Common Terms Used in AML

Anti-Money Laundering (AML) is a term mainly used in the finance and legal industries to describe the legal controls that require financial institutions and other regulated entities to prevent or report money laundering activities. For example, a bank must perform due diligence by having proof of a customer's identity and that the use, source and destination of funds do not involve money laundering. United States federal law related to money laundering is implemented under the Bank Secrecy Act of 1970 as amended by anti-money laundering acts up to the present.

Bank Secrecy Act

The Bank Secrecy Act (BSA) was passed by the Congress of the United States in 1970. The BSA is sometimes referred to as an "Anti Money Laundering" law ("AML") or jointly as "BSA/AML". Several anti-money laundering acts, including provisions of the USA PATRIOT Act, have been enacted up to the present to amend the BSA. (See 31 USC 5311-5330 and 31 CFR 103.) The BSA requires banks and other financial institutions to report certain transactions to government agencies, and not to disclose to the clients that certain reports have been filed about them. These transactions include deposits or withdrawals of more than $10,000 in cash in a day, or purchase of monetary instruments (money orders, cashiers checks, travelers checks) with more than $3,000 of cash. For such transactions, the bank must report certain information about the person doing the transaction, such as address and occupation in a "currency transaction report" ("CTR") to the Internal Revenue Service. If it appears the person is in any way attempting to circumvent the report, the Bank must file a "suspicious activity report" ("SAR") with the Financial Crimes Enforcement Network ("FINCEN"). There are stiff penalties for individuals and institutions which fail to file CTRs, SARs or disclose to its clients that it has filed a SAR about a client.

Financial Crimes Enforcement Network (FinCEN)

The Financial Crimes Enforcement Network (FinCEN) maintains a comprehensive database of financial records created in 1990 as an arm of the United States Department of the Treasury to combat money laundering. Their primary purpose is to gather information on the movement of large or suspicious amounts of money, and to increase the communication about that movement to various domestic and international law enforcement agencies, including the Bureau of Alcohol, Tobacco, Firearms, and Explosives, the Drug Enforcement Administration, the Federal Bureau of Investigation, the Secret Service, the Internal Revenue Service, the Customs Service, and the U.S. Postal Inspection Service.

All banks, casinos, brokerage firms, or financial institutions that transfer money must notify FinCEN of any cash transaction over $10,000 in value, as well as any other "suspicious" activity.

An interesting side effect of this is that the FinCEN paperwork - in which a legal name must be given - is being used by casinos to catch some of the higher-volume blackjack card counters.

Know Your Customer

Know Your Customer or "KYC" is the due diligence that financial institutions and other regulated companies must perform to identify their clients and ascertain relevant information pertinent to doing financial business with them. Typically, KYC is a policy implemented to conform to a customer identification program mandated under the Bank Secrecy Act. Know your customer policies have becoming increasingly important globally to prevent fraud, money laundering or financing of terrorism. Countries typically have KYC rules coming from their financial govenance or taxation department. In a simple form these rules may equate to answering twelve questions. Due diligence means more than that, however, as areas of concern must be investigated. Another aspect of KYC checking is to verify that the customer is not on any lists of known or suspected fraudsters or money launderers such as OFAC's SDN list. This list typically contains thousands of entries that is updated monthly or more often. A further aspect of the KYC is to verify that the particular product being sold is well suited to this customer prior to selling it to them.

Money Laundering

Money laundering is the practice of engaging in financial transactions in order to conceal the identity, source and/or destination of money.

In the past, the term "money laundering" was applied only to financial transactions related to otherwise criminal activity. Today its definition is often expanded by government regulators (such as the United States Office of the Comptroller of the Currency), to encompass any financial transaction which generates an asset or a value as the result of an illegal act, which may involve actions such as tax evasion or false accounting. As a result, the illegal activity of money laundering is now recognized as potentially practiced by individuals, small and large business, corrupt officials, and members of organized crime (such as drug dealers or the Mafia).

The increasing complexity of financial crime, the increasing recognised value of so-called financial intelligence (FININT) in combating transnational crime and terrorism, and the speculated impact of capital extracted from the legitimate economy has led to an increased prominence of money laundering in political, economic and legal debate.

Office of Foreign Assets Control (OFAC)

The Office of Foreign Assets Control (OFAC) of the United States Department of the Treasury administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries, terrorists, unapproved international narcotics traffickers, and those engaged in activities related to the unapproved proliferation of weapons of mass destruction. OFAC acts under presidential wartime and national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze foreign assets under US jurisdiction. Many of the sanctions are based on United Nations and other international mandates, are multilateral in scope, and involve close cooperation with allied governments.

Politically Exposed Persons

The term "politically exposed persons" ("PEP") applies to persons who perform important public functions for a state. The definition used by regulators or in guidance is usually very general and leaves room for interpretation. For example the Swiss Federal Banking Commission in its guidelines on money laundering uses the term "person occupying an important public function", the US interagency guidance uses "senior foreign political figure" and the BIS paper Customer due diligence for banks says "potentates".

The term should be understood to include persons whose current or former position can attract publicity beyond the borders of the country concerned and whose financial circumstances may be the subject of additional public interest. In specific cases, local factors in the country concerned, such as the political and social environment, should be considered when deciding whether a person falls within the definition.

The following examples are intended to serve as aids to interpretation:

• Heads of state, government and cabinet ministers;
• Influential functionaries in nationalized industries and government administration;
• Senior judges;
• Senior party functionaries;
• Senior and/or influential officials, functionaries and military leaders and people with similar functions in international or supranational organizations;
• Members of ruling royal families;
• Senior and/or influential representatives of religious organizations (if these functions are connected with political, judicial, military or administrative responsibilities)

Smurfing

Smurfing is a banking term used to describe the splitting of a large financial transaction into multiple smaller transactions. This is done to evade scrutiny by regulators or law enforcement. Each of these smaller transactions is below a minimum limit (such as $10,000 in the United States) above which banks must report any financial transaction.

Criminal enterprises often send different couriers to make these transactions, and those couriers are known as smurfs in this context. The term is in widespread use in the context of money laundering, and has been known to appear in official Federal criminal indictments in the U.S. The practice of smurfing is more formally (and euphemistically) known as "structuring a deposit".

The term is said to have originated with a US law enforcement official watching The Smurfs on television, while wondering about how drug dealers could launder so much money undetected; it occurred to him that it trickled out in small amounts just like little smurfs running around.

Alternatively, the stream of cheery students arriving in the Cayman Islands with packs of money may have reminded law enforcers of The Smurfs because "The Smurfing Song", the 1978 novelty hit by Father Abraham and the Smurfs, began with the words, "Where are you all coming from?"

Suspicious Activity Report

A Suspicious Activity Report (or SAR) is a report regarding suspicious or potentially suspicious financial activity, filed with FinCEN (the FINancial Crimes Enforcement Network), an arm of the United States Department of the Treasury. (See the FinCEN website for detailed guidelines)

SARs are filed primarily by financial institutions such as banks, credit unions and check cashing establishments. Casinos are required to file a separate report called a SAR-C. FINCEN requires a SAR report to be filed by a financial institution when the financial institution experiences a potential loss (also known as risk or exposure) of $25,000 or more, a potential loss of $10,000 or more when a suspect can be identified, for any potential loss when an employee is involved (such as embezzlement or misuse of position) or any transaction or set of transactions that may be deemed suspicious. By far the most common reason for filing a SAR is when a financial institution suspects its customer is trying to structure his transactions in a way so as to avoid a Currency transaction report being filed upon him. A CTR is required under the Bank Secrecy Act for any cash transaction or transactions greater than $10,000.

SAR reports include detailed information about transactions that are or appear to be fraudulent, and the individuals conducting such transactions. While many institutions file thousands of SARs a year, very few people will have a SAR filed with their name included. The goal of SAR filings is to help the Federal government identify individuals, groups and organizations involved in fraud, terrorist financing and money laundering. At the same time, neither the financial institution, nor the Federal government is required to notify an individual or organization that a SAR has been filed that includes their name. Financial institutions usually undergo an investigations process prior to filing a SAR to assure that the information reported is appropriate and accurate. This process will often include review by financial investigators, management and attorneys prior to filing.

An institution can file these reports as a paper form, electronically on tape or floppy disk, or through a special secure internet connection.

Financial institutions face very heavy penalties for failing to properly file Suspicious Activity Reports, including large fines, regulatory restrictions, and even losing their charter. This regulatory compliance has become increasingly important for financial institutions in recent years, with entire departments and executive positions springing up to ensure regulatory compliance, in SARs as well as the Bank Secrecy Act and the Sarbanes-Oxley Act.

Do you have a term you'd like to see added? E-mail the term and definition to kkirkpatrick@iirusa.com. Full credit for submission will be given after the definition.