Sometimes the world of AML can feel like a jargon train, or you’ve just heard 5 different acronyms in one sentence and you’re not quite sure what they mean. We’re here to help.
Compliance is serious stuff, especially if you get it wrong, but that doesn’t mean it has to be hard to understand or full of legalese.
As a regulated industry, Anti-Money Laundering (AML) has its fair share of technical jargon and acronyms. As busy accountants, you don’t have time to become an AML expert, and there certainly isn’t time to understand every single acronym out there – understanding them, however, can help you to navigate the complex landscape of AML compliance (because there are a LOT). In this article, we will explore the most common AML acronyms and provide a brief explanation of each of them, so that next time you find yourself faced with yet another acronym, you know exactly what it means.
Consider this a refresher on all acronyms AML-related or some light AML training.
Let’s get into unpacking the acronym soup of AML 🍜.
1. AML: Anti-Money Laundering
Let’s finish with an easy one, AML. We should all be familiar with this one, and the fact that you are here suggests that AML compliance is something that’s on your mind. Anti-Money Laundering encompasses a comprehensive framework of laws and regulations designed to combat money laundering and the financing of terrorism. In the UK the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017, as you may know them) set out the requirements of what regulated businesses (that means accountants) must implement to detect and deter money laundering activities. These measures are crucial to maintaining the integrity of the financial system and preventing illicit funds from being used for illegal purposes.
2. CDD: Customer Due Diligence
Customer Due Diligence (CDD) is an essential process that accountants (and all regulated businesses, such as Law Firms) must undertake before establishing a business relationship with a customer. It involves identifying information about the potential customer, which might include the persons with significant control and the entity's structure, we also shouldn’t forget that CDD is not one-and-done and only for potential new clients, it’s equally important, if not more important to do this on an ongoing basis. It also involves verifying the customer's identity, assessing the nature and purpose of the relationship, and evaluating the potential money laundering or terrorist financing risks associated with the customer, for example, what type of industry they operate in. Carrying out CDD essentially helps accountants understand who their customers are and the associated risks ensuring they are not unwittingly working with clients facilitating illicit activities.
3. KYC: Know Your Customer
Know Your Customer (KYC) or Know Your Client (whatever you might prefer) is a term often used interchangeably with CDD, but it’s important to understand the nuance given they are often combined. The KYC component is really all about understanding who your client is, and if they are who they say they are. It’s about verifying that the business or individual you are working with is a genuine one that exists as a legal entity, not a front for illicit or criminal activity. The key components of KYC that you need to carry out include, verifying the client's identity through government-issued identification documents and also gathering information on the client's business structure, ownership and activities. The CDD process we’ve discussed above is essentially a follow-up from this ‘initial’ information gathering, it’s the part where you assess and make a risk assessment based on all the information you’ve gathered in an attempt to understand who you’re working with. It’s important to note this doesn’t just happen during onboarding, you should continuously be learning about, and building a more complete picture of your clients.
4. PEP: Politically Exposed Person
A Politically Exposed Person (PEP) is an individual who holds a prominent public position or has held such a position in the past. PEPs are considered higher-risk customers due to the potential for abuse of their positions for illicit purposes. Businesses must subject PEPs to enhanced due diligence to mitigate the risks associated with these individuals. By conducting thorough checks on PEPs, businesses can ensure compliance with AML regulations and protect themselves from potential reputational and financial risks.
5. FWRA: Firm-Wide Risk Assessment
A well-conducted (and documented) FWRA serves as the foundation for an effective AML program. It helps your firm allocate resources appropriately, prioritise risk mitigation efforts, and ensure compliance with AML regulations. Failure to conduct a thorough and ongoing risk assessment can result in regulatory penalties and reputational damage. A Firm-Wide Risk Assessment should include information about clients, products, services, geographic locations, and delivery channels categorised by risk level – this helps you to develop those risk mitigation strategies and makes sure that your firm has a good understanding of risk across your whole client base – from a regulatory perspective this is a critical component of your AML compliance, but something that isn’t always readily available.
6. PSC: Person With Significant Control
PSC stands for Persons with Significant Control. PSC refers to individuals or entities that hold significant influence or control over a company. Under the Companies Act 2006 and related regulations, companies are required to identify and maintain a register of their PSCs, disclosing information about their ownership and control. PSCs typically include individuals or entities holding more than 25% of a company's shares, voting rights, or having the ability to appoint or remove the majority of the board. From an AML compliance perspective, when you’re dealing with a company it’s critical to carry out a thorough risk assessment on each individual or entity that is listed as a PSC – this is a key part of understanding the people and entities involved, and it helps to deter the misuse of shell companies to help maintain integrity in the financial system.
7. MLR: Money Laundering Regulations
The Money Laundering Regulations (MLR) are a set of regulations in the UK that implement the EU's AML directives. The MLR details the specific AML requirements for various regulated sectors, of which accounting is one of those, including customer due diligence, record-keeping, and reporting obligations.
8. EDD: Enhanced Due Diligence
Enhanced Due Diligence (EDD) is an advanced level of due diligence that businesses must perform for high-risk customers. It involves gathering additional information about the customer, such as their source of wealth or funds, to assess the potential risks associated with the relationship. EDD is particularly important when dealing with customers who are politically exposed persons (PEPs), foreign PEPs, or trusts. By conducting EDD, businesses can better understand the risks involved and implement appropriate risk mitigation measures.
9. CFT: Countering the Financing of Terrorism
Countering the Financing of Terrorism (CFT) is an integral part of AML regulations. It focuses on preventing the use of financial systems for funding terrorist activities. Whereas AML regulations are focused on preventing money laundering, CFT measures are focused on preventing funding terrorism, or terrorist activities. CFT measures require businesses to have policies, procedures, and controls in place to identify and report any suspicious transactions that may be linked to terrorism financing. By detecting and deterring terrorism financing, CFT measures contribute to maintaining national security and global stability.
10. FIU: Financial Intelligence Unit
The Financial Intelligence Unit (FIU) is a specialised unit within the law enforcement or regulatory agency responsible for collecting, analysing, and disseminating financial intelligence related to money laundering and terrorism financing. In the UK, the FIU plays a critical role in receiving and analysing Suspicious Activity Reports (SARs) submitted by reporting entities. The FIU's analysis helps identify patterns and trends in money laundering and terrorism financing activities, enabling law enforcement agencies to take appropriate actions.
11. SAR: Suspicious Activity Report
A Suspicious Activity Report (SAR) is a report submitted by businesses and individuals to the FIU when they encounter transactions or activities that raise suspicions of money laundering or terrorism financing. SARs are a vital tool in combating financial crimes, as they provide valuable information to law enforcement agencies and help identify potential threats. Reporting entities have a legal obligation to file SARs whenever they have reasonable grounds to suspect illicit activities.
12. LCT: Large Cash Transactions
Large Cash Transactions (LCT) refer to transactions involving a significant amount of physical cash that meets or exceeds a specified threshold. In the UK, transactions exceeding £10,000 in physical currency are considered LCTs. Reporting entities must report LCTs to the FIU as part of their AML obligations. By monitoring and reporting LCTs, businesses contribute to the detection and prevention of money laundering and other financial crimes.
13. MLRO: Money Laundering Reporting Officer
The Money Laundering Reporting Officer (MLRO) is another critical role within all regulated industries, which includes us as accountants. The MLRO is responsible for receiving, reviewing, and escalating Suspicious Activity Reports (SARs) or Suspicious Transaction Reports (STRs) to the FIU. They act as the point of contact between the business and the regulatory authorities regarding AML matters.
Depending on the size of your accounting firm, the responsibility will likely fall on a different person – in small firms it’s not uncommon for one of the directors to be wearing the MLRO ‘hat’ (after all someone has to), whereas in larger firms will typically have a dedicated AML team who take part of everything concerning AML compliance for the firm.
14. FATF: Financial Action Task Force
The Financial Action Task Force (FATF) is an intergovernmental organisation that sets international standards and promotes policies to combat money laundering and terrorist financing. The FATF's recommendations serve as a global reference for AML practices. For us as accountants, the guidelines set out by the FATF take a risk-based approach and help us understand AML obligations, how to conduct risk assessments, and how to implement effective AML measures, ensuring compliance with international best practices.
15. POCA: Proceeds of Crime Act
Last but not least, the Proceeds of Crime Act (POCA) is a key piece of legislation in the UK's AML framework. POCA provides the legal basis for identifying and confiscating the proceeds of criminal activities, including money laundering. The act also outlines the obligations of businesses to report suspicious activities and cooperate with law enforcement agencies.
The truth is there are many more acronyms in the world of AML. Globally we’d hazard a guess that there are several hundreds of associated acronyms or abbreviations, that encompass terms, organisations, regulations and concepts. Whilst we’ve not covered everything in this article we’ve aimed to cover the ones that we more often than not see people getting confused about, and ones we’ve often been asked about.
If something is missing from our top 15 list that you’d like to see added, then you can email us and let us know what you’d like to see added, we always welcome suggestions and updates from our community.
And, of course, we’ve been working hard to train our very own AMLia, so if you need an answer straight away, then our AML chatbot is a great place to start (they’re pretty smart, but not perfect 🤖).
(NB: This article doesn't constitute legal advice and is intended for general informational purposes only. Always consult with a legal expert or compliance consultant for guidance specific to your firm.)