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.
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.
Alternative Remittance System (ARS)
Underground banking or informal value transfer systems.
Often associated with ethnic groups from the Middle East,
Africa or Asia, and commonly involves the transfer of values
among countries outside of the formal banking system. The
remittance entity can be an ordinary shop selling goods that
has an arrangement with a correspondent business in another
country. There is usually no physical movement of currency
and a lack of formality with regard to verification and recordkeeping.
The money transfer takes place by coded information
that is passed through chits, couriers, letters or faxes, followed
by telephone confirmations. Almost any document that carries
an identifiable number can be used by the receiver to pick up
the values in the other country. The systems are referred to
by different names depending upon the country: Hawala (an
Arabic word meaning “change” or “transform”), Hundi (a Hindi
word meaning “collect”), Chiti banking (referring to the way the
system operates), Chop Shop banking (China), and Poey Kuan
(Thailand).
Anti-Money Laundering Program
The system designed to assist institutions in their fight against
money laundering and terrorist financing. In many jurisdictions,
government regulations require financial institutions, including
banks, securities dealers and money services businesses,
to establish such programs. At a minimum, the anti-money
laundering program should include:
1. Written internal policies, procedures and controls;
2. A designated AML compliance officer;
3. On-going employee training; and
4. Independent review to test the program.
Bank Draft
Vulnerable to money laundering because it represents a
reputable international monetary instrument drawn on a
reputable institution, and is often made payable—in cash—
upon presentation and at the issuing institution’s account in
another country.
Bank for International Settlements (BIS)
An international organization that serves as a bank for central
banks and which fosters international monetary and financial
cooperation with the purpose of attaining stability in the world
economy. It hosts the Secretariat of the Basel Committee on
Banking Supervision. The Committee has formulated broad
supervisory standards and guidelines on Know Your Customer
issues. See www.bis.org.
Bank Secrecy
Refers to laws and regulations in countries that prohibit
banks from disclosing information about an account—or even
revealing its existence—without the consent of the account
holder. Impedes the flow of information across national borders
among financial institutions and their supervisors. One of
FATF’s 40 Recommendations states that countries should
ensure that secrecy laws do not inhibit the implementation of
the FATF Recommendations.
Bank Secrecy Act (BSA)
The primary U.S. anti-money laundering regulatory statute
(Title 31, U.S. Code Sections 5311-5355) enacted in 1970 and
most notably amended by the USA Patriot Act in 2001. Among
other measures, it imposes money laundering controls on
financial institutions and many other businesses, including the
requirement to report and to keep records of various financial
transactions.
Bank Secrecy Act (BSA) Compliance Program
A program that U.S.-based financial institutions—as defined by
the Bank Secrecy Act—are required to establish and implement
in order to control money laundering and related financial
crimes. The program’s components include at a minimum: the
development of internal policies, procedures and controls; the
designation of a compliance officer; ongoing employee training;
and an independent audit function to test the program.
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
Basel Committee on Banking Supervision (Basel Committee)
The Basel Committee was established by the G-10’s central
bank of governors in 1974 to promote sound supervisory
standards worldwide. Its secretariat is appointed by the Bank
for International Settlements in Basel, Switzerland. It has
issued, among others, papers on customer due diligence for
banks, consolidated KYC risk management, transparency in
payment messages, due diligence and transparency regarding
cover payment messages related to cross-border wire
transfers, and sharing of financial records among jurisdictions
in connection with the fight against terrorist financing. See
www.bis.org/bcbs.
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.
Batch Transfer
Transfer comprising a number of individual wire transfers that
are sent to the same financial institution, and which may be
ultimately intended for different persons.
Benami Account
Also called a nominee account. Held by one person or entity on
behalf of another or others, Benami accounts are associated
with the hawala underground banking system of the Indian
subcontinent. A person in one jurisdiction seeking to move
funds through a hawaladar to another jurisdiction may use a
Benami account or Benami transaction to disguise his/her true
identity or the identity of the recipient of the funds.
Beneficial Owner
The natural person who ultimately owns or controls an account
through which a transaction is being conducted. It also
incorporates those persons who exercise ultimate effective
control over a legal person or arrangement.
Beneficiary
All trusts (other than charitable or statutory-permitted noncharitable
trusts) must have beneficiaries, which may include
the settlor. Trusts must also include a maximum time frame,
known as the “perpetuity period,” which normally extends up
to 100 years. While trusts must always have some ultimately
ascertainable beneficiary, they may have no defined existing
beneficiaries. Trusts may only have objects of a power until
some person becomes entitled as beneficiary to income
or capital on the expiry of a defined period, known as the
“accumulation period.” The latter period is normally coextensive
with the trust perpetuity period, which is usually
referred to in the trust deed as the “trust period.”
Bureau de Change
Also called “casa de cambio” or “exchange office,” a bureau
de change offers a range of services that are attractive to
money launderers: currency exchange and consolidation of
small denomination bank notes into larger ones; exchange of
financial instruments such as travelers checks, money orders
and personal checks; and telegraphic transfer facilities. In some
countries, such businesses are not as heavily scrutinized for
money laundering as are traditional financial institutions. Also,
their customers are often occasional, making it more difficult for
these businesses to “know their customers.”
Caribbean Financial Action Task Force (CFATF)
A FATF-style regional body comprising Caribbean states,
including Aruba, the Bahamas, the British Virgin Islands, the
Cayman Islands and Jamaica. See www.cfatf.org.
Clearing Account
Also called an “omnibus” or “concentration account.” Held by a
financial institution in its name, a clearing account is used
primarily for internal administrative or bank-to-bank transactions
in which funds are transmitted and commingled without
personally identifying the originators. The USA Patriot Act
prohibits the use of such accounts for customer transactions.
Collection Accounts
Immigrants from foreign countries deposit many small amounts
of currency into one account where they reside, and the
collected sum is transferred to an account in their home country
without documentation of the sources of the funds. Certain
ethnic groups from Asia or Africa may use collection accounts
to launder money.
Counter-Terrorism Committee (CTC)
A United Nations Committee established in 2001 pursuant to
Security Council Resolution 1373 (2001). Concerning counterterrorism,
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 financing
Criminal Proceeds
Any property derived from or obtained, directly or indirectly,
through the commission of a crime.
Cross Border
Used in the context of activities that involve at least two
countries, such as wiring money from one country to another or
taking currency across a border.
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.
Cuckoo Smurfing
A form of money laundering linked to alternative remittance
systems in which criminal funds are transferred through the
accounts of unwitting persons who are expecting genuine funds
or payments from overseas. The term cuckoo smurfing first
originated in investigations in the U.K., where it is a significant
money laundering technique.
Currency
Banknotes and coins that are in circulation as a medium of
exchange.
Currency Smuggling
The illicit movement of large quantities of cash across borders,
often into countries with strict banking secrecy, poor exchange
controls or poor anti-money laundering legislation
Currency Transaction Report (CTR)
A report that documents a currency 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.
Custodian
A bank, financial institution or other entity that is responsible
for managing or administering or safekeeping assets for other
persons or institutions. Typically, custodians are not active,
aggressive managers of the assets in question, but, instead,
serve to passively conserve them.
Custody
The act or authority of safeguarding and administration of
clients’ investments or assets.
Customer Due Diligence (CDD)
In terms of money laundering controls, it means implementing
adequate policies, practices and procedures that promote
high ethical and professional standards for dealing with
customers and are designed to prevent banks from being used,
intentionally or unintentionally, by criminal elements. Customer
due diligence includes not only establishing the identity of
customers, but also monitoring account activity to identify those
transactions that do not conform with the normal or expected
transactions for that customer or type of account.
Customer Identification Program (CIP)
The policies and procedures of an institution that aim to identify
and verify the identity of its customers. In general, the program
must be in writing, have senior board approval and include
procedures for customer notification.
Designated Non-Financial Businesses and Professions
With its 2003 revisions, FATF indicated the following
businesses should comply with the 40 Recommendations.
Casinos (including Internet casinos).
Real estate agents.
Dealers in precious metals.
Dealers in precious stones.
Lawyers, notaries, other independent legal professionals
and accountants. Refers to sole practitioners, partners
and employed professionals within professional firms. It
is not meant to refer to “internal” professionals who are
employees of other types of businesses, or to professionals
working for government agencies who may already be
subject to measures that would combat money laundering.
Trust and company service providers. Refers to all persons
or businesses that are not covered elsewhere under the
Recommendations, and which provide any of the following
services to third parties:
Acting as a formation agent of legal persons.
Acting as (or arranging for another person to act as) a
director or secretary of a company, a partner of a
partnership, or a similar position in relation to other legal
persons.
Providing a registered office, business address or
accommodation, correspondence or administrative address
for a company, a partnership or any other legal person or
arrangement.
Acting as (or arranging for another person to act as) a
trustee of an express trust.
Disclosure Order
A document that requires a person who has information
relevant to an investigation to answer questions at an interview,
to provide information, or to produce documentation. The order
can be exercised not only against a person whose assets are
under investigation, but also against a third party, such as a
financial institution.
Domestic Transfer
Wire transfer in which the originator and beneficiary institutions
are located in the same jurisdiction. A domestic transfer
therefore refers to any chain of wire transfers that takes place
entirely within the borders of a single jurisdiction, even though
the system used to send the wire transfer may be located in
another jurisdiction.
Eastern and Southern African Anti-Money Laundering Group
(ESAAMLG)
A FATF-style regional body comprising fourteen countries from
the Eastern region of Africa down to the Southern tip of Africa.
It was established in 1999.
Egmont Group of Financial Intelligence Units
In 1995, a number of national financial intelligence units (FIUs)
began working together in an informal organization known as
the Egmont Group, named for the site of its first meeting in the
Egmont-Arenberg Palace in Brussels. The goal of the group is
to provide a forum for FIUs to improve support to their national
anti-money laundering programs and to develop protocols for
information sharing. The FIUs’ support includes expanding
and systematizing the exchange of financial intelligence,
improving expertise and capabilities of the personnel of such
organizations, and fostering improved communications among
FIUs through application of new technologies and sharing of
information for financial crimes investigations.
Electronic Banking
A form of banking in which funds are transferred through an
exchange of electronic signals among financial institutions
rather than through an exchange of cash, checks or other
negotiable instruments.
Electronic Cash (E-Cash)
A payment mechanism designed for the Internet, electronic
cash represents a series of monetary value units electronically
stored on the hard drive of a computer or microchip of a
plastic card. It is anonymous like cash, and has immediate
value. E-cash is attractive to money launderers because of its
anonymity and the ease it provides in “transporting” large sums
quickly and easily via the Internet. It is also called “e-money.”
Electronic Funds Transfer (EFT)
The movement of funds between financial institutions
electronically. The two most common electronic funds transfer
systems in the U.S. are FedWire and CHIPS. (SWIFT is
often referred to as the third EFT system, but in reality it is an
international messaging system that carries instructions for
wire transfers between institutions, rather than the wire transfer
system itself.) Other systems that facilitate funds movement,
but are not technically EFT systems, include automatedclearing houses (ACH), which are networks that conduct batch
processing of messages for book transfers between institutions.
Enhanced Due Diligence (EDD)
Additional examination and cautionary measures aimed at
identifying customers and confirming that their activities and
funds are legitimate.
Eurasian Group on Combating Money Laundering and
Terrorist Financing (EAG)
A FATF-style regional body formed in October 2004 in Moscow.
Member countries include Belarus, China, Kazakhstan,
Kyrgyzstan, Russia, Tajikistan, Turkmenistan and Uzbekistan.
See http://www.eurasiangroup.org/.
European Union (EU)
The European Union is a family of democratic European
countries. Its member states have set up common institutions
to which they delegate part of their sovereignty so that
decisions on specific matters of collective interest can be made
democratically at the European level. See http://europa.eu/
index_en.htm
Financial Action Task Force (FATF)
FATF was chartered in 1989 by the Group of Seven industrial
nations to foster the establishment of national and global
measures to combat money laundering. It is an international
policy-making body that sets anti-money laundering standards
and counter-terrorist financing measures worldwide. Its
Recommendations do not have the force of law. Thirty-four
countries and two international organizations are members. In
2012, FATF substantially revised its 40 + 9 Recommendations
and reduced them to 40. FATF develops annual typology
reports showcasing current money laundering and terrorist
financing trends and methods. See www.fatf-gafi.org.
Financial Action Task Force on Money Laundering in
South America (GAFISUD - Grupo de Acción Financiera de
Sudamérica)
A FATF-style regional body for South America, established in
2000. Members include: Argentina, Bolivia, Brazil, Chile,
Colombia, Costa Rica, Ecuador, Mexico, Panama, Paraguay,
Peru, and Uruguay. See http://www.gafisud.info/home.htm.
Financial Action Task Force-Style Regional Body (FSRB)
FSRBs have forms and functions similar to those of FATF.
However, their efforts are targeted to specific regions.
Examples include the Caribbean Financial Action Task Force,
the Eastern and Southern African Anti-Money Laundering
Group, and the Middle East North Africa Financial Action 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:
Acceptance of deposits and other repayable funds from the
public.
Lending.
Financial leasing.
The transfer of money or value.
Issuing and managing means of payment (e.g., credit and
debit cards, checks, traveler’s checks, money orders and
bankers’ drafts, electronic money).
Financial guarantees and commitments.
Trading in:
money market instruments (checks, bills, CDs,
derivatives etc.);
foreign exchange;
exchange, interest rate and index instruments;
transferable securities and
commodity futures trading.
Participation in securities issues and the provision of
financial services related to such issues.
Individual and collective portfolio management.
Safekeeping and administration of cash or liquid securities
on behalf of other persons.
Otherwise investing, administering or managing funds or
money on behalf of other persons.
Underwriting and placement of life insurance and other
investment-related insurance.
Money and currency changing.
Financial Intelligence Unit (FIU)
A central governmental office that obtains information from
financial reports, processes it and then discloses it to an
appropriate government authority in support of a national antimoney
laundering effort. The activities performed by an FIU
include receiving, analyzing and disseminating information and,
sometimes, investigating violations and prosecuting individuals
indicated in the disclosures.
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.
Forensic Accountant
Specializes in analyzing financial evidence and testifying as an
expert witness in cases of white-collar crime, including money
laundering.
Forfeiture
The permanent loss of private property or assets as a result of
legal action by a government authority. Generally, the owner of
the property has failed to comply with the law or the property is
linked to some sort of criminal activity.
Freeze
To prevent or restrict the exchange, withdrawal, liquidation,
or use of assets or bank accounts by governmental action.
As defined by FATF’s “General Glossary” as they relate to
the revised Recommendations of 2012: In the context of
confiscation and provisional measures (e.g., Recommendations
4, 32 and 38), the term freeze means to prohibit the transfer,
conversion, disposition or movement of any property,
equipment or other instrumentalities on the basis of, and for
the duration of the validity of, an action initiated by a competent
authority or a court under a freezing mechanism, or until a
forfeiture orconfiscation determination is made by a competent
authority.
For the purposes of Recommendations 6 and 7 on the
implementation of targeted financial sanctions, the term
freeze means to prohibit the transfer, conversion, disposition
or movement of any funds or other assets that are owned
or controlled by designated persons or entities on the basis
of, and for the duration of the validity of, an action initiated
by the United Nations Security Council or in accordance
with applicable Security Council resolutions by a competent
authority or a court.
In all cases, the frozen property, equipment, instrumentalities,
funds or other assets remain the property of the natural or
legal person(s) that held an interest in them at the time of
the freezing and may continue to be administered by third
parties, or through other arrangements established by such
natural or legal person(s) prior to the initiation of an action
under a freezing mechanism, or in accordance with other
national provisions. As part of the implementation of a freeze,
countries may decide to take control of the property, equipment,
instrumentalities, or funds or other assets as a means to protect
against flight.
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.
Futures
Contracts that require delivery of a commodity of specified quality
and quantity at a specified price on a specified future date.
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.
Group of Eleven Industrialized Nations (G-10)
The group is made up of the original G-7 group of industrialized
nations, plus Sweden, Belgium, the Netherlands, and
Switzerland, which was the 11th country to join in 1964.
Although it now has 11 members, the group continues to be
called the G-10.
Group of Seven Industrialized Nations (G-7)
Body made up of seven countries: U.S., Japan, Germany,
France, Italy, the U.K. and Canada.
Hawala
A funds exchange system in Indian and Chinese civilizations used to facilitate
the secure and convenient cross-border movement of funds. Hawala was
born centuries before Western financial systems. 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 confidential, as records are not stringently kept. In Pakistan, the
system is called hundi. See Alternative Remittance System.
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.
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.
International Financial Institutions (IFIs)
IFIs are financial institutions that have been established or
chartered by more than one country. The best known IFIs are
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.
International Monetary Fund (IMF)
An organization of more than 180 member countries, the
IMF was established to promote monetary cooperation, to
foster economic growth and high levels of employment, and
to 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 FATF.
International Money Laundering Abatement and Anti-Terrorist
Financing Act
The Act represents Title III of the USA Patriot Act of 2001,
which contains most, but not all, of the provisions of that
landmark law that deal directly with anti-money laundering
matters.
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.
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.
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
Customer Due Diligence procedures.
Investment Banking
Self-standing department or unit within a financial institution
that provides strategic capitalizations, amassing huge amounts
from diverse sources for corporate deal making, and other
alternatives to traditional banking instruments.
IVTS
Informal Value Transfer System. See Alternative Remittance
System.
Know Your Customer (KYC)
Anti-money laundering 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 antimoney
laundering program.
Know Your Employee (KYE)
Anti-money laundering 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, past criminal activity and suspicious activity.
KYE is a key tool in detecting suspicious activity because
employees can be accomplices of money launderers.
Layering
The second phase of the classic three-step money laundering
process between placement and integration, layering involves
distancing illegal proceeds from their source by creating
complex levels of financial transactions designed to disguise
the audit trail and to provide anonymity.
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. In addition, banks can suffer administrative or criminal
penalties imposed by the government. 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.
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. Letters of Credit (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 lax
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 nonexistent
trade transactions.
Letter Rogatory
See Commission Rogatoire.
Loan Back Method of Money Laundering
With a loan-back, the criminal puts the illicit funds in an offshore
entity that he owns and then “loans” them back to himself or
a company he owns. This technique works because it is hard
to determine who actually controls offshore accounts in some
countries. This process allows the launderer to “clean” illicit
money and to generate tax benefits by deducting purported
interest payments.
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
deposits. 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.
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 (FIUs), 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 an 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.
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.
Monetary Instruments
Travelers checks, negotiable instruments, including personal
checks and business checks, official bank checks, cashier’s
checks, promissory notes, money orders, securities or stocks
in bearer form. Monetary instruments are normally included,
along with currency, in the anti-money laundering regulations of
most countries, and financial institutions must file reports and
maintain records of customer activities involving them.
Money Laundering
The process of concealing or disguising the existence,
source, movement, destination or illegal application of illicitlyderived
property or funds to make them appear legitimate. It
usually involves a three part system: Placement of funds into
a financial system, layering of transactions to disguise the
source, ownership and location of the funds, and integration
of the funds into society in the form of holdings that appear
legitimate. The definition of money laundering varies in each
country where it is recognized as a crime.
Money Laundering Reporting Officer (MLRO)
A term used in various international rules to refer to the person
responsible for overseeing a firm’s anti-money laundering
activities and program and for filing reports of suspicious
transactions with the national FIU. The MLRO is the key person
in the implementation of anti-money laundering strategies and
policies.
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.
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.
Money Transfer Service or Value Transfer Service
Financial service that accepts cash, checks other monetary
instruments that can store value in one location and pay 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 of the regulated system. In some
jurisdictions, informal systems are referred to as alternative
remittance services or underground (or parallel) banking
systems.
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).
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.
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.
Alternative Remittance System (ARS)
Underground banking or informal value transfer systems.
Often associated with ethnic groups from the Middle East,
Africa or Asia, and commonly involves the transfer of values
among countries outside of the formal banking system. The
remittance entity can be an ordinary shop selling goods that
has an arrangement with a correspondent business in another
country. There is usually no physical movement of currency
and a lack of formality with regard to verification and recordkeeping.
The money transfer takes place by coded information
that is passed through chits, couriers, letters or faxes, followed
by telephone confirmations. Almost any document that carries
an identifiable number can be used by the receiver to pick up
the values in the other country. The systems are referred to
by different names depending upon the country: Hawala (an
Arabic word meaning “change” or “transform”), Hundi (a Hindi
word meaning “collect”), Chiti banking (referring to the way the
system operates), Chop Shop banking (China), and Poey Kuan
(Thailand).
Anti-Money Laundering Program
The system designed to assist institutions in their fight against
money laundering and terrorist financing. In many jurisdictions,
government regulations require financial institutions, including
banks, securities dealers and money services businesses,
to establish such programs. At a minimum, the anti-money
laundering program should include:
1. Written internal policies, procedures and controls;
2. A designated AML compliance officer;
3. On-going employee training; and
4. Independent review to test the program.
Bank Draft
Vulnerable to money laundering because it represents a
reputable international monetary instrument drawn on a
reputable institution, and is often made payable—in cash—
upon presentation and at the issuing institution’s account in
another country.
Bank for International Settlements (BIS)
An international organization that serves as a bank for central
banks and which fosters international monetary and financial
cooperation with the purpose of attaining stability in the world
economy. It hosts the Secretariat of the Basel Committee on
Banking Supervision. The Committee has formulated broad
supervisory standards and guidelines on Know Your Customer
issues. See www.bis.org.
Bank Secrecy
Refers to laws and regulations in countries that prohibit
banks from disclosing information about an account—or even
revealing its existence—without the consent of the account
holder. Impedes the flow of information across national borders
among financial institutions and their supervisors. One of
FATF’s 40 Recommendations states that countries should
ensure that secrecy laws do not inhibit the implementation of
the FATF Recommendations.
Bank Secrecy Act (BSA)
The primary U.S. anti-money laundering regulatory statute
(Title 31, U.S. Code Sections 5311-5355) enacted in 1970 and
most notably amended by the USA Patriot Act in 2001. Among
other measures, it imposes money laundering controls on
financial institutions and many other businesses, including the
requirement to report and to keep records of various financial
transactions.
Bank Secrecy Act (BSA) Compliance Program
A program that U.S.-based financial institutions—as defined by
the Bank Secrecy Act—are required to establish and implement
in order to control money laundering and related financial
crimes. The program’s components include at a minimum: the
development of internal policies, procedures and controls; the
designation of a compliance officer; ongoing employee training;
and an independent audit function to test the program.
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
Basel Committee on Banking Supervision (Basel Committee)
The Basel Committee was established by the G-10’s central
bank of governors in 1974 to promote sound supervisory
standards worldwide. Its secretariat is appointed by the Bank
for International Settlements in Basel, Switzerland. It has
issued, among others, papers on customer due diligence for
banks, consolidated KYC risk management, transparency in
payment messages, due diligence and transparency regarding
cover payment messages related to cross-border wire
transfers, and sharing of financial records among jurisdictions
in connection with the fight against terrorist financing. See
www.bis.org/bcbs.
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.
Batch Transfer
Transfer comprising a number of individual wire transfers that
are sent to the same financial institution, and which may be
ultimately intended for different persons.
Benami Account
Also called a nominee account. Held by one person or entity on
behalf of another or others, Benami accounts are associated
with the hawala underground banking system of the Indian
subcontinent. A person in one jurisdiction seeking to move
funds through a hawaladar to another jurisdiction may use a
Benami account or Benami transaction to disguise his/her true
identity or the identity of the recipient of the funds.
Beneficial Owner
The natural person who ultimately owns or controls an account
through which a transaction is being conducted. It also
incorporates those persons who exercise ultimate effective
control over a legal person or arrangement.
Beneficiary
All trusts (other than charitable or statutory-permitted noncharitable
trusts) must have beneficiaries, which may include
the settlor. Trusts must also include a maximum time frame,
known as the “perpetuity period,” which normally extends up
to 100 years. While trusts must always have some ultimately
ascertainable beneficiary, they may have no defined existing
beneficiaries. Trusts may only have objects of a power until
some person becomes entitled as beneficiary to income
or capital on the expiry of a defined period, known as the
“accumulation period.” The latter period is normally coextensive
with the trust perpetuity period, which is usually
referred to in the trust deed as the “trust period.”
Bureau de Change
Also called “casa de cambio” or “exchange office,” a bureau
de change offers a range of services that are attractive to
money launderers: currency exchange and consolidation of
small denomination bank notes into larger ones; exchange of
financial instruments such as travelers checks, money orders
and personal checks; and telegraphic transfer facilities. In some
countries, such businesses are not as heavily scrutinized for
money laundering as are traditional financial institutions. Also,
their customers are often occasional, making it more difficult for
these businesses to “know their customers.”
Caribbean Financial Action Task Force (CFATF)
A FATF-style regional body comprising Caribbean states,
including Aruba, the Bahamas, the British Virgin Islands, the
Cayman Islands and Jamaica. See www.cfatf.org.
Clearing Account
Also called an “omnibus” or “concentration account.” Held by a
financial institution in its name, a clearing account is used
primarily for internal administrative or bank-to-bank transactions
in which funds are transmitted and commingled without
personally identifying the originators. The USA Patriot Act
prohibits the use of such accounts for customer transactions.
Collection Accounts
Immigrants from foreign countries deposit many small amounts
of currency into one account where they reside, and the
collected sum is transferred to an account in their home country
without documentation of the sources of the funds. Certain
ethnic groups from Asia or Africa may use collection accounts
to launder money.
Counter-Terrorism Committee (CTC)
A United Nations Committee established in 2001 pursuant to
Security Council Resolution 1373 (2001). Concerning counterterrorism,
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 financing
Criminal Proceeds
Any property derived from or obtained, directly or indirectly,
through the commission of a crime.
Cross Border
Used in the context of activities that involve at least two
countries, such as wiring money from one country to another or
taking currency across a border.
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.
Cuckoo Smurfing
A form of money laundering linked to alternative remittance
systems in which criminal funds are transferred through the
accounts of unwitting persons who are expecting genuine funds
or payments from overseas. The term cuckoo smurfing first
originated in investigations in the U.K., where it is a significant
money laundering technique.
Currency
Banknotes and coins that are in circulation as a medium of
exchange.
Currency Smuggling
The illicit movement of large quantities of cash across borders,
often into countries with strict banking secrecy, poor exchange
controls or poor anti-money laundering legislation
Currency Transaction Report (CTR)
A report that documents a currency 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.
Custodian
A bank, financial institution or other entity that is responsible
for managing or administering or safekeeping assets for other
persons or institutions. Typically, custodians are not active,
aggressive managers of the assets in question, but, instead,
serve to passively conserve them.
Custody
The act or authority of safeguarding and administration of
clients’ investments or assets.
Customer Due Diligence (CDD)
In terms of money laundering controls, it means implementing
adequate policies, practices and procedures that promote
high ethical and professional standards for dealing with
customers and are designed to prevent banks from being used,
intentionally or unintentionally, by criminal elements. Customer
due diligence includes not only establishing the identity of
customers, but also monitoring account activity to identify those
transactions that do not conform with the normal or expected
transactions for that customer or type of account.
Customer Identification Program (CIP)
The policies and procedures of an institution that aim to identify
and verify the identity of its customers. In general, the program
must be in writing, have senior board approval and include
procedures for customer notification.
Designated Non-Financial Businesses and Professions
With its 2003 revisions, FATF indicated the following
businesses should comply with the 40 Recommendations.
Casinos (including Internet casinos).
Real estate agents.
Dealers in precious metals.
Dealers in precious stones.
Lawyers, notaries, other independent legal professionals
and accountants. Refers to sole practitioners, partners
and employed professionals within professional firms. It
is not meant to refer to “internal” professionals who are
employees of other types of businesses, or to professionals
working for government agencies who may already be
subject to measures that would combat money laundering.
Trust and company service providers. Refers to all persons
or businesses that are not covered elsewhere under the
Recommendations, and which provide any of the following
services to third parties:
Acting as a formation agent of legal persons.
Acting as (or arranging for another person to act as) a
director or secretary of a company, a partner of a
partnership, or a similar position in relation to other legal
persons.
Providing a registered office, business address or
accommodation, correspondence or administrative address
for a company, a partnership or any other legal person or
arrangement.
Acting as (or arranging for another person to act as) a
trustee of an express trust.
Disclosure Order
A document that requires a person who has information
relevant to an investigation to answer questions at an interview,
to provide information, or to produce documentation. The order
can be exercised not only against a person whose assets are
under investigation, but also against a third party, such as a
financial institution.
Domestic Transfer
Wire transfer in which the originator and beneficiary institutions
are located in the same jurisdiction. A domestic transfer
therefore refers to any chain of wire transfers that takes place
entirely within the borders of a single jurisdiction, even though
the system used to send the wire transfer may be located in
another jurisdiction.
Eastern and Southern African Anti-Money Laundering Group
(ESAAMLG)
A FATF-style regional body comprising fourteen countries from
the Eastern region of Africa down to the Southern tip of Africa.
It was established in 1999.
Egmont Group of Financial Intelligence Units
In 1995, a number of national financial intelligence units (FIUs)
began working together in an informal organization known as
the Egmont Group, named for the site of its first meeting in the
Egmont-Arenberg Palace in Brussels. The goal of the group is
to provide a forum for FIUs to improve support to their national
anti-money laundering programs and to develop protocols for
information sharing. The FIUs’ support includes expanding
and systematizing the exchange of financial intelligence,
improving expertise and capabilities of the personnel of such
organizations, and fostering improved communications among
FIUs through application of new technologies and sharing of
information for financial crimes investigations.
Electronic Banking
A form of banking in which funds are transferred through an
exchange of electronic signals among financial institutions
rather than through an exchange of cash, checks or other
negotiable instruments.
Electronic Cash (E-Cash)
A payment mechanism designed for the Internet, electronic
cash represents a series of monetary value units electronically
stored on the hard drive of a computer or microchip of a
plastic card. It is anonymous like cash, and has immediate
value. E-cash is attractive to money launderers because of its
anonymity and the ease it provides in “transporting” large sums
quickly and easily via the Internet. It is also called “e-money.”
Electronic Funds Transfer (EFT)
The movement of funds between financial institutions
electronically. The two most common electronic funds transfer
systems in the U.S. are FedWire and CHIPS. (SWIFT is
often referred to as the third EFT system, but in reality it is an
international messaging system that carries instructions for
wire transfers between institutions, rather than the wire transfer
system itself.) Other systems that facilitate funds movement,
but are not technically EFT systems, include automatedclearing houses (ACH), which are networks that conduct batch
processing of messages for book transfers between institutions.
Enhanced Due Diligence (EDD)
Additional examination and cautionary measures aimed at
identifying customers and confirming that their activities and
funds are legitimate.
Eurasian Group on Combating Money Laundering and
Terrorist Financing (EAG)
A FATF-style regional body formed in October 2004 in Moscow.
Member countries include Belarus, China, Kazakhstan,
Kyrgyzstan, Russia, Tajikistan, Turkmenistan and Uzbekistan.
See http://www.eurasiangroup.org/.
European Union (EU)
The European Union is a family of democratic European
countries. Its member states have set up common institutions
to which they delegate part of their sovereignty so that
decisions on specific matters of collective interest can be made
democratically at the European level. See http://europa.eu/
index_en.htm
Financial Action Task Force (FATF)
FATF was chartered in 1989 by the Group of Seven industrial
nations to foster the establishment of national and global
measures to combat money laundering. It is an international
policy-making body that sets anti-money laundering standards
and counter-terrorist financing measures worldwide. Its
Recommendations do not have the force of law. Thirty-four
countries and two international organizations are members. In
2012, FATF substantially revised its 40 + 9 Recommendations
and reduced them to 40. FATF develops annual typology
reports showcasing current money laundering and terrorist
financing trends and methods. See www.fatf-gafi.org.
Financial Action Task Force on Money Laundering in
South America (GAFISUD - Grupo de Acción Financiera de
Sudamérica)
A FATF-style regional body for South America, established in
2000. Members include: Argentina, Bolivia, Brazil, Chile,
Colombia, Costa Rica, Ecuador, Mexico, Panama, Paraguay,
Peru, and Uruguay. See http://www.gafisud.info/home.htm.
Financial Action Task Force-Style Regional Body (FSRB)
FSRBs have forms and functions similar to those of FATF.
However, their efforts are targeted to specific regions.
Examples include the Caribbean Financial Action Task Force,
the Eastern and Southern African Anti-Money Laundering
Group, and the Middle East North Africa Financial Action 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:
Acceptance of deposits and other repayable funds from the
public.
Lending.
Financial leasing.
The transfer of money or value.
Issuing and managing means of payment (e.g., credit and
debit cards, checks, traveler’s checks, money orders and
bankers’ drafts, electronic money).
Financial guarantees and commitments.
Trading in:
money market instruments (checks, bills, CDs,
derivatives etc.);
foreign exchange;
exchange, interest rate and index instruments;
transferable securities and
commodity futures trading.
Participation in securities issues and the provision of
financial services related to such issues.
Individual and collective portfolio management.
Safekeeping and administration of cash or liquid securities
on behalf of other persons.
Otherwise investing, administering or managing funds or
money on behalf of other persons.
Underwriting and placement of life insurance and other
investment-related insurance.
Money and currency changing.
Financial Intelligence Unit (FIU)
A central governmental office that obtains information from
financial reports, processes it and then discloses it to an
appropriate government authority in support of a national antimoney
laundering effort. The activities performed by an FIU
include receiving, analyzing and disseminating information and,
sometimes, investigating violations and prosecuting individuals
indicated in the disclosures.
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.
Forensic Accountant
Specializes in analyzing financial evidence and testifying as an
expert witness in cases of white-collar crime, including money
laundering.
Forfeiture
The permanent loss of private property or assets as a result of
legal action by a government authority. Generally, the owner of
the property has failed to comply with the law or the property is
linked to some sort of criminal activity.
Freeze
To prevent or restrict the exchange, withdrawal, liquidation,
or use of assets or bank accounts by governmental action.
As defined by FATF’s “General Glossary” as they relate to
the revised Recommendations of 2012: In the context of
confiscation and provisional measures (e.g., Recommendations
4, 32 and 38), the term freeze means to prohibit the transfer,
conversion, disposition or movement of any property,
equipment or other instrumentalities on the basis of, and for
the duration of the validity of, an action initiated by a competent
authority or a court under a freezing mechanism, or until a
forfeiture orconfiscation determination is made by a competent
authority.
For the purposes of Recommendations 6 and 7 on the
implementation of targeted financial sanctions, the term
freeze means to prohibit the transfer, conversion, disposition
or movement of any funds or other assets that are owned
or controlled by designated persons or entities on the basis
of, and for the duration of the validity of, an action initiated
by the United Nations Security Council or in accordance
with applicable Security Council resolutions by a competent
authority or a court.
In all cases, the frozen property, equipment, instrumentalities,
funds or other assets remain the property of the natural or
legal person(s) that held an interest in them at the time of
the freezing and may continue to be administered by third
parties, or through other arrangements established by such
natural or legal person(s) prior to the initiation of an action
under a freezing mechanism, or in accordance with other
national provisions. As part of the implementation of a freeze,
countries may decide to take control of the property, equipment,
instrumentalities, or funds or other assets as a means to protect
against flight.
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.
Futures
Contracts that require delivery of a commodity of specified quality
and quantity at a specified price on a specified future date.
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.
Group of Eleven Industrialized Nations (G-10)
The group is made up of the original G-7 group of industrialized
nations, plus Sweden, Belgium, the Netherlands, and
Switzerland, which was the 11th country to join in 1964.
Although it now has 11 members, the group continues to be
called the G-10.
Group of Seven Industrialized Nations (G-7)
Body made up of seven countries: U.S., Japan, Germany,
France, Italy, the U.K. and Canada.
Hawala
A funds exchange system in Indian and Chinese civilizations used to facilitate
the secure and convenient cross-border movement of funds. Hawala was
born centuries before Western financial systems. 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 confidential, as records are not stringently kept. In Pakistan, the
system is called hundi. See Alternative Remittance System.
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.
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.
International Financial Institutions (IFIs)
IFIs are financial institutions that have been established or
chartered by more than one country. The best known IFIs are
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.
International Monetary Fund (IMF)
An organization of more than 180 member countries, the
IMF was established to promote monetary cooperation, to
foster economic growth and high levels of employment, and
to 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 FATF.
International Money Laundering Abatement and Anti-Terrorist
Financing Act
The Act represents Title III of the USA Patriot Act of 2001,
which contains most, but not all, of the provisions of that
landmark law that deal directly with anti-money laundering
matters.
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.
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.
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
Customer Due Diligence procedures.
Investment Banking
Self-standing department or unit within a financial institution
that provides strategic capitalizations, amassing huge amounts
from diverse sources for corporate deal making, and other
alternatives to traditional banking instruments.
IVTS
Informal Value Transfer System. See Alternative Remittance
System.
Know Your Customer (KYC)
Anti-money laundering 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 antimoney
laundering program.
Know Your Employee (KYE)
Anti-money laundering 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, past criminal activity and suspicious activity.
KYE is a key tool in detecting suspicious activity because
employees can be accomplices of money launderers.
Layering
The second phase of the classic three-step money laundering
process between placement and integration, layering involves
distancing illegal proceeds from their source by creating
complex levels of financial transactions designed to disguise
the audit trail and to provide anonymity.
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. In addition, banks can suffer administrative or criminal
penalties imposed by the government. 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.
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. Letters of Credit (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 lax
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 nonexistent
trade transactions.
Letter Rogatory
See Commission Rogatoire.
Loan Back Method of Money Laundering
With a loan-back, the criminal puts the illicit funds in an offshore
entity that he owns and then “loans” them back to himself or
a company he owns. This technique works because it is hard
to determine who actually controls offshore accounts in some
countries. This process allows the launderer to “clean” illicit
money and to generate tax benefits by deducting purported
interest payments.
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
deposits. 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.
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 (FIUs), 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 an 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.
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.
Monetary Instruments
Travelers checks, negotiable instruments, including personal
checks and business checks, official bank checks, cashier’s
checks, promissory notes, money orders, securities or stocks
in bearer form. Monetary instruments are normally included,
along with currency, in the anti-money laundering regulations of
most countries, and financial institutions must file reports and
maintain records of customer activities involving them.
Money Laundering
The process of concealing or disguising the existence,
source, movement, destination or illegal application of illicitlyderived
property or funds to make them appear legitimate. It
usually involves a three part system: Placement of funds into
a financial system, layering of transactions to disguise the
source, ownership and location of the funds, and integration
of the funds into society in the form of holdings that appear
legitimate. The definition of money laundering varies in each
country where it is recognized as a crime.
Money Laundering Reporting Officer (MLRO)
A term used in various international rules to refer to the person
responsible for overseeing a firm’s anti-money laundering
activities and program and for filing reports of suspicious
transactions with the national FIU. The MLRO is the key person
in the implementation of anti-money laundering strategies and
policies.
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.
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.
Money Transfer Service or Value Transfer Service
Financial service that accepts cash, checks other monetary
instruments that can store value in one location and pay 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 of the regulated system. In some
jurisdictions, informal systems are referred to as alternative
remittance services or underground (or parallel) banking
systems.
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).
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