How Blockchain Technology Could Have Prevented Massive Fraud

A recent report uncovering the disappearance of billions of dollars under the noses of leading auditing companies and regulatory agencies shook the business world. This is the recent Wirecard scandal that caught even the strictest regulatory bodies off guard.

Wirecard is a German-based card issuer which is now embroiled in a money-laundering scheme. Its expansive network of subsidiaries and convoluted corporate structure gave way for some officials to commit subtle fraud. It’s a shame, especially because the business was once highly regarded as a regulatory-compliant body.

Wirecard managed to hide and dispose of around $2.1 billion worth of fraud. Since 2006, the company has been eligible to issue credit cards and handle money on behalf of merchants. In 2011 & 2014, it started purchasing multiple Asian payment companies. These newly acquired companies were subsidiaries hiding suspicious transactions, now known to include a $2 billion balance sheet hole.

In 2020, an investigation initiated by German and Singaporean regulators exposed the scheme and the missing money. This shocking discovery should serve as an eye-opener—not just for banks and the business world, but for consumers as well.

How Blockchain Technology Can Help

Instead of relying on traditional auditing practices, businesses should strive for technology-driven changes that will mitigate the risk of fraud. This is where blockchain would be of use.

Ideally, every time a firm tries to suppress fund details, a notification should pop-out somewhere to alert regulatory bodies and entities. This could discourage most businesses from even thinking of altering their financial records.

Blockchain technology enables cross-organizational sharing that can significantly reduce financial crimes or even small-time shady transactions. With Blockchain, It would be easier to track and identify illegal activities—even if they are international transactions, and even if banks are used as a cover.

With the influx of sophisticated criminal networks, Blockchain technology will be beneficial to regulators in corroborating evidence across systems. To identify instances of money laundering and other financial crime without compromising data, regulators can use cryptographically secure tools such as private set intersection, which allows parties to compare two or more data sets and identify matching elements without revealing underlying information.

The Wirecard scandal certainly calls for the need for a higher level of disclosure, especially in relation to regulation, but not at the expense of compromising data privacy. A balance can be made with new cryptographic techniques that will identify and flag spurious transactions, without necessarily spilling other information.

In this case, it is clear that the relevant regulatory body failed miserably. But the damage is done, and there is no choice but to pick up the pieces. Nothing can be done other than repairing the damage and implementing new methods to avoid the same thing from happening all over again in the future.

The use of Blockchain technology in a regulated financial system could create a decentralized and more transparent payment and accounting system. This can help discourage businesses from finding ways to circumvent regulatory laws. In other words, the deployment of blockchain technology is a promising remedy to avoid havoc brought by incidents such as the Wirecard scandal.