Know Your Transaction (KYT) is an anti-money laundering (AML) and compliance procedure that focuses on understanding the nature and pattern of customer transactions. Its purpose is to monitor and assess the risk levels of the transactions that take place through a financial institution. This process helps in detecting and preventing fraudulent activities, money laundering, and other financial crimes.
How KYT Differs from KYC and KYB:
- Know Your Customer (KYC): This is the process of verifying the identity of the clients. KYC involves checking customer’s identity documents, understanding their financial behavior, and assessing their risk factors. It’s about knowing who the customer is.
- Know Your Business (KYB): Similar to KYC, KYB is about understanding the businesses that banks and financial institutions engage with. It includes verifying the business’s registration details, understanding the nature of the business, the industry in which it operates, its beneficiaries, and the risks it may pose.
- Know Your Transaction (KYT): Unlike KYC and KYB, which are focused on the identity of individuals and businesses, KYT is about the ongoing monitoring of their transactions. KYT procedures analyze transaction patterns to detect anomalies that may suggest illegal or high-risk activities.
Where KYT is Used:
KYT is used in various sectors within the financial industry:
- Banks and traditional financial institutions to monitor account activity.
- Payment processors and money transfer services to screen transactions in real-time.
- Cryptocurrency exchanges and wallet providers to track the flow of digital assets.
- Fintech companies offering financial services, including peer-to-peer lending and crowdfunding platforms.
KYT Example Walkthrough:
Imagine a customer named Alice who regularly sends money overseas using a money transfer service. Here’s how KYT might work for her:
- Transaction Profiling: The service creates a profile of Alice’s usual transaction patterns, including the average amount, frequency, and destinations of the transfers.
- Real-time Monitoring: Each time Alice initiates a transaction, the system analyzes it in real-time, comparing it with her profile and historical data to spot any discrepancies.
- Alert Generation: One day, Alice sends a significantly larger amount to a country she has never transacted with before. The KYT system flags this as an anomaly and generates an alert.
- Investigation: A compliance officer reviews the transaction. They may look at the source of funds, the reason for the transaction, and the recipient’s details to determine if there’s a legitimate explanation.
- Decision: If the transaction is deemed to be risky or doesn’t comply with AML regulations, the financial institution might block the transfer and file a report with the relevant authorities. If the transaction is found to be legitimate, the information is noted, and Alice’s profile is updated to include this new pattern of behavior.
In this example, KYT enables the money transfer service to act proactively to prevent potential financial crime. The process is designed to protect both the financial institution and its customers, ensuring compliance with AML regulations and maintaining the integrity of the financial system.
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This page was last updated on November 4, 2023.
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