Glossary

Arbitrage
The nearly simultaneous purchase and sale of an asset in order to profit from a difference in the price. It exploits price differences of identical goods in different market locations.
Arm's-length transaction
If two unrelated companies trade with each other across international boundaries, there is generally negotiation on price, resulting in a fair or market-driven charge, which is acceptable for tax purposes.
ARS—Alternative Remittance System
See IVTS.
AML/CFT—Anti–Money Laundering/Combating the Financing of Terrorism
Collective term generally used to describe the legal and regulatory framework and other obligations countries must implement. See also FATF 40.
APG—Asia Pacific Group
A FATF-style regional body, the APG wrote a comprehensive 2012 TBML typologies report.
ASYCUDA—Automated System for Customs Data
A computerized system designed by the United Nations Conference on Trade and Development (UNCTAD) to administer a country's customs.
ATT—Afghan Transit Trade
A regional agreement between landlocked Afghanistan and its neighbors that allows goods to be imported into the country with preferential duties. The trade has resulted in massive smuggling and trade fraud, and it continues to facilitate the laundering of narcotics proceeds and contributes to the financing of terrorist groups operating in South Asia.
BMPE—Black Market Peso Exchange
One of the most pernicious money laundering schemes in the Western Hemisphere. It is also one of the largest, processing billions of dollars a year from Colombia alone via TBML and other schemes.
BSA—Bank Secrecy Act
Officially known as the “Currency and Foreign Transactions Reporting Act,” it requires financial institutions to help various government agencies detect and prevent money laundering. Specifically, the BSA requires banks and other financial institutions to file reports of currency transactions exceeding $10,000, to keep records of cash purchases of negotiable instruments, and to report suspicious activity.
Bulk cash smuggling (BCS)
The physical transportation or smuggling of bulk cash currency in order to place it in a jurisdiction with less stringent financial transparency reporting requirements.
Capital flight
Wealth, capital, and assets are moved from a country when there is a loss of confidence. Generally this is due to an event or policies that have economic consequence such as political instability, monetary uncertainties, increase in taxes, or currency depreciation.
Carousel fraud
The practice of importing goods from a country where they are not subject to Value Added Tax (see VAT), selling them with VAT added, then deliberately not paying the VAT to the government. The fraudster charges VAT on the sale of the goods and instead of paying it to the government simply absconds—taking the VAT with him. It is a form of “carousel” or “merry-go-round” fraud when sometimes goods are cycled between companies and jurisdictions collecting ever more fraudulent VAT revenues. Sometimes in TBML, carousel fraud also refers to the process of cycling trade goods (genuine or fictitious) in and out of non-VAT markets in order to justify payment abroad.
CBP—Customs and Border Protection
See ICE.
CDD/KYC—Customer Due Diligence/Know Your Customer
The first step financial institutions must take to detect, deter, and prevent money laundering and terrorist financing; i.e., maintain adequate knowledge about their customers and their financial activities.
CMIR—Report of International Transportation of Currency or Monetary Instruments
The United States has established a declaration system that applies to all incoming and outgoing physical transportation of cash and other monetary instruments. It is illegal to transport more than $10,000 (or its foreign equivalent) in cash or other monetary instruments into or out of the country without filing a CMIR, also known as FinCEN Form 105.
Countervaluation
Often employed in settling debts between traders and those involved with underground finance. For example, a party in a transaction may over- or undervalue a commodity or trade item such as gold, thereby transferring value to another party and/or offsetting debt owed.
CTR—Currency Transaction Report
Financial institutions are required to file a CTR with FinCEN whenever they process a currency transaction exceeding $10,000. These reports include useful identifying information about the transaction. Once FinCEN receives them, they are input into a BSA reporting database that is available to federal banking regulators and—with restrictions—the law enforcement community.
Delaware corporation
See shell corporation.
DARTT—Data Analysis and Research for Trade Transparency
A computer system designed to analyze anomalies in import and export data. Anomalies are often indicators of illicit activity such as money laundering, smuggling, and trade fraud.
Egmont Group
The international standard-setter for financial intelligence units. An organization created with the explicit purpose of serving as a center to overcome the obstacles preventing the sharing of financial intelligence and other information between member FIUs.
Export incentives
Tax, legal, and/or regulatory payments or allowances that encourage domestic companies to export goods or services.
FATF—Financial Action Task Force
Also known by the French name Groupe d'action financiére sur le blanchiment de capitaux (GAFI), FATF was created by the G-7 leaders in 1989 in order to address increased concerns about money laundering's threat to the international financial system. This intergovernmental policymaking task force was given the mandate of examining money-laundering techniques and trends, reviewing domestic and international actions, and setting the international standard for combating money laundering and terrorism financing. FATF-style regional bodies associated with FATF are found throughout the world.
FATF 40
The FATF-issued international standards for preventing, detecting, and suppressing both money laundering and terrorist financing. Although they are technically just “recommendations,” they carry the force of “mandates for action” throughout much of the international community and financial sector.
Fei-chien
A very old Chinese underground financial system originally designed to pay taxes. Over the centuries it evolved as an underground money and value transfer system. Today, fei-chien, sometimes also known as “flying money,” and other similar indigenous Chinese parallel financial systems are used to fill the needs of both Chinese entrepreneurs and migrants around the world. Skirting official financial restrictions and regulations that impede commercial efficiency, fei-chien facilitates capital flight, tax evasion, the repatriation of profits, and the remittance of wages.
FinCEN—Financial Crimes Enforcement Network
A bureau with the U.S. Department of Treasury, FinCEN is the U.S. financial intelligence unit.
FIU—financial intelligence unit
In many countries, a central national agency responsible for receiving, requesting, analyzing, and/or disseminating disclosures of financial information to the competent authorities, primarily concerning suspected proceeds of crime and the potential financing of terrorism. An FIU's mandate is backed up by national legislation or regulation.
Flying money
Also known as fei-chien, hui kuan, and chiao hui, flying money is an ancient Chinese underground financial and alternative remittance system. See IVTS and fei-chien.
FTZ—free trade zone
Designated geographic areas outside of normal customs areas and procedures. FTZs and similar districts such as special economic zones, enterprise zones, free ports, and export processing zones generally offer duty- and tax-free access and sometimes incorporate a number of other incentives for businesses. They provide a preferential environment for goods and services usually associated with exports.
FSRB—FATF Style Regional Body
These bodies—which are modeled on FATF and are granted certain rights by that organization—serve as regional centers for matters relating to AML/CFT. Their primary purpose is to promote a country's implementation of comprehensive AML/CFT regimes and implement the FATF 40 recommendations.
HS—Harmonized Tariff Schedule
Developed by the World Customs Organization, the HS comprises about 5,000 commodity groups, each identified by a common six-digit code. The HS is supported by well-defined rules to achieve uniform classification. The system is used by more than 200 countries as a basis for their customs tariffs.
Hawala
A centuries-old broker system based on trust, found throughout South Asia, the Middle East Africa, and the Americas. It allows customers and brokers (hawaladars) to transfer money or value without physically moving it, often in areas of the world where banks and other financial institutions have little or no presence. Historically and culturally, trade is often used to settle accounts between hawaladars. Hawala-like systems are used by many different cultures but under different names.
Hawaladar
A broker in a hawala or hawala-type network.
Hundi
In Pakistan and Bangladesh, hundi is the term used to describe hawala.
HSI—Homeland Security Investigations
An investigative arm of the Department of Homeland Security active in combating criminal organizations illegally exploiting America's travel, trade, financial, and immigration systems. HSI is a part of ICE that employs special agents to do investigations. ICE has other divisions.
ICE—Immigration and Customs Enforcement
Part of the Department of Homeland Security, ICE executes its mission through the enforcement of more than 400 federal statutes, and focuses on immigration enforcement, preventing terrorism and combating the illegal movement of people and trade.
INCSR—International Narcotics Control Strategy Report
A congressionally mandated report released annually in March by the U.S. State Department Bureau of International Narcotics and Law Enforcement Affairs. Volume I describes international narcotics production, and Volume II describes money laundering and related financial crimes in countries around the world.
IVTS—informal value transfer systems
Sometimes known as parallel banking, underground banking, or alternative remittance systems, IVTS refers to any system, mechanism, or network that transfers money for the purpose of making an equivalent amount of funds payable to a third party in another geographic location, whether or not in the same form. The transfers often take place outside of conventional banking systems and often use trade-based value transfer systems to settle accounts between brokers.
Integration
This is the last stage of the money-laundering process. The laundered money is introduced into the economy so that it appears to be normal business earnings, making it very difficult for law enforcement to detect. Some methods of integration include real estate purchases, buying luxury vehicles, investing in the stock market, and investment in trade goods. See also placement and layering.
IRS/CI—Internal Revenue Service/Criminal Investigations
This U.S. law enforcement agency investigates potential criminal violations of the Internal Revenue Code, Bank Secrecy Act, and related financial crimes.
KYC—know your customer
KYC is the process of a bank or business knowing the true identity and activity of a client or customer. See CDD.
Layering
This is the second stage of the money laundering process. The purpose of this stage is to make it more difficult for law enforcement to detect or follow the trail of illegal proceeds. Methods include converting cash into monetary instruments and moving money between bank accounts. See also integration and placement.
MSB—money services business
Any individual or business that engages in accepting and transmitting funds by any means through a financial agency or institution. All informal financial operators in the United States, including hawaladars, are legally categorized as MSBs. Examples include currency dealers, check cashers, and issuers of travelers' checks, money orders, or stored value.
Overinvoicing
When money launderers and those involved with value transfer, trade fraud, and illicit finance misrepresent goods or services on an invoice by indicating that they cost more than what they are actually worth. This allows one party in the illicit transaction to transfer money to the other under the guise of legitimate trade.
Parallel banking
See IVTS.
Placement
This is the first stage of the money-laundering process. Illicit money is disguised or misrepresented, then placed into circulation through financial institutions, casinos, shops, and other businesses, both local and abroad. A variety of methods can be used for this purpose including currency smuggling, bank complicity, currency exchanges, securities brokers, blending of funds, asset purchase, and so forth. See also integration and layering.
Remittance code
In underground money and value transfers such as hawala and fei-chien, brokers sometimes provide the customer with a code when they receive the money to be remitted. The customer in turn communicates this code to the intended recipient of the money. When the money is actually delivered, the recipient presents the code to the courier or partner hawaladar to complete the transaction.
SAR/STR—Suspicious Activity Report/Suspicious Transaction Report
If a financial institution suspects or has reasonable grounds to suspect that the funds involved in a given transaction derive from criminal or terrorist activity, it is obligated to file a report with its national FIU containing key information about the transaction. In the United States, SAR is the most common term for such a report, though STR is used in many other jurisdictions.
Service-based laundering
Instead of laundering money or transferring value through trade goods, services are used. Similar to TBML, service-based laundering revolves around invoice fraud and manipulation.
Shell company
An incorporated company with no significant operations, established with the sole purpose of holding or transferring funds, often for money-laundering purposes. As the name implies, shell companies have only a name, address, and bank accounts; clever money launderers often attempt to make them look more like real businesses by maintaining fake financial records and other elements. Generally, there is a lack of beneficial ownership information.
Smurfing/structuring
A money-laundering technique that involves splitting a large bank deposit into smaller deposits to evade the U.S. government's CTR and SAR requirements for financial institutions.
Task force
In the United States, a task force is a collaborative effort between federal, state, and local law enforcement designed to target a particular criminal activity, and often in a particular geographical area. Resources, expertise, and jurisdictions are combined. The task force has proven to be an effective way to combat crime. There have also been international law enforcement task forces. The FATF is an international policymaking task force. See FATF.
TBML—trade-based money laundering
The process of disguising the proceeds of crime and moving value via trade transactions in an attempt to legitimize their illicit origin.
Trade diversion
In an international trade situation, a business or broker that offers a lower-cost product for importation into a particular country tends to create a trade diversion away from another importer or local producers whose prices are higher for a similar product.
Transfer pricing
In the context of TBML, transfer pricing is what subsidiaries of the same multinational charge each other for goods and services. It is generally done to shift tax liability to a tax-free or low-tax haven.
Tri-Border Area
The frontier junction of Paraguay, Argentina, and Brazil. This area is known for its illicit activity, including TBML, terrorism financing, customs fraud, drug smuggling, intellectual property rights violations, and tax evasion. The geography of the region makes it very difficult to monitor, facilitating and promoting organized crime and related activities.
TTU—Trade Transparency Unit
TTUs examine trade between countries by comparing, for example, the export records from Country A and the corresponding import records from Country B. Allowing for some recognized variables, the data should match. Any wide discrepancies could be indicative of trade fraud (including TBML). Anomalies could also be the back door to underground remittance and informal value transfer systems that are based on trade such as hawala. The first TTU was established in the United States and is currently directed by Homeland Security Investigations. TTUs have since been established around the world.
Underground banking
See IVTS.
Underinvoicing
When money launderers and those involved with value transfer, trade fraud, and illicit finance misrepresent goods or services on an invoice by indicating that they cost less than what they are actually worth. This allows the traders to settle debts between each other in the form of goods or services.
VAT—value added tax
A type of consumption tax by which the value of an article is increased at each stage of its production or distribution.
WCO or World Customs Organization
Esablished in 1952 as the Customs Co-operation Council (CCC), the WCO is an independent intergovernmental body whose mission is to enhance the effectiveness and efficiency of 180 Customs administrations across the globe that collectively process approximately 98 percent of world trade.
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