Know your transaction (KYT) refers to evaluating and monitoring financial transactions to identify illicit activities. Banks and financial institutions have been historically associated with fraudulent activities, such as money laundering and terrorism financing. However, the pandemic gave rise to such activities, owing to the increase in digitization and the adoption of blockchain technology. The industry must understand how digital transactions can carry information that is hard to follow using the typical monitoring procedures. Financial institutions must implement a robust know your transaction monitoring system to curb these activities and safeguard customer and business interests.
Besides business reasons, federal and international regulatory bodies require companies to comply with anti-money laundering (AML) and counter-terrorism financing (CTF) policies. However, it can be confusing and time-consuming for a company to deal with relevant complexities and regional AML policies. This post discusses the best practices for know your transaction (KYT) verification a company should know before jumping into it.
Develop Policy Procedures
The initial phase of developing a know your transaction strategy starts with developing internal policies. For this purpose, the company needs expert resources that understand the evolving landscape of such regulations. Currently, firms working in the US must comply with the Bank Secrecy Act. The act’s implementation falls under the AML policies of Financial Industry Regulatory Authority (FINRA) Rule 3310. Similarly, the EU enforces the 5th Anti-money Laundering Directive (5AMLD) to curb financial fraud. However, it plans to introduce the 6th directive and a new Anti-money Laundering Authority (AMLA) to ensure enhanced security. Hiring inexperienced resources to develop an internal policy that does not address prevalent regulations can prove fatal for the company. Therefore, a firm should strive to create a comprehensive know your transaction policy that is concise and facilitates the transaction monitoring system.
Conduct Frequent Review
Most companies need to understand that compliance with AML policies, especially knowing your transaction, is not a one-off project. Instead, it requires frequent reviews to ensure compliance with established and amended policies. Due to the rapid digitization of the finance sector, scammers are using diverse methods to exploit the system. In 2022 alone, the Federal Trade Commission reported 2.4 million reports which collectively caused a loss of $8.8 billion. Firms should implement an internal review system to identify amendments in regulatory policies and prevalent scams. Therefore, helping the company stay secure and prevent any legal violation of know your transaction compliance regulations.
Independent Supervision of Program
Violating or not adhering to AML and knowing your transaction policies can cause reputational, legal, and monetary issues for a company. In the worst-case scenario, the company’s operational licenses can be revoked by regulatory authorities. The firm’s management and leadership should be responsible for ensuring ownership and accountability of the compliance program. As discussed above, the company’s strategic leadership must attend policy reviews to stay updated with the changing regulations and risks. Granted, it can be hectic and time-consuming for the internal team to handle such tasks. A better option is to look for a KYT solution provider that complies with all regulations and implements a strict quality check on verifications.
Continuous Training and Transaction Monitoring
Ideally, all stakeholders in the company should undergo periodic training on regulations and the company’s internal policy. This will ensure that responsible leaders understand the significance of knowing your transaction program and actively take part in strengthening it.
Secondly, unlike other verification procedures, KYT requires constant monitoring of financial proceedings. The primary difference between effective programs and subpar ones is the accuracy of monitoring analysis. Therefore, the system should be strong enough to identify underlying patterns of customer transactions.
Third-Party Know Your Transaction Services
Implementation of a compliance program and constant monitoring is time-consuming and resource-intensive work. It also requires continuous staff involvement and investments to maintain the quality of verification checks. In 2023, when the world strives for efficiency across all sectors, it can be a liability for a company to hire an internal team to manage a know your transaction program. A more suitable option is to look for a third-party KYT solution provider. Compared to an in-house team, such services are cost-friendly and use AI to enhance accuracy. Moreover, the provider constantly updates the system to reflect the changes in regulations, thus staying compliant with policies. Apart from performing due diligence checks, such solutions typically compare the data with national and international databases to identify potential scammers. Cross-validation with databases adds another layer of security to the compliance program.
Key Takeaways
Know your transaction covers areas related to the financial proceedings of customers and clients. A robust KYT system can ensure compliance with regulations and protect the company from potential threats. Yet, the implementation can be complex and hectic for an internal team. Third-party solutions provide better accuracy, efficiency, and security in a cost-friendly package. Therefore, firms can comply with AML policies without breaking the bank.
