When KYT tools become zombie systems: What you think is compliance is actually a trap

Different focus on risk types

: Some tools are good at tracking addresses related to OFAC sanctions lists, while others are better at identifying mixers or darknet markets. If the tool you choose is not good at identifying the main types of risks facing your business, then it is basically a decoration.

Update delays and intelligence lags

: The life cycle of black market addresses can be short. A risky address marked by one tool today may take days or even weeks for another tool to synchronize. This time difference in intelligence is enough for money launderers to complete several rounds of operations. Therefore, when an institution puts all its hopes on a single KYT tool, it is actually gambling - betting that all the risks it encounters are just within the "cognitive range" of this tool. "Malnutrition" caused by data islands: How can water flow without a source? If a single tool is narrow-minded, then data islands are completely "malnourished". The KYT system has never been an isolated system. Its effectiveness is based on a comprehensive understanding of counterparties and trading behaviors. It needs to continuously obtain "data nutrients" from multiple sources such as the KYC (Know Your Customer) system, customer risk rating system, and business system. When these data channels are blocked or the data itself is of low quality, KYT becomes a sourceless water and loses the basis for judgment.

In many fast-growing payment companies, this scenario is common:

The KYC team is responsible for customer access, and their data is stored in system A; the risk control team is responsible for transaction monitoring, and their data is in system B; the compliance team is responsible for AML reporting, and they use system C. The three systems belong to different departments and are provided by different suppliers. There is almost no real-time data interaction between them. As a result, when the KYT system analyzes a real-time transaction, the customer risk rating it is based on may still be the static information entered by the KYC team three months ago. This customer may have exhibited a variety of high-risk behaviors in these three months, but this information is trapped in the risk control team's B system, and the KYT system knows nothing about it.

The direct consequence of this "malnutrition" is that the KYT system cannot establish an accurate customer behavioral baseline. One of the core capabilities of an effective KYT system is to identify "anomalies" - transactions that deviate from the customer's normal behavior patterns. But if the system doesn't even know what is "normal" for a customer, how can it identify "anomalies"? In the end, it can only degenerate to relying on the most primitive and crude static rules, producing a large number of worthless "junk alerts", and getting one step closer to "zombies".

Static rules of "carving a boat to find a sword": using an old map to find a new world

Criminals' methods are changing with each passing day, from traditional "smurfing" to cross-chain money laundering using DeFi protocols, to false transactions through the NFT market, and their complexity and concealment are growing exponentially. However, the rule bases of many "zombie KYT systems" are still at the level of a few years ago, just like holding an old nautical chart to find a new world, destined to find nothing.

Static rules, such as "call the police if a single transaction exceeds $10,000", are simply not worth mentioning in the eyes of today's black industry practitioners. They can easily split a large amount of funds into hundreds or thousands of small transactions through automated scripts, perfectly bypassing this simple threshold. The real threat is hidden in complex behavior patterns:

• A newly registered account conducts small and high-frequency transactions with a large number of unrelated counterparties in a short period of time.

• After the funds flow in quickly, they are immediately transferred out through multiple addresses without any stop, forming a typical "peel chain".

• The transaction path involves high-risk currency mixing services, unregistered exchanges or addresses in sanctioned areas.

These complex patterns cannot be effectively described and captured by static rules. What they need is a machine learning model that can understand the transaction network, analyze the capital chain, and learn risk characteristics from massive data. The rules and models of a healthy KYT system should be dynamic and self-evolving. However, the "zombie system" has lost this ability. Once its rule base is set, it is rarely updated. In the end, it was left far behind in the arms race with the black industry and completely "brain dead".

"Heartbeat stop" at the process level: from "once and for all" to "alarm fatigue"

If technical defects lead to the "brain death" of the system, then the collapse of process management directly leads to "heartbeat stop". No matter how advanced a system is technically, if it does not have the right process to drive and respond, it is just a pile of expensive code. In the "Compliance Theater", process failures are often more hidden and more lethal than technical failures.

The illusion of "launching is victory": treating the wedding as the end of love

Many companies, especially start-ups, have a "project-based" mindset in compliance construction. They believe that the procurement and launch of the KYT system is a project with a clear starting point and end point. Once the system is successfully launched and passes the regulatory acceptance, the project is declared a successful end. This is the most typical illusion in the "Compliance Theater" - treating the wedding as the end of love, thinking that you can rest assured from now on.

However, the life cycle of a KYT system is only the first day of going online. It is not a tool that can be "set aside once and for all", but a "living organism" that requires continuous care and optimization. This includes:

• Continuous parameter calibration

  : The market is changing, customer behavior is changing, and money laundering methods are changing. The monitoring thresholds and risk parameters of the KYT system must be adjusted accordingly. The $10,000 alarm threshold that was reasonable a year ago may no longer make sense after the business volume has increased tenfold.

• Regular rule optimization

  : As new risks emerge, new monitoring rules need to be continuously developed and deployed. At the same time, the effectiveness of old rules should be regularly evaluated to eliminate those "junk rules" that only produce false positives.

• Necessary model retraining

  : For systems that use machine learning models, the models must be retrained regularly with the latest data to ensure their ability to recognize new risk patterns and prevent model decay.

When an organization falls into the illusion of "going online means victory", these crucial follow-up maintenance tasks will be neglected. Without anyone responsible and without budget support, the KYT system is like a sports car abandoned in a garage. No matter how good the engine is, it will only slowly rust and eventually become a pile of scrap metal.

"Alarm fatigue" crushes compliance officers: the last straw

The most direct and catastrophic consequence of a "zombie system" that is improperly configured and lacks maintenance is the generation of a large number of false positives. According to industry observations, in many financial institutions, 95% or even more than 99% of the alarms generated by the KYT system are eventually verified as false positives. This is not just a problem of inefficiency, it will trigger a deeper crisis - "Alert Fatigue".

We can imagine the daily life of a compliance officer:

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, he finds that it is a normal business behavior of the customer and closes it. The second one, the same thing. The third one, the same thing... Day after day, he is drowned in an endless sea of false alarms. The initial vigilance and seriousness are gradually replaced by numbness and perfunctory. He begins to look for "shortcuts" to quickly close the alarm, and his trust in the system drops to the freezing point. In the end, when a real high-risk alarm appears among them, he may just take a quick look, habitually mark it as a "false alarm", and then close it.

"Alarm fatigue" is the last straw that breaks the compliance defense line. It psychologically destroys the combat effectiveness of the compliance team, turning them from risk "hunters" into "cleaners" of alarms. The energy of the entire compliance department is consumed in the ineffective fight with a "zombie system", while the real criminals, under the cover of the clamor of alarms, swagger through the defense line.

At this point, a KYT system has completely "heart stopped" in terms of process. It is still generating alarms, but these "heartbeats" have lost their meaning, no one responds, and no one believes. It has completely turned into a zombie.

In order to obtain a license and please investors, the management of a friend's company staged a classic "compliance drama": a high-profile announcement of the purchase of the industry's top KYT tool, and used it as a publicity capital for "committed to the highest compliance standards". But in order to save money, only one supplier's service was purchased. The management's logic was: "We used the best, don't blame me if something goes wrong." They selectively forgot that any single tool has blind spots.

In addition, the compliance team was short of staff and did not understand the technology, so they could only use the most basic static rule templates provided by the supplier. Monitoring large transactions and filtering a few public blacklist addresses was considered to have completed the task.

The most critical thing is that once the business volume increases, system alarms will come in like snowflakes. Junior analysts soon discovered that more than 95% of them were false alarms. In order to meet their KPIs, their job changed from "investigating risks" to "closing alarms." Over time, no one took the alarms seriously anymore.

Professional money laundering gangs soon smelled the odor of rotten meat. They used the simplest but effective method to turn this "zombie system" into their own ATM: through the "smurf" tactic of "breaking the whole into pieces", they split the funds from illegal online gambling into thousands of small transactions below the monitoring threshold, disguised as e-commerce repayments. In the end, it was not their team members who sounded the alarm, but their partner bank. When the investigation letter from the regulator was delivered to the CEO's desk, he was still confused, and it was said that his license was revoked later.

Figure 2: Comparison of risk levels of 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 of the Ethereum chain.

The stories around us are a mirror, reflecting the shadows of countless financial technology companies that are performing "compliance theater". They may not have fallen yet, just because they are lucky and have not been targeted by professional criminal gangs. But it is ultimately a matter of time.

Act 2: From "Zombies" to "Sentinels" - How to Awaken Your Compliance System?

After revealing the pathology of the "zombie system" and witnessing the tragedy of the "compliance theater", we cannot just stop at criticism and lamentation. As front-line practitioners, we are more concerned about: How to break the deadlock? How to reawaken a dying "zombie" and turn it into a "front-line sentinel" that can really fight and defend?

The answer does not lie in buying a more expensive and more "authoritative" single tool, but in a complete transformation from concept to tactics. This set of methodology has long been a tacit secret among the real doers in the circle. MetaComp's research systematically quantified and made it public for the first time, providing us with a clear and executable manual.

Core solution: Say goodbye to one-man show and embrace "multi-layer defense system"

First of all, we must completely abandon the theatrical thinking of "just buy a tool and it's done" from the root of our thinking. True compliance is not a one-man show, but a positional battle that requires the construction of a deep defense system. You can't expect a single sentry to stop a huge army. What you need is a three-dimensional defense network composed of sentries, patrols, radar stations, and intelligence centers.

Tactical core: multi-tool combination

The tactical core of this defense system is the "multi-tool combination". 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 is, how many tools are needed? Two? Four? Or the more the better?

MetaComp's research provides a critical answer: The combination of three tools is the golden rule for achieving the best balance between effectiveness, cost and efficiency.

We can understand this "three-piece set" in a popular way:

• The first tool is your "front-line sentinel":

  It may have the widest coverage and can detect most common risks.

• The second tool is your "Special Patrol Team": It may have unique reconnaissance capabilities in a specific area (such as DeFi risks, specific regional intelligence), and can discover hidden threats that the "Sentinels" cannot see.

• The third tool is your "Rear Intelligence Analyst": It may have the most powerful data correlation analysis capabilities, which can connect the scattered clues found by the first two to outline a complete risk portrait.

When these three tools work together, their power is far more than a simple addition. Data shows that upgrading from two tools to three tools will lead to a qualitative leap in compliance effectiveness. MetaComp's report points out 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 call "effective compliance."

In contrast, upgrading from three tools to four tools can further reduce the false clean rate, but its marginal benefit is already very small, while the cost and time delay it brings are significant. Research shows that the screening time of four tools may be as long as 11 seconds, while three tools can be controlled within about 2 seconds. In payment scenarios that require real-time decision-making, this 9-second gap may be the life and death line of user experience. Figure 3: Effectiveness and efficiency trade-off of KYT tool combination Data source: MetaComp Research - Comparative Analysis of On-Chain KYT for AML&CFT, July 2025. The chart intuitively shows the impact of increasing the number of tools on reducing the "missing rate" (effectiveness) and increasing the "processing time" (efficiency), clearly showing that the three-tool combination is the most cost-effective option.

Methodology implementation: Build your own "rule engine"

Choosing the right "three-piece set" combination only completes the equipment upgrade. What's more critical is how to command this multi-service force to fight in coordination. You can't let the three tools speak for each other, you need to establish a unified command center - that is, your own "rule engine" independent of any single tool.

Step 1: Standardization of risk classification - speaking the same language

You can't be led by the tools. Different tools may use different labels such as "Coin Mixer", "Protocol Privacy", "Shield" to describe the same risk. It would be a disaster if your compliance officer needs to remember the "dialect" of each tool. The right approach is to establish a set of internally unified and clear risk classification standards, and then map all risk labels of the connected tools to your own standard system.

For example, you can establish the following standardized classification:

In this way, no matter which new tool you connect to, you can quickly "translate" it into a unified internal language, thereby achieving horizontal comparison and unified decision-making across platforms.

Step 2: Unify risk parameters and thresholds - draw clear red lines

With a unified language, the next step is to formulate unified "rules of engagement". You need to set clear and quantifiable risk thresholds based on your own risk appetite and regulatory requirements. This is a key step in converting subjective "risk appetite" into objective instructions that can be executed by machines.

This set of rules should not be just a simple amount threshold, but a more complex, multi-dimensional combination of parameters, for example:

• Severity level definition

  : Clarify which risk categories are "serious" (such as sanctions, terrorist financing), which are "high risk" (such as theft, dark web), and which are "acceptable" (such as exchanges, DeFi).

• Transaction-Level Taint %

  ：Defines when the proportion of funds indirectly coming from high-risk sources in a transaction reaches a certain level before an alarm is triggered. This threshold needs to be set scientifically through a large amount of data analysis, rather than being decided on a whim.

• Wallet-Level Cumulative Taint %

  ：Defines when a wallet needs to be marked as a high-risk wallet after the proportion of funds it has transferred to and from high-risk addresses throughout its entire transaction history. This can effectively identify those "old-timer" addresses that have been engaged in gray transactions for a long time.

These thresholds are the "red lines" you set for the compliance system. Once touched, the system must respond according to the preset script. This makes the entire compliance decision-making process transparent, consistent and defensible.

Step 3: Design a multi-layer screening workflow - a three-dimensional attack from point to surface

Finally, you need to integrate standardized classifications and unified parameters into an automated multi-layer screening workflow. This process should be like a sophisticated funnel, filtering layer by layer and gradually focusing to achieve a precise attack on risks while avoiding excessive interference with a large number of low-risk transactions.

An effective workflow should include at least the following steps:

1. Initial Screening

   : All transaction hashes and counterparty addresses are first scanned in parallel by the "three-piece set" of tools. If any of the tools issues an alert, the transaction will enter the next stage.

2. Direct Exposure Assessment

   : The system determines whether the alert is "direct exposure", that is, the counterparty address itself is a marked "serious" or "high risk" address. If so, this is the highest priority alert and should immediately trigger a freeze or manual review process.

3. Transaction-Level Exposure Analysis

   ：If there is no direct exposure, the system will start "fund tracing" to analyze what proportion (Taint %) of the funds in this transaction can be indirectly traced back to the risk source. If this proportion exceeds the preset "transaction-level threshold", it will proceed to the next step.

4. Wallet-Level Exposure Analysis

   ：For cases where transaction-level risk exceeds the limit, the system will further conduct a "comprehensive physical examination" of the counterparty's wallet and analyze the overall risk status of its historical transactions (Cumulative Taint %). If the "healthiness" of the wallet is also lower than the preset "wallet-level threshold", the transaction will eventually be confirmed as high risk.

5. Final Decision (Decision Outcome)

   : Based on the final risk rating (severe, high, medium-high, medium-low, low), the system automatically or prompts manual execution of the corresponding operation: release, interception, return or report.

The subtlety of this process lies in that it transforms risk identification from a simple "yes/no" judgment into a three-dimensional assessment process from point (single transaction) to line (fund chain) and then to surface (wallet portrait). It can effectively distinguish between the severe risks of "direct hits" and the potential risks of "indirect contamination", thereby achieving optimal allocation of resources - responding to the highest-risk transactions as quickly as possible, conducting in-depth analysis of medium-risk transactions, and quickly releasing the vast majority of low-risk transactions, perfectly resolving the contradiction between "alarm fatigue" and "user experience".

Final Chapter: Dismantle the Stage and Return to the Battlefield

We spent a long time dissecting the pathology of the "zombie system", reviewing the tragedy of the "compliance theater", and exploring the "battle manual" for awakening the system. Now, it's time to return to the starting point.

The biggest harm of "compliance theater" is not how much budget and manpower it consumes, but the fatal and false "sense of security" it brings. It makes decision makers mistakenly believe that risks are under control, and makes executors numb in the ineffective work day after day. A silent "zombie system" is far more dangerous than a system that does not exist at all, because it will put you in danger without any defense.

In today's era of simultaneous iteration of black industry technology and financial innovation, relying on a single tool for KYT monitoring is tantamount to running naked on a battlefield full of gunfire. Criminals have an unprecedented arsenal of weapons - automated scripts, cross-chain bridges, privacy coins, DeFi mixing protocols, and if your defense system is still at the level of a few years ago, it is only a matter of time before it is breached.

True compliance is never a performance to please the audience or deal with inspections. It is a tough battle, a protracted battle that requires sophisticated equipment (multi-layer tool combination), strict tactics (unified risk methodology) and excellent soldiers (professional compliance team). It does not need a gorgeous stage and hypocritical applause, but a reverence for risks, honesty of data, and continuous polishing of processes.

Therefore, I appeal to all practitioners in this industry, especially those who hold resources and decision-making power: Please give up the fantasy of "silver bullet" solutions. There is no magic tool in the world that can solve all problems once and for all. There is no end to the construction of a compliance system. It is a dynamic life cycle process that needs to be continuously iterated and improved based on data feedback. The defense system you build today may have new loopholes tomorrow. The only way to deal with it is to stay vigilant, keep learning, and keep evolving.

It's time to dismantle the fake stage of "Compliance Theater". Let us return to the risk battlefield full of challenges but also opportunities with the real "Sentinel System". Because only there can we truly protect the value we want to create.