Anti-money laundering (AML) programs that verify customer identities and backgrounds are a staple for financial institutions trying to stop criminals from using their platforms to move illicit funds. Companies interested in maintaining the strictest compliance to AML laws might consider enhancing their programs with Know Your Transaction (KYT) processes to better monitor customers’ transaction data for suspicious activity.
While technical KYT solutions can be a significant investment, the cost to a company’s bottom line and reputation from fines and sanctions are significantly higher if they fail to catch a criminal enterprise in their midst.
What is KYT and why is it important?
KYT, a subset of AML transaction monitoring, uses sophisticated rulesets to monitor customers’ transactions for anomalous behavior that could indicate criminal activity. The end goal of successful KYT processes, when used in conjunction with other AML tactics, is to prevent criminals from using the organization’s platform or services to carry out financial crimes.
While Know Your Customer (KYC) processes help institutions assess potential risk through identity verification, KYT analyzes the actual data from every financial action that takes place in a client’s account in order to identify possible red flags. Together, these two strategies can paint a clearer picture of a client’s expected vs. actual risk. An AML program that features KYC, KYT customer due diligence (CDD), and a robust customer identification program (CIP) can provide assurance that a company has taken all reasonable protective measures against money laundering, terrorist financing, and related fraud.
Financial institutions whose AML programs can be enhanced by KYT include:
- Credit unions
- Insurance companies
- Fintech companies
- Investment companies
- Cryptocurrency exchanges
- Online gaming facilitators
- Credit card companies
How is KYT conducted?
The KYT process involves continuously monitoring, analyzing, and tracking client transactions. It can be broken down into three steps: data analysis, risk assessment, and reporting.
Depending on a financial institution’s needs and the technology it employs, KYT systems can review standard criteria, including the transaction’s geographic location, the parties involved, and the customer’s expected activities, or they can be more dynamic and allow for customized needs including keywords, frequencies, ranges, and other patterns. Artificial intelligence holds the key to a fully responsive system that can use machine learning to adapt to ever-changing financial crime trends and the various regulatory requirements trying to keep pace.
If a transaction is flagged as suspicious during the analysis phase, an investigation should begin. Here, the institution takes a deeper dive into the origin, purpose, and nature of each concerning transaction. For example, a customer could be making one or multiple transactions at levels just below local record-keeping thresholds, a process known as structuring or smurfing. An analyst would review the transactions and might even work with client managers or bankers to determine if this happened in error, coincidentally, or intentionally.
When it’s confirmed that an illegal transaction has occurred, financial institutions are obligated to file a suspicious activity report (SAR) with the appropriate regulator within the designated time frame.
What are the benefits of KYT?
Beyond complying with current and future AML requirements, KYT offers many additional benefits to financial institutions:
Improved risk management
KYT processes give institutions both broad and granular data-driven insights into clients’ financial behaviors, which improves their ability to mitigate risk in the near and long term.
Boosted operational efficiency
While it’s true that adding a whole new set of monitoring tasks can introduce new levels of complexity into your compliance operations, proper KYT is can be automated by specifically designed software. Automation vastly increases the rate of transaction analysis, allowing institutions to catch and track suspicious activity before it can severely damage operations.
Greater detection and prevention of financial crimes
KYT allows institutions to crack down on the risks from a wide range of financial crimes, including terrorism financing, money laundering, and fraud. Institutions that report these activities to law enforcement agencies provide valuable data for criminal investigations and ultimately play a part in protecting the financial system.
Because KYT provides so much information about customer transactions, these added data points enable more thorough customer due diligence. Transaction histories can be useful tools in enhancing customer risk profiles, arming organizations with an extra layer of protection against potential problems.
What should you consider when implementing KYT?
While KYC adds another layer of protection, there’s no getting around the fact that it also adds more spinning plates for compliance teams to balance. More data also comes with the need for greater processing power, speed, security, and analysis.
These are some important considerations when implementing KYT:
With the sheer amount of data and information it takes to manage in a built-out KYT program, automation is the only reasonable solution. As with any AML process improvement, the cost of building a new KYT framework can vary. Options for improving data collection, analysis, and risk assessment include upgrading or patching in-house systems, installing third-party software, or outsourcing everything to an all-encompassing third-party.
Reducing the amount of repetitive manual tasks is ultimately a cost-saving strategy, as companies can retrain staff for more high-level and interpersonal-intensive work such as escalations and investigations. So the initial investment in a new system can still lead to cost savings over time.
High data fidelity is essential for KYT. Institutions can pave the way by ensuring their KYT program integrates with all their other data warehouses, investing in reliable data management and warehousing systems, and hiring and/or training staff appropriately (especially around data security and privacy rules). Legacy systems should also be readied. Where feasible and secure to do so, certain companies might even consider data-sharing agreements with other institutions.
If transaction monitoring is being handled correctly and sensibly, a high percentage of the flagged suspicious activities should be false positives. Though time-consuming and frustrating, this is virtually the only guarantee that the proverbial net is large enough to catch any bad actors. Best practices for weeding through false positives efficiently and accurately includes fully staffing to avoid bottlenecks and refining the escalation and investigation processes to reduce delays in the event that true matches are identified.
Using Persona for KYT
KYT is a hotspot on the proverbial AML heat map, and companies should consider their unique needs, rather than trends, when investing in a systemic program improvement.
A best-in-class solution is one that monitors all of the activities your users initiate on your platform. This includes transactions and other high-risk actions, such as when a user changes their contact information, payment details, or linked accounts. Persona’s platform enables teams to easily bring this information into one platform where you can set rules specific to your business to flag any suspicious anomalies.
The more information you’re able to gather, and the faster you can do so, the stronger your case will be in the event that suspicious activity is detected and confirmed.
In addition to helping businesses build compliant AML programs, when potential suspicious activity occurs, Persona streamlines the manual review process, leveraging automation to scale without sacrificing quality or compliance. With Persona, businesses like Branch can consolidate data and customize case views with ease while simultaneously protecting sensitive information.