Learn the basic concepts of AML and Links to External Resources.
Glossary of AML & Regulatory Compliance Concepts & Terms
Anti-Money Laundering is simply measures taken by regulated businesses to detect, deter, report and prevent money laundering.
Blockchain is a distributed digital ledger technology that enables secure, transparent and tamper-proof record-keeping of transactions between parties. It allows for the creation of a decentralized network that can verify and validate transactions without the need for a centralized authority, such as a bank or government. Blockchain technology is important in the fight against financial crime because it provides a transparent and immutable record of all transactions that take place on the network. This makes it more difficult for criminals to engage in fraudulent activities like money laundering, as transactions are publicly visible and can be traced back to the source. Additionally, the decentralized nature of the blockchain network ensures that there is no single point of failure or control. This makes it much harder for criminals to manipulate or tamper with the data on the network.
Blockchain analytics refers to the use of sophisticated machine learning algorithms and other techniques to analyse transaction data and identify patterns and trends that may be indicative of fraudulent or potential suspicious transactions. With the emergency of blockchain analytics, financial crime practitioners and law enforcement agencies can more effectively track and monitor cryptocurrency transactions. This has made it more difficult for criminals to exploit cryptocurrencies for illicit purposes.
Cryptocurrencies are a type of digital currency that use encryption techniques to secure their transactions and to control the creation of new units. They operate independently of banks and governments and are based on a decentralized system, which means they are not controlled by any single entity. You can buy and sell cryptocurrencies on digital exchanges, and their value can fluctuate based on supply and demand. Some people see cryptocurrencies as a form of investment, while others use them to buy goods and services online. Cryptocurrencies have been associated with money laundering due to their product features, such as their decentralized nature, complexity, anonymity, global reach, and speed. These features make cryptocurrencies attractive to money launderers looking for ways to launder their criminal proceeds. Although transactions in cryptocurrencies are recorded on a public ledger called the blockchain, the identities of the participants are often difficult to trace, especially if they use techniques such as mixing services or privacy coins to obfuscate their transactions.
Customer Due Diligence (CDD)
From an anti-money laundering perspective, Customer Due Diligence (CDD) refers to the analysis of a client’s Know Your Customer (KYC) information to assess potential money laundering and other financial crime risks associated with the customer. CDD is an ongoing, active process that involves establishing the customer’s identity, understanding the nature of their activities, evaluating the risks of money laundering and other financial crimes associated with the customer for monitoring purposes, and profiling the client for ongoing due diligence to detect and report any potential suspicious activity.
Cyber crime is any criminal act dealing with computers and networks (called hacking). Additionally, cyber crime also includes traditional crimes conducted through the Internet.
Financial crime as the name suggest is any crime involving money. It also refers to as economic crime. Generally. financial crime or economic crime are designated categories of predicate offenses that individual countries may define in their domestic law as serious offenses. The most common categories of financial crime are Money Laundering (ML) and Terrorist Financing (TF), Fraud, Sanctions, Bribery & Corruption, Data & Information Security and Market Abuse.
Financial Crime (FinCrime)
Financial crime, as the name suggests, refers to any crime involving money and is also referred to as economic crime. Generally, financial crime or economic crime are designated categories of predicate offenses that individual countries may define in their domestic law as serious offenses. The most common categories of financial crime include Money Laundering (ML) and Terrorist Financing (TF), Fraud, Sanctions, Bribery & Corruption, Data & Information Security, and Market Abuse.
Fraud is a deliberate deception or misrepresentation made for personal gain or to obtain something of value, such as money, property, or services. It can take various forms, such as identity theft, credit card fraud, investment fraud, insurance fraud, and romance scams. Fraud is considered a serious crime and falls within regulators’ objectives of reducing the risk of financial crime and its impact on society. Therefore, firms are obligated by regulations to protect themselves and their customers against fraud by assessing areas of their business most vulnerable to fraudsters and taking appropriate measures to mitigate their fraud risks.
High Net Worth Individuals (HNWIs)
High Net Worth Individuals (HNWIs) are individuals with significant financial resources, typically having a net worth of over $1 million, although this can vary depending on the country or region, or institution’s internal policy. HNWIs may have acquired their wealth through inheritance, successful entrepreneurship, or investment. Regulators expect obligated firms to apply a risk-based approach to identify the inherent risks associated with their HNWI customers, considering factors such as their source of wealth, country of residence, occupation, and other relevant information. Based on this assessment, firms are expected to apply appropriate levels of due diligence and other controls to effectively manage the risks associated with their HNWI customers. Overall, firms are expected to accept HNW customers or continue to do business with only HNW customers whose source of wealth and funds can be reasonably established as legitimate. This ensures that financial institutions are not facilitating money laundering or terrorist financing through their business relationships with HNWIs.
Know Your Customer (KYC)
KYC refers to the process used by businesses to verify the identity of their clients and assess their suitability for conducting business. By understanding who they are (or might be) doing business with, companies can prevent bad actors from gaining access to the financial system. The KYC process typically involves collecting personal information and documentation from clients to establish their identity, and then using this information to conduct risk assessments and compliance checks. This helps ensure that businesses are operating in compliance with legal and regulatory requirements, and also helps to protect against financial crimes like money laundering and terrorist financing.
Money laundering (ML)
Money laundering (ML) is the generic term used to describe the process by which criminals disguise the original source of the proceeds of crime by finding ways to integrate it into the formal economy or the financial system to make it appear legitimate. The Money Laundering process is essential to making crime worthwhile. Money laundering is global problem affecting the international financial system. As result financial and non-financial institutions around the world are require to take specific measures to prevent criminals using their business to facilitate money laundering. Financial instructions and regulated businesses play as essential role in the global fight against money laundering and other financial crimes.
Money mules are individuals who knowingly or unknowingly aid criminal organizations in laundering their illicit profits. They do this by providing their own bank accounts to help receive and transfer fraudulent funds, thus concealing the origin of the illicit funds and making them appear legitimate. This also helps to distance the criminal groups from prosecution. Criminals recruit money mules through various means, such as offering financial incentives to individuals in financial difficulties. Criminals may also exploit a romantic relationship to seek support from their online partner who may be under the impression that they are in a genuine romantic relationship with the person making the request. As a result, the partner may feel obligated to provide assistance. Howbeit, being a money mule is illegal and can result in severe consequences, including imprisonment and financial penalties.
Predicate offence, also known as a “predicate crime,” is a term used in the context of money laundering and refers to the underlying criminal activity that generates the proceeds that are subsequently laundered. Predicate offences can be any criminal activity that generates monetary proceeds, the illegal proceeds of which are then laundered. Predicate offences include a wide range of criminal activities. The FATF maintains a list of designated predicate offences, which include drug trafficking, arms trafficking, human trafficking, fraud, bribery, corruption, cybercrime, tax crimes, environmental crimes, terrorist financing, and others. It’s worth noting that while the FATF’s list of designated predicate offences provides guidance to member countries, individual countries may have their own lists of predicate offences based on their national laws and regulations.
Politically Exposed Person (PEP)
Politically Exposed Persons (PEPs) are individuals who have been appointed by a community, institution, an international body, or a country to a prominent or high-profile position. These positions come with power, influence, and access to resources that can make PEPs susceptible to bribery, corruption, and money laundering. As a result, AML/CTF regulatory requirements mandate that obligated firms to identify potentially politically exposed customers and establish a tailored, risk-based control framework to manage the risks associated with PEP customers effectively.
Risk-Based Approach (RBA)
A risk-based approach is a method of decision-making that prioritizes actions or decisions based on the level of risk involved. In regulatory compliance parlance, a risk-based approach simply involves taking appropriate AML/CTF mitigation or supervision measures in accordance with the level of risk identified. It involves identifying potential risks, analysing them, and then implementing measures that are commensurate with the level of risk identified to mitigate or manage them. This means that where the ML/TF risk associated with a situation is higher, enhanced or additional measures must be taken to mitigate the higher risk. Enhanced measures imply that the range, degree, frequency, or intensity of controls conducted must be stronger, and vice versa for lower risk situations. RBA is a fundamental requirement for an effective implementation of the AML/CTF framework. Its objective is to give AML and regulatory compliance practitioners the flexibility to use preventative measures in a way that ensures resources are prioritized and applied more effectively.
Suspicious Transaction Reports (STRs) & Suspicious Activity Reports (SARs)
Businesses operating in the regulated sector are legally obligated to report to their designated financial intelligence institutions if they know, suspect, or have reasonable grounds to suspect that a transaction or activity may be related to money laundering or illicit activities. Such reporting, known as Suspicious Transaction Reports (STRs) for transactions and Suspicious Activity Reports (SARs) for client activities, is critical in preventing financial crimes and safeguarding the integrity of the financial system. STR/SAR reporting serves as a vital source of information and intelligence from the private sector, which may not be visible to law enforcement otherwise. The information from STRs/SARs is used to investigate and prosecute potential criminal activities that need to be addressed. Failure to report knowledge or suspicion of money laundering activity or criminal property by businesses or individuals working in the regulated sector is a punishable offence.
Source of Wealth (SoW) and Source of Funds (SoF)
In the context of financial crime, source of wealth (SoW) primarily refers to how a customer has amassed their overall net worth, such as through economic, business, and commercial activities. “Source of funds” (SoF), on the other hand, pertains to the origin of funds to be used in a particular transaction or account. SoW and SoF are critical components of customer risk assessment and risk management, particularly for high net worth and politically exposed customers. Obligated firms must thus conduct SoW and SoF checks on relevant customers to identify, mitigate, and manage the risks of money laundering and other financial crimes. SoW/SoF assessments provide reliable evidence and explanations about a customer’s wealth and funding sources, ensuring that the funds used in the business relationship are legitimate.
Terrorist individuals and groups need money to survive and operate. Terrorism financing is the process of providing funds or other forms of financial support to individuals or groups engaged in terrorist activities. The funds can be obtained through legal activities, such as donations from individuals or organizations, or through illegal activities, such as money laundering or illicit trade. Combating Terrorist Financing (CTF) encompasses the actions taken by individuals and institutions to prevent the misuse of funds for terrorist activities by disrupting and preventing terrorist groups from accessing funds and other financial resources. This includes measures such as freezing assets, monitoring charities and other non-profit organisation often abused by terrorist groups to detect and report suspicious transactions or activities.