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Hawala 
A funds exchange system in Indian and Chinese civilizations used to facilitate the secure and convenient 
cross-border movement of funds. Hawala was born centuries before Western financial systems. 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. 
 
 
 

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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 confidential, as records are not stringently kept. 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. 
I
 
Identity Theft 
The assumption of another person‘s identity without authorization for use in fraudulent transactions that 
results 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 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. 
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. 
 

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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.   
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. 
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.   
International Financial Institutions (IFIs) 
IFIs are financial institutions that have been established or chartered by more than one country. The best 
known IFIs are 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, to foster economic growth and high levels of 
employment, and to 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   
 
 

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helping assess the progress of member countries in meeting laundering control standards, such as those 
issued by 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 anti-money laundering matters. 
International Narcotics Control Strategy Report (INCSR) 
Issued annually by the U.S. Department of State, the report includes a lengthy section on the status of 
money laundering efforts in most nations. 
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 Customer Due 
Diligence procedures. 
Investment Banking 
Self-standing department or unit 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. 
K
 
 

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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 
Recommendations issued at the 1990 Aruba meeting that created the Caribbean Financial Action Task 
Force. 
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 a mental state may be inferred from objective factual circumstances. The exact definition 
of knowledge that accompanies an anti-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, when 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 anti-money 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 the 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 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) 
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. Many experts believe that a sound KYC program is one of the best tools in an effective anti- 
money laundering program. 
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. KYE is a key tool in detecting suspicious activity because 
employees can be accomplices of money launderers. 
 
 
 

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L 
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 to 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. 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. Letters of Credit (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 lax 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 illicit 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. This process allows the launderer to ―clean‖ illicit money and 
to generate tax benefits by deducting purported interest payments. 
 
 

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Lockbox 
Service offered by banks to companies in which the company receives payments by mail to a post office 
box and the bank picks up the payments several times a day, deposits them into the company‘s account, and 
notifies the company of the deposits. The service enables the company to put the money to work as soon as 
it is received, but the amounts must be large in order for the value obtained to exceed the cost of the service. 
In the insurance industry there is also widespread use of ―lock boxes‖ for payment of life insurance and 
annuities products. 
M
 
Mail-Forwarding or Mail-Drop Service 
A legal commercial enterprise that uses a stable, physical address as a delivery destination for letters or 
parcels on behalf of fee-paying clients who do not live on the premises. Mail can be held or forwarded at 
the client‘s request. Some mail-drops provide similar services for faxes as well. Money launderers often use 
mail drop addresses as their address, sometimes referring to their box number as either a ―suite‖ or an 
―apartment‖ number. Often, ―shell‖ or unlicensed banks are found to have mail drop addresses. 
Manipulation of Import and/or Export Prices 
A money laundering method that uses the overpricing or underpricing of products or services traded in 
international commerce to move money from one country to another. 
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 analyzing 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. The Egmont Group of FIUs has 
established a model for such MOUs. Unlike the Mutual Legal Assistance Treaty (see below), this gateway 
is ordinarily used not for obtaining evidence, but for obtaining intelligence that might lead to evidence. 
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. 
 
 
 
 

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Mock Trial on Money Laundering 
Program launched by the United Nations Office on Drugs and Crime (UNODC) and the Organization of 
American States Inter-American Drug Abuse Control Commission (CICAD) in various Latin American 
countries. The program‘s objective is 
to equip investigators, prosecutors and judges with the know- how to crack money laundering cases. It uses 
cases that are built around authentic events. Since the program was launched in Ecuador in September 2002, 
a number of mock trials have been conducted. 
Monetary Instruments 
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 anti-money laundering regulations of most 
countries, and financial institutions must file reports and maintain records of customer activities involving 
them. 
Money Laundering 
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 financial 
institution‘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. 
Money Order 
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) 
Term used in the U.S. and elsewhere for money remittance companies; check cashers; issuers, sellers and 
redeemers of money orders and travelers checks; currency exchange houses; and stored value product 
companies. 
 

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Money Transfer Service or Value Transfer Service 
Financial service that accepts cash, checks 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. 
MONEYVAL 
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). 
Monitoring 
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. 
Mutual Fund 
An investment company that continually offers new shares and buys existing shares back on demand, using 
its capital to invest in diversified securities of other companies. Money is collected from individuals and is 
invested on their behalf in varied equity or debt portfolios. 
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. 
N
 
 
 
 

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Naked Trust 
See Bare Trust. 
NCCT 
See Non-Cooperative Countries and Territories (NCCT) List. 
NCCT Criteria 
Criteria published in the FATF Report on Non-Cooperative Countries and Territories issued in February 
2000 used to determine which countries to designate as NCCTs. See Non- Cooperative Countries or 
Territories (NCCTs) list. 
Nesting 
The practice that involves the use of a foreign correspondent bank account by another foreign bank to 
conduct its own transactions. 
Nominee Account 
See Benami Account. 
Nominee Company 
A corporation that is formed for the express purpose of holding securities and other assets in its name on 
behalf of others, or providing nominee directors and/or officers on behalf of clients. 
Non-Cooperative Countries and Territories (NCCT) List 
Countries and territories that were designated starting In 1999 by the Financial Action Task Force as being 
non-cooperative in the global anti-money laundering effort or as lacking adequate anti-money laundering 
controls. The last country was removed from this list in October 2006. 
Non-Financial Trades and Businesses 
See Designated Non-Financial Businesses and Professions.