AML and financial crime glossary: plain-language definitions

Beneficial owner

The beneficial owner is the real person who ultimately owns or controls a customer, or on whose behalf a transaction is carried out, even if ownership is held through companies, trusts or nominees.

Correspondent banking

Correspondent banking is an arrangement in which one bank provides accounts and services, such as payments and foreign exchange, to another bank, usually in a different country.

Customer due diligence (CDD)

Customer due diligence is the set of checks a firm does on a customer: identify and verify them, identify the beneficial owner, understand the purpose of the relationship, and monitor it over time.

Enhanced due diligence (EDD)

Enhanced due diligence is the additional scrutiny applied to higher-risk customers, relationships or transactions, beyond standard customer due diligence.

Financial intelligence unit (FIU)

A financial intelligence unit is the national agency that receives, analyses and shares suspicious activity reports and other financial information to fight money laundering and terrorist financing.

Hawala

Hawala is an informal value transfer system in which money is moved through a network of brokers based on trust, often with no physical transfer of funds between the two ends.

Integration

Integration is the final stage of money laundering, in which laundered funds re-enter the legitimate economy and look like ordinary income or assets.

Know your customer (KYC)

Know your customer is the process of verifying who a customer is and understanding their business and risk. In practice it is used as a near-synonym for customer due diligence.

Layering

Layering is the second stage of money laundering: moving funds through many transactions, accounts, companies or countries to hide where they came from.

Placement

Placement is the first stage of money laundering, in which criminal cash or other proceeds are put into the financial system or converted into other assets.

Politically exposed person (PEP)

A politically exposed person is someone who holds, or has held, a prominent public function, such as a head of state, minister, senior judge, senior military officer or executive of a state-owned company.

Predicate offence

A predicate offence is the underlying crime that generates the proceeds being laundered, such as fraud, corruption, drug trafficking or tax crime.

Risk-based approach

The risk-based approach means a firm identifies and assesses its own money laundering and terrorist financing risks and applies controls in proportion to them, instead of treating every customer and transaction the same.

Sanctions screening

Sanctions screening is checking customers, owners, counterparties and payments against sanctions lists to make sure the firm does not deal with listed persons or prohibited activity.

SDN (Specially Designated Nationals) list

The SDN list is OFAC's list of individuals, companies and vessels whose assets are blocked and with whom US persons are generally prohibited from dealing.

Shell company

A shell company is a legal entity with no real operations, employees or assets of its own, often used to hold assets or move money without revealing who owns it.

Structuring (smurfing)

Structuring means breaking a transaction into smaller amounts to stay below a reporting or monitoring threshold. It is also called smurfing.

Suspicious activity report (SAR / STR)

A suspicious activity report, also called a suspicious transaction report, is a confidential report that a regulated firm files with the national financial intelligence unit when it suspects money laundering, terrorist financing or another crime.

Tipping off

Tipping off is telling a customer, or anyone else, that a suspicious activity report has been or will be filed, or that an investigation is under way.

Trade-based money laundering (TBML)

Trade-based money laundering is the use of international trade transactions to disguise criminal proceeds and move value, for example by falsifying the price, quantity or quality of goods on invoices.

Transaction monitoring

Transaction monitoring is the ongoing review of customer transactions to spot activity that is unusual or inconsistent with what is known about the customer, so that it can be investigated and, if needed, reported.

Travel Rule

The Travel Rule requires financial institutions and crypto-asset service providers to pass originator and beneficiary information along with a transfer so that each firm in the chain can screen it.