Your guide to the sometimes bewildering jargon in the world of financial crime
In digital currency, an address is a destination where a user sends and receives digital currency. In a way, it is similar to a bank account. These addresses usually include a long series of letters and numbers
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.
An altcoin is a digital currency other than bitcoin. There were more than 1,000 altcoins listed on data source CoinMarketCap at the time of this writing. Another way of describing the term “altcoin” is referring to it as an alternative protocol asset, meaning that it follows a protocol (set of rules) that’s different than that of bitcoin.
Alternative Remittance System (ARS)
Underground banking or Informal Value Transfer Systems (IVTS). 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 record- keeping. The money transfer takes place by coded information that is passed through chits, couriers, letters, faxes, emails, text messages, or online chat systems, followed by some form of telecommunications confirmations.
Anti-Money Laundering International Database (AMLID)
A compendium of analyses of anti-money laundering laws and regulations, including two general classes of money laundering control measures—domestic laws and international cooperation—as well as information on national contacts and authorities. A secure, multilingual database, AMLID is an important reference tool for law enforcement officers involved in cross-jurisdictional work.
Anti-Money Laundering Programme
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
In cryptocurrency, arbitrage refers to taking advantage of the price difference between two different exchanges. If bitcoin is selling for £8,950 on one exchange and £9,000 on another, a trader can buy the digital currency on the first exchange and sell it on the second for a modest profit.
Asia/Pacific Group on Money Laundering (APG)
A Financial Action Task Force (FATF)-style regional body consisting of jurisdictions in the Asia/Pacific Region.
Anything an individual or legal entity owns that has a monetary value. Fixed assets are those items, such as buildings and equipment, that will be used over a period of time; current assets include raw materials, cash, and any money other parties owe to the individual or legal entity.
The practice of removing an individual or legal entity’s access to assets during or as the result of an investigation into a sanctions violation. Asset blocking is also referred to as freezing an asset.
The practice of taking ownership of an individual or legal entity’s asset during or as the result of an investigation into a sanctions violation.
The illegal practice of moving assets from one jurisdiction to another for the purpose of avoiding fines, confiscation, or other penalties.
Similar to asset seizure, asset forfeiture is an important tool to help law enforcement agencies defund organized crime and prevent the commission of new crimes. In civil asset forfeiture, assets unrelated to the commission of a crime can be taken from the individual accused of committing a crime.
The prevention of a person targeted by sanctions from accessing or using his or her bank account or other financial assets. Asset freezing is also referred to as blocking an asset.
The illegal practice of purchasing assets, such as real estate properties, using a blend of legal and illegal funds as a means of making matches more complicated.
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.
Asset Protection Trusts (APTs)
A special form of irrevocable trust usually created (i.e., settled) offshore for the principal purposes of preserving and protecting part of one’s wealth from creditors. Title to the asset is transferred to a person named the trustee. APTs are generally used for asset protection and are usually tax neutral. Their ultimate function is to provide for the beneficiaries. Some proponents advertise APTs as allowing foreign trustees to ignore U.S. court orders and to simply transfer the trust to another jurisdiction in response to legal action threatening the trust’s assets.
Automated Clearing House (ACH)
An electronic banking network that processes large volumes of both credit and debit transactions that originate in batches. ACH credit transfers include direct deposit payroll payments and payments to contractors and vendors. ACH debit transfers include consumer payments on insurance premiums, mortgage loans and other kinds of expenses.
Automated Screening Tool (AST)
Software systems used by large financial institutions to facilitate the screening process, as opposed to manual screening. In general, ASTs are designed to screen against sanctions lists. ASTs generate hits against sanctions lists that may be consolidated into alerts based on, for example, a customer record. For one customer record there may be multiple hits against sanctions lists that are consolidated under one alert.
A single entity, whether a government or a coalition of governments, such as the EU, acting to implement and enforce a sanctions regime. See Unilateral Sanctions.
Back-to-Back Letters of Credit
A form of financing in which Bank A issues a letter of credit as collateral to Bank B in order to issue a separate letter of credit to the beneficiary. This often happens when the underlying agreement between the applicant and beneficiary contains restrictions about the credit quality of the bank that is issuing the letter of credit, the location of the issuing bank, or other stipulations that prevent the applicant’s bank from issuing a direct letter of credit to the beneficiary. A sanctions evader can use a back-to-back letter of credit to remove the name of a sanctioned bank from the documentation.
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.
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.
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.
The process of screening a firm’s entire customer base and other associated entities, such as vendors, with ASTs on a periodic basis.
In relation to a certificate, share transfer or other document, a bearer form enables a designated investment or deposit to be sold, transferred, surrendered or addressed to a bearer without the need to obtain further written instructions.
Bearer Negotiable Instruments
Includes monetary instruments in bearer form such as: negotiable instruments (including checks, promissory notes and money orders) that are either in bearer form, are endorsed without restriction, are made out to a payee, or are otherwise in such form that title thereto passes upon delivery.
Negotiable instruments that accord ownership in a corporation to the person who is in physical possession of the bearer share certificate, a certificate made out to “Bearer” and not in the name of an individual or organization.
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.
The term beneficial owner has two different definitions depending on the context:
· The natural person who ultimately owns or controls an account through which a transaction is being conducted.
· The natural persons who have significant ownership of, as well as those who exercise ultimate effective control over, a legal person or arrangement.
The term beneficiary has two different definitions depending on the context:
· The person (natural or legal) who benefits from a transaction, such as the party receiving the proceeds of a wire, a pay-out on an insurance policy.
· In the trust context, all trusts (other than charitable or statutory-permitted non- charitable 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.
Bill of Exchange
A shipping document that shows the means by which exporters are paid for the goods that are to be shipped, including information such as the names of the exporter, importer, issuing bank, and the bank where the funds will be drawn.
A casino customer goes to various slot machines putting cash in the bill acceptors and collects cash-out tickets with nominal gaming activity, then cashes out at the casino cage or asks for a check.
An internal list of names (including places, persons, entities, and individuals) that are screened to identify any sanctions exposure, in addition to government and vendor-maintained sanctions lists. Other potential additions to a firm’s internal blacklist may come from OFAC advisories and other warnings that list entities that did not merit being placed on the SDN list but are still considered high risk. The FATF blacklist is a list of countries that FATF has determined are noncooperative in the international fight against money laundering and terrorist financing.
Black Market Peso Exchange (BMPE)
The Black-Market Peso Exchange (BMPE) is an example of a complex method of trade-based money laundering. The BMPE originally was driven by Colombia’s restrictive policies on currency exchange. To circumvent those policies, Colombian businesses bypassed the government levies by dealing with peso brokers that dealt in the black market or parallel financial market. Colombian drug traffickers took advantage of this method to receive Colombian pesos in Colombia in exchange for U.S. drug dollars located in the U.S.
Many digital currencies make use of blocks, which contain transactions that have been confirmed and then combined together.
The blockchain, which is a distributed ledger system, consists of a series of blocks. These blocks contain verified transactions. The blockchain was designed to be not only decentralised, but also immutable, meaning that entries could not be erased once placed on this distributed ledger. The idea of the blockchain was first introduced when the bitcoin white paper was released in late 2008.
Bureau of Industry and Security (BIS)
A section of the US Department of Commerce responsible for ensuring that trade sanctions are properly understood, implemented, and enforced in the United States. Among other tasks, the BIS regulates the import and export of sensitive, dual-use, and controlled goods and materials. The mission statement of the BIS is: “Advance US national security, foreign policy, and economic objectives by ensuring an effective export control and treaty compliance system and promoting continued US strategic technology leadership.”
Caribbean Financial Action Task Force (CFATF)
A FATF-style regional body comprising Caribbean nations, including Aruba, the Bahamas, the British Virgin Islands, the Cayman Islands and Jamaica.
Casa de Cambio
Also called a “bureau de change” or an “exchange office,” a casa de cambio 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 travellers checks, money orders and personal checks; and telegraphic transfer facilities.
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.
CICAD (Comisión Interamericana para el Control del Abuso de Drogas or Inter-American Drug Abuse Control Commission)
CICAD has issued several sets of anti-money laundering recommendations, including amendments to the Organization of American States (OAS) Model Regulations issued in 1992.
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.
Also known as letters rogatory, a commission rogatoire is a written request for legal or judicial assistance sent by the central authority of one country to the central authority of another when seeking evidence from the foreign jurisdiction. The letter typically specifies the nature of the request, the relevant criminal charges in the requesting country, the legal provision under which the request is made, and the information sought.
An action or state of adhering to a set of legislation, regulations, rules, policy, specifications, or understood norms.
Sanctions that prohibit all transactions and activity with a sanctioned country by the sanctioning country except in rare, specific instances.
Also called an “omnibus 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.
Concentration risk primarily applies to the asset side of the balance sheet. As a common practice, supervisory authorities not only require financial institutions to have information systems to identify credit concentrations, but also set limits to restrict bank exposure to single borrowers or groups of related borrowers. On the liability side, concentration risk is associated with funding risk, especially the risk of early and sudden withdrawal of funds by large depositors that could harm an institution’s liquidity.
The network for a digital currency reaches consensus when the network’s nodes agree that a transaction took place. This agreement is crucial if the varying network participants (nodes) are to have the same information. In other words, consensus is crucial to distributed ledger systems
Consolidation of Goods
A method of sanctions evasion in which a person or organization either groups small shipments into one larger shipment or mixes restricted items in with other goods and does not declare those restricted items in shipping documentation.
The measurement of the quality of controls used to mitigate a business’ inherent risks (also referred to as mitigation measures or quality of risk management). These controls should be both appropriate and effective to mitigate the identified sanctions risks. That is, they must be proportionate. Where there is an elevated risk, the controls should be more comprehensive to mitigate that risk.
Types of legal entities that may be subject to misuse such as private limited companies and public limited companies whose shares are not traded on a stock exchange, trusts, non-profit organizations, limited partnerships and limited liability partnerships, and private investment companies. Occasionally, it is difficult to identify the persons who are the ultimate beneficial owners and controllers of corporate vehicles, which makes the vehicles vulnerable to money laundering.
The provision of banking services by one bank (the “correspondent bank”) to another bank (the “respondent bank”). Large international banks typically act as correspondents for hundreds of other banks around the world. Respondent banks may be provided with a wide range of services, including cash management (e.g., interest-bearing accounts in a variety of currencies), international wire transfers of funds, check clearing services, payable-through accounts and foreign exchange services.
Any property derived from or obtained, directly or indirectly, through the commission of a crime.
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.
A cryptocurrency is merely a currency that relies on cryptography. Bitcoin, for example, leverages cryptography in order to verify transactions.
Cryptography is basically the process of encoding and decoding information so that would-be observers are unable to understand the information being sent.
The illicit movement of large quantities of cash across borders, often into countries without strict banking secrecy, poor exchange controls or poor anti-money laundering legislation.
Currency Transaction Report (CTR)
A report that documents a physical currency transaction that exceeds a certain monetary threshold. A CTR can also be filed on multiple currency transactions that occur in one day exceed the required reporting amount. Some countries, including the U.S., have requirements addressing when CTRs should be filed with government authorities.
A bank, financial institution, or other entity that is responsible for managing, administering, or safekeeping assets for other persons or institutions. A custodian holds assets to minimize risk of theft or loss, and does not actively trade or handle the assets.
Customer Due Diligence (CDD)
A set of internal controls that enable a financial institution to establish a customer’s identity, predict with relative certainty the types of transactions in which the customer is likely to engage, and assess the extent to which the customer exposes it to a range of risks (i.e., money laundering and sanctions). Organizations also need to know their customers through CDD to guard against fraud and comply with the requirements of relevant legislation and regulation. Effective CDD programs also help to protect banks’ reputation and the integrity of banking systems by reducing the likelihood of banks becoming a vehicle for or a victim of financial crime. As such, they constitute an essential part of sound risk management.
Third-party databases can be a good source of both primary and secondary information sources. Examples of third-party databases include rating agencies, stock exchanges, and legal databases. The information provided by third-party databases can be helpful but should never stand on its own.
A distributed denial of service (DDoS) attack takes place when multiple parties work together to overwhelm a system by inundating it with either requests for information or malicious data. The nefarious parties involved in such an attack want to prevent a resource, such as a server, from being able to provide some specific service, such as serving a web page.
Some digital currency exchanges have suffered DDoS attacks from nefarious parties looking to cripple these marketplaces and hopefully take advantage of this vulnerability to steal cryptocurrency. Whilst efforts to steal digital assets may not work, an exchange’s users could become unhappy simply because they cannot make trades through the marketplace.
Dealing in Funds
The practice, which must be avoided, of a financial institution moving, transferring, altering, using, or accessing funds it has frozen. Dealing in funds also includes interacting with funds in any way that would result in any change to their volume, amount, location, ownership, possession, character, or destination, or any change that would enable the funds to be used, including portfolio management. Asset-freezing restrictions require that the frozen assets must be segregated.
Five-question process for determining which alerts can reasonably be discounted, and which others warrant an investigation.
The process of removing a sanctions target from a list after the restrictions imposed on them have been removed.
The ways in which products and services are provided by a firm to its customer (also referred to as servicing methods and distribution channels). For example, reliance upon brokers, intermediaries, and other independent third parties pose a higher sanctions risk than when a business interacts directly with customers and suppliers. The absence of face-to-face onboarding presents a higher risk than when customers are onboarded directly or through a domestic affiliate. Other delivery channels without face-to-face onboarding, such as internet banking and money services businesses, are also considered to pose a higher inherent sanctions risk. A delivery channel that processes payments quickly is also a higher risk.
Denied Persons List (DPL)
A list, published by BIS, of individuals, entities, or companies that have been denied export privileges, most commonly because they have violated the Export Administration Act. American companies and individuals are forbidden from entering any export dealings with any person or entity on the DPL.
Designated Categories of Offense
Those crimes considered by FATF to be money-laundering predicate offenses. Each country can separately decide how it will define specific offenses and their elements under its own domestic laws. Many nations do not specify which crimes can serve as predicates for laundering prosecutions and merely state that all serious felonies may be predicates.
Designated Non-Financial Businesses and Professions
FATF recommends certain standards apply to non-financial businesses and professions, including specifically:
· Casinos (including Internet casinos).
· Real estate agents.
· Dealers in precious metals and precious stones.
· Lawyers, notaries, other independent legal professionals and accountants. (Note that this refers to those who prepare or carry out certain duties on behalf of clients.)
· Trust and company service providers who prepare or carry out certain duties on behalf of their clients
Dilution of Sanctioned Ownership
Complex ownership structures involving multiple entities in different jurisdictions can reduce the percentage of a business that is owned by a sanctioned party so that it falls below thresholds which would prevent trade. This dilution allows a sanctioned country or entity to avoid the restrictions the sanctions create.
A distributed ledger is a system of recording information that is simply distributed, or spread across, many different devices. The blockchain, for example, is a distributed ledger that was originally created to keep track of all bitcoin transactions.
The process of converting clients’ payments from a foreign currency into US dollars.
Electronic funds 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 actual system used to send the wire transfer may be located in another jurisdiction or online.
A principle whereby at least two employees are required in order to complete an internal control task. The purpose of dual control is to protect against internal fraud and prevent internal control failure at a single point. Also referred to as “maker-checker” or “four-eyes.”
The products or technology that can be used for either military or civilian purposes. Most often, in diplomatic and political platforms, these are goods that can serve multiple uses at one time. An example is missile technology, which can be used for both scientific research and military action.
The investigation and examination of a company or group conducted in the process of preparing for a business transaction. Due diligence should be completed before entering into any financial transaction or business relationship.
Eastern and Southern African Anti-Money Laundering Group (ESAAMLG)
A FATF-style regional body comprising countries from the Eastern region of Africa down to the Southern tip of Africa, established in 1999.
The imposition of trade or financial restrictions and penalties by one or more countries against another country, entity, or individual with the purpose of changing a behaviour. Economic sanctions can include actions such as tariffs, trade restrictions, and financial limitations.
Egmont Group of Financial Intelligence Units
The Egmont Group of consists of a numerous national of financial intelligence units (FIUs) that meet regularly to find ways to promote the development of FIUs and to cooperate, especially in the area of information exchange, training and the sharing of expertise. The goal of the group is to provide a forum for FIUs to improve cooperation in the fight against money laundering and the financing of terrorism, and to foster the implementation of domestic programs in this field.
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.)
Electronic Money (E-Money)
Electronic cash represents a series of monetary value units in some electronic format, such as being stored electronically online, on the hard drive of a device, or on the microchip of a plastic card.
An official government action to ban trade or commercial activity with a specific country, sometimes involving a specific trade product (e.g., a grain embargo or an oil embargo).
The unlawful act of taking or misappropriating funds entrusted by an employer or organization for one’s own use.
A shipping document used to certify that a buyer is the final recipient of the materials and is not planning to transfer the materials to another party.
Enhanced Due Diligence (EDD)
In conjunction with Customer Due Diligence, EDD calls for additional measures aimed at identifying and mitigating the risk posed by higher risk customers. It requires developing a more thorough knowledge of the nature of the customer, the customer’s business and understanding of the transactions in the account than a standard or lower risk customer. A financial institution should ensure account profiles are current and monitoring should be risk-based.
Escrow refers to a third-party holding financial resources on the behalf of other parties. A third-party would hold funds in escrow when the other entities involved in a transaction may not trust each other.
Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG)
A FATF-style regional body formed in October 2004 in Moscow.
European Union Directive on Prevention of the Use of the Financial System for the Purpose of Money Laundering and Terrorist Financing
First adopted by the European Union in June 1991 and updated in 1997, 2005, 2015, and 2018, the directive requires EU member states to prohibit and manage the risks of money laundering and terrorist financing. The directive applies to a broad spectrum of entities beyond just financial institutions, including accountants, notaries, trust companies, estate agents, tax advisors, art dealers, virtual currency exchanges, and gaming services. Member states must implement directive standards in several areas, especially related to customer due diligence, emerging risks, and consequences for failure to comply.
Europol is the EU’s law enforcement agency. Its main goal is to help achieve a safer Europe for the benefit of all EU citizens. In the area of anti-money laundering, Europol provides member states’ law enforcement authorities with operational and analytical support via the ELOs (Europol Liaison Officers) and its analysts, as well as state of the art databases and communication channels.
An internal control used to mitigate sanctions risks. Event-triggered monitoring occurs whenever relevant information about an existing customer (e.g., its jurisdiction of operation) changes, therefore requiring an interim review of information prior to a scheduled review.
Export Administration Regulations (EAR)
A set of regulations administered and enforced by the Bureau of Industry and Security, a division of the US Department of Commerce. They apply specifically to physical goods or commodities such as technology, software, and other items subject to export controls.
Export Control Joint Unit (ECJU)
A UK-based agency responsible for administering licenses for export-controlled goods (military and dual-use) that might otherwise be involved in an embargo.
A trust created expressly by the settlor, usually in the form of a document such as a written deed of trust. An express trust differs from trusts that do not result from the specific intent or decision of a settlor to create a trust (e.g., constructive trust established by a court of law to address undeclared property).
When a customer or its third party violates sanctions without the cooperation or knowledge of internal staff.
A state making, applying, and enforcing laws, regulations, and other rules of conduct in respect to persons, property, or activity beyond its territory. The US is the primary government engaged in applying extraterritoriality to its sanction’s regime. The EU, believing that the practice of extraterritoriality violates international law, does not allow for the concept of extraterritoriality in relation to the sanctions restrictions it imposes.
The extension of one country’s policies and laws to the citizens and institutions of another. Depending on jurisdiction, money laundering laws may extend prohibitions and sanctions into other jurisdictions.
Actions taken by one person to assist or support another person in engaging in activity. Within a sanction’s context, facilitation means when one person (person A) who is not allowed to engage in an activity either directly or indirectly assists or supports another person (person B) to engage in that activity. The activity does not necessarily need to be prohibited for person B, but only for person A.
Either (1) a hit that is identified during the screening process as a possible alert, but is dismissed, when in fact there is a match to a target named on a sanctions list; or (2) screened activity that would have generated a hit if the screening process had been calibrated to catch such activity, such as a target match that is unidentified because thresholds are too high.
A hit identified during the screening process as a possible alert, but when reviewed, is found not to be a match to a target named on a sanctions list.
Fiat currencies are currencies that have value because they are minted by a central bank. Fiat means “by decree,” and these currencies have value because some central authority has decreed that they have monetary value. Examples of fiat currencies include the British pound, euro and Japanese yen
Final Rule Part 504
Regulations issued by the New York State Department of Financial Services (DFS) on June 30, 2016, to emphasize the need for sound transaction monitoring and filtering programs (TMPs). The Rule went into effect on January 1, 2017, requiring regulated institutions to maintain TMPs reasonably designed to monitor transactions after their execution for compliance with the Bank Secrecy Act and AML laws and regulations and prior to their execution for compliance with the US treasury department’s Office of Foreign Assets Control (OFAC). The regulation includes suspicious activity reporting requirements and prevention of unlawful transactions with targets of economic sanctions administered by OFAC.
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-five 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 Latin America (GAFILAT)
A FATF-style regional body for Latin America, established in 2000.
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. In conjunction with FATF, FSRBs constitute an affiliated global network to combat money laundering and terrorist financing.
Financial Intelligence Unit (FIU)
A central national agency responsible for receiving, analysing, and transmitting disclosures on suspicious transactions to appropriate authorities.
Foreign Sanctions Evader (FSE)
A foreign individual or entity determined to have violated, attempted to violate, conspired to violate, or caused a violation of US sanctions. OFAC publishes a list of FSEs, and transactions by US persons or within the United States involving FSEs are prohibited.
The involuntary loss of property or assets as a result of legal action. Generally, the owner of the property has failed to comply with the law, or the property is linked to some sort of criminal activity.
A fork is a change in a digital currency’s rules or protocol. Developers update a cryptocurrency’s protocol from time to time. A fork can be either a hard fork or a soft fork. A hard fork is a change to a digital currency’s protocol that makes blocks created using the old protocol incompatible with the new chain.
Free Trade Zone (FTZ)
Also known as special economic zones, FTZs are delimited geographic areas within a country with zone management that provides infrastructure and services to tenant companies. In FTZs, the rules for doing business are different and promoted by a set of policy instruments that are not generally applicable to the rest of the country. FTZs constitute a key risk area specific to trade-related activities because they commonly have inadequate sanctions safeguards; minimal oversight by local authorities; weak procedures to inspect goods and legal entities, including appropriate record-keeping and information technology systems; and lack of cooperation between FTZs and local customs authorities.
To prevent or restrict the exchange, withdrawal, liquidation, or use of assets or bank accounts. Unlike forfeiture, frozen property, equipment, 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. The courts may decide to implement a freeze as a means to protect against flight.
Any business set up and controlled by another organization. While not necessarily illicit, criminals use front companies to launder money by giving the funds the appearance of legitimate origin. Front companies may subsidize products and services at levels well below market rates or even below manufacturing costs.
A matching technique used by financial institutions to increase the effectiveness of the screening processes by overcoming problems such as flawed records and databases. Fuzzy logic is accomplished through algorithms that use “degrees of similarity” to determine the probability that two names are the same. Fuzzy logic can find matches in misspelled names, incomplete names, and names with different spellings but similar sounds or phonetics. In addition, fuzzy logic accepts different formats for date of birth and other inconsistencies. Although fuzzy logic increases the likelihood of identifying potential target matches, it can also increase the number of false positives.
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. Some countries impose due diligence requirements on gatekeepers that are similar to those of financial institutions.
Globalization refers to the integrating of national economic, trade, and communication operations by businesses engaging in international trade. Globalization generally includes the enlarging of national perspectives to international and interdependent perspectives of society. It advocates a freer transfer of goods and services, as well as assets, across national and international boundaries. It is believed that globalization may limit the effectiveness of sanctions because a globalized market makes it easier to replace and reroute trade channels.
Governance is the allocation of power and decision-making authority among the board of directors and management to establish internal controls for the purposes of managing risk and compliance with laws, regulations, and internal policies. Governance may include systems of checks and balances and a responsibility for leadership and organization.
The party who transfers title or ownership of property or assets. In a trust, typically the person who creates or funds the trust.
A grey list is a list of entities that are suspicious or higher risk for causing a negative impact to a firm. Within the context of sanctions, the grey list includes the names of countries with strategic deficiencies in anti-money laundering and counterterrorism financing regimes. Moreover, these countries have also not made sufficient progress or otherwise committed to action plans to address deficiencies identified by FATF.
Gulf Cooperation Council (GCC)
Formed in 1981, the GCC promotes cooperation between its member states in the fields of economy and industry. Member states include Kuwait, Bahrain, Qatar, Saudi Arabia, Oman and the United Arab Emirates. The GCC is a member of FATF, although its individual members are not.
A hard fork is a type of fork that creates a permanent change to a digital currency’s protocol, or rules. When one of these forks takes place, it results in a whole new blockchain, which will not accept any blocks mined using the old rules.
An informal value transfer system common in the Middle East, North Africa, and the Indian sub-continent. The system operates outside traditional banking systems. In a basic form, a customer contacts a hawaladar and gives him money to be transferred to another person. The hawaladar contacts his counterpart where the second person lives, who remits the funds to that person. A running tally is kept between the hawaladars of which owes the other a net sum.
A hawala broker.
Cryptocurrency investors developed the term “HODL,” which stands for “hold on for dear life.” The acronym originally came from a misspelling of the world “hold.” Digital currencies can be highly volatile, so when they start experiencing significant price fluctuations, some market participants state that they should simply “HODL.”
The fundamental rights of humans which are conceived to be “inherent to all human beings regardless of race, sex, nationality, ethnicity, language, religion, or any other status.” Human rights are considered irrepressible by government. The UN Universal Declaration of Human Rights was adopted in 1948 to protect the social, cultural, financial, and political rights of individuals. Among the human rights covered by the declaration are the right to life, liberty, education, and equality under law. The declaration also sets human protections that are the basis of many modern national constitutions, such as the freedom to assemble and the right to free speech, to religious freedoms, and to other liberties. No country is bound to abide by human rights standards, yet the standards serve as a guide for human independence, interest, and protection.
Human smuggling refers to the transport or illegal entry of a person across international borders in contravention of one or more countries’ laws. Human smuggling differs from human trafficking in that it focuses on the entry or transport, rather than the exploitation of the person involved.
Also known as Trafficking in Persons. The trade of humans, most commonly for the purpose of sexual slavery, forced labour or commercial sexual exploitation. Trafficking occurs in almost every country in the world and is often cited as the second largest criminal enterprise in the world.
Type of information about a sanction target that is recorded on a sanctions list, for example, name, date of birth, jurisdiction, national identification number, entity with which a target is linked, information about penalties imposed against a target, registered legal address, and website URL. Identifiers apply to both individuals and legal entities.
A list of words or names that automated screening tools often mistake as matches and thereby create potential matches to targets named on sanctions lists. These are words or names that the organization’s compliance team has checked and confirmed do not actually match up, such as Andrew and Andrea. An addition to an inequalities list will apply the inequality to all future screened instances and decrease the likelihood of a future match. Therefore, inequalities lists should have sufficient controls (at least dual controls) for additions to the list and periodic review.
The level of sanctions risks that exists before controls are applied to mitigate them. There are four main inherent risk categories: customers, products and services, countries, and delivery channels. Inherent risk is linked to the risk assessment process, which evaluates the effectiveness of an institution’s risk controls. Inherent risk considers the likelihood and impact of noncompliance prior to considering any mitigating effects of risk management processes.
Initial Coin Offering
An initial coin offering (ICO) represents the first time that an organisation offers digital tokens to the public in an effort to raise money. Companies frequently hold these offerings so they can finance projects.
These digital token sales have often been likened to initial public offerings (IPOs), where companies sell more traditional assets such as stocks and bonds in order to raise money.
The integration phase, often referred to as the third and last stage of the classic money laundering process, places laundered funds back into the economy by re-entering the funds into the financial system and giving them the appearance of legitimacy.
When an organization’s own staff members commit or facilitate a sanctions violation. Examples include the following:
· When a staff member either fails to apply or overrides internal controls to circumvent transaction monitoring tools
· When a staff member uses client accounts to conceal the origin of funds
International Business Company (IBC)
A variety of offshore corporate structures, which are dedicated to business use outside the incorporating jurisdiction and feature rapid formation, secrecy, broad powers, low cost, low to zero taxation and minimal filing and reporting requirements.
International Monetary Fund (IMF)
An organization of more than 180 member countries, the IMF works to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. 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.
The process of obtaining, evaluating, recording, and storing information about an individual or legal entity with whom one is conducting business, in response to an alert indicating a possible sanctions violation. Investigations often begin with simple checks before progressing to further investigation such as account review, customer outreach, and possible escalation to the compliance function.
A company that helps evaders avoid the appearance of involvement of either a sanctioned entity or an entity that is trying to do business with a sanctions target. Evaders choose an isolation company either for its past business activities or its lack of traceable connection to the entities involved in the evasive activity.
Joint Comprehensive Plan of Action (JCPOA)
A detailed agreement with five annexes reached by Iran and the P5+1 (China, France, Germany, Russia, the United Kingdom, and the United States) on July 14, 2015. The nuclear deal was endorsed by UN Security Council Resolution 2231, adopted on July 20, 2015. Iran’s compliance with the nuclear-related provisions of the JCPOA is verified by the International Atomic Energy Agency (IAEA) according to certain requirements set forth in the agreement. On May 8, 2018, President Trump announced that the United States would withdraw from the JCPOA and reinstate US nuclear sanctions on the Iranian regime.
Jurisdiction of Citizenship
The country (or countries, in the case of dual citizenship) in which an individual is a legal citizen.
Jurisdiction of Residence
The country in which an individual resides most of the time; the country in which an individual life in his or her primary residence.
A corrupt leader who exploits the people and resources of a state for personal gain.
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.
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.
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.
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.
A written authorization issued by a sanctions regulator that permits an activity that otherwise might be prohibited or restricted under a particular sanction. The laws or regulations passed to implement financial sanctions generally include language that allows otherwise prohibited transactions to take place under specific circumstances, whether via a general or specific license. A general license is an exemption that all persons may transact under—an example would be transacting for purposes of humanitarian aid. A specific license is an exception for the applicant of the license and establishes the circumstances in which the applicant may transact if the license is granted.
Limited Liability Company (LLC)
A specifically defined type of business in the United States, in which personal liability is separated from corporate liability. LLCs are especially popular in high-risk businesses, as the individuals (owners, directors, etc.) associated with such ventures seek to avoid personal accountability for corporate debts or lawsuits.
Look-Back (or Look-Back Review)
The process of looking back at a customer’s transaction activity over a specific time period in the past. Look-back reviews of past transactions can help verify a customer’s actual activity and provide “red flags” by identifying transactions that might indicate links to sanctions targets, jurisdictions, or restrictions.
Mandatory Sanctions Lists
Supranational sanctions list, such as those including targets designated by the United Nations Security Council Resolutions (UNSCR), which must be screened against. Depending on the country in which a business is located and operates, local sanctions regimes may be required (i.e., mandatory) and would need to be included within a firm’s sanctions compliance program.
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 analysing 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.
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.
Mining is the process for creating new units of a digital currency. For example, the bitcoin network releases new bitcoins every time a block is mined. In this instance, mining involves confirming transactions and combining them in to blocks.
This verification requires hardware and electricity, and miners are rewarded with digital tokens for contributing these needed resources.
The mining incentive is a reward that miners get for confirming transactions and mining them in to blocks. Verifying the transactions of the bitcoin network, for example, requires specialised hardware and substantial electricity, so miners are compensated with a mining incentive.
A type of trade that involves buying securities in one currency and then selling identical ones in another currency.
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 antimony laundering regulations of most countries, and financial institutions must file reports and maintain records of customer activities involving them.
The process of concealing or disguising the existence, source, movement, destination or illegal application of illicitly- derived 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.
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)
A person (whether a natural or legal person) engaged in any of the following activities where it exceeds the applicable regulatory threshold, at which point the person is generally deemed to be a financial institution subject to AML obligations:
· Dealing in foreign exchange
· Check cashing
· Issuing or selling traveller’s checks or money orders
· Providing or selling prepaid access
· Money transmission
Money Transfer Service or Value Transfer Service
Financial service that accepts cash, checks and 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.
Council of Europe Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures. Formerly PC- R-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).
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.
Multilateral sanctions are restrictions supported by more than one country or entity. These can be imposed by allies against a common enemy or for the purpose of realizing a greater economic and punitive impact.
Mutual Evaluation Report (MER)
Reports giving an in-depth description and analysis of a country’s systems for limiting financial crimes based on FATF recommendations. While the reports are not sanctions, they have the potential to influence the risk a financial institution will take when dealing with a particular country or region.
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.
The process of matching an internal record (i.e., customer, counterparty, related account party) against a sanctioned list record, either manually or through an automated screening tool. Name screening may also include batch name screening, which allows a firm to screen its entire customer base using automatic screening tools on a periodic basis. When onboarding new customers, name screening against sanctions lists is undertaken prior to accepting a new customer relationship, and it is done in real time. Name screening forms a part of entry controls, which give the financial institution more opportunities to collect SDD information.
The ways in which an individual’s name is given to or used by him or her. Names can be presented in many ways, largely dependent upon the country or cultural norms of the country where the individual was born or raised.
The use of a bank’s correspondent relationship by a number of underlying banks or financial institutions through their relationships with the correspondent bank’s direct customer. The underlying respondent banks or financial institutions conduct transactions and obtain access to other financial services without being direct customers of the correspondent bank.
The practice where a respondent bank provides downstream correspondent services to other financial institutions and processes these transactions through its own correspondent account. The correspondent bank is thus processing transactions for financial institutions on which it has not conducted due diligence. While this is a normal part of correspondent banking, it requires the correspondent bank to conduct enhanced due diligence on its respondent’s AML program to adequately mitigate the risk of processing the customer’s customers’ transactions.
Nominee Director or Shareholder
Person who is not the actual director or shareholder of a company but who is appointed to act on behalf of its directors or shareholders. Although the use of nominee shareholders is also in rapid decline, the use of nominee directors is still common.
Non-Governmental Organization (NGO)
Not for profit organizations that are not directly linked to the governments of specific countries, and perform a variety of service and humanitarian functions, including bringing citizen concerns to governments, advocating for causes and encouraging political participation. Some countries’ anti- money laundering regulations for NGOs still have loopholes that some worry could be exploited by terrorists or terrorist sympathizers trying to secretly move money.
Non-Profit Organizations (NPO)
These can take on a variety of forms, depending on the jurisdiction and legal system, including associations, foundations, fund-raising committees, community service organizations, corporations of public interest, limited companies and public benevolent institutions. FATF has suggested practices to help authorities protect organizations that raise or disburse funds for charitable, religious, cultural, educational, social or fraternal purposes from being misused or exploited by financiers of terrorism.
Non-Proliferation Treaty (NPT)
The UN Treaty on the Non-Proliferation of Nuclear Weapons was signed in 1968 and went into effect in March 1970. The NPT solidified the commitment of signing countries to prevent the spread of nuclear weapons. Its goal was to minimize the risk of the use of nuclear weapons in conflict, which could result in significant destruction. Likewise, the NPT sought to keep the weapons out of the hands of rogue nations and terrorists.
Office of Foreign Assets Control (OFAC)
The agency within the US Department of the Treasury responsible for administering and enforcing economic sanctions issued as part of US foreign policy and by international organizations like the United Nations against targeted foreign countries. It often works in consultation with other agencies, such as the Department of State, to oversee national security goals. A core component of the agency’s responsibilities is the creation and maintenance of the Specially Designated Nationals (SDN) list.
Office of the Superintendent of Financial Institutions (OSFI)
The primary agency regulating financial institutions in Canada.
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 favourable to foreign investments because of low or no taxation or strict bank secrecy regulations.
Offshore Banking License
A license that prohibits a bank from doing business with local citizens or in local currency as a condition of its license.
Offshore Financial Centre (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 centres of the U.S. and Europe.
The risk of direct or indirect loss of operations due to inadequate or failed internal processes, people or systems, or as a result of external events. Public perception that a bank is not able to manage its operational risk effectively can disrupt or harm the business of the bank.
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.
The account holder or, where there is no account, the person (natural or legal) which places the order with the financial institution to perform the wire transfer.
A result generated by an AST. A partial match means the entity being screened is similar enough to the sanctioned entity based on fuzzy logic and potentially other identifying factors, such as date of birth. Partial matches require further human intervention to determine whether the match is a target match (or true match), i.e., whether the name being screened is the same entity as the sanctioned target.
Pass-Through Sanctions Risk
The incorrect assumption that the sanctions risks associated with a customer’s affiliates or subsidiaries is simply a problem for the customer to assess and manage. Regulators in the United Kingdom and United States require all parties within a transaction chain to check for possible sanctions risks. It is important for financial institutions to ask for and review information about a customer’s affiliates and subsidiaries.
Payable Through Account
Transaction account opened at a depository institution by a foreign financial institution through which the foreign institution’s customers engage, either directly or through subaccounts, in banking activities and transactions in such a manner that the financial institution’s customers have direct control over the funds in the account. These accounts pose risks to the depository institutions that hold them because it can be difficult to conduct due diligence on foreign institution customers who are ultimately using the PTA accounts.
A method of screening that focuses on screening payment messages. Unlike name screening, payment screening takes place with current customers and is performed before a payment or message is processed. Payment screening relies on payment messages using predefined templates, codes, and acronyms to describe certain information. The information provided in these predefined templates is typically provided by a third party; therefore, the firm has little, if any, control over how the data is presented.
Payments, Cross Border
Payments that involve more than one country, whether by physically transporting cash across an international border, or by transferring money electronically from one country to another.
Existence of an actual brick and mortar location with meaningful management of the institution physically located within a country, where it maintains business records and is subject to supervision. The mere existence of a local agent or low-level staff does not constitute physical presence.
The first phase of the money laundering process: The physical disposal of proceeds derived from illegal activity.
Politically Exposed Person (PEP)
According to FATF’s revised 40 Recommendations of 2012, 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. The term PEP does not extend to middle- ranking individuals in the specified categories. Various country regulations will define the term PEP, which may include domestic as well as foreign persons.
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. Ponzi schemes involve fake, non-existent investment schemes in which the investors are tricked into investing on the promise of unusually attractive returns. The operator of the scheme can keep the operation going by paying off early investors with the money from new investors until the scheme collapses under its own weight and/or the promoter vanishes with the remaining money.
POS stands for “proof of stake,” which is a method of confirming transactions. The digital currencies that use this approach to verification frequently provide all their digital tokens up front, and miners are selected based on how many units they have (their stake). In these cases, users who confirm transactions, sometimes referred to as “forgers,” receive transaction fees for their contributions.
POW is an acronym for “proof of work,” which is a system of proving that a digital currency’s transactions have been verified. Many digital currencies, including bitcoin, use POW. Under such a system, miners must do “work” that is difficult for them to contribute, but easy for the broader network to verify. Miners are usually rewarded for verifying transactions by receiving units of a digital currency.
“Specified unlawful activities” whose proceeds, if involved in the subject transaction, can give rise to prosecution for money laundering. Most anti-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.”
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 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.
A private key is a piece of information—presented as a string of numbers and letters—that an investor can use to access their digital currency.
A public key is an address where an investor can receive digital currencies. This public key, like the private key, is a combination of numbers and letters.
Pump and Dump
A “pump and dump” is a type of investment scheme where a market participant—or several—work together to inflate the price of an asset so they can sell it when its value is artificially high. This practice may be particularly pervasive when it comes to digital currencies, as traders can easily get together using Telegram groups with the goal of causing specific cryptocurrencies to rise sharply in value.
Real Time Gross Settlement Systems (RTGS)
International wire transfers use RTGS within a given jurisdiction. In RTGS, money or securities are transferred between banks on a “real time” and “gross” basis, meaning that payment transactions are not subject to a waiting period, and each transaction is settled on a one-on-one basis.
Reasonable Cause (to Suspect)
In the United Kingdom, in the absence of definite knowledge of wrongdoing, a firm must have reasonable cause to suspect that it is in possession of, or controlling the economic assets of, a designated person. Reasonable cause to suspect is defined as a set of circumstances from which an honest and reasonable person should have inferred knowledge or formed the suspicion of wrongdoing.
A corporate register is a listing of key information about the company, such as when a corporation was formed and who its owners and directors are. Corporate (or company) registers are often publicly available on the company’s website or websites maintained by professional associations or entities, such as chambers of commerce or legal databases. In the United States, the secretary of state for each state and the District of Columbia maintains an online register for corporations doing business in that state.
A government entity responsible for supervising and overseeing one or more categories of financial institutions. The agency generally has authority to issue regulations, to conduct examinations, to impose fines and penalties, to curtail activities and, sometimes, to terminate charters of institutions under its jurisdiction. Most financial regulatory agencies play a major role in preventing and detecting money laundering and other financial crimes. Most regulators focus on domestic institutions, but some have the ability to regulate foreign branches and operations of institutions.
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.
Reporting Requirements, Initial and Periodic
Initial reporting and periodic reporting often exist side by side. Initial reporting occurs immediately when funds are identified, and a freeze or reject is activated; this report usually includes providing the regulatory body with a detailed breakdown of the financial institution’s exposure to the sanctions target. In addition, many jurisdictions require annual (as is the case for OFAC) or quarterly reports from the financial institution about blocked assets. These reports provide a summary of the assets the firm is holding in compliance with specific sanctions restrictions and how the assets have been segregated.
A bank for which another financial institution establishes, maintains, administers or manages a correspondent account.
The amount of risk that a firm is willing to accept in pursuit of value or opportunity. A firm’s risk appetite reflects its risk management philosophy and comfort level for undertaking business in situations in which there could be an elevated sanctions risk. In turn, risk appetite influences the firm’s culture and operating style and guides resource allocation. An organization’s risk appetite is determined through the risk-assessment process and formalized in a Risk Appetite Statement or Framework. A business should determine its risk appetite based on the resources it has to invest in controls, staffing, and measures to protect its reputation. Firms can have an overarching risk appetite (i.e., enterprise-wide) and/or have risk appetites defined on a more granular level (e.g., by department).
A tool that allows a business to identify and assess the extent to which it may be exposed to risks. In global banking, risk assessments form the foundation of a sound sanctions compliance program. The key purpose of a risk assessment is to drive improvements in financial crime risk management by identifying the general and specific sanctions risks a financial institution is facing; the ways in which these risks are mitigated by a firm’s sanctions compliance program controls; and any additional controls to mitigate the residual risk that remains for the institution. A well-planned and well-formulated risk assessment allows a business to understand its risk profile and then determine its risk appetite for undertaking business in situations in which there could be an elevated sanctions risk.
The assessment of the varying risks associated with different types of businesses, clients, accounts and transactions in order to maximize the effectiveness of an anti-money laundering program.
ROI is short for “return on investment.” Basically, if an investor puts their money in to a digital currency, they are doing so with the hope that they will receive a compelling return.
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.
Sanctions are punitive or restrictive actions taken by individual countries, regimes, or coalitions with the primary purpose of provoking a change in behaviour or policy. Sanctions can restrict trade, financial transactions, diplomatic relations, and movement. They can be specific or general in their implementation and enforcement. Sanctions are also referred to as restrictive measures.
Sanctions Compliance Officer (SCO)
Within the second line of defence in the governance structure of a sanction’s compliance program, the SCO is responsible for ongoing monitoring for sanctions compliance, including sample testing and a review of exception reports, to enable the escalation of identified noncompliance or other issues to senior management and, where appropriate, the board. The SCO is the contact point for all sanctions-related issues for internal and external authorities and is responsible for reporting suspicious transactions. To enable the successful oversight of the sanction’s compliance program, the SCO must have sufficient independence from the business lines to prevent conflicts of interest and unbiased advice and counsel.
Sanctions Compliance Program (SCP)
A program run by a firm to comply with regulator expectations concerning sanctions compliance and to manage the firm’s sanctions risk. OFAC encourages organizations subject to US jurisdiction to use a risk-based approach to sanctions compliance by developing, implementing, and regularly updating SCPs. SCPs follow a similar methodology to that adopted by anti-money laundering compliance programs. According to OFAC, the five essential components of an SCP are (1) management commitment; (2) risk assessment; (3) internal controls; (4) testing and auditing; and (5) training.
The deliberate attempt to remove or conceal the involvement of sanctioned places, entities, or individuals in a transaction or series of transactions. When sanctions evasion is successful, a business that would have been flagged, taxed, restricted, or prohibited is allowed to proceed unhindered.
Sanctions Due Diligence (SDD)
A similar process to Know Your Customer (KYC) / Customer Due Diligence (CDD) that focuses on the risks specific to sanctions, taking into account governance and risk assessment. SDD builds upon the KYC/CDD information an organization collects as part of its existing AML program. SDD is applied throughout the life cycle of a relationship at the start of a relationship (i.e., onboarding); when new products are introduced, in response to trigger events during a relationship, such as a “match” generated by a screening tool; during periodic reviews; and when a relationship ends.
A set of sanctions that have a common nexus or theme. These are either referred to by the issuer of the set of sanctions or by the intended purpose of the set of sanctions. For example, the “OFAC sanctions regime” or the “North Korea sanctions regime.” Depending on the context, a sanctions regime may be limited to unilateral sanctions or may include multilateral sanctions.
Scope of Licensing
Details on which activities are permitted with the license in question. For example, if a firm is managing frozen assets for a customer and it needs to transfer some of the customer’s assets to a business (for example, a creditor with a legitimate claim), the firm needs to determine whether, and under what circumstances, the license allows this activity.
Scope of Permitted Activities
Details on exactly which activities are permitted without a license under a sanction, and which are only permitted with a license. A license may stipulate that certain activities are only permitted during a certain period of time or during specified seasons.
A newer form of restriction focused on targeting key entities and sectors of a country’s economy. They prohibit certain types of transactions with certain people or entities in the targeted country within a targeted sector of the economy. Sectoral sanctions are very dependent on facts and context when applied.
Sectoral Sanctions Identification List (SSI List)
A list of those targeted by sectoral sanctions. The SSI list is not part of the Specially Designated Nationals (SDN) list. However, individuals and companies on the SSI list may also appear on the SDN list. Note that the SDN list is very broad, and the SSI list against Russia is very narrow.
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.
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 trust’s assets, the deed may be accompanied by a non-legally binding letter setting out what the settlor wishes done with the assets.
A transaction in which a sanctions target sells assets or equity to close associates or other affiliated persons. These can include friends, colleagues, subordinates, business partners, and family members. Similar to using an isolation company, the idea is that the sanctions target no longer appears to “own” the assets or shares in a company. However, the target continues to influence or control the asset or the company’s operations.
A company that has been created months or years ahead of time, often by a law firm or an accounting firm. Then the company goes “on the shelf” until needed. Some investors use these shelf companies, or “aged” companies, to gain a clean business record.
Bank that exists on paper only and that has no physical presence in the country where it is incorporated or licensed, and which is unaffiliated with a regulated financial services group that is subject to effective consolidated supervision.
A company without active business or significant assets. Shell companies are legal, but people sometimes use them illegitimately—for instance, to disguise business ownership.
Shorting an asset, also known as taking a short position, means making a bet that the asset will fall in value. There are several methods that traders can use to short digital currencies, including futures, options and margin trading. Investors considering this method should keep in mind it involves a lot of risk, especially with cryptocurrencies because of their volatile nature.
One of the first steps in an investigation, simple checks are those initial actions taken to discount or confirm a sanctions link; an example of a simple check includes comparing data about a sanctions target with a firm’s Know Your Customer (KYC) data.
A commonly used money laundering method, smurfing involves the use of multiple individuals and/or multiple transactions for making cash deposits, buying monetary instruments or bank drafts in amounts under the reporting threshold. The individuals hired to conduct the transactions are referred to as “smurfs.”
Sources of information that provide direct evidence about a sanction or a sanctions target. Examples of primary sources include sanctions instruments, sanctions list, trade activity lists, and transaction activity.
Sources created “after the fact” that report on, analyse, or collect information that has already appeared in primary source documents. If there is a discrepancy between primary sources and secondary sources, it is a red flag that deserves, at minimum, further investigation in order to clarify the discrepancy. Examples of secondary sources include corporate registers, third-party databases, and media publications.
Specially Designated Nationals and Blocked Persons List (SDN List)
A list of individuals and companies, published by OFAC, that are owned, controlled by, or acting on behalf of a targeted country. The list also includes groups and people, such as terrorists or drug traffickers, who are associated with a specific crime as opposed to a country. The US Department of the Treasury maintains the list and may name a person or company as an SDN. When the government identifies a person or company as an SDN, it blocks their assets and forbids US persons to do business with them. The government may also impose fines and imprison lawbreakers. Also, individuals may lose their export privileges. The US government may put the person or business on a list of blocked, denied, or debarred individuals and institutions.
Investigative tactic in which undercover officers pose as criminals, sometimes through a “front” business, to win the confidence of suspected or known criminals to gather information and to 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.
A non-sanctioned person with a low public profile who acts for or stands in the place of a sanctions target, also called a “front man.” The straw man does not act in any real sense as an owner or controller. Instead, he or she carries out activities at the direction of the sanctions target, who is active in the background.
The principle that an organization is liable even if it did not intend to violate or knowingly violate a sanction. Organizations are also liable even if they have robust sanctions compliance programs in place.
An algorithm for efficient searching that involves finding occurrence(s) of a pattern string within another string or body of text. Also referred to as pattern matching, this method can be used to recognize social security numbers, telephone numbers, zip codes, and any other information that follows a specific pattern. It is also useful for looking for information that follows leading text and then extracting the text that comes after it, as well as reprocessing documents. This algorithm works by reading through text strings to match patterns.
Stripping involves omitting or removing key information, such as the sender’s name or the business name, from a payment message to avoid detection. It may happen with or without the knowledge of other participants in the transaction. When a wire transfer travels through multiple parties before reaching the intended final destination, there are multiple opportunities for information to be abbreviated, omitted, or altered. For this reason, most jurisdictions have enacted laws that require payments to contain certain “basic” information, including the sender’s and the recipient’s name and address. When a wire originates from a sanctioned entity or location, and the intent is to deliver it within the United States or European Union, where restrictions would ordinarily flag the payment and block it, sanctions evaders have an incentive to remove the information that would trip the system.
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.
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. The term can refer to either the process or the actual document that compels the recipient to act.
Irregular or questionable customer behaviour or activity that may be related to a money laundering or other criminal offense, or to the financing of a terrorist activity. May also refer to a transaction that is inconsistent with a customer’s known legitimate business, personal activities, or the normal level of activity for that kind of business or account.
Suspicious Transaction Report (STR)
A government filing required by reporting entities that includes a financial institution’s account of a questionable transaction. Many jurisdictions require financial institutions to report suspicious transactions to relevant government authorities such as its FIU on a suspicious transaction report (STR), also known as a suspicious activity report or SAR.
SWIFT (Society for Worldwide Interbank Financial Telecommunications) provides a messaging network that financial institutions use to securely transmit information and instructions. The network works through a standardized system of codes in which each member organization is assigned a unique code that has either 8 or 11 characters. The SWIFT messaging system sends payment orders that must be settled by correspondent accounts that the member institutions have with one another.
Identification of a party as matching one named on a sanctions list. It is also referred to as a true match and results from sanctions screening.
Sanctions against a specific target, generally with a goal of a specific outcome. Targeted sanctions can be in the form of financial or trade restrictions focused on restricting movement, and they can be applied unilaterally by one country or multilaterally by many countries. Targeted sanctions are also referred to as smart sanctions.
Countries that offer special tax incentives or tax avoidance to foreign investors and depositors.
The process by which terrorists fund their operations in order to perform terrorist acts. There are two primary sources of financing for terrorist activities. The first involves financial support from countries, organizations or individuals. The other involves a wide variety of revenue-generating activities, some illicit, including smuggling and credit card fraud.
A method of adjusting the thresholds within the algorithms in an automated screening tool to match a financial institution’s greatest areas of sanctions risk. A threshold is typically described as a percentage, and it controls the generation of alerts. Threshold calibration reflects the updating and reconfiguration of algorithms based on emerging trends, an institution’s internal investigations, external information, and channels of financial crime activity developing and changing over time. (See false negative and false positive.)
A digital token is a unit of a digital currency, such as a bitcoin. It is worth noting that some of these tokens are used for specific ecosystems, and those are frequently referred to as utility tokens. Other digital tokens are essentially securities.
The various parties that form the payment chain. Payment messages pass through toll gates and can change in the process.
Transaction Monitoring and Filtering Programs (TMPs)
Programs required of financial institutions under the New York State Department of Financial Services (DFS) Final Rule Part 504 to monitor transactions after their execution for compliance with the Bank Secrecy Act and AML laws and regulations. It includes requirements for suspicious activity reporting as well as for monitoring transactions prior to their execution
The conversion of text from one script into another” for example, a document written in Arabic characters that is converted into Cyrillic script. This phenomenon can present a name screening challenge.
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 approximately 100 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. TI is best known for its annual Corruption Perceptions Index (CPI), which ranks countries by perceived levels of corruption among public officials; its Bribe Payers Index (BPI) 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.
The shipment of goods through intermediate countries, sometimes involving transfer from one vessel to another, before reaching an intended destination. Transhipment sometimes happens to avoid blockades at the ports of entry for sanctioned regimes or to hide the identity of the country of origin at the destination location. Transhipment is prohibited by some governments and entities.
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 terms set by the grantor.
May be a paid professional or company or unpaid person that holds the assets in a trust fund separate from the trustee’s own assets. The trustee invests and disposes of the assets in accordance with the settlor’s trust deed, taking into consideration any letter of wishes.
Refers to a money laundering method and is a term used by FATF.
These are sanctions imposed by a single country against a targeted entity. These are generally considered less effective than multilateral sanctions. Still, they serve to target specific offensive practices on behalf of imposing nations. As an example, the Magnitsky Act allows for unilateral, global sanctions to be imposed on human rights offenders. Assets can be frozen, and offenders may be barred from entering the US. Another example occurred in the 1980s when Australia autonomously banned shipments of uranium to France. With few exceptions (for example, the European Union), these are often referred to as autonomous sanctions.
UN Security Council Resolution 1373 (2001)
Adopted in 2001, the resolution requires member nations to take a series of actions to combat terrorism 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.”
Transaction that appears designed to circumvent reporting requirements, is inconsistent with the account’s transaction patterns or deviates from the activity expected for that type of account.
USA PATRIOT Act
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Public Law 107-56). Enacted on October 26, 2001, the historic U.S. law brought about momentous changes in the anti-money laundering field, including more than 50 amendments to the Bank Secrecy Act. Title III of the Act, the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, contains most, but not all, of its anti- money laundering-related provisions.
A payment in which a bank or other institution from country A sends a transaction through a bank in country B using an offshore bank. In the financial world, U-turn payments are most commonly known in relation to US sanctions—particularly to those imposed on Iran.
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 the 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.
A medium of exchange that operates in the digital space that can typically be converted into either a fiat (e.g., government issued currency) or it can be a substitute for real currency.
The term “whale” is used to describe a trader who makes sizable bets. This term is a good one to know because market participants with the ability to execute very large transactions can potentially manipulate the market—or “make waves in the ocean.”
The developers who create digital currencies usually provide white papers for these innovative assets. These documents generally offer comprehensive information on the digital token in question, as well as its underlying technology. For example, the bitcoin white paper provided information on a “peer-to-peer electronic cash system.” Investors who are considering taking part in ICOs can benefit greatly from reviewing any available white papers on the subject.
A list of individuals and entities whose characteristics trigger a hit or alert by an AST (automated screening tool), but who are found not to be a match to a sanctions list. Some ASTs allow users to attach supplementary information that supports the conclusion that this person or entity is not a sanction target and warrants inclusion on the whitelist.
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 wilful 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.
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.
Named after the castle in Switzerland where its first working session was held, the Wolfsberg Group is an association of global financial institutions, including Banco Santander, Bank of America, Bank of Tokyo-Mitsubishi UFJ, Barclays, Citigroup, Credit Suisse Group, Deutsche Bank, Goldman Sachs, HSBC, J.P. Morgan Chase, Standard Chartered Bank and UBS. 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.
The World Bank is a vital source of financial and technical assistance to developing countries. It is not a bank in the usual sense but is made up of two unique development institutions owned by 184 member countries the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). Both organizations provide low-interest loans, interest-free credit, and grants to developing countries. In 2002, the IMF and the World Bank launched a 12-month pilot program to assess countries anti-money laundering and counter-terrorist financing measures. The World Bank and the IMF, in conjunction with FATF, developed a common methodology to conduct such assessments based on the FATF 40 Recommendations.