Know Your Transaction (KYT) – What is KYT and Why KYC isn’t Enough Today?

What is KYT

The write-up highlights Know Your Transaction (KYT), what is KYT, why KYT is important, and that only KYC isn’t enough today to fight money laundering, terrorism, and other financial crimes.

Contents

 

What is KYT – Know Your Transaction

Know Your Transaction (KYT) is a derivative of AML Transaction Monitoring and refers to examining both fiat and crypto financial transactions. KYT is considered the future of Know Your Customer (KYC) as merely identifying individuals and businesses isn’t enough today. There is a growing need to examine the onboarding clients’ transaction activities continuously. Transaction Monitoring or KYT is essential to determine money laundering, fraudulent activities, or suspicious behaviors, sometimes as serious as a mass proliferation of weapons or drug trafficking.

Certainly, the Transaction Monitoring method applies to both fiat and cryptocurrency; it cannot be denied that the KYT gained its prominence with the advent of cryptocurrencies, as because of the anonymous nature of crypto transactions, the investigative authorities have to follow the provenance of transactions to track fraud rather than following the identities behind it. Thus, it is indisputable that KYT has become the new KYC.

 

KYT is the Future of KYC

The fintech and international regulatory experts perceive that Know Your Transaction (KYT) is the future of KYC. The rising adoption of cryptocurrency has further amplified the scope of KYT as it gives institutions the aptitude to break down and structure crypto transactions for AML monitoring and risk mitigation. KYC is identifying and verifying the authenticity of individuals and businesses; performing due diligence based on the risk factors they bring to the institutions that offer services to them. While KYT is a step further, programmed to drill down the granular datasets of client transactions based on their risk profiles and detect bad or fraudulent transactions they perhaps perform.

 

Why KYC isn’t Enough

The identity world is constantly shifting, and institutions must keep up with continuous due diligence on their client base. At a global level, there is an ongoing deliberation wherein institutions are trying to realize why KYC isn’t enough to deter financial fraud and that they would now require KYT as part of AML measures. Businesses must understand that Know Your Customer (KYC) is one of the most vital of all AML procedures as it fulfills the onboarding procedure of verifying ID documents, proof of address, and beneficial ownership.

However, one may still argue that KYC isn’t enough as there must have ongoing due diligence in the process to ensure client risk levels in the long run. Altogether, all these AML activities must be achieved without compromising the customer experience. Hence, KYT Transaction Monitoring has probably been weighed as the most sought-after method, wherein individual and business activities are monitored in real-time without creating extra hassle for the clients. Clients are only approached when a transaction hits a red flag.

KYC and screening against PEP, Sanctions, and Adverse Media give fundamental profiling on the onboarding clients. Nevertheless, KYC is a static approach lacking an advanced investigation to monitor client transactions and estimate their risks. KYC and screening procedures rely heavily on publicly available data; the information could be outdated, manipulated, or completely made up. There are instances when institutions have even lost potential valuable clients due to false positives and inaccurate red flags.

At the same time, the Know Your Transaction (KYT) method leverages identifying transaction laundering activities that involve illegal, suspicious events. KYT Transaction Monitoring program reveals the true business activities of the clients; it brings data-driven conclusions by examining transactions in real time. Based on patterns and traits derived from the raw transaction data and relating the same with the nature of the business, red-flag indicators are derived on location, payment velocity, timing, originating bank, etc.

 

Which Industries Need KYT

Every industry today that deals with mass onboarding and bulk transaction processing of clients would require Know Your Transaction (KYT). It can be said that KYC and screening procedures provide identity insights. At the same time, KYT gives transaction insights on bits of information that could otherwise be difficult to follow without proper techniques. Thus, KYC and KYT offer a comprehensive AML risk mitigation solution, in which KYT programs are always custom-built per industry requirements. The customization is based on the transaction type, i.e., cash or card payments, SWIFT transactions, inward/outward remittance, payment using trade finance instruments, third-party payment processing, etc.

However, the term KYT has recently become more synonymous with crypto AML, as in blockchain and cryptocurrencies, the focus is more on the transaction than the identity. Here, the authenticity is attributed to the transaction history linked to patterns, not the blockchain clients. KYT has become more prominent in banks and financial institutions that serve digital assets or blockchain clients. With the introduction and adoption of the FATF Travel Rule, it’s now inevitable to complement KYC due diligence with the KYT efforts to complete the compliance measures related to crypto exchanges and VASPs.

 

KYT and Transaction Laundering

Transaction Laundering is an online form of money laundering. The mechanism is rather skillful as it involves shell website operations to disguise fraudulent activities from the AML regulators. Transaction Laundering involves a front legitimate-looking site with visibly clean advertising, but the website sells illegal/prohibited products or services via a camouflaged or shell website in the background. This type of money laundering method deceives the banks and credit card networks as they assume to be processing the payments for a legitimate site.  KYT Transaction Monitoring has tremendous potential to examine uncanny merchant activities and their behavioral patterns to unearth prohibited ecommerce websites disguising their products or services from the authorities via ingenious Transaction Laundering schemes.

 

Know Your Transaction (KYT) in Cryptocurrency

It is now apparent that Know Your Transaction (KYT) is an offshoot of KYC, and it’s only when the two work in conjunction that the customer risk mitigation process is complete. Particularly in the Blockchain industry, the KYT in Cryptocurrency checks suspicious wallet addresses, large buying or selling cryptos, anonymous crypto exchange activities, etc.

Since KYT is the KYC of Blockchain, the crypto AML process also comprises flagging sanctioned individuals or entities, filing irregular asset transfers crossing thresholds, continuously monitoring dark markets, and halting possible scamming activities and misusing of cryptocurrencies.

 

Important KYT Regulations

The Know Your Transaction (KYT) monitoring system aims to assist the national AML authorities and Financial Intelligence Units (FIUs) in timely actions against money launderers, miscreants, and lawbreakers. The KYT Transaction Monitoring programs are based on international AML standards, including payment reporting thresholds and red-flag indicators, as set by Financial Action Task Force (FATF) 40+9 AML-CFT Recommendations, EU Anti-Money Laundering Directives (especially the 5thAMLD) and other such international organizations. The international AML standards are mainly integrated with fines and imprisonment set by national laws pertinent to money laundering and financial crimes.

The financial transactions are monitored in real-time, using predetermined programming algorithms to track suspicious behavioral patterns. It is on the part of the Money Laundering Reporting Officer (MLRO) of the regulated institutions to report the identified fraud and criminal transactions to the state FIUs which further investigates the data-driven reports and takes sufficient actions against those individuals or businesses accountable for such activities. The recent FATF Travel Rule suggests continuous tracking of transactions involving various cryptocurrencies for Virtual Assets Service Providers (VASPs). The FATF Trave Rule calls for appropriate KYC due diligence and risk scoring of crypto users and digital asset investors.

 

IDMkyX: The X Factor

Boost your KYC efforts with IDMkyX KYT from the brand of IDMerit. Understand the importance of KYT Transaction Monitoring on Blockchain and AI-based Machine Learning technologies.

Explore various vigilance possibilities for your business, and abide by the latest FATF, AMLD, and your national AML-CFT guidelines with IDMkyX. Book a free Know Your Transaction (KYT) consultation and clear your doubts about why your KYC capabilities are incomplete without an effective KYT Transaction Monitoring compliance program.

Tony Raval
Tony Raval

Tony Raval brings more than 15 years of leadership in data technology as the Founder and CEO of IDMERIT, headquartered in Carlsbad, California. He leads an executive team including top data tech veterans to execute on his passion of creating a global data universe generating true and trusted intelligence. IDMERIT’s competitive success has come from the company’s ability to perform cross-border transactions, for which Tony and his team have developed a meticulous process and progressive technology. The company was launched as the result of a highly effective engagement with a leading global financial institution, whereby the company was uniquely able to triangulate multiple elements to create a comprehensive, and yet, frictionless experience. Tony has provided data intelligence to companies such as Google, SalesForce, and HP as well as clients across financial, government and other sectors seeking a superior partner in compliance and mitigating risk. He holds a Master’s Degree in computer engineering and data sciences, is an active member of the Entrepreneurs Organization San Diego and dedicated mentor to new entrepreneurs in EO’s Accelerator Program, enjoys meditation and running, and he and his wife Sonal recently celebrated their three-year-old son's birthday.

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