Know Your Transaction (KYT) is a process employed by financial institutions to monitor the merchants’ businesses through the analysis of transaction data. Examining transaction data allows accurate and data-driven conclusions to be made, as it produces the essential evidence required upon suspicions over any fraudulent merchant activity.
Transaction laundering can be easily associated with money laundering, the main difference being – transaction laundering is conducted online. The mechanism of transaction laundering is ingenious: disguised by a shell website, transaction laundering is executed simply by setting up a website that appears ‘normal’ (the shell website) i.e., advertising legal goods or services, whilst operating a ‘fraudulent’ site unknown to banks and card networks that conducts prohibited business activities. The transactions from the ‘fraudulent’ site are then routed through the ‘normal’ site to disguise the transaction as legitimate – deceiving banks, payment service providers, and card networks that these are all valid transactions and profits acquired from the ‘normal’ website.
Why is Transaction Laundering used?
Similar to money laundering, criminals need a way to disguise incomes acquired from prohibited ecommerce businesses e.g., illegal online gambling or child pornography, and integrate it into the legitimate financial system. Because these activities violate card network rules, not only are applicants rejected upon applying for merchant accounts, but their accounts can also be terminated and reported if their associated website noticeably displays restricted business activities. Outsmarting the system, criminals began to exploit shell websites to continue their fraudulent ecommerce activities undetected – facilitating the birth of transaction laundering.
Weakness of a reliance on KYC and web crawling
There are many limitations when using Know Your Customer (KYC) and web crawling in the process of risk management, merchant monitoring, and identifying transaction laundering activities. KYC checks and web crawling rely heavily on open data and/or information provided by the individual or business. This raises several issues in itself – publicly available data may be outdated, and information provided by the applicant may be manipulated or fabricated. Undoubtedly, KYC and web crawling are crucial for due diligence and onboarding new merchants, as it provides fundamental profiling on applicants and their business nature. However, both KYC and web crawling alone are not efficient nor effective for long-term monitoring and risk management.
While both procedures can be sufficient to onboard new merchants in the early stages, it lacks the delivery of concrete evidence required for verifying any suspected illegal or transaction laundering activities. Relying purely on KYC and web crawling for risk management can lead to another challenge: false positives – inaccurately flagging potential merchants as a financial risk.
Insights derived from KYT
The advantage of KYT is that it targets transaction data – evidence that is available in real time, and that is hard to be manipulated or changed. Examining transaction data can produce both quantitative and qualitative analyses to determine the true business activities of merchants. With concrete supporting evidence in hand, KYT can help to generate highly accurate insights and allow data driven conclusions to be made.
In simple words, because KYT can connect transaction data to specific sites, it exposes concealed websites (used to conduct illegal activities) – creating the opportunity for further investigation and gaining additional information based on data extracted from the no-longer-concealed website. Through this technique, information that would have otherwise been disregarded, such as hidden businesses and business activities as well as the identities of other associated stakeholders can be discovered, reinforcing the effectiveness of KYT. Analysing raw transaction data can reveal transaction patterns and trends (e.g., transaction velocity, frequency, time, location), and whether there are any irregular changes worth noting or investigating. For example, location – if transactions for a site are limited to or are mainly coming from buyers in a high-risk location or country, these are red flags to be aware of, to mitigate financial risks. When looking at the time and velocity of transactions, ‘normal’ sites should accumulate transactions conducted over any time of the day, while suspicious sites might have little to no transactions for majority of the day, and suddenly a burst of a thousand transactions over two specific hours
Even examining transaction amounts offer valuable information – a USD 10,000 transaction on a site that sells small fashion accessories would appear suspicious, as the items in the store should have a low price range. While the list of intelligence and detection that KYT can accomplish goes on, ultimately the importance lies within identifying potential risks as early as possible and taking action in a timely manner.
The bottom line
Know Your Transaction can tell you many things. However, the right tools, resources, and technology are essential to implementing KYT effectively. In order to effectively extract data and trace transaction details to its roots, advanced technology and professional data analytic experience is vital. Utilising third party vendors – especially MMSP approved service providers, is a great way to begin your KYT journey.
About Brandon Li
Brandon is the Director of Product at Austreme and a fintech enthusiast He speaks in seminars and conferences such as the Mastercard Global Risk Leadership Conference to share trends and recommendations of how to use fintech in daily operations to mitigate payment risks and comply with regulations.
About Austreme
Austreme is an industry leader in forensic fintech, helping brand owners, acquiring banks, and payment service providers monitor and detect the online merchants’ illegal and brand-damaging transactions under the international card associations’ global brand protection program. We provide a wide range of financial risk management services for customers globally, specialising in big data analytics, anti-transaction laundering, online store illegal content monitoring, and merchant onboarding. For more information about Austreme, please visit http://www.austreme.com.
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