An Inclusive Guide to the Know Your Transaction (KYT) Procedure

Know Your Transactions (KYT) procedure is utilized in the financial sector to evaluate financial transactions, mainly to identify fraudulent activities known as Money Laundering. Financial institutions should comprehend how financial transactions hold vast amounts of personal information that is hard to follow.  Authorized paperwork, clearance slips, and invoices are examples of financial signals. These financial signals must be tracked diligently with relevant records, which will later be used for auditing, mainly for investigation and anti-money laundering (AML). As the cryptocurrency industry grows, financial institutions should look deep into cryptocurrency transactions to help identify financial crimes. In 2023, the risk of financial scams and money laundering was 5.6 out of 10 in Honduras, which increased from 2021, and was the best of 2015. Now, it is counted among those who are highest in the risk index of financial frauds in Iberian America.

Through transaction monitoring, suspicious financial activities can get recognized and institutions can detect illegal funds and criminal networks. The Know Your Transaction (KYT)  procedure helps institutions comply with ordinance and prevent customer reputation.

The Alliance of KYT and Anti-Money Laundering 

Know your Transaction (KYT) is closely related to Anti-Money Laundering (AML) regulations, which are used to prevent money laundering and financial fraud. These regulations help financial institutions to: 

  • Discover
  • Secure
  • Report 

Suspicious financial activities. The Know Your Transaction (KYT) procedure is an essential part of these processes for immediate monitoring of transactions. By complying with AML regulations, financial sectors help maintain recognition and avoid legal penalties. 

Know Your Transaction (KYT) Procedure- Complete guide

Know Your Transaction (KYT) operates by monitoring and tracking financial transactions in real-time, and the process involves the following steps: 

  • Data Scrapping

Financial institutions usually collect data from various sources, such as customer information, transactional data, and external data sources.

  • Risk Scoring

The collected data is analyzed based on various factors, such as the geographic location of the transaction, the parties involved, and, mainly, the nature of the transaction. Then, the analyzed data is assigned a risk score according to these factors.

  • Monitoring of transactions

The transaction data is monitored using rules-based systems and algorithms mainly designed to detect unusual activities. Transaction screening completes until it gets approved as suspicious and helps in analyzing its suspicious transaction.

  • Transaction Reporting System

During the transaction reporting, financial institutions must report the transaction to relevant AML and CTF regulation authorities if the transaction is suspicious. 

  • Scrutinization

The research team would do the scrutinization to get to know about the suspicious activity.

Why Financial Institutions Must Access KYT Solution?

As there are increased financial crimes and money laundering, so financial institutions should use KYT for the following reasons: 

  • Financial institutions must comply with AML and CTF regulations. Know Your Transaction (KYT) is an important tool for helping them meet these regulations.
  • Technology innovation in cryptocurrency and innovation focuses on transaction history instead of an individual which leads to financial scams.
  • It is a risk management tool for financial institutions that helps them mitigate risks associated with counterparties or specific transactions.
  • KYT procedure helps conduct better customer due diligence by providing detailed data on the customer’s transaction history and risks associated with their activities.
  • The KYT procedure has reduced the manual process and increased accuracy by automating the observation, tracing, and reporting of transactions.

Challenges and Solutions in Executing KYT Procedure

The following are important challenges to be covered while implementing the KYT process: 

  1. False Positives

The KYT procedure may have false positives and could be time-consuming to investigate, resulting in unnecessary reporting. This issue can be resolved by improving KYT algorithms and investing in staff training to improve the quality of investigations. 

  1. Data Quality

Know Your Transaction (KYT) procedure depends on high-quality data, which can sometimes be difficult to obtain. The best solution to this challenge is investing in data management processes and establishing data-sharing agreements with other institutions that deal with finance.

  1. Technological Transformation

Emerging technologies such as cryptocurrency and blockchain have presented new challenges to the Know Your Transaction (KYT) procedure. This challenge could easily be resolved by staying up-to-date with new technologies and collaborating with technology providers to authorize their expertise.

  1. Cost-Effective 

Implementing KYT procedures is costly, mainly for smaller institutions. This challenge can be solved by outsourcing to third-party Know Your Transaction (KYT) service providers to reduce the cost.

  1. Resources Limitation

Limitations of resources could be another challenge for smaller institutions. This can be overcome by prioritizing activities of KYT procedures and funding for automation to improve efficiency.

Final Interpretation

KYT implementation is necessary because it helps in compliance with AML and CTF rules and protects against all legal and reputational risks.  KYT procedure is a mandatory requirement to prevent financial crimes such as money laundering. 

AML, transaction monitoring system (TMS), and Customer Due Diligence (CDD) units collectively contribute to the productivity of the KYT approach. By implementing KYT approaches, firms can prevent financial institutions from financial scams.

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