KYT (Know Your Transaction): the continuous monitoring that complements KYC

Verifying a client's identity once is no longer enough. That realisation gave rise to KYT, Know Your Transaction, a compliance approach that shifts the focus from who to what: not just knowing who you are dealing with, but continuously monitoring what that client actually does with their money. For regulated companies in the Luxembourg financial centre (banks, funds, payment service providers, brokers and digital asset platforms), this distinction is no longer theoretical: it shapes a growing share of the due diligence obligations imposed by the CSSF.

KYT complements KYC, it does not replace it

KYC (Know Your Customer) applies when the business relationship begins: verification of identity, beneficial owners and source of funds. It is a one-off check, carried out when the account is opened and then updated periodically. KYT, by contrast, operates continuously on the transactions themselves: amounts, frequency, recipients, geographical areas and consistency with the risk profile established during KYC. A fully identified client may, months after onboarding, start carrying out operations that no longer match their declared profile: this is precisely what KYT is meant to detect, where a static KYC would see nothing.

The two approaches are therefore complementary and, for most obliged entities, both are mandatory. The CSSF regularly points this out in its publications on anti-money laundering and countering the financing of terrorism (AML/CFT): client identification must be accompanied by ongoing monitoring of business relationships and transactions, with documentation of the source of funds and wealth.

Why the subject is gaining momentum

The term KYT first took hold in the world of virtual assets, where the traceability of flows on the blockchain allows particularly detailed transaction analysis. In Luxembourg, this dimension took on concrete importance with the switch from the national regime for virtual asset service providers (VASPs, "PSAV" in French) to European authorisation under MiCA: the transitional period ended on 1 July 2026, and registered providers must now operate under crypto-asset service provider (CASP, "PSCA" in French) status, supervised by the CSSF. But KYT is not limited to crypto-assets: it applies equally to traditional payments, international transfers, fund structures and private banking activities, wherever a financial flow can reveal abnormal behaviour.

The European timetable adds further pressure. The European Anti-Money Laundering Authority (AMLA), headquartered in Frankfurt, began operating in 2025 and will scale up, with direct supervision of high-risk entities from 2028. The sixth anti-money laundering directive (AML6) and the associated European regulation require the gradual application of new due diligence obligations between 2026 and 2027. For Luxembourg companies already overseen by the CSSF, this development does not overturn existing principles, but it tightens how they are applied: stronger traceability, harmonised practices across the Union, and more intrusive checks on the quality of name screening and the effectiveness of transaction monitoring.

The role of artificial intelligence

Historically, transaction monitoring relied on fixed rules: amount thresholds, lists of high-risk countries, predefined scenarios. The well-known problem with this approach is the volume of false positives it generates, alerts that tie up entire compliance teams only to find, ultimately, nothing abnormal. Machine learning changes the picture by modelling a client's normal transaction behaviour and flagging genuine deviations rather than mere threshold breaches. Feedback published in the sector reports significant reductions in false positive rates, freeing up analysis time for genuinely suspicious cases.

This capability comes with a counterpart: AI does not remove the need for human judgement on alerts, and supervisory authorities, the CSSF first among them, expect institutions to be able to explain and document the logic of their detection systems, not just produce a score. An AI-assisted KYT model remains a tool serving a regulatory obligation, not a substitute for the responsibility of the obliged entity.

What Luxembourg decision-makers should take away

For a regulated company established in Luxembourg, three points deserve immediate attention:

• Check how KYC and KYT fit together in your internal framework. The CSSF assesses not only whether procedures exist but whether they are effective: a solid KYC at onboarding does not make up for deficient transaction monitoring afterwards.
• Anticipate the growing European regulatory burden. Between the end of the MiCA transition for digital asset providers and the gradual implementation of the AML6/AMLA package through 2027, documentation and traceability requirements will keep tightening.
• Do not hand everything over to the tool blindly. A KYT system, whether rule-based or AI-based, must remain configured, audited and documented so that every alert closed or escalated can be justified during an inspection by the CSSF or, in future, by AMLA.

KYT is not a passing technology trend: it is the operational expression of an increasingly explicit regulatory requirement, that of knowing not only your client but also what they do, on an ongoing basis. For the Luxembourg financial centre, where a reputation for rigour in compliance is a strategic asset, investing in this monitoring capability is less an option than a competitive necessity.