Compliance processes are continually enriched with new functions to combat varying emerging issues, further complicating the process. One fundamental pillar of the compliance process involves the Know-Your-Transaction (KYT) module. KYT is a methodology which provides organisations with critical analysis required to identify and reveal any suspicious fraudulent transactions conducted by customers or investors. This is through looking into an individual’s background and transaction history. KYT modules connect the profiles of customers or investors and their transactions made so that institutions screening these individuals are able to look out for illicit transactions.
Why is KYT is Needed for Businesses
There are a variety of reasons KYT is required, and it is generally categorised into two main groups. First, KYT is needed for the critical functions it performs, as no other modules have the same focus. It enables businesses to screen and monitor the transactions which are performed by customers or investors, especially when it pertains to cryptocurrency transactions. To add, KYT assumes an analytical position in monitoring patterns found in transactions, although some of their methods or abilities may vary. By doing so, criminal activity can be detected when it comes to money laundering or other forms of theft through cryptocurrencies.
Second, KYT is required because other modules cannot combat the issues that arise without KYT. The possession of some modules, but not others, would not ensure security from all angles, as no single module is sufficiently all-rounded. A common misconception held by many organisations is that a Know-Your-Customer (KYC) system sufficiently protects the company and their customers or investors from risks; however, this is untrue. A KYC screening only reports issues with those being onboarded when they meet certain criteria, such as being a politically-exposed person (PEP) or sanctioned individual. Otherwise, trends in transactions or any suspicious activity would not be reported. Not to mention, a KYC screen would only notify you of any changes in an individual’s profile if ongoing monitoring and re-screening functions are turned on.
New Crimes Call for New Interventions
Significantly, the number of crimes relating to cryptocurrencies are on the rise and fraudsters are getting more creative in how they commit such crimes. This demands new interventions to be put in place whereby one of them includes KYT. Transaction Monitoring (TM) is an important aspect of KYT when combatting many crimes in the cryptocurrency space. The steps and their significance in doing so are broken down:
Stage 1: Knowing the Customer
Before forming business relationships, financial institutions (FIs) must ensure that their risk-assessment framework and customer due diligence (CDD) closely follow the anti-money laundering and counter-terrorism financing (AML/CFT) notices issued by the Monetary Authority of Singapore (MAS). The imposed frameworks must be able to determine the risks posed by each consumer and provide the FI with sufficient knowledge of their consumers.
Stage 2: Risk-Based Calibration
The second stage of TM involves risk-based calibration of the system, whereby FIs configure and set up the appropriate parameter, threshold, and scenario of its TM system according to the unique needs, risks, and situations it faces. There should also be frequent back-testing to analyse historical data for prediction of results and making amendments to their system before risking any actual capital. Similarly, FIs must conduct checks for data integrity to ensure that information in their TM systems is accurately captured and transmitted. Such control checks will allow detection and assessment of any abnormalities or errors associated with data integrity.
Step 3: Robust Implementation
In conjunction with the previous phases, it is also crucial for FIs to ensure the quality, accuracy, and consistency of the personnel who are handling the TM process and the alerts generated. FIs ought to provide their employees with adequate training and guidance for them to perform their duties effectively and to avoid errors during the TM process as much as possible. To further strengthen their TM implementation, FIs should train their staff to conduct pre-transaction checks and execute proper alert handling and documentation.
Step 4: Resolve and Enhance
When FIs detect suspicious or questionable transactions, they are required to file suspicious transaction reports (STRs) with the Suspicious Transaction Reporting Office (STRO) promptly. If FIs decide to retain the relationship with the customer, they have to put in place appropriate enhanced measures to mitigate the risk of the accounts being abused for ML/TF activities. Also known as post-STR practices, these measures include subjecting the suspicious accounts to enhanced scrutiny and obtaining compliance or higher management approvals before executing further transactions. FIs are highly encouraged to conduct quality assurance checks by periodically sampling the quality of their alerts handling, ensuring the robustness of their TM process.
Relying solely on KYC for risk management can present issues like false positives, where a customer is incorrectly flagged as a financial risk. In conclusion, critical analysis of transactions can provide valuable information and evidence required for verifying any suspected illegal or fraudulent transactions. Hence, a robust KYT and TM process is essential for FIs to effectively detect and report suspicious transactions and take the steps to mitigate ML/TF risks. FIs should also inculcate risk awareness and mitigation measures amongst all staff for the efficient execution of KYT controls.