Anti-Bribery and Corruption Programs, Blockchain and Crypto: Who and Why?

Kroll’s 2022 anti-bribery and corruption (ABC) survey results regarding blockchain and cryptocurrency (crypto) align with the geographic and sectoral evolution of the regulatory landscape around digital cryptographic protocols and processes for the flow of data and assets.

News about a blockchain and crypto industry “race” keep gathering, with global investments in the sector reported to have reached over USD 30 billion in 2021.1 The use of blockchain as part of an ABC program holds in the balance at 52% against 48% of respondents worldwide not planning to use it (31%), unsure (7%) or not knowing how it could be used as part of their organization’s ABC program (10%). Among those who confirmed the use of blockchain as part of ABC programs (52%), 24% indicated that their firms were using blockchain, with an additional 29% stating that while not using it yet, their organization was planning to use it as part of their ABC program in the future. These survey results demonstrate a certain, if gradually paced, increase in awareness about and use of the blockchain technology and its distributed security and validation features within the compliance and risk management functions of companies in the countries and regions surveyed. As the sector and its financial ramifications keep growing, this technology brings in its track new anti-bribery and corruption and anti-money laundering (AML) challenges.

Kroll’s 2022 ABC Survey Insights Relating to Countries Using Blockchain

From 2020, the Middle East region has been increasingly described as a developing crypto hub and the federal government of the United Arab Emirates (UAE) has encouraged initiatives and issued blockchain strategies, including a 2021 blueprint to transition half of all government transactions onto the blockchain. In early April 2022, the Financial Times reported on Dubai “[attracting] big crypto firms with tailored regulations” after launching a licensing scheme to offer virtual asset licenses, thus making the UAE a haven for the global crypto sector. 2

In line with these regional trends reported in current news above, Kroll’s 2022 ABC survey respondents in the Middle East (Kingdom of Saudi Arabia and the United Arab Emirates) demonstrated through their answers that the region is considerably more involved in the use of blockchain, cryptocurrencies and managing related risks. Middle East respondents (46%) were significantly higher to state that their organization is using blockchain as part of their ABC program, in contrasting with the rest of the world: Europe (27%), Asia Pacific (22%), the U.S. and Canada (13%) and Latin America (11%).

Responses also showed a higher familiarity with the use of the blockchain technology in the area of investments in Latin America (55%) and the Middle East (40%), while the main areas for which the blockchain technology has demonstrated value such as procurement (through tagging, sensitive data and database management), cash and supply management (authentication and anti-counterfeiting) were more subscribed by respondents in the U.S. and Canada (77%), Asia Pacific (75%) and Europe (74%).

Respondents in the Middle East (61%) were also significantly more likely to state that their company accepts or makes payments through the use of cryptocurrency compared to Asia Pacific (30%), Europe (28%), Latin America (21%) and the U.S. and Canada (12%). Understandably, respondents appreciate the decentralized nature of crypto and perceive the benefits of virtual and secured exchanges not circumscribed to their jurisdiction and local currency. Crypto, while pseudonymous, is traceable and provides a form of assurance that politically-driven seizure, embezzlement and other ABC risks can be tracked, addressed or prevented.

Questions naturally arise from the UAE’s position on crypto due to the fact that the country has just been added to the Financial Action Task Force (FATF) grey list for ”strategic deficiencies” of enhanced monitoring of procedures for the prevention of money laundering at the beginning of March 2022. 3 Following the addition on the grey list by the FATF, regional news reported that Russian expatriates have been flocking to the UAE, since controls on deposits and western sanctions in relation to the war do not apply there.

Adoption and Associated Challenges: Crypto Risk Areas and Vulnerable Sectors 

Notwithstanding the Middle East’s approach to blockchain and crypto that permits more instant unmonitored transactions beyond local borders and currency, a desire to implement blockchain and crypto seems to prepare countries in the region to face crypto risks better. Outside the Middle East (72%), only half of the respondents stated that their organization is prepared for regulatory requirements that prohibit the use of cryptocurrency payments in response to a ransomware attack. A ransomware attack is a type of malware cyberattack where access to a computer or its data is prevented by encryption, and a ransom crypto payment is requested to the benefit of the hacking party. A company making a ransom payment incurs a risk that the funds will be used to commit a crime, including a sanction violation. Unless it proves it had to make the payment under duress and its conduct was a reasonable response to the threat, it may be liable for money laundering offenses, such as in Australia.4

For different reasons that could be attributed to either a total ban5 of or an increased familiarity and use of crypto, respondents in the Kingdom of Saudi Arabia (84%), the United Arab Emirates (76%) and Greater China (68%) showed the highest rate of confidence that their ABC programs address crypto risks such as ransomware, fraud and embezzlement of crypto assets, which may have disappeared from crypto-wallets and -exchanges following a hack.

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Overall, excluding the Middle East, firms show limited confidence that their ABC programs can address cryptocurrency risks.

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Criminality, Environmental Footprint and Capacity Building Concerns

Stories of ransomware, fraud, hacks and crypto-organized crime may trigger hasty conclusions about blockchain due to a lack of awareness of the technology and an understanding of how it works in sectors other than the financial industry. This is one of the main challenges associated with steps toward blockchain being embraced for implantation.

Illegitimate cryptocurrency operators and frauds abound. An example is the cryptocurrency-based OneCoin Ponzi pyramid scheme which raised USD 4 bn from 2014 to 2016, even though it had no blockchain model or payment system.6 Another cryptocurrency-based Ponzi scheme, Argyle Coin, claiming to be backed in diamonds, was halted in 2019 by the SEC after it stole funds worth USD 30 million from 300 investors. 7

Caution, environmental impact due to energy usage and carbon footprint, difficulty to comply, a lack of understanding and other perceived challenges associated with blockchain may well explain why blockchain technology is not being deployed at a faster pace among companies and ABC and risk professionals worldwide.

Among other challenges, the need for capacity development arising from the use of blockchain technology is perceived as too onerous when added to technical considerations and running costs. For instance, the amount of work to get the correct data from the supply chain onto a blockchain is a time consuming and laborious process. During this process, it is extremely important to input the latest, correct and most relevant information. Inefficient technological design may create low scalability and can also be an obstacle when attempting to implement blockchain applications in areas where transparency–as well as relevant confidentiality, strong security and validation processes–could help strengthen ABC programs.

Exposure to ABC Risks Through Sanctioned Regimes

Worries surrounding cryptocurrencies that are associated with blockchain technology could also be a reason for the lack of adoption of blockchain technology in other areas.

Sanctions directly imposed against the Taliban regime after their hostile takeover of Afghanistan in August 2021 have led to a surge in the use of cryptocurrency by Afghani citizens who are trying to navigate the crisis.8  Iran also continued to explore the use of cryptocurrencies to circumvent the effects of the 2012 sanctions. In April 2021 and January 2022, specialist crypto news websites reported that the Central Bank of Iran and the Ministry of Trade were finalizing a mechanism to allow importers and exporters to use crypto in their international deals, thus removing part of the scrutiny currently faced by traditional transactions and increasing risks of sanction violations for businesses and ABC professionals worldwide.9

On April 8, 2022, as part of a new tranche of sanctions against Russia in response to the war in Ukraine, the EU banned cryptocurrency exchanges and other companies from providing high-value deposit services to Russian citizens, residents and firms. The move was described as an aim at strengthening existing measures and closing loopholes to address concerns that blacklisted Russian oligarchs and other entities that may be using bitcoins and other digital assets to circumvent sanctions. 10

Blockchain, Risk Professionals and ABC Program Management

Kroll’s 2022 ABC survey responses show that the use of blockchain’s applications among boards, ABC and risk and compliance professionals is not widespread or significant. As detailed, an average of 18% of respondents outside of the Middle East are using it with a potential of 28% not using it but planning to do so in the future. 

Given the ongoing and increasing use cases for blockchain in the areas of information security, digital identification and traceability, it is effortless to envisage how the technology can facilitate and enhance the work of ABC and compliance professionals worldwide in the future in regard to managing their ABC programs.

As measures come into place to regulate the crypto industry, blockchain and its applications are likely to pick up for anti-bribery and corruption and risk professionals over the next years.

As an example, and in regard to the recent chronology of crypto industry regulation, in June 2019, the FATF (the intergovernmental standard-setter for AML), adopted “travel rule’ requirements to be followed by June 2020 for cryptocurrency exchanges and other service providers to send customer data (names and account numbers) to institutions receiving transfers of digital funds, similar to a wire transfer at a bank. The U.S. Crypto-Currency Act of 2020 established regulatory mandates for crypto commodity and cryptocurrency among existing regulators, and on March 9, 2022, President Biden signed the Executive Order on Ensuring Responsible Development of Digital Assets, reportedly the first whole of government approach to regulating cryptocurrency activities. Like the steps taken in the U.S., the European Securities and Markets Authority (ESMA) previously released its 2020-22 focus plan detailing how the agency plans to integrate a joint regulation of cryptocurrencies in the EU. 11

One of the blockchain capabilities associated with smart contracts and network procurement activities traceability on private and secured blockchain platforms can be leveraged to support accounting and auditing of public finances. As such, data from spending programs and the results of the expenditure can be linked despite funds passing through various layers of government and public service agencies. An example of the value of this application would have certainly helped track the UK government contract allocation and spending during the first COVID-19 response in early 2020, which has since raised scrutiny of the public tender process integrity.

Blockchain technology is currently not being used in areas where transparency–as well as relevant confidentiality, strong security and validation processes–could help strengthen ABC programs. However, as Kroll’s 2022 ABC survey results suggest, adoption of some blockchain applications by risk and compliance professionals in regions other than the Middle East appears likely, if unhurried at this moment in time.

 

Sources: 
1 https://www.ft.com/content/65eb9636-d253-42af-8526-50d70c41a19b
2 https://www.ft.com/content/228250b0-b5a8-48a7-8e38-513fe4af6d6f
3 https://www.reuters.com/world/middle-east/fatf-adds-uae-grey-money-laundering-watchlist-2022-03-04
4 https://www.ashurst.com/en/news-and-insights/insights/ransomware-new-legislation-should-criminalise-making-ransomware-payments
5 In September 2021, the Central Bank of China declared all cryptocurrency transactions illegal and the state of Singapore, which for some time was positioned to become an alternative crypto hub, did not deliver on its promises for the crypto sector, awarding less licenses to operate than initially expected.
6 https://www.bbc.co.uk/news/stories-50435014
7 https://cointelegraph.com/news/sec-shuts-down-ponzi-scheme-which-duped-300-into-diamond-backed-cryptocurrency
8 https://www.bbc.co.uk/news/world-asia-60715707
https://cryptopotato.com/iran-to-allow-legally-mined-bitcoin-to-be-used-for-import-payments
https://blockworks.co/irans-central-bank-ministry-of-industry-to-allow-crypto-payments-for-foreign-trade-settlements 
https://cointelegraph.com/news/iran-to-allow-crypto-payments-for-international-trade-report
10 www.moneylaundering.com/news/eus-latest-sanctions-against-russia-target-cryptocurrency-deposits
11 https://www.esma.europa.eu/press-news/esma-news/esma-prepares-new-responsibilities-in-2020. Also since 2020, when it laid out its five-year digital strategy plan, the EU Commission has been supporting the development of EU-wide rules for blockchain to avoid legal and regulatory fragmentation. The Commission adopted a comprehensive package of legislative proposals for the regulation of crypto assets.

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