When KYT Tools Become 'Zombie Systems': What You Think Is Compliance Is Actually a Trap

Author: Aiying AML Peter

Original link: https://mp.weixin.qq.com/s/Wgo0zhadtCt7jQUJw0FpxQ

Statement: This article is a reprinted content. Readers can obtain more information through the original link. If the author has any objections to the form of reproduction, please contact us, and we will make modifications according to the author's requests. Reproduction is only for information sharing and does not constitute any investment advice, nor does it represent the views and positions of Wu Shuo.

Everyone in the industry knows that there are two kinds of compliance: one is for regulators to see, and the other is real risk management. The former is called 'Compliance Theater,' while the latter is genuine risk management with real consequences. Sadly, the vast majority of institutions, especially those financial technology companies racing on the wind, are unconsciously performing the former.

What is the essence of 'Compliance Theater'? It is a stage carefully built to cope with inspections, obtain licenses, and appease investors. On this stage, the correctness of processes outweighs everything else, and the elegance of reports is far more important than the ability to identify risks. The actors (compliance officers) recite pre-written lines (compliance manuals), operate extravagant props (expensive systems), and present a scene of prosperity to the audience (regulatory bodies). As long as the performance is good, the license is obtained, financing is secured, and everyone is happy.

In this grand play, the most dazzling, expensive, and deceptive prop is those 'zombie systems' that appear to be running 24/7 but have long since lost their soul and are essentially non-functional. Especially the KYT (Know Your Transaction) system, which should be the sharpest scout on the front lines of anti-money laundering (AML), often 'dies' first, becoming a zombie that only consumes budgets and provides a false sense of security. It lies quietly on the server, with green lights flashing, reports generating, everything seems normal—until a real bomb explodes right under its nose.

This is the biggest compliance trap. You think you've equipped yourself with the best gear, building an impenetrable defense, but in reality, you are just feeding a zombie with money and resources. It won't protect you; it will only let you die without a trace when disaster strikes.

So, the question arises: why do the KYT tools we invest heavily in sometimes become mere zombies? Is it a fatal mistake in technology selection, or a complete breakdown of process management? Or is it an inevitable result of both?

Today, we turn our focus to the 'Compliance Theater' stage in the financial technology and payment industry, especially in the Southeast Asian market, where the regulatory environment is complex and business growth is rampant. Here, real dramas are being performed, and what we need to do is to lift the curtain and see the truth behind the scenes.

Act One: Analyzing Zombie Systems—How Did Your KYT Tool 'Die'?

The birth of a 'zombie system' does not happen overnight. It doesn't die suddenly due to a shocking vulnerability or a catastrophic failure; instead, it gradually loses the ability to perceive, analyze, and react in the day-to-day 'normal operation,' like a frog boiling in water, ultimately becoming just a shell that maintains vital signs. This process can be dissected from both technical and procedural dimensions to see how a fully functional KYT system gradually approaches 'death.'

Technical 'Brain Death': Single Point of Failure and Data Silos

Technology is the brain of the KYT system. When the neural connections of the brain are severed, information input is obstructed, and analytical models become rigid, the system enters a state of 'brain death.' It continues to process data but has lost the ability to understand and judge.

Cognitive Blind Spots of Single Tools: Seeing the World with One Eye

Over-reliance on a single KYT tool is the primary and most common cause of system failure. This is almost common knowledge in the industry, but in the script of 'Compliance Theater,' this is often selectively ignored in pursuit of so-called 'authority' and 'simplified management.'

Why is a single tool fatal? Because no single tool can cover all risks. It's like asking a sentinel to monitor enemies from all directions; there will always be blind spots. Recently, a research report published by Singapore-licensed digital asset service provider MetaComp revealed this harsh reality through test data. The study analyzed over 7,000 real transactions and found that relying on one or two KYT tools for screening could lead to as much as 25% of high-risk transactions being erroneously cleared. This means that a quarter of the risks are directly ignored. This is no longer a blind spot; it's a black hole.

Data Source: MetaComp Research - Comparative Analysis of On-Chain KYT for AML & CFT, July 2025. The chart shows that when the risk threshold is set to 'medium-high risk,' the false negative rate for a single tool can be as high as 24.55%, while a combination of two tools can reach up to 22.60%, whereas a combination of three tools drops sharply to 0.10%.
This huge risk exposure stems from the intrinsic flaws of the KYT tool ecosystem. Each tool is built on its proprietary data sets and intelligence collection strategies, leading to natural differences and blind spots in the following aspects:

· Differences in Data Sources

Some tools may have close ties with U.S. law enforcement, providing stronger coverage for risk addresses involving North America, while others may focus on the Asian market, offering more timely intelligence on localized scam networks. No single tool can simultaneously be the intelligence king across all global regions.

· Different Risk Type Focus

Some tools excel at tracking addresses related to OFAC sanction lists, while others are more adept at identifying mixing services or darknet markets. If the tool you choose is not good at recognizing the primary risk types your business faces, it is essentially useless.

· Update Delays and Intelligence Lag

The lifecycle of black market addresses may be quite short. A tool that marks a risk address today may take several days or even weeks for another tool to synchronize. This time lag in intelligence is sufficient for money launderers to complete several rounds of operations.

Therefore, when an institution pins all its hopes on a single KYT tool, it is essentially gambling—betting that all the risks it encounters are exactly within the 'cognitive range' of that tool.

Data Silos Cause 'Malnutrition': How Can Water Flow Without a Source?

If a single tool has a narrow view, then data silos represent complete 'malnutrition.' The KYT system is never an isolated system; its effectiveness is built on a comprehensive understanding of counterparties and transaction behaviors. It needs to continuously obtain 'data nutrients' from multiple sources such as KYC (Know Your Customer) systems, customer risk rating systems, and business systems. When these data channels are blocked, or the data itself is of low quality, the KYT system becomes like water without a source, losing its judgment baseline.

In many rapidly growing payment companies, this scenario is common:

The KYC team is responsible for customer onboarding, and their data is stored in System A; the risk control team monitors transactions, and their data is in System B; the compliance team handles AML reporting, using System C. The three systems belong to different departments, provided by different vendors, and there is almost no real-time data interaction between them. The result is that when the KYT system analyzes a real-time transaction, the customer risk rating it relies on may still be static information entered by the KYC team three months ago. This customer may have exhibited various high-risk behaviors during these three months, but this information is trapped in the risk control team's System B, and the KYT system is completely unaware.

The direct consequence of this 'malnutrition' is that the KYT system cannot establish an accurate customer behavior baseline. One of the core capabilities of an effective KYT system is to identify 'anomalies'—transactions that deviate from the customer's normal behavior pattern. But if the system doesn't even know what a customer's 'normal' is, how can it talk about identifying 'anomalies'? Ultimately, it can only regress to relying on the most primitive, crude static rules, producing a large number of worthless 'false alarms,' moving one step closer to becoming a 'zombie.'

Static Rules' 'Searching for the Sword by Carving the Boat': Using Old Maps to Find New Lands

Criminal tactics are constantly evolving, from traditional 'smurfing' to using DeFi protocols for cross-chain money laundering and conducting fake transactions through NFT markets; their complexity and concealment increase exponentially. However, many 'zombie KYT systems' still operate with rules that are years out of date, like using an old nautical chart to search for new lands, doomed to achieve nothing.

Static rules, such as 'alert if a single transaction exceeds $10,000,' seem trivial to today's black market operators. They can easily use automated scripts to split a large sum into thousands of smaller transactions, perfectly circumventing such simple thresholds. The real threats lie hidden in complex behavioral patterns:

· A newly registered account engages in numerous small, high-frequency transactions with a large number of unrelated counterparties in a short time.

· Funds quickly flow in and are immediately dispersed through multiple addresses without any pause, forming a typical 'peel chain.'

· Transaction paths involve high-risk mixing services, unregistered exchanges, or addresses in sanctioned areas.

These complex patterns cannot be effectively described or captured by static rules. What they need are machine learning models capable of understanding transaction networks, analyzing funding links, and learning risk characteristics from vast amounts of data. A healthy KYT system should have dynamic and self-evolving rules and models. However, 'zombie systems' have lost this ability; once their rulebase is set, updates are rare, ultimately falling far behind in the arms race against the black market, resulting in complete 'brain death.'

Process Level 'Cardiac Arrest': From 'Set and Forget' to 'Alert Fatigue'

If technical flaws lead to 'brain death' of the system, the breakdown of process management directly leads to 'cardiac arrest.' Even if a system is technologically advanced, without proper processes to drive and respond, it is just a pile of expensive code. In 'Compliance Theater,' failures in processes are often more insidious and more lethal than failures in technology.

'Going Live Equals Victory' Illusion: Treating Weddings as the Endpoint of Love

Many companies, especially startups, hold a 'project-based' mindset towards compliance development. They believe that the procurement and launch of a KYT system is a project with a clear beginning and end. Once the system is successfully launched and passes regulatory acceptance, this project is declared a triumph. This is the most typical illusion of 'Compliance Theater'—treating a wedding as the endpoint of love, believing they can rest easy afterwards.

However, the lifecycle of a KYT system starts on the day it goes live. It is not a tool that can be 'set and forgotten'; it is a 'living entity' that requires continuous care and optimization. This includes:

· Continuous parameter calibration: The market changes, customer behavior changes, and money laundering techniques evolve. The monitoring thresholds and risk parameters of the KYT system must be adjusted accordingly. A $10,000 alert threshold that was reasonable a year ago may become meaningless after a tenfold increase in business volume.

· Regular rule optimization: With the emergence of new risks, new monitoring rules need to be continuously developed and deployed. At the same time, the effectiveness of old rules should be evaluated periodically, eliminating those 'garbage rules' that only produce false positives.

· Necessary model retraining: For systems using machine learning models, it is essential to periodically retrain the model with the latest data to ensure its ability to recognize new risk patterns and prevent model decay.

When an organization falls into the illusion of 'going live equals victory,' these crucial follow-up maintenance tasks will be neglected. Without responsible personnel and budget support, the KYT system becomes like a sports car abandoned in a garage; no matter how good the engine is, it will slowly rust and eventually turn into a pile of scrap.

'Alert Fatigue' Crushes Compliance Officers: The Last Straw

A misconfigured, poorly maintained 'zombie system' leads to the most direct and disastrous consequence: generating massive false alerts (False Positives). Industry observations indicate that in many financial institutions, 95% or even over 99% of alerts generated by the KYT system are ultimately confirmed as false alarms. This is not just an issue of inefficiency; it triggers a deeper crisis—'alert fatigue.'

We can imagine a compliance officer's daily routine:

Every morning, he opens the case management system and sees hundreds of pending alerts. He clicks on the first one, and after half an hour of investigation, finds it to be a normal business behavior, so he closes it. The second one is the same. The third one is still the same... Day after day, he is overwhelmed by an endless ocean of false alarms. The initial vigilance and seriousness gradually give way to numbness and perfunctoriness. He starts looking for shortcuts to close alerts quickly, and his trust in the system plummets. Ultimately, when a genuinely high-risk alert appears among them, he might just glance at it, habitually marking it as a 'false alarm' and closing it.

'Alert fatigue' is the last straw that breaks the compliance line. It psychologically destroys the combat effectiveness of the compliance team, turning them from risk 'hunters' into alert 'cleaners.' The entire compliance department's energy is consumed in an ineffective struggle against a 'zombie system,' while real criminals stroll past the defenses under the cover of the alert noise.

At this point, a KYT system has completely 'stopped beating' in process terms. It continues to generate alerts, but these 'heartbeats' have lost their meaning, with no one responding and no one believing. It has turned into a complete zombie.

Previously, a friend's company, in order to obtain a license and please investors, staged a classic 'Compliance Theater': they publicly announced the procurement of the industry's top KYT tool and used it as promotional capital for 'committing to the highest compliance standards.' However, to save money, they only purchased services from one vendor. The management's logic was: 'We used the best; if something goes wrong, don't blame me.' They selectively forgot that any single tool has cognitive blind spots.

Additionally, the compliance team was understaffed and lacked technical knowledge, so they could only use the most basic static rule templates provided by the vendor. Monitoring large transactions and filtering a few publicly available blacklisted addresses were considered completing the task.

Most critically, once the business volume increased, system alerts flooded in. Junior analysts quickly discovered that over 95% of them were false alarms. To meet KPIs, their work shifted from 'investigating risks' to 'closing alerts.' Over time, no one took alerts seriously anymore.

Professional money laundering gangs quickly sensed the smell of rotting flesh. They used the simplest yet most effective methods to turn this 'zombie system' into their ATM: by employing the 'smurfing' tactic to split funds from illegal gambling into thousands of small transactions below the monitoring threshold, disguising them as e-commerce returns. In the end, it wasn't their team members who triggered the alerts but their partner bank. When the regulatory agency's investigation letter arrived on the CEO's desk, he was still bewildered, and it was later reported that their license was revoked.
Figure 2: Comparison of Risk Levels Across Different Blockchain Networks
Data Source: MetaComp Research - Comparative Analysis of On-Chain KYT for AML & CFT, July 2025. The chart shows that in the sampled data, the proportion of transactions on the Tron chain rated as 'serious,' 'high,' or 'medium-high' risk is significantly higher than that on the Ethereum chain.

The stories around us serve as a mirror, reflecting the shadows of numerous financial technology companies that are performing 'Compliance Theater.' They may not have collapsed yet, simply because they have been lucky enough not to be targeted by professional criminal groups. But it is ultimately a matter of time.

Act Two: From 'Zombie' to 'Sentinel'—How to Awaken Your Compliance System?

After revealing the pathology of 'zombie systems' and witnessing the tragedy of 'Compliance Theater,' we cannot stop at mere criticism and lamentation. As frontline practitioners, we are more concerned about: How to break the deadlock? How to awaken a dying 'zombie' and transform it into a real, capable, and defensive 'frontline sentinel'?

The answer does not lie in purchasing more expensive, more 'authoritative' single tools, but in a complete transformation from concepts to tactics. This methodology has long been an unspoken secret among the true practitioners within the industry. MetaComp's research systematically quantifies and publicizes it for the first time, providing us with a clear and actionable operational manual.

Core Solution: Say Goodbye to Solo Performances and Embrace a 'Multi-Layer Defense System'

First, it is essential to completely abandon the theater mindset that 'buying a tool is enough' from its ideological roots. True compliance is not a solo performance, but a positional battle that requires constructing a deep defense system. You cannot expect a single sentinel to block thousands of troops; what you need is a three-dimensional defense network composed of sentinels, patrols, radar stations, and intelligence centers.

Tactical Core: Multi-Tool Combination Punch

The tactical core of this defense system is the 'multi-tool combination punch.' The blind spots of a single tool are inevitable, but the blind spots of multiple tools are complementary. Through cross-validation, we can minimize the hiding space of risks.

So, the question arises: how many tools are actually needed? Two? Four? Or is more always better?

MetaComp's research provides an extremely critical answer: a combination of three tools is the golden rule that strikes the best balance between effectiveness, cost, and efficiency.

We can understand this 'three-piece set' in simple terms:

· The first tool is your 'frontline sentinel': it may cover the widest area and can detect most routine risks.

· The second tool is your 'special patrol team': it may have unique reconnaissance capabilities in a specific area (such as DeFi risks, regional intelligence) and can uncover concealed threats that the 'sentinel' cannot see.

· The third tool is your 'intelligence analyst in the rear': it may have the most powerful data correlation analysis capabilities, connecting the scattered clues discovered by the first two to outline a complete risk profile.

When these three work together, their power is far more than the simple sum of their parts. Data shows that upgrading from two tools to three tools results in a qualitative leap in compliance effectiveness. MetaComp's report indicates that a well-designed three-tool screening model can reduce the false clean rate of high-risk transactions to below 0.10%. This means that 99.9% of known high-risk transactions will be captured. This is what we refer to as 'capable compliance.'

In contrast, while upgrading from three tools to four tools can further reduce the false clean rate, the marginal benefit becomes very small, while the costs and time delays are significant. Research shows the screening time for four tools can take up to 11 seconds, while three tools can keep it around 2 seconds. In payment scenarios requiring real-time decisions, this 9-second difference could be a matter of life or death for user experience.
Figure 3: Effectiveness and Efficiency Trade-offs of KYT Tool Combinations Data Source: MetaComp Research - Comparative Analysis of On-Chain KYT for AML & CFT, July 2025. The chart visually demonstrates the impact of increasing the number of tools on reducing false clean rates (effectiveness) and increasing processing times (efficiency), clearly indicating that a three-tool combination is the most cost-effective choice.

Methodology Implementation: Establish Your Own 'Rule Engine'

Choosing the right 'three-piece set' combination only completes the equipment upgrade. The key is how to command this multi-unit force to work together. You cannot allow the three tools to speak separately; you need to build a unified command center—your own 'rule engine' that is independent of any single tool.

Step One: Standardize Risk Classification—Speak the Same Language

You cannot be led by the tools. Different tools may use different labels, such as 'Coin Mixer,' 'Protocol Privacy,' or 'Shield,' to describe the same risk. If your compliance officer needs to remember every tool's 'dialect,' it would be a disaster. The correct approach is to establish a set of internally unified and clear risk classification standards, and then map the risk labels of all integrated tools to your own standard system.

For example, you can establish the following standardized categories:
Table 1: Example of Risk Category Mapping
In this way, no matter which new tool is integrated, you can quickly 'translate' it into a unified internal language, achieving cross-platform horizontal comparisons and unified decision-making.

Step Two: Unify Risk Parameters and Thresholds—Define Clear Red Lines

With a unified language, the next step is to establish unified 'rules of engagement.' You need to set clear, quantifiable risk thresholds based on your own risk appetite and regulatory requirements. This is a crucial step in converting subjective 'risk preferences' into objective, machine-executable commands.

These rules should not just be simple monetary thresholds, but rather more complex, multi-dimensional parameter combinations, such as:

Severity Level Definition: Clearly define which risk categories fall under 'serious' (such as sanctions, terrorist financing), which are 'high-risk' (such as theft, darknet), and which are 'acceptable' (such as exchanges, DeFi).

Transaction-Level Taint %: Define at what proportion of a transaction's funds indirectly originating from high-risk sources an alert should be triggered. This threshold needs to be scientifically set through extensive data analysis, rather than decided arbitrarily.

Cumulative Taint %: Define at what proportion of funds exchanged with high-risk addresses over the entire transaction history a wallet should be marked as high-risk. This effectively identifies those 'old hands' addresses that have long engaged in gray transactions.

These thresholds are the 'red lines' you delineate for the compliance system. Once breached, the system must respond according to pre-set scripts. This makes the entire compliance decision-making process transparent, consistent, and defensible.

Step Three: Design a Multi-Layer Screening Workflow—From Point to Surface for Comprehensive Assault

Finally, you need to integrate the standardized classifications and unified parameters into an automated multi-layer screening workflow. This process should function like a precision funnel, filtering at multiple levels and gradually focusing, achieving precise strikes against risks while avoiding excessive interference with numerous low-risk transactions.

An effective workflow should at least include the following steps:
Figure 4: An Example of an Effective Multi-Layer Screening Workflow (Adapted from MetaComp KYT Methodology)
1. Initial Screening: All transaction hashes and counterparty addresses are first scanned in parallel using the 'three-piece set' tools. If any tool raises an alert, the transaction proceeds to the next stage.

2. Direct Exposure Assessment: The system determines whether the alert is due to 'direct exposure,' meaning the counterparty address itself is marked as 'serious' or 'high-risk.' If so, this belongs to the highest priority alert, triggering immediate freezing or manual review processes.

3. Transaction-Level Exposure Analysis: If there is no direct exposure, the system begins 'fund tracing' to analyze what proportion of the funds in this transaction can be traced back to risk sources. If this proportion exceeds the preset 'transaction-level threshold,' it moves to the next step.

4. Wallet-Level Exposure Analysis: For cases where transaction-level risks are exceeded, the system further conducts a 'comprehensive examination' of the counterparty's wallet, analyzing its overall risk status (Cumulative Taint %). If the wallet's 'health' also falls below the preset 'wallet-level threshold,' the transaction is ultimately confirmed as high-risk.

5. Final Decision: Based on the final risk rating (serious, high, medium-high, medium-low, low), the system automatically executes or prompts manual actions: release, intercept, return, or report.

The brilliance of this process lies in its transformation of risk identification from a simple 'yes/no' judgment to a three-dimensional evaluation process that progresses from point (individual transaction) to line (funding links) and then to surface (wallet profiles). It effectively distinguishes between 'direct hits' of severe risks and 'indirectly contaminated' potential risks, enabling optimized resource allocation—responding most quickly to the highest-risk transactions, conducting in-depth analysis on medium-risk ones, while rapidly clearing the vast majority of low-risk transactions, perfectly resolving the conflict between 'alert fatigue' and 'user experience.'

Final Chapter: Dismantle the Stage and Return to the Battlefield

We have spent a long time dissecting the pathology of 'zombie systems,' reviewing the tragedy of 'Compliance Theater,' and exploring the 'operational manual' for awakening systems. Now, it is time to return to the starting point.

The greatest harm of 'Compliance Theater' is not how much budget and manpower it consumes, but the deadly, false sense of 'security' it creates. It leads decision-makers to mistakenly believe that risks are under control, and it numbs executors in daily ineffective labor. A silent 'zombie system' is far more dangerous than a nonexistent system because it can lead you into danger while you are unprepared.

In today's era, where black market technology and financial innovation iterate simultaneously, relying on a single tool for KYT monitoring is akin to running naked on a battlefield filled with bullets. Criminals have access to an unprecedented arsenal—automation scripts, cross-chain bridges, privacy coins, DeFi mixing protocols—while if your defense system is still at the level of several years ago, being breached is just a matter of time.

True compliance has never been a performance designed to please the audience or cope with inspections. It is a tough battle, a prolonged war that requires excellent equipment (multi-layer tool combinations), rigorous tactics (unified risk methodologies), and outstanding soldiers (professional compliance teams). It does not need a flashy stage and hypocritical applause; it needs a reverence for risk, honesty with data, and ongoing refinement of processes.

Therefore, I call upon all practitioners in this industry, especially those with resources and decision-making power: please abandon the illusion of 'silver bullet' solutions. There is no magical tool that can solve all problems once and for all. The construction of a compliance system has no endpoint; it is a dynamic lifecycle process that requires continuous iteration and refinement based on data feedback. The defense system you establish today may reveal new vulnerabilities tomorrow; the only way to respond is to remain vigilant, continuously learn, and evolve.

It is time to dismantle the false stage of 'Compliance Theater.' Let us return to the challenging yet opportunity-filled battlefield of genuine risks with a truly capable 'sentinel system.' Because only there can we truly safeguard the value we wish to create.

Report link: https://www.mce.sg/metacomp-kyt-report/

References
[1] Know-Your-Transaction (KYT) | New Standard in Crypto Compliance
https://www.chainup.com/blog/kyt-crypto-compliance-procedures/

[2] Understanding AML Tactics: Know Your Transaction (KYT) - Vespia
https://vespia.io/blog/know-your-transaction-kyt

[3] A Comprehensive Guide to Understanding Know Your Transaction ...
https://www.tookitaki.com/compliance-hub/a-comprehensive-guide-to-understanding-know-your-transaction-kyt

[4] 1 in 4 Risky Transactions May Be Missed - MetaComp Study Finds ...
https://laotiantimes.com/2025/07/17/1-in-4-risky-transactions-may-be-missed-metacomp-study-finds-limited-kyt-tools-insufficient-for-blockchain-compliance/

[5] MetaComp Study Finds Limited KYT Tools Insufficient for Blockchain ...
https://www.prnewswire.com/apac/news-releases/1-in-4-risky-transactions-may-be-missed--metacomp-study-finds-limited-kyt-tools-insufficient-for-blockchain-compliance-302507721.html