International Finance Bank LTD

Key Tested Telex (KTT) 

Our Services, analogue and digital KTT


Similarities and differences between KTT and SWIFT transfers. 

Both are communication systems used for transmitting payment instructions between banks, but they differ in terms of technology, security, and adoption.


Similarities:

  1. Purpose: Both KTT and SWIFT transfer-instructions are used to send payment orders between financial institutions across borders. They facilitate the exchange of information and instructions necessary for completing international transactions through Nostro-Vosto corresponding bank accounts.
  2. Standardization: Both systems rely on standardized message formats to ensure that financial institutions can accurately interpret and process the information being transmitted.


Differences:

  1. Technology: KTT transfers-instructions rely on telex technology, which is an older communication system that uses teleprinters to send text-based messages. SWIFT transfer-instructions, on the other hand, utilize a more modern, secure, and efficient digital messaging system.
  2. Security: SWIFT instructions are considered to be more secure than KTT instructions due to the use of advanced encryption methods and secure protocols. KTTs, being based on older telex technology, are more vulnerable to potential security risks.
  3. Speed: SWIFT messages are generally faster than KTT messages. The digital nature of SWIFT messaging allows for quicker transmission and processing of payment instructions, while KTT instructions can be slower due to the limitations of telex technology.
  4. Adoption: SWIFT is the globally dominant financial messaging system, with over 11,000 financial institutions in more than 200 countries and territories participating in its network. KTT transfers, meanwhile, are less commonly used today, having been largely replaced by the SWIFT system.
  5. Message Types: SWIFT supports a wide range of message types, including those related to payments, securities, trade services, and foreign exchange, among others. KTT transfers, in contrast, have a more limited scope, focusing mainly on payment instructions.


SWIFT orders are more widely adopted, secure, and efficient due to their use of modern technology. KTT messages, based on telex technology, are less common and less secure in comparison.

While KTT and SWIFT messages are critical for communicating the details and instructions for these transactions, they do not themselves facilitate the actual fund transfer. The distinction is important for understanding the roles and limitations of different systems in the financial transaction process. The KTT (Key Tested Telex) and SWIFT (Society for Worldwide Interbank Financial Telecommunication) messaging systems are utilized primarily for the transmission of payment instructions, transfer details, and other types of financial information between banks. These systems facilitate secure and efficient communication but do not directly handle the physical transfer of funds. Instead, the actual movement of currency is executed through different mechanisms. These include:

  1.  Correspondent Bank Accounts: Banks often use nostro-vostro accounts held with each other to settle transactions. When a transfer is initiated, the sending bank’s account is debited, and the receiving bank’s account is credited. This process can involve multiple banks, especially for international transfers.
  2. Real-Time Gross Settlement (RTGS) Systems: These are specialized payment systems where the transfer of money or securities takes place from one bank to another on a “real-time” and on a “gross” basis. Settlement in “real-time” means payment transactions are not subjected to any waiting period. The transactions are settled as soon as they are processed. “Gross settlement” means the transaction is settled on a one-to-one basis without bundling or netting with any other transaction.
  3. Instant Payment Systems: These are modern financial transfer methods that enable immediate or near-immediate fund transfers between banks and financial institutions. This system is particularly useful for consumer transactions and is gaining popularity due to its speed and convenience.


A nostro account (short for "nostro vostro account") is an account that a bank holds with another bank for instance in a foreign country, typically in the local currency. These accounts facilitate international transactions by acting as a bridge between the banks involved in a transfer. The term "nostro" is derived from Latin, meaning "our account with you," while "vostro" means "your account with us."


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Here's how nostro accounts are typically used in international money transfers:

  1. Initiating the transfer: When a customer wants to make an international money transfer, they approach their bank (Bank A) with the relevant details, such as the beneficiary's name, account number, and the receiving bank's information (Bank B). Bank A informs Bank B as the recipient of the transfer (MT103)
  2. Correspondent banking relationship: For the transfer to occur, Bank A and Bank B must have a correspondent banking relationship, meaning they either have nostro accounts with each other or use intermediary banks that have nostro accounts with both Bank A and Bank B or Bank A has another corresponding bank relationship with Bank C.
  3. Payment instruction: Bank A sends a payment instruction to Bank B, if they have a corresponding bank relationship, or to the intermediary bank Bank C, if not, using a secure messaging system like SWIFT or KTT (MT202). This message contains all the necessary details for the transaction, such as the amount to be transferred and the beneficiary's account information.
  4. Debiting and crediting accounts: Upon receiving the payment instruction, Bank B or the intermediary Bank C debits the nostro account held by Bank A and credits the beneficiary's account with the transferred amount. Concurrently, Bank A debits the customer's account for the transferred amount plus any applicable fees.
  5. Reconciliation and settlement: At the end of the day, both banks reconcile the nostro and vostro accounts to ensure that all transactions have been accurately recorded and settled.


Using nostro accounts in this manner allows for the efficient transfer of funds between different countries and currencies while minimizing the need for physical movement of cash. These accounts also help banks manage their foreign exchange risk by holding funds in various currencies.


Although KTT transfers utilize nostro accounts in a similar manner to other international money transfers like SWIFT, the telex-based communication system makes KTT transfers slower and less secure compared to more modern systems like SWIFT. 


As a result, KTT transfers are less common today, with most financial institutions opting for the more efficient and secure SWIFT system for international transactions.

KTT Currency Transfer Structure 

with KTT 103 & KTT (or SWIFT) 202 COV instructions 

Actual Fund Transfer:  These protocols are adept at transmitting transaction details, such as messages and instructions, yet they do not facilitate the actual movement of funds. For the physical transfer of funds, systems such as corresponding banking, Real-Time Gross Settlement (RTGS), and Real-Time Payments (RTP) are indispensable. 

  • In corresponding banking, funds are moved between accounts at different banks. 
  • In the RTGS system, funds transfer occurs between compensation accounts within the central bank(s). 
  • Similarly, in the RTP system, funds are transferred between clearing accounts. 

These systems are critical for the actual transfer of monetary assets. Therefore, it is imperative that the sending bank not only possesses telex capabilities but also maintains full integration with the banking system.

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Two distinct Levels: 

The Instruction Level and the actual Funds Transfer Level

KTT Funds Transfer to us

To alleviate some compliance concerns when an MT 103 was sent per KTT instead of SWIFT to us, you could consider your sending bank including the following additional information in the MT 202 COV within the correspondent bank to correspondent bank transmission of funds, where the format allows:

  1. Ordering Customer Information: Provide details of the ordering customer, similar to Field 50 in MT 103. This can include name, address, and account number.
  2. Beneficiary Information: Include details of the beneficiary, mimicking Field 59 in MT 103. This should have the beneficiary name, address, and account number.
  3. Purpose of Payment: Explicitly state the reason for the transaction, which could alleviate some Anti-Money Laundering (AML) concerns.
  4. Regulatory Reporting Information: If your jurisdiction requires, include codes or identifiers for regulatory reporting.
  5. Reference to KTT MT 103: A specific mention that the MT 202 COV is tied to a KTT MT 103, can provide context to the intermediary bank.
  6. Contact Information: Include specific contact details for the compliance department or transaction manager responsible for this payment, in case the receiving bank needs immediate clarification.
  7. Special Handling Instructions: Any extra instructions for the receiving bank that could facilitate the identification and proper handling of the transferred funds.
  8. Charges and Fees Information: In absence of an SWIFT MT 103, it might be beneficial to clarify who will bear transaction-related charges to prevent misunderstandings.
  9. Additional Identifiers: Include any additional transaction identifiers that can link the MT 202 COV to the KTT MT 103, such as invoice numbers or internal transaction IDs.


Note on Compliance
Including additional information in the MT 202 COV may not fully mitigate compliance risks, especially AML and CFT (Combating the Financing of Terrorism) checks that are typically addressed with a SWIFT MT 103 message and it's important to ensure that the modified MT 202 COV still complies with applicable standards and interbank agreements.

Why is KTT still in use?

Despite the advent of advanced and secure financial messaging systems like SWIFT, Key Tested Telex (KTT) messages continue to find relevance among High Net Worth Individuals (HNWIs) and analogous companies. The primary reason lies in their desire to minimize the exposure of their financial transactions to multiple intermediaries, thereby reducing the risk of monitoring and potential data breaches. This explanation delves into the intricacies of KTT messages, contrasts them with MT103 messages, and elucidates why they remain a preferred choice for privacy-conscious entities. 

 

Understanding KTT Messages 

  1. Historical Context: KTT messages originated in the era of telex communications, a teleprinter network that allowed direct, point-to-point text-based messaging between banks before the widespread adoption of digital systems. 
  2. Key Tested Mechanism: The “Key Tested” aspect refers to a method of authentication where a prearranged numerical key or test code is used between the sender and receiver to verify the message’s authenticity. This system ensures that only the intended parties will act upon the message. 
  3. Direct Communication: KTT messages are typically sent directly from one bank to another without passing through centralized networks or multiple correspondent banks. This directness reduces the number of entities that handle the message. 

 

The MT103 Message and Its Monitoring 

 

  1. SWIFT Network: MT103 is a standardized message format used within the SWIFT (Society for Worldwide Interbank Financial Telecommunication) network for international customer credit transfers. 
  2. Intermediary Banks: MT103 messages often pass through several correspondent banks before reaching the final beneficiary. Each intermediary processes and records the transaction details. 
  3. Regulatory Oversight: The SWIFT network is subject to strict regulatory oversight to prevent illicit activities like money laundering and terrorism financing. Consequently, transactions are monitored by financial authorities both on the level of SWIFT itself and on the level of the intermediary banks, and data is always stored and accessible for compliance purposes. 

 

Why KTT Messages Are Still Used 

 1. Enhanced Privacy: 

  • Fewer Intermediaries: By minimizing the number of banks involved to two, the sending and the receiving bank, KTT messages reduce the points at which transaction data is accessible, thereby enhancing confidentiality. 
  • Direct Exchange: The point-to-point nature of KTT messages means that transaction details are only known to the sender and receiver, limiting exposure. 

 2. Reduced Monitoring: 

  • Avoiding Centralized Networks: Without passing through a network like SWIFT, KTT messages are less susceptible to monitoring by multiple bodies and international mechanisms. 
  • Control Over Information Flow: Entities can control who has access to transaction information, which is crucial for maintaining competitive advantages or protecting sensitive financial strategies. 

 3. Trust and Established Relationships: 

  • Long-standing Practices: Some banks and clients have established trust in traditional methods like KTT, especially in regions where modern systems are less prevalent or in specific industries where discretion is valued. 
  • Customised Agreements: Banks may have bespoke arrangements with clients to use KTT messages for specific transactions, ensuring tailored services that meet their privacy needs. 

 4. Technical and Legal Considerations: 

  • Jurisdictional Variations: In some countries, the legal framework or technical infrastructure may favor or only support KTT messages over SWIFT messages. 
  • Avoiding Sanctions and Restrictions: Entities operating in or with countries facing international sanctions may use KTT messages to circumvent restrictions imposed on SWIFT transactions. Therefore the receiving bank has to be extra vigilant and enforce restrictions and regulation.

 

Risks and Challenges 

 1. Security Concerns: 

  • Obsolescence: KTT systems are considered outdated and may lack the robust security features of modern messaging platforms, making them potentially vulnerable to interception or fraud. 
  • Authentication Risks: The reliance on manual key testing can introduce human error or be exploited if the key is compromised. 

 2. Regulatory Compliance: 

  • Legal Implications: Using KTT messages to avoid monitoring can raise legal and ethical issues, potentially leading to penalties if used to facilitate illicit activities. 
  • Due Diligence Requirements: Banks must ensure that they comply with anti-money laundering (AML) and know-your-customer (KYC) regulations that extend not only to the sending client but also to the sending bank, even when using less monitored communication channels. 

 

KTT messages persist in the financial landscape primarily due to their ability to offer enhanced privacy and reduce the risk of monitoring by multiple intermediaries. For HNWIs and similar companies where discretion is paramount, the direct and controlled nature of KTT communications provides a tailored solution that aligns with their needs. However, this comes with trade-offs in terms of security and regulatory compliance. As the financial industry continues to evolve, balancing the demand for privacy with the necessity of robust oversight remains a critical challenge.

The Evolution of Key Tested Telex (KTT)

A Pioneer in Secure Financial Communications

In an era before digital networks revolutionized global communications, the financial world relied on innovative analog solutions to conduct international business. Among these solutions, the Key Tested Telex (KTT) system emerged as a crucial development in secure financial communications, marking a significant milestone in banking history.

The Foundation: The Telex Network

The story of KTT begins with the Telex network, a groundbreaking communication system that emerged in Germany during the 1930s. Combining "Teleprinter" and "Exchange," Telex introduced real-time, character-based messaging between institutions across vast distances. This system represented a quantum leap forward from traditional telegrams, eliminating the need for manual intervention in message transmission.

The Telex network's expansion coincided with the post-World War II era of globalization, transforming from a domestic communication tool into an international network that transcended language barriers and technical standards. This standardization proved particularly valuable for the financial sector, where clear, reliable communication was paramount.

The Security Imperative

As international banking grew more complex and the volume of cross-border transactions increased, the limitations of standard Telex communications became apparent. The system's vulnerability to eavesdropping, lack of encryption, and susceptibility to fraudulent messages posed significant risks. In an industry where a single miscommunication could result in substantial financial losses, these security gaps were unacceptable.

The Innovation: Key Tested Telex

The development of Key Tested Telex represented a sophisticated response to these security challenges. KTT introduced a revolutionary verification mechanism: a shared code system between communicating parties. This innovation allowed banks to authenticate the origin and integrity of messages, establishing a crucial layer of security in an era before digital encryption.

The system worked through a elegant yet effective process:

  1. The sending institution incorporated a unique code into its message
  2. This code was known only to the sending and receiving institutions
  3. The receiving party verified the message against the shared code altered by an algorithm 
  4. Message authenticity was confirmed only when the codes matched


Impact and Legacy

KTT's influence extended beyond its immediate security benefits. It represented one of the first systematic approaches to secure financial communications, establishing principles that would later influence modern digital security protocols. The system demonstrated the financial sector's commitment to innovation and security, setting standards that would shape future developments in banking communications.

KTT Key Exchange Procedure for Financial Institutions

  1. Should your esteemed financial institution intend to transmit a KTT to us, we kindly invite you to download and meticulously observe the guidelines outlined in the KTT Validation Procedure here.
  2. To generate the dynamic Output AES Code (Key) for your KTT please click here.


If you want to know more about how to transfer funds through the KTT and corresponding banking system, please get in contact with our Head of Corresponding Banking M. Amri Elarisse


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