26th February 2020
AML in the Insurance Sector
in the Insurance Sector
With around 62% of firms reporting exposure to financial crime, money laundering in the insurance sector is a growing global problem. Life insurance firms are at particular risk of money laundering because of the massive flows of funds into and out of their businesses: most life insurance firms offer highly flexible policies and investment products that offer opportunities for customers to deposit and subsequently withdraw large amounts of cash with a relatively minor reduction in value.
Accordingly, governments and international authorities implement a range of anti-money laundering life insurance regulations and issue life insurance sanctions lists. With compliance penalties including fines and prison terms, life insurance firms should ensure they understand their obligations and how to implement them as part of their AML policy.
Life insurance products and mechanisms that are vulnerable to money laundering include:
- Single premium policies: Policies that allow money launderers to offload large amounts of money in a single transaction.
- Annuity policies or high regular premium savings: After paying premiums with criminal funds, money launderers can receive legitimate income from annuity policies or premium savings products.
- Cooling-off periods: Money launderers can request refunds of premiums during a cooling-off period or can deliberately overpay premiums to trigger a refund.
- Policy surrender: Money launderers can surrender their policies at a loss to regain their deposited money.
- Top-ups: After paying a small initial premium in order to avoid regulatory attention, money launderers can top up their policy payments to offload more criminal funds.
- Transferring ownership: Customers can purchase life insurance policies and transfer ownership to a criminal third party who subsequently withdraws the money.
- Policy loans: After building up its value with premium payments, money launderers can take out loans from their life insurance policy using its cash value as collateral. Policy loans do not involve stringent AML checks and do not have to be repaid: the value of the loan and interest will be deducted from the death benefit.
- Collateral: Single premium policies can be used as collateral for bank loans. Money launderers can surrender their policies to repay their loans.
- Secondary life market: Instead of surrendering their policy, customers in poor health can sell their policy to a criminal third party. Insurers must then identify the new policy owner.
Most financial authorities put in place risk-based transaction monitoring requirements for insurance companies within their jurisdictions. In the United States, the Bank Secrecy Act (BSA) sets out a range of “covered products” to which transaction monitoring requirements apply:
- Permanent life insurance policies (excluding group life insurance policies)
- Annuity contracts (excluding group annuity contracts)
- Any insurance product with cash value or investment features
Suspicious Activity Reports: Under the BSA, insurance firms must submit suspicious activity reports (SARs) to the Financial Crimes Enforcement Network (FinCEN) when they detect suspicious transactions connected to one of the covered products. FinCEN issues a SAR form specifically for insurance companies: when completing the form, insurers must obtain client information from a range of sources, including insurance agents and brokers.
FinCEN has set a $5,000 threshold for transactions that should be classified as suspicious and merit SAR submission. Insurers should also consider a range of red flags that could indicate potential money laundering or terrorism financing activities. Those transaction red flags include:
- The purchase of an insurance product that does not reflect a customer’s needs.
- The early surrender of an insurance product at a cost to the customer.
- The surrender of an insurance product with the refund directed to a third party.
- No concern for the investment performance of a purchased insurance product and significant concern for its early surrender terms.
- Purchases using unusual payment methods, such as cash or cash equivalents, or with monetary instruments in structured amounts.
- Customer reluctance to provide identifying information when purchasing an insurance product.
- Customers borrowing the maximum amount available from their insurance product shortly after purchase.
Financial Action Task Force: The intergovernmental Financial Action Task Force (FATF) sets out anti-money laundering insurance industry guidance to be implemented within its member states (as a member state, the US enacts FATF requirements in the BSA). The FATF works in partnership with private sector insurance companies to ensure that its regulations are effective and reflect current industry expertise.
Asia-Pacific: The risk posed by life insurance products is also reflected by financial regulators in APAC. Like other jurisdictions, insurance industry regulations in APAC are risk-based and entail a range of transaction monitoring requirements. In Singapore, for example, the Monetary Authority of Singapore (MAS) includes specific requirements for insurers in Notice 314 on the Prevention of Money Laundering and Countering the Financing of Terrorism. Insurance companies must comply with targeted financial sanctions that are imposed on customers, entities and individuals by international and governmental authorities. In practice, this means that insurance firms are restricted or prohibited from selling life insurance products to customers that appear on official sanctions lists.
Accordingly, insurance firms must implement sanctions screening measures as part of their AML programs to identify customers that appear on those lists. Where customers (policyholders or beneficiaries) appear on sanctions lists, insurance firms must take steps to block transactions or freeze assets and report to the relevant authorities.
Since many international authorities share the same AML/CFT objectives, there may be overlap between various sanctions lists. The US, for example, implements the Office of Foreign Assets Control (OFAC) sanctions list, along with the United Nations Security Council sanctions list.
Key points for insurers to consider for their sanctions compliance policy include:
- Risk-based: Firms must select sanctions watchlists that align with the risk presented by their customers and the jurisdictions in which they operate.
- Ongoing screening: Firms must ensure that their sanctions program screens customers on an ongoing basis to accommodate changes in risk profiles.
- Confirmation process: When a customer is matched to a sanctions list, firms should have a process in place to confirm that customer’s identity and inclusion on the list.
- Error detection: Sanctions programs should have fail-safe measures to catch employee errors or even deliberate attempts to circumvent the screening process.
In addition to implementing suitable transaction monitoring measures to prevent their life insurance products from being used for criminal purposes, insurers should also ensure their AML/CFT programs include suitable customer due diligence (CDD) measures to verify the identities of their customers. CDD is a critical component of the sanctions screening process since it allows insurers to establish that customers are being truthful about their identities and to subsequently find them on sanctions lists.
Given the vast amount of information involved in transaction monitoring and sanctions screening, many insurers choose to automate their AML/CFT programs with smart technology. Automated AML/CFT is an opportunity to enhance the speed and accuracy of monitoring and screening processes, reduce potential human error and, ultimately, avoid costly compliance penalties.