Since then, financial institutions have built technical systems and have large anti-financial crime departments at great expense to classify their customers and create risk profiles. KYC plays a central role in the customer onboarding process and risk-based transaction monitoring.
How effective is KYC for efficient transaction monitoring? Even though banks know their customers better than ever, do they also know customer transactions? critical customers and their payments. But just relying on KYC is definitely not enough.
KYC is not Enough
The KYC requirements for bank are strict and conform to a global set of guidelines agreed by a number of jurisdictions. Although the knowledge of a customer is uniform, there are no special features that describe these requirements as an internationally acceptable standard. Some jurisdictions have regulations, while others leave it up to market participants to do so in accordance with the wording and spirit of the law.
Today, most KYC processes are manual and usually static; Once the KYC due diligence has been carried out, there is little to no follow-up action. The person or company ensures that they are present on paper for as long as the law requires. The reality is that things are always changing in the business world. This makes ongoing due diligence a further problem for banks. How should banks efficiently and effectively carry out ongoing due diligence across their entire customer base?
As technology plays an increasingly important role in the financial services industry, the liability of financial institutions will only increase. Compliance with a financial crime is increasingly coming into focus. and its participants can become more and more transparent. Legislators are motivated to protect investors, make markets fair and efficient, fight terrorist financing and fight money laundering. Know your transaction will be an inevitable facet of future regulation.
A Deep Dive into KYT
At the center of all financial transactions is the need for clarity about the counterparties involved and the purpose of the payment. These are the most basic requirements. To further complicate matters, for example, if one company is making payments to another company, additional documents may be required. These can be waybills, tax withholding documents, government documents, proof of identity, or even proof of residence. Sometimes even more detailed details are required, for example, who checked which document in which process step.
Transaction level information, where this data is centralized and easily referenced, therefore has many advantages. The key to industry leadership is moving to a model where banks know more about their customer’s transactions.
KYT is that model. Automated message enrichment with accurate and relevant information taken directly from the original data sources, rather than manually, is the ideal scenario. Build more trust between affiliates and correspondent banks, lower operating costs, and increase security with a simplified compliance process that counterparties can trust.
Why Is Transaction Laundering Used?
Similar to money laundering, criminals have to hide the income from prohibited e-commerce transactions, such as illegal online gambling or child pornography and integrate them into the legitimate financial system. for merchant accounts, but your accounts can also be terminated and reported if your partner website exhibits noticeably reduced business activity. After this, criminals began to exploit phantom websites to continue their fraudulent e-commerce activities unnoticed, which facilitated the birth of transaction laundering.
How to Implement KYT Effectively Under These Conditions?
A look at those involved in the transaction is promising. On the one hand, it is about recognizing who is the sender and recipient of a payment, but also which banks are involved; especially for payments from foreign banks or correspondents. Even if the regulatory authority does not prescribe the monitoring of non-customer transactions, it is worth taking a closer look here.
What information is there about the participants in a payment? Can you get information from the media or the internet? Are there entries for the parties in relevant lists? Particularly with regard to non-customers, correspondent banks, NGOs, etc.,
Transaction monitoring should be improved. Examples are the identification of companies, companies, and NGOs in combination with keywords from the areas of donations, refunds, or cancellations. Another example is the selection of names and addresses against Lists of known mailbox company addresses. Compliance employees receive more detailed information to assess whether a suspicious payment has been made.
Another challenge in transaction monitoring is the identification of all payment participants. Non-customers of banks may not have a unique identifier and account number identification or IBAN. In addition, SWIFT FIN offers several options for defining names, addresses, and bank details via the letter option. This often means that transactions with the same payee are not recognized as such due to different spellings. Only by merging the name and address data with a clear identification can sales be reliably grouped and different cash flows recorded.
This requires a bottom-up process in the transaction monitoring system that uses smart algorithms and fuzzy logic to automatically identify identical participants and forwards them to the monitoring system. with your unique identifier. With such a system, the quality of the alarms improves significantly and banks know their transactions much better.