Know Your Client and Anti-Money Laundering compliance processes are ripe for a technological revolution with blockchain technology, says one private funds lawyer.
Blockchain is a type of distributed ledger technology (DLT), which works by creating a database, which can be shared across a network of participants, with any changes being received by all participants simultaneously. The items shared can be financial, legal, physical or electronic.
“KYC and AML processes lend themselves to DLT. Given that the point of AML is transparency, and is such an administrative burden – I’d go as far as to say it’s inevitable that DLT use will become standard for AML,” said Rob Mailer, a partner at international law firm, Morrison & Foerster.
However, Mailer doesn’t think the technology, even if widely adopted, would replace human compliance input altogether.
“To an extent, the human element will always need to remain. However, DLT has the potential to reduce ‘human error’ inaccuracies in AML processes,” said Mailer.
Commercial adoption of DLT in private equity is a long way off, but there are signs the technology is gaining regulatory legitimacy.
In July, the US state of Delaware, a popular funds domicile, authorized the use of DLT in the administration of Delaware corporate records, including stock ledgers.
“Delaware has recently passed legislation on the use of DLT for registration of underlying shareholdings. Once the benefits of DLT become well-known, I think it’ll encourage other jurisdictions to explore similar laws,” he added.