With the often bewildering array of terms that crop up in the world of compliance and wealth management, we have put together a glossary for readers' benefit.

From time to time, bankers outside the compliance sphere will encounter various terms that they might find mystifying. The following are some of the most frequently used terms in the anti-money-laundering sphere. Any relationship manager or bank executive would do well to familiarise himself with them.

Fourth EU Money Laundering Directive - this is a piece of European Union legislation that has yet to be finalised and is evolving all the time, in the usual EU fashion. It is in response to changes made to the Financial Action Task Force's "40 recommendations" in February 2012. The 25-man FATF is the world's anti-money-laundering standard-setter.

Among the reforms-to-be are registers of beneficial ownership for companies and some trusts all over the EU, and a requirement for all EU states - not just the UK, Gibraltar, the Crown Dependencies and Ireland - to force their financial institutions to take a risk-based approach to compliance.

AML - anti-money-laundering. A ubiquitous abbreviation that many compliance people mistakenly use as a noun.

Beneficial owner - The natural person who ultimately owns or controls the customer-entity, which could be a corporation, a trust, a foundation, a special purpose vehicle, a protected cell company or anything else. An entity may have more than one beneficial owner, and in more than one sense.

CDD or customer due diligence - a term invented by the Basle Committee on Banking Supervision to refer to the range of measures used by "authorised persons" or other licensed financial service practitioners to comply with the law in respect of:

-- identifying and verifying the identities of their customers and/or their beneficial owners;

-- obtaining information on the purpose and intended nature of the business relationship;

-- conducting "ongoing monitoring" (a grotesque but ubiquitous phrase) of the business relationship, which among other things entails scrutinising transactions undertaken throughout the course of that relationship to ensure that those transactions are consistent with the institution’s knowledge of the customer, his/her or its business and risk profile, including, where necessary, the source of funds.

CDD is basically Euro-speak for the American phrase KYC or "know your customer".

CFT or countering the financing of terrorism - another grotesque phrase that cannot be avoided, as in “I'm doing CFT this morning”. The average money-laundering reporting officer is almost bound to treat any literate person he encounters as suspicious.

Correspondent bank - a bank that provides a current or other liability account and related services to another institution to meet its cash, clearing, liquidity management and short-term borrowing or investment needs.

Sanctions - financial sanctions or restrictive measures vary from prohibiting the transfer of funds to a disgraced country and freezing the assets of a government, the corporate entities and residents of the target country to targeted asset freezes that impound the assets of individuals and entities.

Financial Action Task Force - this is a 25-man intergovernmental body in Paris that develops and promotes money-laundering and terrorist finance standards worldwide.

Fuzzy matching – this relates to any process that identifies inexact matches. Fuzzy matching software identifies possible matches where data – whether in official lists or in firms’ internal records – is misspelled, incomplete or missing. They are often tolerant of multinational and linguistic differences in spelling, formats for dates of birth, and similar data. A sophisticated system is bound to have a variety of settings, allowing the compliance officer to make the matching process more or less fuzzy at will.

MI or management information - any information about the way a business works. It is often lodged in people's heads, their computers, memos on desks and elsewhere.

MLRO or money laundering reporting officer - this is the banker responsible for ensuring that measures to combat money laundering/terrorist financing within the firm are effective.

MLRO report - an annual report prepared by the MLRO and presented to the board. It analyses and makes recommendations about the operation and effectiveness of a bank’s ML/TF/sanctions systems and controls established to comply with (in the UK) the Money Laundering Regulations 2007 and (in Ireland) the Criminal Justice Act 2010.

Money-laundering – this is the process by which the proceeds of crime are converted into assets whose appearance of legitimate origin is so good as to allow them to be retained permanently.

Ongoing monitoring - see CDD

PEP or politically exposed person - a person who is, or has at any time in the preceding 12 months, been entrusted with a prominent (usually national - this is where the definition is fuzzy) public function. The term PEP only applies to people who reside outside the country where the CDD is being done, although this will change when the Fourth Directive (or other legislation to promulgate the FATF reforms) comes through. Any member of the PEP's nuclear family is also rated as a PEP, which definition rather interestingly leaves out his nephews and nieces.

In most jurisdictions there must be “senior management sign-off” before any relationship with a PEP begins. In the UK this is de rigeur; in Ireland, many bank directors do not bother.

“Reliance” – this is when one regulated bank or other financial firm relies on information gathered by another to skip or shorten the usual onboarding process. In other words, this happens when one firm relies on another to do CDD on the customer, usually retrospectively. This is a loose and unofficial term but universally known.

Respondent bank - receives a current or other liability account and related services from another bank to meet its cash, clearing, liquidity management and short-term borrowing or investment needs.

SCDD or simplified customer due diligence - for certain categories of customer, full CDD is not necessary because the risk that money laundering or terrorist financing might arise from such business is a low one. SCDD does not represent a total exemption as, before it applies, firms have to conduct and keep records of tests to satisfy themselves that the customer or business qualifies. Most national regulators specify the circumstances in which SCDD can take place.

SLA or service level agreement – this is when “reliance” takes place, regulators in many countries, such as the US and Ireland, expect "firm A" to have a contract or at least a non-binding memorandum of understanding with "firm B" beforehand. Firm B could be a software firm or compliance consultancy, but the responsibility for good CDD always lies with the principal. It has become fashionable in some quarters in recent years to refer to this as an SLA.

Source of funds - CDD on the provenance of the funds coming into the bank or institution.

Source of wealth - CDD on the wealth of the individual concerned, most of which the bank or institution may never see. Sometimes it is only possible to interrogate the subject and hope that he is telling the truth. This always happens prior to the approval of a non-resident PEP.

STR or suspicious transaction report – this a report made to the authorities about suspicions of money laundering or terrorist financing. In the UK, an MLRO can go to jail for not making one. In the US, the Bank Secrecy Act 1970 dictates that the compliance officer must report all suspicious activity, not just transactions; in the EU this is not necessary although the British government has been pretending that all activity is reportable. British regulators and police therefore all use the American term "suspicious activity report" or SAR.

One legendary instance (which probably never occurred, even in days of yore) in which there is a difference might happen when a money-launderer enters a bank with a suitcaseful of cash, hears about the extensive CDD questions he has to answer before opening an account, changes his mind and walks out. An American compliance officer is legally obliged to send a report to the Internal Revenue Service's computer in Detroit; a British or European MLRO is not obliged to send the authorities any report at all, although this will not stop British policemen from being less than truthful on the subject.