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Account Monitoring Order

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

Affidavit

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

Alternative Remittance System (ARS)

Underground banking or informal value transfer system. 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 in regard to verification and record-keeping. The money transfer takes place by coded information that is passed through chits, couriers, letters or faxes, followed by telephone confirmations. Almost any document that carries an identifiable number can be used by the receiver to pick up the values in the other country. The systems are referred to by different names depending upon the country: Hawala (an Urdi word meaning "reference"), Hundi (a Hindi word meaning "trust"), Chiti banking (referring to the way the system operates), Chop Shop banking (China), and Poey Kuan (Thailand).

Anti-Money Laundering International Database (AMLID)

A compendium of analyses of 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. See www.imolin.org.

Anti-Money Laundering Program

See Money Laundering Compliance Program.

Arrest Warrant

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

Asia/Pacific Group on Money Laundering (APG)

A Financial Action Task Force (FATF)-style regional body consisting of jurisdictions in the Asia/Pacific Region. See www.apgml.org.

Asset Manager

A person appointed through a written contract by a company or trust to direct the entity's investment program. The program can be a fully discretionary account, or the contract can impose limitations on it. Fees to the asset manager can be based on performance achieved, trading commissions or a percentage of the valuation of the estate under his or her management. High fees and a close relationship with the owners or beneficiaries can expose the asset manager to potential conflicts between a duty to report unusual or suspicious activity and the fiduciary duty to the client.

Asset Protection

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

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 (so-called "flying trusts").

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. The system is used for bulk orders made days in advance—for example, a large corporation's entire payroll. Both governments and commercial sectors can utilize the ACH system. ACH payments are commonly small, recurring and submitted in bulk by well established users, and are not practical for money laundering.

Bank Draft

Vulnerable to money laundering because it represents a reputable international monetary instrument drawn on a reputable institution, and is often made payable—in cash—upon presentation and at the issuing institution's account in another country.

Bank for International Settlements (BIS)

An international organization that serves as a bank for central banks and which fosters international monetary and financial cooperation with the purpose of attaining stability in the world economy. It hosts the Secretariat of the Basel Committee on Banking Supervision. The Committee has formulated broad supervisory standards and guidelines on Know Your Customer issues. See www.bis.org.

Bank Secrecy

Refers to laws and regulations in countries that prohibit banks from disclosing information about an account—or even revealing its existence—without the consent of the account holder. Impedes the flow of information across national borders among financial institutions and their supervisors. Article 4 of the FATF's 40 Recommendations of 2003 states that countries should ensure that financial institutions' secrecy laws do not inhibit 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 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; an ongoing employee training program; and an independent audit function to test the program.

Bare Trust

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

Basel CDD Paper

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

Basel Committee on Banking Supervision (BCBS)

The Basel Committee was established by the G-10's central bank of governors in 1974 to promote sound supervisory standards worldwide. Its secretariat is appointed by the Bank for International Settlements in Basel, Switzerland. It has issued, among others, papers on Customer Due Diligence for Banks, Consolidated KYC Risk Management, and Sharing of financial records among jurisdictions in connection with the fight against terrorist financing. See www.bis.org/bcbs.

Batch Processing

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

Batch Transfer

Transfer comprising a number of individual wire transfers that are sent to the same financial institution, and which may be ultimately intended for different persons.

Bearer Form

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 in any other way without the need to obtain further written instructions.

Bearer Negotiable Instruments

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

Bearer Share

Negotiable instruments that accord ownership in a corporation to the person who is in physical possession of the bearer share certificate.

Bearer Share Certificate

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

Benami Account

Also called a nominee account. Held by one person or entity on behalf of another or others, Benami accounts are associated with the hawala underground banking system of the Indian subcontinent. A person in one jurisdiction seeking to move funds through a hawaladar to another jurisdiction may use a Benami account or Benami transaction to disguise his/her true identity or the identity of the recipient of the funds.

Beneficial Owner

The natural person who ultimately owns or controls a customer and/or the person on whose behalf a transaction is being conducted. It also incorporates those persons who exercise ultimate effective control over a legal person or arrangement.

Beneficiary

All trusts (other than charitable or statutory-permitted noncharitable trusts) must have beneficiaries, which may include the settlor. Trusts must also include a maximum time frame, known as the "perpetuity period," which normally extends up to 100 years. While trusts must always have some ultimately ascertainable beneficiary, they may have no defined existing beneficiaries. Trusts may only have objects of a power until some person becomes entitled as beneficiary to income or capital on the expiry of a defined period, known as the "accumulation period." The latter period is normally coextensive with the trust perpetuity period, which is usually referred to in the trust deed as the "trust period".

Biometrics

The science of identifying features that distinguish one person from another. Fingerprinting, voice recognition and iris (eye) scans are three forms of biometrics technology that may some day render pen-to-paper signatures outdated. Certain institutions use biometrics to verify the identity of their customers. With the advent of customer identification regulations, biometric tools may become more common in financial institutions.

Black Market Peso Exchange (BMPE)

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

Blank Check Company

A type of company designed to be used by private corporations intending to issue publicly traded shares through "reverse mergers" without the high expenses involved in making their own initial public offering. Blank check companies often have few assets, engage in little business activity, and have no business plan or experienced management.

Bookmaker

Plays a comparable role to that of a stockbroker, but in the gambling industry. For a fee, a bookmaker holds money for a person who gambles. Bookmakers are vulnerable to money laundering, since launderers may offer their customers money for winning betting slips, often 7 to 10 percent above the value of the winnings. The launderer then collects clean money from the bookmaker.

Branch

A place of business that forms a legally dependent part of a financial institution and carries out directly all or some of the transactions inherent in the business of that financial institution.

Bureau de Change

Also called "casa de cambio" or "exchange office," a bureau de change offers a range of services that are attractive to money launderers: Currency exchange and consolidation of small denomination bank notes into larger ones; exchange of financial instruments such as travelers checks, money orders and personal checks; and telegraphic transfer facilities. In some countries such businesses are not as heavily scrutinized for money laundering as are traditional financial institutions. Also, their customers are often occasional, making it more difficult for these businesses to "know their customers."

Bust-Out

A scheme in which the use or extension of credit is obtained and increased fraudulently and the perpetrators avoid having to pay back the illegally obtained credit or goods. Typically, a bust-out ring will operate a shell or front business that accepts credit purchases on stolen or fraudulently obtained credit cards. The criminals run the cards or numbers through credit card terminals but either do not provide any goods or services or provide stolen or non-licensed goods. The innocent credit card company credits the account of the front business. Before the transactions can be reversed, the criminals have moved the funds from the accounts of the front business. The cardholders who knowingly participate in these bust-out schemes generally refuse to pay the credit card companies for their "purchases." These people have either obtained cards with fraudulent or stolen identification or otherwise cannot be found. Bust-out schemes have been very popular in creating large bankruptcy frauds in which business entities secure increasing loans in excess of the actual value of the company or property and then run with the money, leaving the lender to foreclose and take a substantial loss.

Cardholder

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

Caribbean Financial Action Task Force (CFATF)

A FATF-style regional body comprising Caribbean states, including Aruba, the Bahamas, the British Virgin Islands, the Cayman Islands and Jamaica. See www.cfatf.org.

Casa de Cambio

See Bureau de Change.

Cash-Based Business

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

Cash Collateralized Loans

Often extended to private banking customers, a cash collateralized loan accepts cash deposits as the loan's collateral. The cash deposits can sometimes reside in another jurisdiction.

Cash Deposits

Sums of money placed in a financial institution's accounts. Vulnerable to money laundering in the "placement phase," as criminals move their cash into the non-cash economy by making deposits into accounts at financial institutions.

Cashier's Check

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

CDD

See Customer Due Diligence.

CDPC

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

Certification

A formal assertion in writing which, under the USA Patriot Act, is used by U.S. regulators in different contexts, including a written statement by a respondent bank signed by its duly authorized representative certifying that the bank does not do business with shell banks (under Section 313/319 of the USA Patriot Act). It can also be a written representation provided by a U.S. federal agent stating that the matter for which he or she is seeking information from financial institutions under Sec. 314(a) of the USA Patriot Act regulations is linked to money laundering or terrorism.

Chain Referral Scheme

See Pyramid Scheme.

Chiti Banking

See Alternative Remittance System.

Chop Shop Banking

See Alternative Remittance System.

CICAD

See Organization of American States—Inter-American Drug Abuse Control Commission.

Clearing Account

Also called an "omnibus" or "concentration account." Held by a financial institution in its name, a clearing account is used primarily for internal administrative or bank-to-bank transactions in which funds are transmitted and commingled without personally identifying the originators. The USA Patriot Act of 2001 prohibits the use of such accounts for customer transactions.

Collection Accounts

Immigrants from foreign countries deposit many small amounts of currency into one account where they reside, and the collected sum is transferred to an account in their home country without documentation of the sources of the funds. Certain ethnic groups from Asia or Africa may use collection accounts to launder money.

Collective Knowledge

The sum of the knowledge held separately by a financial institution's directors, officers and employees regarding a certain issue, customer or account. The notion of collective knowledge can be used to suggest corporate responsibility for compliance and liability for non-compliance. For that reason, centralized decisions regarding money laundering controls in an institution are vital. Whether or not the company philosophy is one of empowerment or decentralization, the institution will be expected to maintain centralized records and make consistent, uniform decisions on the individual merits of transactions reviewed and controls put in place.

Commission Rogatoire

Also known as letters rogatory, commission rogatoires are written requests 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.

Concentration Account

See Clearing Account.

Concentration Risk

In general, the risk of financial loss that results from the failure of customers to honor their credit obligations to a bank. Supervisory concern about concentration risk primarily applies to the assets side of the balance sheet. As a common practice, supervisors not only require banks to have information systems to identify credit concentrations, but often also set limits to restrict bank exposure to single borrowers or groups of related borrowers. Without knowing exactly who the customers are (through Know Your Customer policies) and their relationship with other customers, the bank is not able to measure its concentration risk, which is particularly relevant in the context of related counter-parties and connected lending. On the liabilities side concentration risk is associated with funding risk, especially the risk of early and sudden withdrawal of funds by large depositors that could harm the bank's liquidity.

Confidentiality

Keeping certain facts, data and information out of public or unauthorized view. In the U.S., U.K. and many other jurisdictions, confidentiality is required when filing suspicious transaction or activity reports — the filing institution's employees cannot notify a customer that a report has been filed. In another context, a breach of confidentiality can occur when an institution discloses client information to enforcement agencies or a financial intelligence unit in violation of the jurisdiction's bank secrecy laws.

Confiscation

Includes forfeiture where applicable, and means the permanent deprivation of funds or other assets by order of a competent authority or a court. Confiscation or forfeiture takes place through a judicial or administrative procedure that transfers the ownership of specified funds or other assets to the state. Upon transfer, the person(s) or entity(ies) that held an interest in the specified funds or other assets at the time of the confiscation or forfeiture lose all rights, in principle, to the confiscated or forfeited assets. (Confiscation or forfeiture orders are usually linked to a criminal conviction or a court decision whereby the confiscated or forfeited property is determined to have been derived from or intended for use in a violation of the law.) Confiscation is a central strategic tool that is required in order to take effective action against money laundering and terrorist financing. It is crucial that criminal justice systems make provisions for efficient and effective methods of tracing, freezing and eventually confiscating proceeds of criminal activity. Mutual legal assistance treaties provide for confiscation of assets in one jurisdiction based upon prosecutions elsewhere.

Constructive (Involuntary) Trust Liability

The imposition of trustee obligations upon a financial institution deemed to "know" that property in its possession belongs to a person other than its client. A financial institution can face the risk of breach of trust if it handles or transfers the funds in a manner detrimental to the interests of the rightful owner. Anti-money laundering specialists should be especially vigilant when there is suspicion that funds may have been derived from a victim of crime, such as fraud or another crime resulting in a victim's loss of funds or property.

Core Principles

Core Principles for Effective Banking Supervision issued by the Basel Committee on Banking Supervision, the Objectives and Principles for Securities Regulation issued by the International Organization of Securities Commissions, and the Insurance Supervisory Principles issued by the International Association of Insurance Supervisors.

Corporate Vehicles

Defined in the Consultation Paper of the FATF as: 1. Corporations: (a) Private limited companies and public limited companies whose shares are not traded on a stock exchange. (b) International business companies/exempt companies. 2. Trusts. 3. Foundations. 4. Limited partnerships and limited liability partnerships. 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 FATF gives such vehicles special focus in the revised 40 Recommendations on Money Laundering of 2003, under section CDD for legal persons and arrangements (Recommendation 5).

Correspondent Banking

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 thousands 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.

Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime

The Convention was adopted by the Committee of Ministers of the Council of Europe in September 1990, which addressed all types of criminal offenses and thereby has greater impact than the Vienna Convention. The offense of money laundering was extended to include money laundering associated with all serious offenses, not only with drug trafficking. In May 2005, a revised convention was adopted and opened for signature.

Counter-Terrorism Committee (CTC)

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

Credit Cards

A plastic card with a credit limit used to purchase goods and services and to obtain cash advances on credit. The cardholder is subsequently billed by the issuer for repayment of the credit extended. Credit cards may be used to launder money when payments of the amounts owed on the card are made with criminal money. Another money laundering method using a credit card involves front-end loading the card with dirty money, and then drawing out the money through ATM machines in various currencies around the world.

Credit Finance

The use of credit to buy pricey items, and the subsequent payment of the borrowed credit with criminal funds. The criminal borrows funds to purchase a high value asset such as a yacht, pays off the loan promptly by cash settlement using illegal proceeds, sells the boat and starts all over again. By paying the credit loans off with dirty money, money launderers can use credit to finance criminal activity.

Criminal Proceeds

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

Cross Border

Used in the context of activities between organizations located in two countries.

Cross-Border Transfer

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

Cuckoo Smurfing

A form of money laundering linked to alternative remittance systems in which criminal funds are transferred through the accounts of unwitting persons who are expecting genuine funds or payments from overseas. The term cuckoo smurfing first originated in investigations in the U.K., where it is a significant money laundering technique.

Currency

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

Currency Smuggling

The illicit movement of large quantities of cash across borders, often into countries with no exchange controls or strict banking secrecy, as well as lax money laundering legislation geared toward detection.

Currency Transaction Report (CTR)

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

Custodian

A bank, financial institution or other entity that is responsible for managing or administering the custody or safekeeping of assets for other persons or institutions. Typically, custodians are not active, aggressive managers of the assets in question, but instead passively conserve them.

Custody

The safeguarding and administration of clients' investments or assets.

Customer Due Diligence (CDD)

Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or transaction with another party. In terms of institutional money laundering controls, it means implementing adequate policies, practices and procedures that promote high ethical and professional standards and prevent banks from being used, intentionally or unintentionally, by criminal elements. Due diligence includes not only establishing the identity of customers, but also monitoring account activity to determine those transactions that do not conform with the normal or expected transactions for that customer or type of account.

Customer Identification Program (CIP)

The policies and procedures of an institution that aim to identify and verify the identity of its customers. In general, the program must be in writing, have senior board approval and include procedures for customer notification.

Customer Information Order

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

Debit Card

A card issued by a financial institution that permits an accountholder to draw funds from a pre-existing account in his or her name for the purpose of paying obligations or for making purchases in other locations or businesses. Debit cards have been found to be convenient tools to launder criminal proceeds, especially if they are issued by financial institutions in secrecy havens, because they leave few, if any, traces of the debited sources of funds.

Debit Transaction

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

Designated Categories of Offense

In its revised 40 Recommendations of 2003, the FATF issued for the first time a list of "designated categories of offense" that enumerates crimes that may lead to money laundering prosecutions. Each country may decide how it will define those offenses and their elements. Many nations do not specify which crime proceeds can serve as predicates for laundering prosecutions and merely state that all serious felonies may be predicates. Others, such as the U.S., specify long lists of crimes that must be present in order for a laundering prosecution to proceed. Under the FATF definition, the designated categories are: • Participation in an organized criminal group and racketeering • Terrorism, including terrorist financing • Trafficking in human beings and migrant smuggling • Sexual exploitation, including sexual exploitation of • children • Illicit trafficking in narcotic drugs and psychotropic substances • Illicit arms trafficking • Illicit trafficking in stolen and other goods • Corruption and bribery • Fraud • Counterfeiting currency • Counterfeiting and piracy of products • Environmental crime • Murder, grievous bodily injury • Kidnapping, illegal restraint, and hostage-taking • Robbery or theft • Smuggling • Extortion • Forgery • Piracy • Insider trading and market manipulation

Designated Non-Financial Businesses and Professions

According to FATF, the following businesses must comply with its revised 40 Recommendations of 2003: 1. Casinos (including Internet casinos) 2. Real estate agents 3. Dealers in precious metals 4. Dealers in precious stones 5. Lawyers, notaries, other independent legal professionals and accountants. Refers to sole practitioners, partners and employed professionals within professional firms. It is not meant to refer to "internal" professionals that are employees of other types of businesses, nor to professionals working for government agencies who may already be subject to measures that would combat money laundering. 6. Trust and company service providers. Refers to all persons or businesses that are not covered elsewhere under the Recommendations, and which provide any of the following services to third parties: a. Act as a formation agent of legal persons b. Act as (or arrange for another person to act as) a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons c. Provide a registered office, business address or accommodation, correspondence or administrative address for a company, a partnership or any other legal person or arrangement d. Act as (or arrange for another person to act as) a trustee of an express trust e. Act as (or arrange for another person to act as) a nominee shareholder for another person

Disclosure Order

A document that requires a person who has information relevant to an investigation to answer questions at an interview, provide information, or produce documentation. The order can be exercised not only against a person whose assets are under investigation, but also against a third party, such as a financial institution.

Domestic Transfer

Wire transfer in which the originator and beneficiary institutions are located in the same jurisdiction. A domestic transfer therefore refers to any chain of wire transfers that takes place entirely within the borders of a single jurisdiction, even though the system used to send the wire transfer may be located in another jurisdiction.

Downstream Correspondent Clearer

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

Dry Trust

See Bare Trust

Eastern and Southern African Anti-Money Laundering Group (ESAAMLG)

A FATF-style regional body comprising East and South African countries, including Kenya, Botswana, Mauritius, Namibia and Zimbabwe. It was established in 1999. See www.esaamlg.org.

Egmont Group of Financial Intelligence Units

In 1995, a number of national financial intelligence units (FIUs) began working together in an informal organization known as the Egmont Group, named for the site of its first meeting in the Egmont-Arenberg Palace in Brussels. The goal of the group is to provide a forum for FIUs to improve support to their national anti-money laundering programs and to develop protocols for information sharing. The FIUs' support includes expanding and systematizing the exchange of financial intelligence, improving expertise and capabilities of the personnel of such organizations, and fostering improved communications among FIUs through application of new technologies and sharing of information for financial crimes investigations.

Electronic Banking

A form of banking in which funds are transferred through an exchange of electronic signals among financial institutions rather than an exchange of cash, checks or other negotiable instruments.

Electronic Cash (E-Cash)

A payment mechanism designed for the Internet, electronic cash represents a series of monetary value units electronically stored on the hard drive of a computer or microchip of a plastic card. It is anonymous like cash, and has immediate value. Ecash is attractive to money launderers because of its anonymity and the ease it provides in "transporting" large sums quickly and easily via the Internet. Also called "e-money.".

Electronic Funds Transfer (EFT)

The movement of funds between financial institutions electronically. The two most common electronic funds transfer systems 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 banks, rather than the wire transfer system itself.) Other systems that facilitate funds movement, but are not technically EFT systems, include automated clearing houses (ACH), which are networks that conduct batch processing of messages for book transfers between institutions.

Electronic Money (E-Money)

See Electronic Cash.

Enhanced Due Diligence (EDD)

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

Eurasian Group on Combating Money Laundering and Terrorist Financing (EAG)

A FATF-style regional body formed in October 2004 in Moscow. Member countries include China, Russia, Kazakhstan, Tajikistan, Kyrgyzstan and Belarus. See www.euroasiangroup.org.

European Union (EU)

The European Union is a family of democratic European countries. Its member states have set up common institutions to which they delegate part of their sovereignty so that decisions on specific matters of collective interest can be made democratically at the European level. See www.europa.eu.int/abc/panorama/index_en.htm.

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, the directive requires EU member states to achieve certain results by amending national laws, if necessary, to prevent their domestic financial systems from being exploited for money laundering. The directive was confined to drug trafficking as defined in the Vienna Convention. The scope of the directive was also confined to credit and financial institutions as the most vulnerable to abuse by money launderers, but member states were encouraged to cover other sectors too that might become involved in laundering. The directive was revised in December 2001 by extending the money laundering offenses beyond credit and financial institutions to corporate service providers, casinos, lawyers and accountants. A third directive in September 2005 replaced the previous two.

Europol

European Law Enforcement Organization, which aims to improve the effectiveness and cooperation of competent authorities in member states in preventing and combating terrorism, unlawful drug trafficking and other serious forms of international organized crime. In the area of money laundering, Europol provides European Union member states' law enforcement authorities with operational and analytical support via the ELOs (Europol Liaison Officers) and its analysts.

Exchange Office

See Bureau de Change.

Exempt Account

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

Express Trust

A trust clearly created by the settlor, usually in the form of a document such as a written deed of trust. An express trust contrasts with trusts that come into being through the operation of the law and do not result from the clear intent or decision of a settlor to create a trust or similar legal arrangements (e.g. constructive trust).

Extradition

The surrender by one country to another of an accused or convicted person under a bilateral agreement that specifies the terms of such exchanges, such as the persons subject to being exchanged and the crimes for which exchanges will be permitted. The 1988 Vienna Convention against Illicit Traffic in Narcotics and Psychotropic Substances makes money laundering an internationally extraditable offense.

Extraterritorial Reach

The extension of one country's policies and laws to the citizens and institutions of another. U.S. money laundering laws contain several provisions that extend its prohibitions and powerful sanctions into other countries. For example, the "extraterritorial jurisdiction" of the principal U.S. money laundering law can apply to a non-U.S. citizen if the "conduct" occurs "in part" in the U.S. (Title 18, USC Sec. 1956(f)).

Financial Action Task Force (FATF)

The FATF was chartered in 1989 by the Group of Seven industrial nations to foster 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. More than 30 countries and two international organizations are members. In 2003, the FATF revised its 40 Recommendations on Money Laundering. Among the organization's tasks is to promote the adoption and implementation of its recommendations by non-member countries. It has also issued Special Recommendations on Terrorist Financing and develops annual typology reports showcasing current money laundering and terrorist financing trends and methods. See www.fatf-gafi.org.

Financial Action Task Force-Style Regional Body (FSRB)

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

Financial Intelligence Unit (FIU)

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

Financial Sector Assessment Program (FSAP)

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

Forensic Accountant

Specializes in analyzing financial evidence and testifying as an expert witness in cases of white-collar crime, including money laundering.

Forfeiture

The permanent loss of private property or assets as a result of legal action by a government authority. Generally, the owner of the property has failed to comply with the law or the property is linked to some sort of criminal activity.

Freeze

To prohibit the transfer, conversion, disposition or movement of funds or other assets on the basis of, and for the duration of the validity of, an action initiated by a competent authority or a court under a freezing mechanism. The frozen funds or other assets remain the property of the person(s) or entity(ies) that held an interest in the specified funds or other assets at the time of the freezing and may continue to be administered by the financial institution or other arrangements designated by such person(s) or entity(ies) before initiation of the action under a freezing mechanism.

Front Company

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

Futures

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

GAFISUD

See South American Financial Action Task Force.

Gatekeepers

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

Giro House

See Remittance Services.

Global Program against Money Laundering (GPML)

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

Grantor

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

Group of Eight Industrialized Nations (G-8)

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

Group of Eleven Industrialized Nations (G-10)

The group is made up of the original G-7 group of industrialized nations plus Sweden, Belgium, the Netherlands, and Switzerland, which was the 11th country to join in 1964. Although it now has 11 members the group continues to be called the G-10.

Group of Seven Industrialized Nations (G-7)

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

Harmful or Preferential Tax Regimes

The United Nations and the Organization for Economic Cooperation and Development have taken the controversial position that a country that has no or low tax rates to encourage foreign business development is engaged in "harmful tax practices." Their position is that offshore tax regimes are not maintained with the intent to attract real business and direct foreign investment, but to foster predatory tax policies that divert business from another country and encourage tax evasion.

Hawala

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

Hedge Fund

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

Hundi

See Hawala.

Identity Theft

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

Informal Value Transfer System (IVTS)

See Alternative Remittance System.

Integration

The integration phase, often referred to as the third and last stage of the classical 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.

Intermediary Financial Institution

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

Internal Controls

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

International Association of Insurance Supervisors (IAIS)

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

International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA)

See World Bank.

International Business Company (IBC)

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

International Finance Corporation (IFC)

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

International Financial Institution (IFI)

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

International Monetary Fund (IMF)

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

International Money Laundering Abatement and Anti-Terrorist Financing Act

The Act represents Title III of the USA Patriot Act of 2001, which contains most but not all of the provisions of that landmark law that deal directly with money laundering matters.

International Police Organization (Interpol)

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

Internet Banking

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

Investment Banking

Self-standing department or one within a financial institution that provides strategic capitalizations, amassing huge amounts from diverse sources for corporate deal making, and other alternatives to traditional banking instruments.

IVTS

Informal Value Transfer System. See Alternative Remittance System.

Kingston Declaration on Money Laundering

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

Knowledge

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

Know Your Correspondent Bank (KYCB)

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

Know Your Customer (KYC)

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

Know Your Customer's Customer (KYCC)

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

Know Your Employee (KYE)

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

Layering

The second phase of the classic three-step money laundering process between placement and integration, layering involves distancing illegal proceeds from their source by creating complex levels of financial transactions designed to disguise the audit trail and provide anonymity.

Legal Risk

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

Letter of Credit

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

Letter Rogatory

See Commission Rogatoire.

Loan Back Method of Money Laundering

With a loan-back, the criminal puts the dirty funds in an offshore entity that he owns and then 'loans' them back to himself or a company he owns. This technique works because it is hard to determine who actually controls offshore accounts in some countries. Allows the launderer to "clean" dirty money and generate tax benefits by deducting purported interest payments.

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