Active monitoring of transactions plays a pivotal role in maintaining the security and authenticity of financial systems. By continuously scrutinizing financial activities through robust practices like Know Your Transaction (KYT), organizations can effectively detect and prevent illicit financial activities such as money laundering and terrorist financing. This robust approach ensures compliance with regulations, fosters trust among stakeholders and contributes to a safer and more transparent financial environment. As enterprises evolve in a global digital landscape, the significance of active transaction monitoring cannot be emphasized. It serves as a critical defense against financial crimes and strengthens the resilience of financial institutions.
Let’s deep dive into the monitoring of transactions procedure for identifying potential financial crimes and reasons why financial institutes should KYT practices.
Tracking Suspicious Transactions: Hong Kong Insurance Authority Reports (2013-2018)
By October 2018, the insurance authorities in Hong Kong received 25 reports about transactions that seemed suspicious for that year. Hong Kong is an important financial center globally and has been working hard to stop money laundering, terrorist financing, and other illegal financial activities for a long time.
Complete Monitoring of Transaction Procedure Through Advanced KYT
Monitoring transactions is a complex procedure that requires accurate systems to scrutinize the money flow. To make the financial systems better, know your transaction whole process is the best procedure for monitoring transactions that are happening in an illegal way. The complete procedure includes five major steps, which are explained below:
Data Collection
During the transaction monitoring process, various types of data are collected from users. These include user credentials, both external and internal data sources, and transactional data. Each piece of information contributes to a comprehensive view of the financial transactions.
Risk Evaluation and Scoring
The data gathered from different sources is scrutinized, and a specific score is allocated based on the threats involved in the financial transactions. The major factors which are involved in assigning and evaluating the risk are as follows:
- Involvement of third parties
- Nature of the transactions
- Geographical nature of the user’s while making transactions
After analyzing these factors, KYT solution provider analyze the intensity of the threats involved and assign a proper risk score.
Surveillance
Surveillance is the third step in the monitoring of transactions, in which transaction data is under real-time scrutiny. It is carried out by the advanced algorithms of artificial intelligence and machine learning. These advanced algorithms are designed in such a way that they detect unusual activities that happen in no time for carrying out terrorist financing and money laundering.
Investigation
The investigation is the ultimate step in know your customer transaction procedure. It is carried out to find out whether it is carried out for financial fraud or for other purposes. Sometimes, customers make a lot of transactions at a time that lies below the threshold, which is called smurfing. These transactions are identified as illegal but actually do not consider to be the one. After proper investigation, officials mark it as illegal or authentic.
Reporting
Suppose a transaction is identified as suspicious or illegal. In that case, financial institutions are required to document it to the relevant authorities as a part of their duty under the compliance regulations of the CTF (Counter-Terrorist Financing) and AML (Anti-Money Laundering).
Reasons Why Financial Institutions Utilize KYT
Know your transaction process is not about maintaining regulation, but it is a proactive approach to preventing financial organizations and the invested parties from regulating with compliance. Financial institutions should carry out the monitoring of transaction procedures for the following reasons:
Regulatory Compliance
Transaction monitoring assists in meeting regulatory compliance rules, which ensure system security and avoid sanctions by not regulating with compliance.
Identifying Financial Crime
Monitoring of transactions assists in the identifying and combating of various financial scams which include money-laundering and terrorist financing. It helps in maintaining the reputation by identifying the potential risks associated with financial activity and preventing their users from monetary losses.
Risk Control
KYT can easily detect and combat the potential risks associated with illegal transactions, users, and third parties involved. It assists financial institutions in making informed decisions.
Enhanced Due Diligence
The conduction of transaction monitoring through KYT enables enhanced due diligence and gives detailed insights into a user’s transaction history.
Operational Effectiveness
KYT assists in increasing operational efficiency by tracking the money flow through the automation process. It mitigates the necessity of manual procedures, increases accuracy, and streamlines compliant efforts.
Final Verdict
In actively monitoring transactions, businesses can effectively recognize illicit financial assets through Know Your Transaction practices. KYT involves thorough scrutiny of economic activities to distinguish suspicious or illegal transactions. By implementing KYT, organizations proactively safeguard against financial crimes such as monetary losses and terrorist financing. This advanced approach not only enhances regulatory compliance but also strengthens the overall integrity of economic systems.
