Red Flag
A warning signal that should bring attention to a potentially suspicious situation, transaction or activity.
Regulatory Agency
A government entity responsible for supervising and overseeing a category of domestic institutions. The agency generally has authority to issue regulations, to conduct examinations, to impose fines and penalties, to curtail activities and, sometimes, to terminate charters of institutions under its jurisdiction. Most financial regulatory agencies play a major role in preventing and detecting money laundering and other financial crimes.
Remittance Services
Also referred to as giro houses or casas de cambio, remittance services are businesses that receive cash or other funds that they transfer through the banking system to another account. The account is held by an associated company in a foreign jurisdiction where the money is made available to the ultimate recipient.
Report on the Observance of Standards and Codes (ROSC)
A report used by the IMF and the World Bank that summarizes the extent to which countries observe internationally recognized standards and codes for fiscal and monetary stability. The standards examine monetary and financial policy transparency, fiscal transparency, banking supervision, securities, insurance, payments systems, corporate governance, accounting, auditing and insolvency and creditor rights. Since 2002, they have also included examination of anti-money laundering and terrorist financing standards. ROSCs summarizing countries’ observance of these standards are prepared and published at the request of the member country. The results are used in consideration of IMF and World Bank loans and for the private sector (including rating agencies) for risk assessment. ROSCs are also useful in determining a country’s prospective risks associated with money laundering. See http://www.imf.org/external/np/rosc/rosc.asp?sort=date.
Reputational Risk
The potential that adverse publicity regarding a financial institution’s business practices and associations, whether accurate or not, will cause a loss of confidence in the integrity of the institution. Banks and other financial institutions are especially vulnerable to reputational risk because they can become a vehicle for, or a victim of, illegal activities perpetrated by customers. Such institutions may protect themselves through Know Your Customer and Know Your Employee programs.
Respondent Bank
A bank for which another financial institution establishes, maintains, administers or manages a correspondent account.
Retrospective Due Diligence
Examining the identity and activity of existing customers and their accounts to confirm their legitimacy. The Cayman Islands and the Bahamas, when adopting their anti-money laundering frameworks, required financial institutions to perform due diligence on existing customers. The U.K. considered the requirement, but did not implement it, citing the heavy burden on businesses in its financial sector. The U.S. does not require retrospective due diligence.
Risk-Based Approach
The assessment of the varying risks associated with different types of businesses, clients, accounts and transactions in order to maximize the effectiveness of an anti-money laundering program.
Risk Matrix
Document or chart that allows financial institutions to assess the money laundering risk of a business or customer relationship. A risk matrix sets out critical elements or parameters of risk—such as the country of origin or the type of anticipated transactions— so that institutions can calculate whether a potential client presents a low, medium or high level of money laundering risk. Later, the matrix allows the institution to make informed decisions on the frequency of transaction monitoring of particular accounts or customers.