Ethics and Compliance Terminology

In this article we are going to explore what are the most popular terms in ethics and compliance fields. This can be a great source of information for compliance training, communications or just familiarizing yourself with the major definitions in compliance.

Corruption – the most common definition corruption is the one used by international anti-corruption organization, Transparency International. It defines corruption as “the abuse of entrusted power for private gain”.

When it comes to corruption it is critical to remember a few things:

(i) The crime of corruption works both ways – offering / giving / promising / authorizing a bribe (a giver side) as well as receiving/accepting/authorizing acceptance of a bribe (a receiver side).

(ii) In most countries, both public and private (e.g. bribing a private company personnel) corruption is prohibited.

(iii) Promising or agreeing to provide a bribe is already a completed bribery crime.

Compliance – is basically a set of rules, processes, practices that a company implements to ensure that its business is conducted in line with applicable laws and regulations. Most often when you hear about compliance in corporate context it can be one of the following:

But it can also be tax compliance, environment compliance, HSE compliance, etc.

AML – anti-money laundering. The largest field of compliance aimed to identify and prevent laundering of money by criminal groups and Government officials. As you may or may not know, when criminal groups earn money, they cannot immediately start using them (e.g. buying property). This is doing that will leave an audit trail – will make it very easy for law enforcement agencies to investigate this.

For this reason, criminal groups are commonly engaged in laundering money which happens in 3 steps: placement (putting money into a legitimate financial system – for example such money can be provided for a placement to a night club or car washing company that can always say they earned this money legitimately), layering (transferring the money between several accounts/entities/countries), and integration (using the money to buy real estate, luxury cars, etc)

This area is generally most applicable to financial institutions (FUs) such as banks or investment companies as well as designated non-financial businesses such as insurance companies.

ABAC or ABC – anti-bribery & anti-corruption compliance. The area of compliance aimed at identifying, preventing and managing corruption risks. Usually this is done by establishing a series of compliance controls at company’s areas where corruption is most possible: providing / accepting gifts and hospitality, obtaining Government permits and licenses, participating in tenders, selecting suppliers, etc.

US FCPA – United States Foreign Corrupt Practices Act. A major anti-corruption law prohibiting companies and individuals from paying bribes to Government Officials. This law has a very broad extraterritorial application meaning that it can be applicable even to people and companies outside the US in case it meets certain criteria (i.e. is related to the US economy).

UKBA – United Kingdom Bribery Act. UK anti-corruption law. Many people ask what the main differences between US FCPA vs UK Bribery Act are. First – the FCPA only applies to cases of bribing Government Officials, while the UK Bribery Act also applies to cases of bribing private companies’ employees. Another important distinction – facilitation payments. While they are not prohibited by the FCPA, they are prohibited by the UK Bribery Act.

Facilitation Payments – these are generally small non-official payments made to low-level Government Officials with the goal to speed up the Government Process. Most often it’s about getting visas, police protection, connecting companies to electricity lines, getting some small permits.

STR – Suspicious Transactions Report. This is a report that banks and other financial companies are required to file to the Governments in case they identify any suspicious activity such as money laundering or other financial crimes. For example, imagine a bank client has a salary of USD 1,000 per month and then one day he starts opening everyday bank deposits of USD 10,000. This would trigger the bank to review this situation and file the Suspicious Transactions Report.

KYC – Know Your Customer. This is the process that banks and financial institutions (as well as some non-financial companies too) have to follow to check their clients. This term is very closely related to money laundering. It includes checking the person’s identity information, verifying the person’s source of funds, checking whether the person is a Government Official or is on any investigation lists (like Interpol), or is a citizen of some high-risk countries, etc. In case any “matches” are identified (for example the KYC system indicates that a person with the same name is a Government Official), the bank has to launch the so called – enhanced due diligence. This usually involves requesting more documents and information from the client, conducting some additional research, or ordering third party research reports.

EDD – enhanced due diligence. As mentioned in the KYC definition, it is the process of conducting additional checks in relation to a client. There are a lot of potential reasons why it can be launched, for example: (i) unclear source of funds, (ii) Government Official status, (iii) adverse media in relation to the customer (e.g. allegations of corruption, money laundering, etc), (iv) individual / company with the same name is on a sanctions list, (v) individual / company is from a sanctioned country, etc.

UBO – Ultimate Beneficiary Owner. Criminal groups often use very complex ownership structure in their businesses and register companies for nominal people (not real owners). This requires banks and financial companies to be extremely vigilant in identifying who are the actual owners (ultimate beneficiary owners) of the company. For example, if a company wants to open a bank account and their shareholders are also shareholders in 500 other companies or the shareholders are completely unrelated to this business, this would definitely provoke the bank to suspect that the shareholders are not the real ones.

PEP – politically exposed person. Usually a Government Official (either current or former) their family members and close associates (friends). Such individuals are generally considered as high-risk customers by banks and financial companies and are subject to enhanced due diligence. The reason – the banks need to make sure that the source of funds such individuals have are legitimate rather than from corruption or other illegal activities.

OFAC – US Office of Foreign Assets Control. It is a part of the US Government responsible for enforcing sanctions laws. OFAC maintains the so called SDN list (specifically designated nationals list) – list of individuals or companies the US people/companies are prohibited from doing business with.

CTR – Currency Transaction Report. It is a report that banks and other financial companies are required to submit to Government Authorities if a customer makes a transaction exceeding a certain amount (e.g. USD 10,000).

MLRO – Money Laundering Reporting Officer. The MLRO is an employee of a bank or another financial company who is responsible for reviewing and submitting suspicious transactions reports to Government Authorities. This includes collecting and reviewing the STR first internally, assessing whether the suspicions in the reports are justified, and filing the reports to the Financial Intelligence Units of Governments.

Sanctions – official restrictive measures imposed by Governments or international organizations (e.g. UN, World Bank) against individuals, companies, countries, territories, economic sectors. Usually they include – asset freezes, travel bans, trade restrictions or embargo, prohibitions of doing business, etc. Banks and financial institutions are required to screen and monitor whether their customers are falling under the sanctions lists.

Export Controls – are laws and regulations aimed at restricting the export of certain goods, services, technologies, and information. Generally, it applies to those goods/technologies/information that can fall under military or dual-use (e.g. goods that can be used both at civil and military).