Know Your Customer Transaction: Understanding Legal Framework Of KYC

 Fintech companies are being consumed by money laundering like a disease, which has a negative impact on client satisfaction. In parallel with digital advancements, fraudsters are also changing. Their strategies for getting over security measures and covering up their unlawful money trails are becoming more difficult to find. As a result, strict AML controls and laws are necessary, especially for banks.

Know Your Customer Transaction:

Legal Framework Of KYC:

The legal framework of Know Your Customer Transaction is a set of laws, regulations, and guidelines that are designed to prevent financial crimes, such as money laundering and terrorist financing. 

The legal framework of KYC is enforced through a combination of regulatory oversight, inspections, and sanctions. Financial institutions that don’t follow KYC regulations may be subject to fines, legal action, or loss of their operating license in various jurisdictions.

The framework varies from country to country, but generally includes the following components:

Customer identification: Financial institutions are required to verify the identity of their customers using reliable and independent documents, data, or information.

1- Customer due diligence: institutions are required to assess the risk associated with each customer and conduct ongoing monitoring of their transactions.

2- Enhanced due diligence: measures for high-risk customers, such as politically exposed persons (PEPs) and customers from high-risk countries.

3- Record keeping: Fintech companies need to maintain records of customer identification and transactional data for a specified period of time.

4- Reporting: An effective report consisting of suspicious transactions should be submitted to regulatory authorities and law enforcement agencies.


Authorities like the European Union and the FATF heavily promote risk-based transaction monitoring to businesses as part of their verification and onboarding procedures.

Intro To Transaction monitoring:

Transaction monitoring is a process used by financial institutions to detect and prevent suspicious or illegal activities, such as money laundering, terrorist financing, or fraud. To find any unusual or suspicious behavior requires the automatic or manual evaluation of transactions and client data.


Transaction monitoring may involve monitoring various types of financial transactions, including deposits, withdrawals, wire transfers, and other types of transactions. It may also involve the use of data analytics tools to identify potential risks and assess the effectiveness of existing controls.

Did you know that recent data reveals that every year, over 5% of the global GDP—roughly $800 billion is laundered? (Office on Drugs and Crime (UN))

Integrating Risk Assessment In Kyc transaction monitoring:

Risk assessment in transaction monitoring is the process of identifying and evaluating the potential risks associated with financial transactions. This includes identifying the types of transactions that are most likely to be used for illicit activities, such as money laundering, terrorist financing, or fraud, and assessing the likelihood and impact of such risks.

There are a lot of things that are considered in establishing an identity as a low-risk or high-risk profile. A variety of factors that can help companies have a risk-based approach in kyc transaction monitoring are:

  • type of customer
  • The geographic location of the transaction
  • Size of the transaction
  •  nature of the products or services involved.

How Transaction reporting system Detects Fraudsters

Transaction reporting systems can help detect fraudsters by identifying unusual or suspicious patterns of behavior in financial transactions. This includes looking for transactions that are inconsistent with a customer’s typical spending patterns, or transactions that involve large sums of money or unusual destinations.

Data collection: The first step in transaction monitoring is to collect data on customer transactions. This may include transaction data from various sources, such as internal systems, external data providers, and public records.

Data analysis: Once the transaction data is collected, it is analyzed using various techniques, such as data mining, pattern recognition, and statistical analysis. This helps identify any suspicious patterns or anomalies that may indicate fraudulent or illegal activity.

Risk assessment: The next step is to assess the risk associated with each transaction, based on factors such as the type of transaction, the customer’s history, and the geographic location of the transaction.

Alert generation: If a transaction is deemed to be high-risk or suspicious, an alert is generated to notify the appropriate personnel or department within the financial institution. The alert may include details about the transaction, the customer, and the potential risk.

Investigation: The alert is then investigated by trained personnel, such as compliance officers or fraud investigators, to determine whether the transaction is indeed suspicious or fraudulent. This may involve gathering additional information or conducting further analysis.

Reporting: Finally, if the investigation confirms that the transaction is suspicious or fraudulent, a report is generated.

Transaction screening system continues to assist Fintech Companies:

  • Digital banks are greatly susceptible to increased risk of money laundering and identity theft.
  • Fintech companies need a proficient transaction screening system 
  • Millions of money are laundered annually through banks.
  • A safe security system helps banks gain a positive reputation with a better customer experience. 
  • suspicious transaction monitoring is based on a risk-based approach to filter out high-risk investors/customers/clients. 

Concluding Remark.

Know Your Customer Transaction plays a vital role in monitoring transactions and fighting against illegal activities like money laundering. Therefore, to keep a close eye on the money trails and transactions, monitoring is a key element in investigation. 

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