Tech for Integrity, Part I
September 2016
Tech for Integrity (1)
A week doesn't go by without a news article somewhere about a government-involved corruption scandal. The explosion of corruption onto our front pages and into mainstream debate creates the impression of a new epidemic – a recent surge in global corruption with tentacles deep into the public sector space. In fact, in a recent Kroll survey of global executives, 40% of those asked said they believe bribery and corruption risks are increasing(2). According to Transparency International, some 58% of Africans across the continent said corruption is on the rise (3).
That said, it is just as possible that recent global public frustration with governments, combined with the extraordinary spread of information communication technology (ICT), have simply shined a very powerful new spotlight into the longstanding dark room of corruption; the absolute magnitude of corruption may not be new, rather the world is simply discovering more of it and tolerating less (4). As the digital age pulls back the curtain on today's global “integrity” issues, the systematic application of technology will give us an opportunity for game-changing progress in the fight for integrity.
Needless to say, corruption, or the abuse of entrusted power for private gain, comes at enormous economic and social cost (5). It destroys the very trust that underpins democratic values and institutions, and puts cracks in the social contract that binds us together (6). 60% of young people see corruption as the most serious issue facing their local communities and the most important factor driving inequality(7). From a purely economic standpoint, according to the IMF, corruption is a tax on investors, undermining outcomes in virtually every global industry(8). While estimates vary, the WEF puts the cost of corruption at 5% of global GDP, or approximately $3.7 trillion dollars (9).
From a business perspective, Angel Gurria of the OECD estimates that corruption adds 10% to the global cost of doing business and 25% to public contracts(10). Yet it is the world’s poor that are hardest hit! Over 1.6 billion people annually have to pay a petty bribe to receive public services, an astounding number(11). Recognizing this, the world’s new Sustainable Development Goals (SDGs), specifically SDG 16.5, target substantially reducing corruption and bribery in all its forms (12).
The search for a new paradigm of integrity is now “top of mind” for the world’s political and economic leaders. A recent WEF survey points to 67 countries that consider corruption to be one of their top three problems(13). ICT may not be a magic bullet, but it is arguably the most powerful tool in the integrity tool kit. While governments have recognized this for years, the pace of technological advances is now supercharging these tools (14).
The inappropriate movement of money, payments and collections of any kind in the public sector is fundamentally enabled by legacy paper, manual and cash processes that only defy digital gravity by avoiding it all together. There has been significant progress in governments adopting electronic payments and collections, including the use of procurement and benefit cards to make payments. We have seen governments successfully implement mobile wallet payment and digital identity solutions; however, given the possibilities of existing and frontier technologies, we have only seen the tip of the iceberg(15).
While some may disagree, despite its historical significance and habitual societal entrenchment, cash is bad(16). Several years ago developmental organizations, including the UN and USAID, began an initiative supported by Citi that is directed at the poorest of the world’s population called the “Better than Cash Alliance.”17 Around the time of the launch of the Better than Cash Alliance, Citi and USAID published its Mobile Wallet Accelerator Principles, most of which are still highly relevant today. The Principles were driven by the belief that mobile phones, which are in the hands of 2 billion of the world’s poorest, could be transformational in connecting the poor to the economy and financial system. The fundamental objective of these mobile payment ecosystems is to replace cash, and by doing so, open up the door to a myriad of financially inclusive digital developmental solutions (18).
Commercial transactions in cash create a lack of transparency that contributes to suffocatingly low revenue to GDP ratios in the developing world(19). Citi estimates that a mere 10% improvement digitizing monetary flows has the potential to shift over $1 trillion dollars into the formal economy (20). Further, Citi estimates that $350-$400 million can be saved by converting cash payments to digital(21)(22) Yet, digital is disruptive, and many of the frontier solutions are still being developed. Just as the digital revolution has turned many industries on their head, from media to music and taxis to hotels, it is at the early stage of disrupting financial and government services(23).
The financial technology (FinTech) feeding this disruption is aimed at cash; 70% of the $19 billion spent on FinTech investments in 2015 was focused on the last mile, where the electronic payment chain breaks down(24). From Kenya’s digital wallets to India’s digital identity, to the disruption witnessed in P2P lending in China, the framework that anchors major components of our regulatory and financial system are being challenged(25). At the same time, this disruption requires new thinking around the safety and security demands of citizens.
Governments should embrace technology with this in mind; CX must be the new UX(26). Today, there are over 200 digital currencies in existence, the most well-known and first of many being Bitcoin, a decentralized “cryptocurrency.”27 Bitcoin developed its reputation as an anti-establishment, anticentralized-trust, autonomous organization, which created opportunities for illicit financial flows beyond the reach of regulators and law enforcement. The extraordinary irony is that bitcoin’s technology platform, blockchain, may end up being one of the most significant integrity tools ever created. Blockchain is a platform that records and verifies transactions on a distributed database, or ledger, and is transparent, traceable and immutable(28).
Steve Johnson, in his seminal book on innovation, talks about “exaptation,” where a mature technology is borrowed from one area to solve an unrelated problem in another area(29). Bitcoin’s original purpose was to allow non-trusting parties to transact in a secure manner without a trusted intermediary. The“exaptation” of Bitcoin’s blockchain technology is likely to be a world of many, many blockchain platforms, with extraordinary wide ranges of permutations on the distributed ledger theme, including ones where there is, in fact, a third party of trust controlling and administering the chain(30). Some blockchain platforms will increasingly be permissioned, centralized while still distributed, where a government or Central Bank can have special permission to control a “master ledger,” with layers of permissioning depending on circles of trust (31).
Blockchain technology – for all its current uncertainties and risks – has the potential to challenge the backbone of global payment channels. The concept of a distributed ledger is not only potentially disruptive to centralized clearing as we know it, but also to all the legacy norms imbedded in and around paper currency, from economic policies and monetary policies to security policies and core social values(32).
These challenges have moved into the rooms of regulators and Central Banks, as these Decentralized Autonomous Organizations, like Bitcoin, take aim at the heart of Central Banks’ trusted third-party role, causing many to be skeptical, cautious or outright concerned(33).
Despite these uncertainties, the power of having an immutable distributed ledger has meant that some governments have already begun using blockchain platforms. One use case is as an asset registry, for validation of physical world assets.
For example, governments can immutably record real estate ledgers, data related to official development assistance, government assets, data related to monitoring of customs duties, or taxes of any kind. Estonia, Honduras, Ukraine, India, among others, have already implemented such blockchain platform solutions(34).
In order to fully understand the power and potential of blockchain technology, one must understand smart contracts(35). Smart contracts will be transformational, as they will allow the electronic exchange of digital value or real assets to be programmed into a blockchain platform. Think of a smart contract as a contract made digital that executes itself autonomously based on certain programmed conditions. When the contract is made immutable by being put onto a blockchain as code, it becomes transparent and searchable. Imagine, therefore, in a world of smart contracts, a government being able to electronically audit digital contracts across an entire procurement supply chain, including the financing components. Integrity becomes exponentially easier to accomplish in a world of smart contracts.
Some Central Banks have come to see the fintech revolution — blockchain, smart contracts and the variety of related technologies — as a digital freight train that can’t be stopped. A number of Central Banks are, therefore, constructively engaging with these new realities to understand them, use them, adapt them and regulate them. Regulators, like the Monetary Authority of Singapore, are even bear-hugging these technologies, proactively investigating, sandboxing, and kicking the tires to help shape their future use(36). Such regulators will be the ones that dominate the new field of “RegTech,” where the regulators themselves use cutting edge technologies to continue to successfully perform their function in the digital age(37).
There is extraordinary brainpower in Central Banks today focused on looking at digital currencies and their potential. Many are testing and modeling their own potential parallel national digital currency, while others have struggled and pulled back. These potential Central Bank owned digital currencies will strive to utilize the underpinning of a blockchain platform, while re-introducing the centralized safety, trust, reliability and “regulatable” components of their role(38). Some are attempting to project the resulting impact of these currencies on the economy. The Bank of England, for example, has modeled a national digital currency (a digital pound) projecting a potential 3% annual increase in GDP(39). Even with the extensive thought, modeling and experimentation, the issues are still highly complex. Yet, that will not necessarily slow the train.
As blockchain and its derivatives come to life, the potential of monster-size big data analytics used to supercharge the integrity fight is also significant. Artificial intelligence, machine learning and predictive analytics will allow powerful virtual “search and destroy” missions to be waged against corruption over the internet(40). While Citi, Mastercard and others have been running complicated anti-corruption algorithms on government flows for years, advanced technologies run by groups like Darktrace and Arachne will likely take this to a whole new level(41).
When we add the advances in biometrics (facial, voice and fingerprints) that will allow digital and multi-factor identity to combine with device, location and behavioral identity techniques, we will see a leapfrog in progress in the identity space(42). This will not stop or defeat the challenges of cybersecurity, which will not be addressed here, but will at least create helpful defenses(43). Identity improvements will, however, radically change the dynamics of the so called “last mile” of the financial inclusion challenge and add another major arrow to the anti-corruption quiver.
The digital world of the future will increasingly be networked, open and collaborative, creating exciting opportunities for integrity initiatives, but only if governments embrace those same concepts(44). Open Application Programming Interface (Open-API), tools that enable software systems to communicate, will increasingly become the norm, with the opportunity to take an Appstore approach to technology solutions that solve government problems. This connected world, when bolted to the Internet of Things (IoT) through a trillion sensors, will take transparency to new levels, as it will add physical assets to the already monumental amount of data captured and subject to advanced analytics(45).
These connected technologies will change the development landscape, as they have the potential to extract manual processes, paper documentation and cash from development flows. When the last mile is made digital and transparent, and information and money can flow freely both ways, the spotlight on the entire digital chain will be bright and the myriad of corruption flash points will become muted.
All of these technologies can be applied to issues surrounding Anti-Money Laundering and Counter Financial Terrorism (AML-CFT) and should encourage regulators and law enforcement to expand their work with fintech and bank players. Promotion of technologies that automate and reduce the cost of the Know Your Customer (KYC) and AML-CFT processes will reap enormous rewards(46). We should use the full array of technology in our arsenal for this fight.
IDmission is one example of a company using integrated cloud-based capabilities, biometric identity solutions, data analytics and know-how on cross-border regulation to drive KYC and AML solutions globally(47).
While many of the emerging technologies will have to be adapted, tested, scaled and perfected, the bigger challenge may well be in changing societies’ paradigms. We will have to build a new social consensus around the appropriate rules, laws and regulations for the fast-changing digital age. Issues like thresholds of privacy, digital safety, security and protection, and citizen experience (CX) need to be urgently addressed.
Johnson writes about how technologies create building blocks that open new doors to solutions previously unthinkable.48 Take as an example the advent and convergence of broadband, the internet and digital compression technology that gave us YouTube. Johnson calls this concept the “adjacent possible.” Emerging fintech and the convergence of multiple technological building blocks are opening the door to brilliant new ways to apply technology to the needs of citizens and the role of government; if we relentlessly explore and apply the technologies in our "adjacent possible,” we can win the integrity battle.
(1) I would like to thank my Citi colleagues for their contributions to this article, in particular Gabrielle Charnoff, Steven Holzer, Amor Sexton, Greg Baxter, Laura Gaviria Halaby, Alex McMahon and Tarun Ratan.
(2) Kroll Survey, “2016 Anti-Bribery and Corruption Benchmarking Report,” 2016
(3) Transparency International, “People and Corruption: Africa Survey,” 2015
(4) U4, “Mixed Incentives: Adopting ICT Innovations for Transparency, Accountability, and Anti-bribery,” 2014
(5) Transparency International, “What is Corruption?”
(6) “The Fourth Industrial Revolution,” Klaus Schwab, 2016
(7) World Economic Forum
(8) IMF, “Corruption Matters,” September 2015
(9) OECD, “The Rationale for Fighting Corruption,” 2013 and World Bank Global GDP
(10) B20 Task Force on Improving Transparency and Anti-Corruption Speech, Angel Gurria, 2012
(11) U4, “Reducing Bribery for Public Services Delivered to Citizens,” 2015
(12) United Nations, Sustainable Development Goals
(13) CSIS, “Costs of Corruption,” February 2014. 144 countries were surveyed.
(14) Bain Report, “Future of Government Smart Toolbox,” June 2014
(15) CSIS, 2014
(16) Willem Buiter Op-Ed, “Toward the Brave New World of Negative Rates and a Cashless Society,” March 2016
(17) UN, Better Than Cash Alliance, https://www.betterthancash.org/about
(18) USAID, Citi, “10 Ways to Accelerate Mobile Money,” 2012
(19) Brookings, “Can Corruption Adversely Affect Public Finances in Industrialized Countries?,” April 19, 2010
(20) Citi Digital Money Index, “Getting Ready for Digital money, A Roadmap,” 2014
(21) Estimate is based on digitizing a quarter of the existing cash-based flows in select high frequency use-cases
(22) Citi Digital Money Index, “Releasing the Flow of Digital Money: Hitting the Tipping Point,” 2016
(23) Citi Global Perspectives and Solutions Report, “Digital Disruption,” March 2016
(24) Citi Digital Money Index, 2014
(25) Transparency International, “Technology Against Corruption,” May 2013
(26) Citizen Experience must be the new User Experience
(27) “Decentralized Applications: Harnessing Bitcoin’s Blockchain Technology,” Siraj Raval, 2016
(28) “Blockchain Revolution,” Don Tapscott and Alex Tapscott, 2016
(29) “Where Good Ideas Come From,” Steve Johnson, 2010
(30) Tapscott, 2016
(31) Tapscott, 2016
(32) MIT, “Blockchain and Financial Services: The Fifth Horizon of Networked Innovation,” May 2016
(33) Raval, 2016
(34) Tapscott, 2016
(35) “The Business Blockchain,” William Mougayar, 2016
(36) Coin Desk, “Singapore Central Bank Funds Blockchain Recordkeeping Project,” July 2015
(37) Duhaimes’s AML Law in Canada, “Fintech and Terrorist Financing – a major RegTech issue,” January 27, 2016
(38) Tapscott, 2016
(39) Bank of England Working Paper, “The Macroeconomics of Central Bank Issued Digital Currencies,” John Barrdear and Michael Kumhof, July 2016
(40) Tapscott, 2016
(41) Transparency International, “The Potential of Fighting Corruption Through Data Mining,” 2015
(42) IJCSNS International Journal of Computer Science and Network Security, “Online Identity Theft and Its Prevention Using Threshold Cryptography,” Sept. 2010
(43) Citi Perspectives, “Responding to Cyber Threats through Public and Private Partnerships,” 2014
(44) MIT, 2016
(45) Schwab, 2016
(46) Financial Action Task Force
(47) IDmission was a Citi Mobile Challenge winner
(48) Johnson, 2010