AML Terms

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Predicate Crimes

"Specified unlawful activities" whose proceeds, if involved in the subject transaction, can give rise to prosecution for money laundering. Most money laundering laws contain a wide definition or listing of such underlying crimes. Predicate crimes are sometimes defined as felonies or "all offenses in the criminal code."

Counter-Terrorism Committee (CTC)

A United Nations Committee established in 2001 pursuant to Resolution 1373 (2001) concerning counter-terrorism, the CTC consists of all 15 Security Council members. The committee monitors the implementation of UN Security Council Resolution 1373, and aims to increase the capacity of member states to fight terrorism.

Suspicion

A belief to the disadvantage of another, accompanied by a doubt.

Downstream Correspondent Clearer

A correspondent banking client who receives correspondent banking services from one institution and provides correspondent banking services to other financial institutions in the same currency as the account it maintains with the institution.

Basel CDD Paper

A guidance paper on customer due diligence for banks issued by the Basel Committee on Banking Supervision (BCBS) in October 2001. The paper includes sound Know Your Customer policies and procedures that according to the Committee are critical to protecting the safety and soundness of banks and the integrity of banking systems. See www.bis.org/bcbs.

Bearer Share Certificate

A negotiable corporate share certificate made out to "Bearer" and not in the name of an individual or organization.

Asset Protection

A process that includes reorganizing how assets are held so as to make them less vulnerable should a claim be made against a person. Asset protection is also a term used by tax planners for measures taken to protect assets from taxation in other jurisdictions.

Currency Transaction Report (CTR)

A report that documents a financial transaction that exceeds a certain monetary threshold. A CTR can also be filed on multiple currency transactions that occur in one day that add up to or are greater than the required reporting amount. In some countries, including the U.S., currency transaction reports must be filed with government authorities under specific circumstances.

Split Deposits

A series of deposits in which a customer splits a sum of money and makes smaller deposits into two or more accounts that add up to the original amount.

Debit Transaction

A transaction that involves the use of a bankcard to purchase goods and services or to obtain cash. The transaction automatically debits the cardholder's deposit account.

Red Flag

A warning signal used to bring attention to a potentially suspicious situation, transaction or activity.

Affidavit

A written statement given under oath before an officer of the court, notary public, or other authorized person. It is commonly used as the factual basis for an application for a search, arrest or seizure warrant.

UN Security Council Resolution 1373

Adopted in 2001, the resolution requires member nations to take a series of actions to combat terrorism, best carried out through the adoption of laws and regulations and the establishment of administrative structures. The resolution also requires member nations to "afford one another the greatest measure of assistance for criminal investigations or criminal proceedings relating to the financing or support of terrorist acts."

Bare Trust

Also known as a dry, formal, naked, passive, or simple trust, in which the trustees have no duties other than to convey the trust property to beneficiaries when called upon to do so. Bare trusts are vulnerable to money laundering, since the final beneficiary is unknown.

Physical Cross-Border Transportation of Currency

Any in-bound or out-bound transportation of currency or bearer negotiable instruments from one country to another. The term includes: (1) physical transportation by a natural person, or in that person's accompanying luggage or vehicle; (2) shipment of currency through cargo it contains, and (3) the mailing of currency or bearer negotiable instruments.

Criminal Proceeds

Any property derived from or obtained, directly or indirectly, through the commission of a crime.

Cross-Border Transfer

Any wire transfer in which the originator and beneficiary institutions are located in different jurisdictions. A cross-border transfer also refers to any chain of wire transfers that has at least one cross-border element.

Currency

Banknotes and coins that are in circulation as a medium of exchange.

Tax Haven

Countries that offer special tax incentives or tax avoidance to foreign investors and depositors. More than 200 jurisdictions worldwide are considered tax havens.

Grantor

Creator and fund provider of a trust, usually for the benefit of another.

Group of Eight Industrialized Nations (G-8)

Entity composed of the U.S., Japan, Germany, France, Italy, the U.K., Canada and Russia.

Financial Sector Assessment Program (FSAP)

Established in 1999 by the International Monetary Fund and the World Bank, the FSAP assesses jurisdictions for their financial systems' strengths and vulnerabilities with an aim to reducing the potential for crises.

Kingston Declaration on Money Laundering

In 1992, the U.S., U.K., France, Canada, and the Netherlands spearheaded a gathering of 17 Caribbean nations in Jamaica. At its conclusion, the nations issued the Kingston Declaration on Money Laundering, which expressed solidarity with the 1988 United Nations Convention on Illicit Trafficking in Narcotic Drugs. The declaration also agreed to implement the FATF 40 recommendations and the 19 additional ones issued at the 1990 Aruba meeting that created the Caribbean Financial Action Task Force. See www.cfatf.org.

Exempt Account

In some countries, a distinction is granted to certain customers of a financial institution permitting the institution to waive its responsibility to report certain transactions that are otherwise required. Exempt accounts must be documented and the financial institutions that secure the exemptions must still monitor their transactions.

Account Monitoring Order

In the United Kingdom and several other countries, an order from a government authority requiring a financial institution to provide transaction information on a suspect account for a specified time period.

IVTS

Informal Value Transfer System. See Alternative Remittance System.

Typology

Refers to a money laundering method and is a term used by the FATF.

Customer Information Order

Requires all financial institutions—or a targeted sample of banks and other financial institutions—to provide the details of any accounts held by the person under investigation, thus enabling an investigator to find out where the suspect's accounts are held.

Chain Referral Scheme

See Pyramid Scheme.

Lockbox

Service offered by banks to companies in which the company receives payments by mail to a post office box and the bank picks up the payments several times a day, deposits them into the company's account, and notifies the company of the deposit. The service enables the company to put the money to work as soon as it is received, but the amounts must be large in order for the value obtained to exceed the cost of the service. In the insurance industry there is also widespread use of "lock boxes" for payment of life insurance and annuities products.

STR

Suspicious Transaction Report.

Money Services Business (MSB)

Term used in the U.S. and elsewhere for money remittance companies; check cashers; issuers, sellers and redeemers of money orders and travelers checks; currency exchange houses, and stored value product companies.

International Association of Insurance Supervisors (IAIS)

The IAIS issues global insurance principles, standards and guidance papers on issues including money laundering. Established in 1994, IAIS represents insurance supervisory authorities in about 180 jurisdictions. See www.iaisweb.org.

Identity Theft

The assumption of another person's identity without authorization for use in fraudulent transactions that result in a loss to the financial institution or the victim whose identity was used.

Placement

The first phase of the money laundering process: The physical disposal of cash proceeds derived from illegal activity.

Nesting

The practice that involves the use of a foreign correspondent bank account by another foreign bank to conduct its own transactions.

Black Market Peso Exchange (BMPE)

The principal and preferred money laundering method of the Colombian drug cartels. Money derived from illegal activity in the U.S. is purchased by "peso brokers" from criminals in other countries and often deposited in U.S. bank accounts that the broker has established. The brokers sell checks and wire transfers drawn on those accounts to legitimate businesses that use them to purchase goods and services in the U.S.

Offshore Bank

Though licensed to conduct banking activities, an offshore bank is prohibited from doing business with local citizens or in local currency as a condition of its license.

Seize

To prohibit the transfer, conversion, disposition or movement of funds or other assets on the basis of an action initiated by a competent authority or a court under a freezing mechanism. However, unlike a freeze, a seizure allows the competent authority to take control of specified funds or other assets. The seized assets remain the property of the person(s) or entity(ies) that held an interest in them at the time of the seizure, although the competent authority will often take over possession, administration or management of the seized assets.

Unusual Transaction

Transaction that appears to circumvent reporting requirements, is inconsistent with the account's transaction patterns or deviates from the activity expected for that type of account

Middle East and North Africa Financial Action Task Force (MENAFATF)

A FATF-style body established for the Middle Eastern and North African regions in 2004. See www.menafatf.org.

South American Financial Action Task Force (GAFISUD)

A Financial Action Task Force-style regional body for South America, established in 2000. Member nations include Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru and Uruguay. See www.gafisud.org.

Respondent Bank

A bank for which another financial institution establishes, maintains, administers or manages a correspondent account.

Internet Banking

A banking business model that uses the Internet to execute its business plan, and whose marketing efforts, execution of transactions and customer service functions are heavily reliant on advanced electronic technology. The main money laundering concern that arises in Internet banking is the difficulty of identifying the "faceless" customer that establishes a relationship with a financial institution, and in applying Know Your Customer procedures.

Front Company

A business that commingles illicit funds with revenue generated from the sale of legitimate products or services. Criminals use front companies to launder illicit money by giving the funds the appearance of legitimate origin. Organized crime has used pizza parlors to mask proceeds from heroin trafficking. Front companies may have access to substantial illicit funds, allowing them to subsidize front company products and services at levels well below market rates or even below manufacturing costs. Front companies have a competitive advantage over legitimate firms that must borrow from financial markets, making it difficult for legitimate businesses to compete with front companies.

Financial Intelligence Unit (FIU)

A central governmental office that obtains financial reports information, processes it in some way and then discloses it to an appropriate government authority in support of a national anti-money laundering effort. The activities performed by an FIU include receiving, analyzing and disseminating information and, sometimes, investigating and prosecuting violations indicated by the disclosures.

Smurfing

A commonly used money laundering method, smurfing involves the use of multiple individuals for making cash deposits, buying monetary instruments or bank drafts in amounts under the reporting threshold. See Structuring.

Nominee Company

A corporation that is formed for the express purpose of holding securities and other assets in its name on behalf of others, or providing nominee directors and/or officers on behalf of clients of its parent bank or trust company. Non-Cooperative Countries and Territories (NCCT) List Countries and territories that have been designated since 1999 by the Financial Action Task Force as being non-cooperative in the global anti-money laundering effort or as lacking adequate money laundering controls. As of October 2006, there are no non-cooperative countries or territories on the list.

Letter of Credit

A credit instrument issued by a bank that guarantees payments on behalf of its customer to a third party when certain conditions are met. L/Cs are commonly used to finance exports. Exporters want assurance that the ultimate buyer of its goods will make payment, and this is given by the buyer's purchase of a bank letter of credit. The L/C is then forwarded to a correspondent bank in the city in which the payment is to be made. The L/C is drawn on when the goods are loaded for shipping, received at the importation point, clear customs and are delivered. L/Cs can be used to facilitate money laundering by transferring money from a country with exchange controls, thus assisting in creating the illusion that an import transaction is involved. L/Cs can also serve as a façade when laundering money through the manipulation of import and export prices. Another laundering use for L/Cs is in conjunction with wire transfers to bolster the legitimate appearance of non-existent trade transactions.

Private Banking

A department in a financial institution that provides high-end services to wealthy individuals. Private banking transactions tend to be marked with confidentiality, complex beneficial ownership arrangements, offshore investment vehicles, tax shelters and credit extension services. Private banking is viewed by many governments as highly vulnerable to money laundering.

Enhanced Due Diligence (EDD)

Additional examination and caution measures aimed at identifying customers and confirming that their activities and funds are legitimate.

UN Security Council Resolution 1267

Adopted in 1999, the resolution imposed sanctions on Taliban-controlled Afghanistan for its support of Osama Bin Laden and the Al-Qaeda organization. The sanctions have subsequently been modified and strengthened—they no longer exclusively target Afghanistan and now extend to any individual, group, undertaking or entity participating in planning or financing activities for al Qaeda or the Taliban. Member countries are obliged to adopt sanction implementation programs so that financial institutions can block the transactions, and freeze the assets of any person or entity on the list of designated terrorist entities maintained by the UN 1267 Committee. See www.un.org/Docs/sc/committees/1267/1267ListEng.htm.

Mutual Legal Assistance Treaty (MLAT)

Agreement among countries allowing for mutual assistance in legal proceedings and access to documents and witnesses and other legal and judicial resources in the respective countries, in private and public sectors, for use in official investigations and prosecutions.

Memorandum of Understanding (MOU)

Agreement between two parties establishing a set of principles that govern their relationship on a particular matter. An MOU is often used by countries to govern their sharing of assets in international asset-forfeiture cases or to set out their respective duties in anti-money laundering initiatives. Financial Intelligence Units, with the task of receiving and analyzing suspicious transaction reports on an ongoing basis and maintaining close links with police and customs authorities, share information among themselves informally in the context of investigations, usually on the basis of a MOU. The Egmont Group of FIUs has established a model for such MOUs. Unlike the Mutual Legal Assistance Treaty (see below), this gateway is ordinarily used not for obtaining evidence, but for obtaining intelligence that might lead to evidence.

Policies

A financial institution's operating regulations and its internal rules that define how employees are expected to conduct themselves.

Hawala

A funds exchange system, hawala was born centuries before Western financial systems in Indian and Chinese civilizations to facilitate the secure and convenient cross-border movement of funds. Merchant traders wishing to send funds to their homelands would deposit them with a hawala broker or hawaladar who normally owned a trading business. For a small fee the banker would arrange for the funds to be available for withdrawal from another banker, normally also a trader, in another country. The two bankers would settle accounts through the normal process of trade. Today, the technique works much the same, with businesspersons in various parts of the world using their corporate accounts to move money internationally for third parties. Deposits and withdrawals are made through hawaladars, rather than traditional financial institutions. The practice is vulnerable to terrorist financing and money laundering—funds do not actually cross borders, and transactions tend to be anonymous, as records are not stringently kept. In the U.S., third parties are normally Indian immigrants who send small sums of money to their homelands to avoid bank fees for wire transfers. In Pakistan, the system is called hundi. See Alternative Remittance System.

Regulatory Agency

A government entity responsible for supervising and overseeing a category of domestic institutions. The agency generally has authority to issue regulations, perform audits and examinations, impose fines and penalties, and terminate charters or curtail activities of institutions under its jurisdiction. Most financial regulatory agencies play a major role in preventing and detecting money laundering and other financial crimes.

Suspicious Transaction Report (STR)

A government form that includes a financial institution's account of a questionable transaction. Many jurisdictions require financial institutions to report suspicious transactions to relevant government authorities on a suspicious transaction report, also known as a suspicious activity report or SAR.

Hedge Fund

A hedge fund is a privately offered investment vehicle—typically high-risk—in which participants' contributions are pooled and invested in a portfolio of securities, commodity futures contracts or other assets. Investors are usually of high net-worth, and can generally redeem investments on a quarterly, semi-annual, or annual basis.

Mail-Forwarding or Mail-Drop Service

A legal commercial enterprise that uses a stable, physical address as a delivery destination for letters or parcels on behalf of fee-paying clients who do not live on the premises. Mail can be held or forwarded at the client's request. Some mail-drops provide similar services for faxes as well. Often, "shell" or unlicensed banks are found to have mail drop addresses.

Money Laundering Compliance Program

Also called Anti-Money Laundering (AML) Program, the system is designed to assist institutions in their fight against money laundering and terrorist financing. In many jurisdictions worldwide, government regulations require financial institutions including banks, securities dealers and money services businesses to establish such programs. At a minimum, the money laundering compliance program usually includes: 1. Written internal policies, procedures and controls. 2. A designated AML compliance officer. 3. On-going employee training programs. 4. Independent review to test the programs.

Money Order

A monetary instrument usually purchased with cash in small (generally under Euro/$500) denominations. It is commonly used by people without checking accounts to pay bills or to pay for purchases in which the vendor will not accept a personal check. Money orders may be used for laundering because they represent an instrument drawn on the issuing institution rather than on an individual's account.

Manipulation of Import and/or Export Prices

A money laundering method that uses the overpricing or underpricing of products or services traded in international commerce to move money from one country to another.

Ponzi Scheme

A money laundering system named after Charles Ponzi, an Italian immigrant who spent 10 years in jail in the U.S. for a scheme that defrauded 40,000 people out of $15,000,000. Ponzi's name became synonymous with the use of new investors' money to pay off prior investors. The prime bank guaranty, roll program, bank debenture program, high yield promises, etc., are all frauds that use the Ponzi system to sustain themselves until the flow of new investor funds stops or the promoter vanishes with the money.

Private Investment Company (PIC)

Also known as a Personal Investment Company, a PIC is a type of corporation that is often established in an offshore jurisdiction with tight secrecy laws to protect the privacy of its owners. In some jurisdictions, an international business company or exempt company is referred to as a private investment company. PICs are viewed as prime money laundering vehicles.

Safety Deposit Box

A safe inside a bank that can be used to store anything of importance a customer wishes to protect, such as legal documents, jewelry, coins, wills, etc. Safety deposit boxes can also provide a useful storage place for the proceeds of crime.

Pyramid Scheme

Also referred to as Chain-Referral Schemes, pyramid schemes are fraudulent marketing programs in which people buy the right to sell to others the right to sell a product, and are based on misrepresentations of investors' ability to recoup their initial investments.

Remittance Services

Also referred to as giro houses or casas de cambio, remittance services are businesses that receive cash or other funds that they transfer through the banking system to another account. The account is held by an associated company in a foreign jurisdiction where the money is made available to the ultimate recipient.

Know Your Correspondent Bank (KYCB)

A set of laundering control policies and procedures employed in determining the beneficial owners of a respondent bank and the type of activity that is "normal and expected" for this bank. Know Your Correspondent Bank is a key tool in detecting suspicious activity and money laundering because correspondent accounts are often used as conduits to launder criminal proceeds internationally. The USA Patriot Act of 2001 included statutory provisions that bear directly on the procedures U.S. financial institutions must follow in connection with foreign correspondent banks.

Money Laundering Reporting Officer (MLRO)

A term used in United Kingdom Financial Services Authority (FSA) rules to refer to the person responsible for overseeing a firm's anti-money laundering activities and program. The MLRO is the key person in the implementation of anti-money laundering strategies and policies.

White-collar crime

A type of crime generally seen as non-violent or involving more sophisticated "business-related" schemes rather than violence or the threat of violence. Such crimes include tax fraud (evasion, false tax returns, failure to file tax returns); money laundering (any attempt to hide money derived from illegal sources), bribery, bankruptcy fraud, environmental fraud, health care fraud and many others.

Batch Processing

A type of data processing and data communications transmission in which related transactions are grouped together and transmitted for processing, usually by the same computer and under the same application.

International Business Company (IBC)

A variety of offshore corporate structures, alternately called "exempt companies," which are dedicated to business use outside the incorporating jurisdiction, rapid formation, secrecy, broad powers, low cost, low to zero taxation, and minimal filing and reporting requirements. An increasing number of offshore jurisdictions are permitting the use of nominee shareholders, directors, and officers.

Politically Exposed Person (PEP)

According to FATF's revised 40 Recommendations of 2003, a PEP is an individual who has been entrusted with prominent public functions in a foreign country, such as a head of state, senior politician, senior government official, judicial or military official, senior executive of a state-owned corporation or important political party official, as well as their families and close associates. PEP does not extend to middle-ranking individuals in the specified categories.

Profiling

An element of Know Your Customer (KYC) procedures by which an institution determines the type of activity that is considered "normal and expected" for a customer and monitors the activity to determine if it stays within the profile. Monitoring from a "normal and expected" profile can be problematic if the profile itself is subject to abuse or includes deceptive transactions. Sophisticated launderers can manipulate a profile over time in order to avoid setting off red flags.

Monitoring

An element of an institution's anti-money laundering program in which customer activity is reviewed for unusual or suspicious patterns, trends or outlying transactions that do not fit a normal pattern. Transactions are often monitored using software that weighs the activity against a threshold of what is deemed "normal and expected" for the customer. The concept of monitoring activity is different from that of identifying unusual transactions. The former generally involves macro or aggregate transactions reviewed through sophisticated software and large databases, while the latter usually involves an institution's employee actually observing a particular transaction.

United Nations (UN)

An international organization that was established in 1945, by 51 countries committed to preserving peace through cooperation and collective security. Today, nearly every nation in the world belongs to the UN. See also Vienna Convention. The United Nations contributes to the fight against organized crime, with initiatives such as the Global Program against Money Laundering (GPML), the key instrument of the UN Office of Drug Control and Crime Prevention in this task. Through the GPML, the UN helps member states to introduce legislation against money laundering and to develop mechanisms to combat this crime. The program encourages anti-money laundering policy development, monitors and analyzes the problems and responses, raises public awareness about money laundering and acts as a coordinator of joint anti-money laundering initiatives with other international organizations. See www.un.org.

International Monetary Fund (IMF)

An organization of more than 180 member countries, the IMF was established to promote monetary cooperation, foster economic growth and high levels of employment, and provide countries with temporary financial assistance. The organization's objectives have remained unchanged since it was established. Its operations, which involve surveillance, financial assistance and technical support, have adjusted to meet the changing needs of member countries. Since 1999, the IMF has taken a more active role in the global anti-money laundering effort, primarily through helping assess the progress of member countries in meeting laundering control standards, such as those issued by the FATF.

Cash-Based Business

Any business in which customers usually pay with cash for the products or services provided, such as restaurants, pizza delivery services, taxi firms, coin-operated machines or car washes. Some money launderers run or use cash-based businesses to commingle illegally obtained funds with cash actually generated by the business.

Shell Bank

Bank that exists on paper only and that has no physical presence in the country where it is incorporated and licensed, and which is unaffiliated with a regulated financial services group that is subject to effective consolidated supervision. These banks are able to evade day-to-day regulation. Recommendation 18 of the FATF 40 Recommendations says that countries should not approve the establishment or accept the continued operation of shell banks. Financial institutions should refuse to enter into, or continue, correspondent banking relationships with shell banks, and should guard against establishing relations with respondent foreign financial institutions that permit their accounts to be used by shell banks.

International Police Organization (Interpol)

Based in Lyon, France, Interpol provides services to national law enforcement agencies in international criminal and money laundering matters, through such means as issuance of alerts or "flags" that seek the assistance of member countries in locating fugitives or identifying financial activity connected to international crimes. Each member nation of Interpol designates a National Central Bureau (NCB) through which requests for assistance are processed.

Transparency International (TI)

Berlin-based, non-governmental organization dedicated to increasing government accountability and curbing both international and national corruption. Established in 1993, TI is active in more than 70 countries. It publishes "corruption news" on its website daily and offers an archive of corruption-related news articles and reports. Its Corruption Online Research and Information System, or CORIS, is perhaps the most comprehensive worldwide database on corruption. Transparency International is best known for its annual Corruption Perceptions Index, which ranks countries by perceived levels of corruption among public officials; its Bribe Payers Index ranks the leading exporting countries according to their propensity to bribe. TI's annual Global Corruption Report combines the CPI and the BPI and ranks each country by its overall level of corruption. The lists help financial institutions determine the risk associated with a particular jurisdiction. See www.transparency.org.

Tax Information Exchange Agreements

Bilateral agreements among national governments that can yield evidence for money laundering and tax evasion prosecutions.

Group of Seven Industrialized Nations (G-7)

Body made up of seven countries: U.S., Japan, Germany, France, Italy, the U.K. and Canada. Gulf Cooperation Council (GCC): Formed in 1981, the GCC promotes cooperation between its member states in the fields of economy and industry. These member states include Kuwait, Bahrain, Qatar, Saudi Arabia, Oman and the United Arab Emirates. The GCC is a member of the FATF, although its individual members are not.

Roll-Over Money Laundering

Commingling of legal and illegal funds to frustrate prosecution for money laundering.

Cashier's Check

Common monetary instrument usually purchased for cash. Used for laundering purposes, cashier's checks provide an instrument drawn on a reputable institution such as a bank or credit union.

Subpoena

Compulsory legal process issued by a court to compel the appearance of a witness at a judicial proceeding, sometimes requiring the witness to bring specified documents.

Futures

Contracts that require delivery of a commodity of specified quality and quantity at a specified price on a specified future date.

Trust

Contractual arrangement among the property owner (the grantor), a beneficiary, and a manager of the property (the trustee) whereby the trustee manages the property for the benefit of the beneficiary in accordance with contractual terms set by the grantor.

Vienna Convention

Convention in 1988 against the Illicit Trade in Narcotic Drugs and Psychotropic Substances. Countries that become parties to the Vienna Convention commit to criminalizing drug trafficking and associated money laundering, and enacting measures for confiscation of the proceeds of drug trafficking. Article III of the Convention provides a comprehensive definition of money laundering, which has been the basis of much subsequent national legislation.

MONEYVAL

Council of Europe Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures. Formerly PCR-EV, the committee was established in 1997 by the Committee of Ministers of the Council of Europe to conduct self- and mutual assessments of anti-money laundering measures in place in Council of Europe countries that are not FATF members. MONEYVAL is a sub-committee of the European Committee on Crime Problems of the Council of Europe (CDPC).

Arrest Warrant

Court order directing a law enforcement officer to seize and detain a particular person and require them to provide an answer to a complaint or otherwise appear in court.

NCCT Criteria

Criteria published in the FATF Report on Non-Cooperative Countries and Territories issued in February 2000 used to determine which countries to designate as NCCTs. See Non-Cooperative Countries or Territories (NCCTs) list.

Legal Risk

Defined by the 2001 Basel Customer Due Diligence for Banks Paper as the possibility that lawsuits, adverse judgments, or contracts that cannot be enforced may disrupt or harm a financial institution. As a result, banks can suffer criminal liabilities and penalties imposed by supervisors. A court case involving a bank may have graver implications for the institution than just the legal costs. Banks will be unable to protect themselves effectively from such legal risks if they do not practice due diligence in identifying customers and understanding and managing their exposure to money laundering.

Risk Matrix

Document or chart that allows financial institutions to assess the money laundering risk of a business or customer relationship. A risk matrix sets out critical elements or parameters of risk—such as the country of origin or the type of anticipated transaction—so that institutions can calculate whether a potential client presents a low, medium or high level of money laundering risk. Later, the matrix allows the institution to make informed decisions on the frequency of transaction monitoring of particular accounts or customers.

Wire Transfer

Electronic transmission of funds among financial institutions on behalf of themselves or their customers. Wire transfers are financial vehicles covered by the regulatory requirements of many countries in the anti-money laundering effort.

International Finance Corporation (IFC)

Established in 1956, IFC is the largest multilateral source of loan and equity financing for private sector projects in the developing world. It is a member of the World Bank Group and is headquartered in Washington, D.C. The IFC promotes sustainable private sector investment in developing countries as a way to reduce poverty. Its contribution to anti-money laundering efforts includes helping countries address structural and institutional weaknesses that may contribute to the lack of market integrity and potential for financial abuse. See www.ifc.org.

CDPC

European Committee on Crime Problems of the Council of Europe. A subcommittee of the CDPC is MONEYVAL, formerly PC-R-EV, the select committee of experts on the evaluation of anti-money laundering measures in European countries that are not members of the FATF.

Retrospective Due Diligence

Examining the identity and activity of existing customers and their accounts to confirm their legitimacy. The Cayman Islands and the Bahamas, when adopting their anti-money laundering frameworks, required financial institutions to perform due diligence on existing customers. The U.K. considered the requirement but did not implement it, citing heavy burden on businesses in its financial sector. The U.S. does not require retrospective due diligence.

Special Recommendations

FATF's international standards on terrorist financing. At an Extraordinary Plenary on the Financing of Terrorism held in Washington, D.C. in 2001, the FATF expanded its mission beyond money laundering. Now, the international organization also focuses energy and expertise on combating terrorist financing. During the meeting, the FATF issued new standards on terrorist financing, and called on all countries to adopt and implement them. Implementing the "Special Recommendations" will deny terrorists and their supporters access to the international financial system. See www.fatf-gafi.org.

Financial Action Task Force-Style Regional Body (FSRB)

FSRBs have forms and functions similar to those of the FATF. However, their efforts are targeted to specific regions. Examples include the Caribbean Financial Task Force, the Eastern and Southern African Anti-Money Laundering Group, and the Middle East North Africa Task Force. Financial Institution According to the FATF's 40 Recommendations, a financial institution is any person or entity that conducts as a business one or more of the following activities or operations on behalf of customers: 1. Acceptance of deposits and other repayable funds from the public. 2. Lending. 3. Financial leasing. 4. The transfer of money or value. 5. Issuing and managing means of payment (e.g. credit and debit cards, checks, traveler's checks, money orders and bankers' drafts, electronic money). 6. Financial guarantees and commitments. 7. Trading in: a. money market instruments (checks, bills, CDs, derivatives etc.); b. foreign exchange; c. exchange, interest rate and index instruments; d. transferable securities; e. commodity futures trading. 8. Participation in securities issues and the provision of financial services related to such issues. 9. Individual and collective portfolio management. 10. Safekeeping and administration of cash or liquid securities on behalf of other persons. 11. Otherwise investing, administering or managing funds or money on behalf of other persons. 12. Underwriting and placement of life insurance and other investment-related insurance. 13. Money and currency changing.

Money Transfer Service or Value Transfer Service

Financial service that accepts cash, checks other monetary instruments or other stores of value in one location and pays a corresponding sum in cash or other form to a beneficiary in another location by means of a communication, message, transfer or through a clearing network to which the money/value transfer service belongs. Transactions performed by such services can involve one or more intermediaries and a third-party final payment. A money or value transfer service may be provided by persons (natural or legal) formally through the regulated financial system (for example, bank accounts), informally through non-bank financial institutions and business entities or outside the regulated system. In some jurisdictions, informal systems are referred to as alternative remittance services or underground (or parallel) banking systems.

International Financial Institution (IFI)

Group that includes the International Monetary Fund and the World Bank. IFIs have an important role in protecting the integrity of the international financial system from abuse. Strengthening a country's capacity to combat money laundering is an integral part of their agenda.

Structuring

Illegal act of splitting cash deposits or withdrawals into smaller amounts, or purchasing monetary instruments, to stay under a currency reporting threshold. The practice might involve dividing a sum of money into lesser quantities and making two or more deposits or withdrawals that add up to the original amount. Money launderers use structuring to avoid triggering a filing by a financial institution. The technique is common in jurisdictions that have compulsory currency reporting requirements. See Smurfing.

Tipping Off

Improper or illegal act of notifying a suspect that he or she has been the subject of a Suspicious Transaction Report or is otherwise being investigated or pursued by the authorities.

Bearer Negotiable Instruments

Include monetary instruments in bearer form such as: travelers checks; negotiable instruments (including checks, promissory notes, and money orders) that are either in bearer form, endorsed without restriction, made out to a fictitious payee, or are otherwise in such form that title thereto passes upon delivery; incomplete signed instruments (including checks, promissory notes, and money orders), with the payee's name omitted.

Smurfs

Individuals hired by money launderers to run from financial institution to financial institution purchasing or depositing monetary instruments in amounts under the reporting threshold.

Offshore Financial Center (OFC)

Institutions that cater to or otherwise encourage banks, trading companies, and other corporate or legal entities to physically or legally exist in a jurisdiction but limit their operations to "offshore," meaning outside the jurisdiction (see Offshore). OFCs have historically been located in the Caribbean or on Mediterranean islands to be in reasonable proximity to the major financial centers of the U.S. and Europe.

Organization for Economic Cooperation and Development (OECD)

International organization that assists governments on economic development issues in the global economy. OECD houses the FATF secretariat in Paris. See www.oecd.org.

Non-Governmental Organization (NGO)

International organizations that are not directly linked to the governments of specific countries, such as Doctors without Borders and the International Red Cross. Some countries' antimony laundering regulations for NGOs still have loopholes that some worry could be exploited by terrorists or terrorist sympathizers trying to secretly move money. For example, Saudi policy implemented in 2003 that prohibits NGOs and charities from sending money outside the Arab nation is not effective.

Sting Operation

Investigative tactic in which undercover officers pose as criminals, sometimes through a "front" business, to win the confidence of suspected or known criminals (or financial institution's employees, if they are suspected to be involved in money laundering) to gather information and obtain evidence of criminal conduct. It is an effective means of identifying criminals, penetrating criminal organizations, and identifying tainted property in money laundering and other cases.

Mutual Fund

Investment company that continually offers new shares and buys existing shares back on demand, using its capital to invest in diversified securities of other companies. Money is collected from individuals and invested on their behalf in varied equity or debt portfolios.

Suspicious Activity

Irregular or questionable customer behavior or activity that may be related to a money laundering or other criminal offense, or to the commission of a terrorist activity financing offense. May also refer to a transaction that is inconsistent with a customer's known legitimate business, personal activities, or the normal business of that type of account.

International Narcotics Control Strategy Report (INCSR):

Issued annually by the U.S. Department of State, the report includes a lengthy section on the status of money laundering efforts in most nations.

Global Program against Money Laundering (GPML)

Key instrument of the United Nations Office of Drug Control and Crime Prevention in its fight against organized crime. Through GPML, the UN helps member states introduce legislation against money laundering and develop and maintain mechanisms that combat the crime. The program encourages anti-money laundering policy development, monitors and analyzes problems and responses, raises public awareness, and acts as a coordinator of joint anti-money laundering initiatives between the UN and other international organizations.

Know Your Customer's Customer (KYCC)

Laundering control policies and procedures used to determine the beneficiaries of a customer's account, such as a correspondent bank or corporate account, and the type of activity that is "normal and expected" for the customer. KYCC for correspondent banking is a key tool in detecting suspicious activity and money laundering because such accounts are often used as conduits to launder criminal proceeds.

Willful Blindness

Legal principle that operates in money laundering cases in the U.S. and is defined by courts as the "deliberate avoidance of knowledge of the facts" or "purposeful indifference." Courts have held that willful blindness is the equivalent of actual knowledge of the illegal source of funds or of the intentions of a customer in a money laundering transaction.

Safe Harbor

Legal protection for financial institutions, their directors, officers and employees from criminal and civil liability for breach of any restriction on disclosing information imposed by contract or by any legislative, regulatory or administrative prohibition, if they report their suspicions in good faith to the Financial Investigation Unit (FIU), even if they did not know precisely what the underlying criminal activity was, and regardless of whether illegal activity actually occurred.

Offshore

Literally, away from one's own home country—if one lives in Europe, the U.S. is "offshore." In the money laundering lexicon, the term refers to jurisdictions deemed favorable to foreign investments because of low or no taxation or strict bank secrecy regulations.

Trustees

May be paid professionals or companies or unpaid persons that hold the assets in a trust fund separate from their own assets. They invest and dispose of them in accordance with the settlor's trust deed, taking account of any letter of wishes. There may also be a protector, who may have power to veto the trustees' proposals or remove them, and/or a custodian trustee, who holds the assets to the order of the managing trustees.

Physical Presence

Meaningful management of an institution located within a country. The mere existence of a local agent or low level staff does not constitute physical presence.

Knowledge

Mental state accompanying a prohibited act. Recommendation 2 of the FATF 40 Recommendations of 2003 says that countries should ensure that: The intent and knowledge required to prove the offense of money laundering is consistent with the standards set forth in the Vienna and Palermo Conventions, including the concept that such mental state may be inferred from objective factual circumstances. The exact definition of knowledge that accompanies the money laundering act varies by country. Knowledge can be deemed, under certain circumstances, to include willful blindness, i.e., "the deliberate avoidance of knowledge of the facts," as some courts have defined the term: For example, if a bank officer proceeds with a transaction while deliberately ignoring the potential illegal origin of the funds involved.

Know Your Employee (KYE)

Money laundering control policies and procedures for acquiring a better knowledge and understanding of the employees of an institution for the purpose of detecting conflicts of interests, money laundering or criminal activities in the past or present, and suspicious activity. KYE is a key tool in detecting suspicious activity because employees are often accomplices of money launderers.

Know Your Customer (KYC)

Money laundering control policies and procedures used to determine the true identity of a customer and the type of activity that is "normal and expected," and to detect activity that is "unusual" for a particular customer. Many experts believe that a sound KYC program is one of the best tools in an effective antimony laundering program.

Wolfsberg Group

Named after the conference center in Switzerland where its first working session was held, the Wolfsberg Group is an association of global financial institutions, including ABN AMRO Bank, Santander Central Hispano, Bank of Tokyo-Mitsubishi, Barclays, Citigroup, Credit Suisse Group, Deutsche Bank, Goldman Sachs, HSBC, J.P. Morgan Chase, Société Générale, and UBS AG. In 2000, along with Transparency International and experts worldwide, the institutions developed global anti-money laundering guidelines for international private banks. Since then it has issued several other guidelines on correspondent banking and terrorist financing, among others. See www.wolfsberg-principles.com.

Nostro Account

Nostro and vostro accounts are mirror correspondent accounts maintained by two banks in different jurisdictions to facilitate transactions in each other's local currency—essentially, clearing accounts that balance foreign currency transactions between the two institutions. For example, Bank X from Brazil might open a U.S.-dollar account at Bank Y in the U.S., called a "nostro" (literally "our") account; Bank Y might open a mirror account in Brazilian reals with Bank X in Brazil—a "vostro" ("your"). Account Financial regulators have expressed concern over the transparency of nostro and vostro account relationships, especially when there are multiple layers of accounts within primary relationships. See also Vostro Account.

Organization of American States—Inter-American Drug Abuse Control Commission (OAS-CICAD)

OAS has issued several sets of money laundering recommendations through its Inter-American Drug Abuse Control Commission (CICAD). They include amendments to the OAS Model Regulations issued in 1992. CICAD has sponsored and coordinated training seminars for public officials and bankers on anti-money laundering measures and oversees the anti-money laundering efforts of its member countries in the Western Hemisphere. See www.cicad.oas.org/EN/.

Office of Foreign Assets Control (OFAC)

Office of the U.S. Department of the Treasury that administers and enforces economic and trade sanctions against targeted foreign countries, terrorism-sponsoring organizations, terrorists, international narcotics traffickers, and others based on U.S. foreign policy and national security goals. Until 1995, OFAC had been concerned only with enforcing asset-blocking and related rules applicable to "Specially Designated Nationals." After September 11, 2001, OFAC became a significant player in the anti-money laundering field as well. The office issues various lists, including "Specially Designated Narcotics Traffickers" and "Specially Designated Terrorists," and its regulations require U.S. financial institutions to block and file reports on accounts, payments or transfers in which an OFAC designated country, entity or individual has an interest. OFAC requirements have an extraterritorial reach, since they require U.S. persons and entities located outside the U.S. to comply. Independent of origin or final destination, if a U.S. financial institution acts as an intermediary for a transaction that involves an OFAC-designated entity, the funds must be blocked. See http://www.treas.gov/offices/enforcement/ofac/index.shtml.

Zakat

One of the Five Pillars of Islam and among the primary obligations that each Muslim must fulfill, zakat means tithing, or alms-giving. Once every lunar year—approximately 355 days—zakat requires a donation to charity representing a fixed portion of a Muslim's possessions, generally 2.5% of an individual's total net worth, excluding obligations and family expenses. Charities can be convenient fronts for those who seek to launder money or finance terrorism.

Offshore Group of Banking Supervisors (OGBS)

Organization that promotes the supervision of banks in their jurisdictions and furthers international cooperation among Offshore Banking Supervisors, Basel Committee member nations, and other banking supervisors. The OGBS was established in 1980 at the instigation of the Basel Committee on Banking Supervision, with which it maintains close contact. Through the Working Group on Cross-Border Banking the Offshore Group joined with the Basel Committee in preparing a paper on Customer Due Diligence for Banks, which the Basel Committee issued in 2001. This paper reinforces principles set in earlier Basel Committee papers by providing more precise guidance on the essential elements of Know Your Customer standards and their implementation. Offshore Group members are fully committed to the KYC standards contained in the paper. The Working Group also has produced as an annex to the Customer Due Diligence paper a General Guide to Account Opening and Customer Identification. See www.ogbs.net.

Vital Service Providers (VSPs)

People who help move the billions of dollars drug traffickers earn around the world. VSPs include accountants, attorneys, broker-dealers, other financial institutions, communications and transportation providers, and people who build concealment traps—sophisticated hiding places for drugs and money in vehicles, boats, or houses.

Cardholder

Person to whom a financial transaction card is issued, or an additional person authorized to use the card.

Settlors

Persons or companies who transfer ownership of their assets to trustees by means of a trust deed. Where the trustees have some discretion as to the investment and distribution of the trusts assets, the deed may be accompanied by a non-legally binding letter setting out what the settlor wishes done with the assets.

Smart Card

Plastic card resembling traditional credit or debit cards that contains a computer chip capable of storing more information than a magnetic stripe, such as health insurance, e-cash, government identification and credit card data.

Internal Controls

Policies and procedures in place within an institution that are designed to detect suspicious activity and criminal activity of a financial nature, including money laundering. Internal controls are one of the essential components of an effective anti-money laundering compliance program.

Stored Value Card

Pre-paid payment card that stores a monetary value from which purchase amounts are deducted each time the card is used.

Gatekeepers

Professionals such as lawyers, notaries, accountants, investment advisors, and trust and company service providers who assist in transactions involving the movement of money, and are deemed to have a particular role in identifying, preventing and reporting money laundering. Their role is important because they can block or facilitate the entry of dirty money into the financial system. Some countries, such as the U.K. and the Cayman Islands, impose due diligence requirements on gatekeepers that are similar to those of financial institutions. Two critical milestones in international gatekeeper regulation have been the European Union's revised anti-money laundering directive of 2001 and the FATF 40 Recommendations of 2003, both containing money laundering controls provisions for these professionals.

Mock Trial on Money Laundering

Program launched by the United Nations Office on Drugs and Crime (UNODC) and the Organization of American States Inter-American Drug Abuse Control Commission (CICAD) in various Latin American countries. The program's objective is to equip investigators, prosecutors and judges with the know how to crack money laundering cases. It uses cases that are built around authentic events. Since the program was launched in Ecuador in September 2002, six mock trials have been conducted in four locations—two in Ecuador, two in Colombia and one each in El Salvador and Nicaragua. More are scheduled in various South and Central American nations.

Intermediary Financial Institution

Receives funds from a wire transfer transmitter's financial institution and relays or transmits the order of payment to the recipient's financial institution. In an international funds transmission, intermediary financial institutions are usually located in different countries.

ROSC

Report on the Observance of Standards and Codes. A report used by the IMF or World Bank that summarizes the extent to which countries observe internationally recognized standards and codes for fiscal and monetary stability. The standards examine monetary and financial policy transparency, fiscal transparency, banking supervision, securities, insurance, payments systems, corporate governance, accounting, auditing and insolvency and creditor rights. Since 2002, they have also included examination of anti-money laundering and terrorist financing. ROSCs summarizing countries' observance of these standards are prepared and published at the request of the member country. The results are used in consideration of IMF and World Bank loans and for the private sector (including rating agencies) for risk assessment. ROSCs are also useful in determining a country's prospective risks associated with money laundering. See www.imf.org/exter-nal/np/rosc/rosc.asp.

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