanent and because of its make-up it is impossible to alter any data on any previous block without making changes to the entire chain. If any node attempts to add new blocks to the ledger all of the users must validate the block using a common protocol. In most cases, the nodes validate new blocks using a ‘proof-of-work’ or ‘proof-of-stake’ consensus algorithm and then, assuming validation, the block is added to the chain.

Blockchain has many possible uses

Distributed ledger technologies like blockchain could potentially radically alter the way in which communication and information are dealt with on a daily basis, in the same way in which the Internet has over the last twenty-five years. Changes within financial services are very imminent and some of those possible changes are developed in the next section of this article.

The verification, execution and recording of economic transactions

Alongside cryptocurrencies which are able to significantly reduce the costs and complexities of global payments, financial establishments are now beginning to use DLT in a number of new ways. For example:

  • Mastercard has developed its own blockchain to improve and manage cross-border financial transactions in different currencies between banks and merchants
  • Visa have used IBM’s blockchain system to enhance cooperation and innovation in payments across the business-to-business world
  • JP Morgan have also produced a digital coin system which functions internally to facilitate money transfers between institutional accounts. The coin will be dispensed on the blockchain network Quorum, requiring authentication from JP Morgan
  • Northern Trust have used their private equity blockchain to administer the first live capital call using DLT. This has allowed investors to manage contracts so that all parties can access the details clearly, efficiently and with greater security.


Further benefits are evident with this technology. Greater liquidity of assets results from the fact that transactions on blockchain can take place almost instantaneously instead of the normal settlement time for the majority of investment vehicles, which is typically around two days or more. Managers can therefore make much more rapid reinvestments of funds to generate a greater income return than would be the case in traditional settings. In our constantly shifting markets, this is clearly of great benefit.

By tokenising normally illiquid assets such as intellectual property, art or real estate, digital tokens can be used to represent value and therefore become the means for trading on the blockchain. Ripple is a good example of the way in which the use of digital currency can be utilised to transfer value between users.

Normal currencies can be presented by a user at the beginning of a cycle, converted into a digital currency (in this case XRP) through an open-source ledger, traded and then converted back to the original currency or to a new currency to reach the recipient at the end of the cycle. This process is much more rapid than the usual channels of currency conversion, is significantly cheaper and also makes traditional assets that were illiquid tradable.

The money markets have until now been populated by so-called ‘middlemen’ who needed to authenticate the reality and genuine value of any assets held in funds through the use of emails and spread sheets. This entire process can now be undertaken by the participating nodes and a verifiable and lasting, undeviating record kept in the blockchain. The savings in both time and resource in terms of administration are obvious and substantial.

A final significant benefit of blockchain technology is in the arena of data security, a matter of concern to all businesses. Because all data on the blockchain is encrypted and fully distributed, it is far less likely to be compromised by cyber-attack on one single location.

Preventing fraud and tracing assets

Because all the transactions within blockchain are recorded in a transparent manner to an absolute ledger with a secure authentication process, a more efficient and rapid asset-tracing can take place than is currently the norm. It is possible to look back on a great deal of real cases of fraud in the past which DLT would undoubtedly have prevented and which it could also have allowed more rapid and effective investigation to be undertaken afterwards, when not prevented.

The Bernard Madoff securities fraud of 2009 was built on a pyramid investment scheme where early investors were paid so-called ‘profits at the expense of more recent investors. Around $65 US billion were lost and the process to trace these assets is still ongoing. Had the use of smart contracts and DLT use of clear rules, parameters and unalterable code been operating at the time, auditors and compliance officers could have identified problems at a much earlier stage. Assets could then only have been invested under those rules, and it would have been impossible to either claim ownership or to distribute assets outside of the established protocol.

Arthur Anderson was the supposed gatekeeper at Enron, verifying accounts and thereby safeguarding investors. However, it conspired with Enron in their crime and also shredded documents to obstruct justice. DLT and the use of smart contracts would have made the audit process cheaper and also much more difficult to fabricate, as the transactions would have been visible, public and much more open to detection. The subsequent embezzling of funds by Enron would not have been possible within a ‘permissioned’ network. All participants within the blockchain would have had cryptographic identities to allow them to review transactions, and also they would all have been prevented from adding to the chain without consensual agreement. The information encrypted within the chain would have retained its indelibility and all involved with be identifiable. There could, therefore, be no hiding place.

The commonly held view promoted by governments is that anonymity within cryptocurrencies allows terrorists and money launderers to misuse them and be untraceable. However, in reality, users are traceable. In fact, when cryptocurrency exchanges are used to store payments and make transactions, personal information, wallet descriptions, bitcoin addresses and IDs can be obtained by the authorities, particularly when the European Union’s fifth directive on anti-money laundering comes into force.

Although blockchain technology will not be able to prevent all fraud and its participants will still be the vital link in terms of integrity, it will certainly be much harder to conduct illegal activities and remain hidden.

Corporate insolvency

In addition to the clear benefits of blockchain in terms of reducing fraud and investigating it, it is also important to note that company administrations and liquidations, which are normally difficult and take up a lot of time, can also be improved by blockchain. Firstly, the need to establish whether or not a company is insolvent could be significantly abridged. By having an unalterable record of all transactions, it is much easier to produce evidence in court which is both legitimate and compelling with regard to any company’s financial status.

Similarly, with blockchain, it may well be easier for any institution to prove the reliability and accuracy of creditor’s claims. All business records between a company and its alleged creditors would be clearly visible on the blockchain, removing the requirement for creditors to make available evidence of their debt in documents.

Blockchain ledgers would also make the retention of title claims much simpler to evidence. Smart contracts allow all assets to be tagged digitally as being linked to the seller until specified conditions are met. If the conditions are not met, the asset clearly still belongs to the seller. If the payment is not fulfilled, then no digital mark would be visible to later recipients of the asset and therefore would not be validated and could not be sold on to another party as the title remains with the seller.

Company legislation typically creates the potential for personal liability for company directors, who have a duty to the companies they represent and serve. If they were, for example, to trade while insolvent, these decisions could be recorded on the blockchain with an App called Boardroom. It is then much easier for evidence to be collected to either substantiate an allegation of mis-action or to use in any defence against an allegation.

A rapid revolution?

There is clearly still much to be done before blockchain can completely revolutionise the sector, however there is evidence of its increasing use. Distributed ledger technology will certainly see a steady rise in use, playing an ever bigger part in business and it seems fairly certain that the whole financial sector is heading towards a significant revolution in the near future.

Blockchain Education

EIMF offers a variety of training activities for individuals and businesses that want to be educated and become certified in Blockchain. Amongst EIMF’s specialised portfolio of training courses, professionals will appreciate the value that has been added in the region with EIMF’s exclusive partnership with the Blockchain Training Alliance (BTA). Their joint know-how allows EIMF’s regional associates to obtain the below prestigious and recognised Certifications:

  • BTA Blockchain Business Foundations
  • BTA Blockchain Solution Architect
  • BTA Blockchain Developer – Ethereum
  • BTA Blockchain Developer – Hyperledger Fabric
  • BTA Blockchain Security Professional


Furthermore, EIMF will be offering classroom-led training activities in various subjects on Blockchain. For additional details on EIMF’s Blockchain professional education, please view our calendar of scheduled educational programmes found here, or speak with an expert learning and development adviser at EIMF at +357-22274470 or