Know Your Transaction (KYT) is the process of a financial institution analyzing transactions to determine if they exhibit suspicious activity, and thereby may be linked to financial crime.
While KYC (Know Your Customer) focuses on verifying the identity of customers, KYT specifically targets monitoring and analyzing transactional activity to detect suspicious behavior.
Here are some key guidelines and practices related to KYT compliance:
- Transaction Monitoring: Financial institutions are required to implement robust systems for monitoring and analyzing transactional activity in real-time or near-real-time. Automated tools and algorithms are often used to flag potentially suspicious transactions based on predefined criteria, such as transaction amount, frequency, geographic location, and counterparties involved.
- Risk-Based Approach: KYT compliance should be risk-based, meaning that institutions assess the level of risk associated with each transaction or customer and allocate resources accordingly. Higher-risk transactions, such as large-value transfers or transactions involving high-risk jurisdictions, receive greater scrutiny and monitoring.
- Customer Due Diligence (CDD): KYT practices typically involve ongoing customer due diligence to ensure that the institution has accurate and up-to-date information about its customers. This includes verifying the source of funds, monitoring changes in transaction patterns, and periodically re-evaluating customer risk profiles.
- Suspicious Activity Reporting (SAR): When potentially suspicious transactions are identified through KYT monitoring, financial institutions are required to file Suspicious Activity Reports (SARs) with the relevant regulatory authorities. SARs provide detailed information about the suspicious activity, enabling authorities to investigate further and take appropriate action if necessary.
- Compliance Training and Awareness: Institutions must provide training and awareness programs to employees responsible for KYT compliance. This includes educating staff about the risks associated with money laundering and terrorist financing, as well as providing guidance on identifying and reporting suspicious transactions effectively.
- Regulatory Compliance: Financial institutions must comply with relevant regulatory requirements and guidelines related to KYT compliance. This may include regulations such as the Bank Secrecy Act (BSA) in the United States, the Financial Action Task Force (FATF) recommendations, and jurisdiction-specific anti-money laundering (AML) and counter-terrorist financing (CTF) laws.
- Data Privacy and Security: Institutions must ensure that they handle transactional data in compliance with data privacy and security regulations. This includes implementing measures to protect customer information and transactional data from unauthorized access, disclosure, or misuse.
- Record-Keeping: Financial institutions are required to maintain comprehensive records of transactional activity and KYT compliance efforts. This includes keeping records of customer identification documents, transaction logs, SARs, and any other relevant documentation.
By adhering to these guidelines and implementing robust KYT compliance measures, financial institutions can better detect and prevent illicit activities/transactions, safeguard their reputation, and comply with regulatory requirements.
