Know Your Transactions – A Guide for Avoiding Crypto Financial Fraud

For any financial institution such as a bank, investment firm, or cryptocurrency platform, mitigating the risk of fraud is a major priority. Because of the monetary nature of such institutions, they have a high likelihood of being at the receiving end of a financial crime. Financial crimes that harm the integrity and financial well-being of a firm can range from identity theft, account takeovers, data breaches, or similar malpractices. Apart from this, established criminal organizations also target these institutions for carrying high-profile crimes, such as money laundering or the financing of terrorist activities. To avoid the occurrence of such scams, companies rely on performing Know Your Transaction (KYT) verification procedures. In this blog, we will be diving a little deeper into this to make you aware of how financial fraud can be effectively detected and prevented. 

Financial Scams on the Rise

Financial fraud is a recurring issue faced by institutions worldwide. With the motive of gaining monetary benefits, criminals target these institutions in a number of ways. Identity theft is currently the fastest-growing crime across the globe. In this fraud, criminals first gain access to confidential data of individuals. To do this, they carry out numerous schemes, including phishing scams, company-wide data breaches, or by looking for discarded personal documents. 

Once the data has been stolen, it is then used to create a new identity (also known as synthetic identity theft) or gain illegal gains. Illegal gains can generally include unauthorized access to bank accounts to steal funds, obtaining illegal medical benefits, committing insurance scams, and much more. 

For the timely detection of such scams, Know Your Transaction verification has become the need of the hour. The KYT process is similar to “Know Your Customer” verification, however, its implementation is mainly directed at cryptocurrency firms. Let’s take a look at what these procedures include. 

Transaction Verification

For the verification of a transaction, it is necessary to ensure that the person making the transaction is actually who they say they are. While cryptocurrencies have the benefits of anonymity, this feature is also used to facilitate fraud. To create a high level of transparency, virtual asset service providers (VASPs) typically require the following information from their users prior to a transaction:

  • Their full name
  • Phone number 
  • Email address
  • Date of birth
  • Physical address and/or nationality
  • Copy of government-issued ID
  • Copy of a recent utility bill
  • Photo of the user with their ID document 

By acquiring this information, VASPs are able to minimize the risk of fraud. KYT builds upon the KYC process, making it easier for auditors to trace back a suspicious transaction in case any sign of money laundering is detected. Without providing this information to fulfill Know Your Transaction requirements, users are unable to perform a transaction. As a result, the KYT process serves as a disincentive for fraudsters and high-profile criminal establishments. 

Creating Trust Through KYT Verification 

The KYT process has long been in demand by consumers, particularly as it creates a relationship based on trust and transparency. For any B2B or B2C relationship to last, these factors require strengthening. Through Know Your Transaction verification, the legitimacy of the minors and end-users can be closely monitored, while the information can also be used to maintain accountability. This way, due diligence is performed, leading to the long-term sustainability of the blockchain and cryptocurrency industry on the whole. 

Compliance Targets Met 

Perhaps the key advantage of performing Know Your Transaction operations is its ability to maintain regulatory compliance. Global regulatory authorities have now included cryptocurrency platforms in their definition of financial institutions. This means that similar to other financial institutions, cryptocurrency providers are also liable to comply with KYC and AML regulations – a failure of which can result in hefty fines and penalties.  

KYC refers to the verification process during which the identity of the end-user is verified. This involves authenticating the end-users by verifying them against global databases using their identity documents. Commonly accepted ID documents include a government-issued ID card, driving license, utility bill, and passport. 

The KYC process is a subdivision of AML (Anti-money Laundering) checks. The AML process ensures that the end-user is not found on any criminal watch list, global sanction, adverse media news, or Politically Exposed Person (PEP) list. 

To maintain compliance with both of these regulations in one go, cryptocurrency exchanges can simply perform Know Your Transaction verification. For the purpose of convenience, numerous third-party KYT service providers can be hired to stay compliant and lower operational costs.

Key Takeaways

  • To maintain compliance with KYC and AML regulations, financial institutions can perform Know Your Customer (KYT) verification
  • KYT processes include both, AML and KYC procedures 
  • By doing so, companies can mitigate the risk of fraud 
  • Hefty fines and charges due to non-compliance can also be avoided through KYT verification 

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