Understanding AML Tactics: Know Your Transaction (KYT)

Kicking off a business relationship with new customers always comes with requirements enforced by the Financial Action Task Force (FATF) and other regulators worldwide. This is why processes like customer due diligence (CDD) and Know Your Business (KYB) are implemented to stay compliant and ensure customers aren't involved with financial crime. Another way you'll want to monitor your customer is through a Know Your Transaction (KYT) approach.

Read on to learn about the importance of KYT, how it relates to anti-money laundering (AML) efforts, and, most importantly, how to conduct it effectively.

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What is Know Your Transaction (KYT)?

Know Your Transaction (KYT), or transaction monitoring, refers to the process and technology financial institutions and businesses use to monitor and analyze financial transactions in real time.

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The primary goal of KYT is to detect and prevent fraudulent activities, money laundering, and other illicit financial activities.

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KYT systems typically use advanced technology, such as machine learning and data analytics, to identify suspicious patterns and anomalies based on the customer's transaction history.

Here’s a quick look at how Vespia’s transaction monitoring dashboard tracks customer transactions.

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5 Reasons why financial institutions need KYT systems

There are many reasons why financial institutions need KYT systems in place. One of the biggest reasons and advantages of integrating KYT solutions with existing Know Your Customer (KYC) and KYB processes is understanding customer risks and mitigating and preventing illicit activities from progressing further. With KYT implementation, more information is obtained and analyzed.

Let's take a look at some more reasons financial institutions need KYT.

1. Fraud prevention
   Know Your Transaction systems help detect and prevent fraudulent activities by monitoring transactions in real-time. KYT enables businesses to take a proactive approach to identifying suspicious behavior patterns that can minimize the amount of financial crime that might slip through the cracks. Financial institutions can effectively protect the business and its customers from fraud-related financial losses.
2. Regulatory compliance
   Financial institutions are subject to strict regulatory requirements. Especially with regular AML audits, businesses must demonstrate that they have effective measures in place to detect and prevent illicit activities. KYT systems equip institutions with the necessary tools needed to stay compliant.
3. AML and CTF compliance
   Regulatory bodies require financial institutions to have robust systems in place to combat money laundering and terrorist financing. With the right KYT systems in place, businesses can monitor transactions 24/7. This provides a way to identify and stop transactions that may be linked to financial crimes and terrorist activities as they happen.
4. Risk management
   With ongoing monitoring procedures set up, KYT systems help financial institutions assess and manage risks more effectively. They can quickly identify and mitigate potential threats to the institution's financial stability.
5. Operational efficiency
   When institutions implement automated KYT systems, they reduce the need for manual intervention. This increases efficiency and allows compliance teams to focus on investigating and resolving flagged transactions rather than constantly performing checks by themselves.

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KYC & KYB vs KYT: What's the difference?

Know Your Customer (KYC), Know Your Business (KYB), and Know Your Transaction (KYT) are all essential components of a comprehensive compliance and risk management framework for financial institutions. They all serve a vital purpose, complementing the function of each other to identify and prevent financial crime.

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Let's take a closer look at their differences.

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Know Your Customer

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Purpose

KYC involves verifying individual customers' identities and backgrounds throughout the digital onboarding process.

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Processes

KYC checks review a person's identity, looking into information such as their name, address, and date of birth. This heavily involves document verification that certifies a person's identity is not associated with money laundering and other financial crimes.

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Goal

KYC aims to ensure that the institution knows who its customers are. This plays a crucial role in assessing their risk level and helps them address any customer risk, prevent fraudulent activities, and comply with anti-money laundering regulations.

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Know Your Business

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Purpose

KYB is concerned with verifying the identity and legitimacy of business entities. Similar to KYC, KYB conducts thorough reviews of employees' backgrounds during onboarding and conducts regular checks to ensure there have been no sudden changes to their information.

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Processes

Throughout the KYB verification process, information that must be confirmed includes business registrations, the business ownership structure, and identifying ultimate beneficial owners (UBOs). Documents that are reviewed include the likes of business licenses and financial statements. A good KYB verification process should weed out fake documents before establishing a business relationship.

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Goal

The goal of KYB is similar to KYC; however, it applies more to entities. KYB ensures businesses are legitimate and free from any ties to illicit activities.

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Know Your Transaction

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Purpose

The purpose of KYT is to monitor and analyze customer transactions, checking for suspicious transactions and any anomalies that suggest illicit activities are at play.

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Processes

KYT systems check for suspicious activity by monitoring ongoing transactions with real-time or periodic checks. Technology such as advanced analytics, machine learning, and risk-based rules are implemented to conduct transaction analysis.

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Goal

The goal of KYT is ultimately to identify potentially fraudulent or illegal transactions in the interest of AML compliance and adhere to counter-terrorist financing (CTF) regulations.

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How KYC, KYB, and KYT work together

KYC and KYB focus primarily on individuals and business entities, verifying these different client identities. Every customer is required to submit the necessary documents for verification in the onboarding process before any financial institution proceeds with the business relationship. Both KYC and KYB verification provide the foundational information that can ultimately influence what rules must be set for the respective customers they evaluate.

This is where KYT steps in, as businesses can determine the level of scrutiny they need for transaction monitoring. Compared to KYC and KYB verification, KYT is essentially embedded into KYB and KYC checks. Once a customer has a determined risk profile, the necessary monitoring checks are lodged. Stricter monitoring processes can be implemented if a customer is identified as high-risk.

Knowing the customer and business profiles helps tailor transaction monitoring rules and algorithms to strengthen the institution's AML program. Monitoring customer transactions, meanwhile, proactively protects financial institutions.

Together, these processes create a robust framework for compliance with regulatory requirements, managing risks, and maintaining the financial system's integrity.

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5 Steps to conduct KYT 

Conducting Know Your Transaction involves several steps. A combination of technology, data analytics, and other regulatory compliance practices is necessary to keep transaction procedures safe and monitoring systems efficient.

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1. Data collection and analysis

Data plays a significant role in KYT. Pooling transaction data from various systems, from external sources like payment processors to internal sources like the core banking system, makes all the difference. Any relevant customer and business data pulled from KYC and KYB verification can also help the system make better-informed decisions by better understanding the context of financial transactions.

Depending on the size of a financial institution's customer database, they can choose whether or not they need a more sophisticated KYT system to process information.

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2. Risk scoring

Efficient AML compliance solutions should be able to implement the necessary assessments that assign the appropriate risk score for transaction data based on all the information at hand. Risk scoring should be able to factor in the following:

• Transaction amount
• Frequency of transactions
• Geographic location
• Customer risk profile

Risk scores can likewise be used to prioritize investigations. As part of risk mitigation procedures, any case with a high-risk transaction must receive immediate attention.

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3. Anomaly detection

AML transaction monitoring systems have the capacity to track customer transactions in real-time and detect anomalies. This is ultimately where KYT comes into play, as it regularly monitors customers, especially those marked as high-risk, using advanced analytics to see deviations from their normal behavior.

A sound KYT system should be able to use both rule-based systems and advanced technology to flag suspicious activities. It can use techniques such as clustering, outlier detection, and pattern recognition to detect anomalies. Here are some of the common rules institutions use for flagging transactions:

• Large transactions just below the allowed threshold
• Transactions with entities in high-risk countries
• Rapid transaction sequences

For instance, Vespia's transaction monitoring solution uses both AI technology and a rule-based approach. New technology detects anomalies and allows for rule customization. Our system allows businesses to set up their own AML rules, which might be necessary for financial institutions in different industries.

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4. Investigation and analysis

After a transaction is deemed an anomaly or flagged as suspicious, compliance teams or analysts must conduct thorough investigations of these transactions. Information that should be reviewed should include transaction details, customer profiles, and historical activity.

Internal and external databases should also be used to gather additional context around these transactions. Collaborating with other teams, such as client managers or bankers, can help gain a deeper insight into whether a transaction was coincidentally an anomaly or intentionally made.

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5. Reporting and documentation

After the final decision in a case is made, financial institutions must file a Suspicious Activity Report (SAR) with their respective regulator within the timeframe specified by their jurisdiction's regulatory laws.

Documentation is also necessary for AML audits. Information that must be accounted for includes the transaction, relevant findings regarding the transaction, the outcomes, decisions made, and all actions taken.

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The challenges of KYT and how to curb them

Implementing KYT has its own challenges that are worth considering. Let's examine how they can also be managed.

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Data volume and complexity

Financial institutions are more likely to handle vast amounts of transaction data daily. Occasionally, some transactions can be complex, with multiple parties, cross-border activity involvement, and various payment methods tied to a single customer. Monitoring and analyzing effectively can become difficult for KYT systems with limited data handling capacity.

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The solution

Robust data governance practices such as risk assessments and the necessary protocols for assigned risk scores can ensure you pull consistent, high-quality data. Advanced analytics and machine learning can also improve the accuracy of transaction monitoring processes. Compare the best transaction monitoring solutions that offer these tools to improve your AML program.

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False positives

Manual transaction monitoring or less advanced KYT systems may generate more false positives than expected. Compliance teams must invest more time than necessary to identify suspicious activities. This can lead to wasted resources that could have been better allocated.

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The solution

Proactively refining and optimizing your transaction monitoring rules and algorithms will save much-needed resources. Continuously monitoring transactions with an automated KYT system can do wonders as most enforce machine learning to learn patterns from past transactions and improve suspicious activity alert triggers.

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Rapidly evolving threats

Keeping up with new and sophisticated financial crime methods is a continuous challenge. Fraudsters and money launderers can adapt technology to change their tactics and bypass detection systems. It's also important to stay vigilant of any attempts they may make with advanced technology.

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The solution

Investing in modern and flexible KYT solutions that are easy to integrate with existing systems will be well worth it. One with an API can also bridge gaps between existing legacy systems and newer technology.

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Changing regulatory compliance across jurisdictions

Regulatory requirements for transaction monitoring vary across jurisdictions, making it especially challenging for financial institutions with global clients. Multiple, sometimes conflicting, regulatory frameworks can be naturally complex to work with.

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The solution

A centralized compliance framework can help determine differing regulatory requirements. The right solution can use technology to automate compliance processes and ensure your business adheres to both local and international regulations.

For instance, Vespia's transaction monitoring solution analyzes your data and recommends the necessary compliance actions, considering the different regulations for over 300 jurisdictions worldwide.

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Monitoring transactions efficiently

KYT is crucial for businesses to adhere to AML compliance requirements. As financial institutions navigate an increasingly complex landscape, KYT systems can help manage risks and keep processes efficient.

Having a robust KYT system ensures your business has a comprehensive way to detect and prevent financial crimes and is ready to adapt to ever-changing technology.

Vespia understands that financial institutions need the right KYT system to protect operations, safeguard customer trust, and adhere to global regulatory standards. Our transaction monitoring tool uses AI and rule-based strategies to keep your business safe.

Keen to learn more? Schedule a demo today.

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