Politically exposed persons (PEPs) represent an increased AML/CFT risk because their political roles often give them access to significant government funds or make them targets for criminals seeking to leverage their influential positions to launder money. Since the purchase of life insurance products has become a popular money laundering methodology in jurisdictions around the world, PEPs may also seek to exploit this industry as a way to transform illegally acquired funds.
With that in mind, insurance firms must pay special attention to the risks posed by PEP-status customers. AML/CFT teams should be able to detect PEPs that purchase their life insurance products, and when they are using them to launder funds, by putting appropriate screening and monitoring measures in place.
Life insurance products are popular among money launders because they allow for the transformation of large amounts of money quickly and can often be acquired without the stricter customer due diligence (CDD) requirements applied in other financial services contexts. Most insurance companies build flexibility into their life insurance products, allowing customers to withdraw their funds as cash shortly after purchase without a significant loss of value.
The elevated public profiles of PEPs may prohibit more conventional approaches to money laundering that normally trigger strict customer due diligence measures. Since life insurance products confer a degree of anonymity that other criminal methodologies do not, they often represent a more attractive target for PEPs seeking to launder money.
The characteristics of certain life insurance products are particularly useful for PEPs. These include:
- Ownership transfer: Some life insurance products allow purchasers to transfer their ownership. Customers may purchase a policy on behalf of a PEP and, at a later date, transfer ownership to a PEP, who then surrenders the policy for cash.
- Loans: It is possible to take out loans from life insurance policies once their value has risen, using their cash value as collateral. Policy loans do not have to be repaid and do not involve detailed AML measures.
- Top-ups: PEPs may purchase products with small initial premiums without triggering AML oversight. Those products can be topped up at a later date with illegal funds.
- Secondary markets: Policyholders may be incentivized to sell their life insurance policies on secondary markets. This means that PEPs may purchase their products with illegitimate funds while avoiding CDD.
Insurance companies must ensure that their AML/CFT programs are able to screen their customers with enough accuracy to identify PEPs and ensure they are not attempting to launder money using their life insurance product(s). PEP screening is particularly challenging for insurance companies because PEPs may be able to use their positions to conceal not only their identities but the source of their wealth. That challenge may be complicated further by customers from foreign countries that may be able to better evade the AML/CFT measures that a firm uses to detect domestic PEPs.
FATF Guidance: The Financial Action Task Force sets out guidance on PEP life insurance screening requirements in its AML/CFT recommendations. FATF Recommendation 12 requires financial institutions to take “reasonable measures” to establish whether the beneficiaries or (where relevant) the beneficial owners of life insurance policies are PEPs. This process should take place at any point during the lifetime of the insurance product but must happen, at the latest, at the point at which the product pays out to its beneficiary.
FATF’s recommendation to conduct risk-based AML/CFT means that the PEP screening process should reflect the risk presented by individual customers: enhanced due diligence (EDD) should be applied to higher-risk customers, while simplified due diligence may be appropriate for lower-risk customers. If a firm finds that a policyholder is not a PEP but its beneficiary is, the relationship between the two parties should be subject to enhanced scrutiny.
Many firms choose to declassify their customers as PEPs after they leave office, given that certain risk criteria have been satisfied. With this in mind, life insurance products are particularly advantageous to PEPs since they often represent a long-term investment that can continue to be an effective money laundering methodology after the individual leaves their political role and is no longer subject to the same AML scrutiny.
Given the ongoing risk presented by life insurance products, firms must ensure their PEP declassification process is applied appropriately and accurately reflects the level of risk that individual customers present. Practically, this means that insurance companies should apply a high level of scrutiny on PEPs during declassification and ensure enhanced due diligence is performed where necessary.
Any approach to PEP screening insurance products should factor in relatives and close associates (RCA) of PEPs who must be subject to the same AML measures as a result of their professional or social proximity to the at-risk individuals. In order to avoid AML/CFT scrutiny, PEPs may seek to use RCAs as part of money laundering schemes, directing them to purchase life insurance products on their behalf before transferring ownership or simply to use illegitimate funds acquired by a PEP relative to purchase insurance products directly.
Accordingly, insurance companies should ensure that their PEP screening process, including customer due diligence and enhanced due diligence measures, extends to RCAs and is sensitive enough to capture any peripheral involvement in money laundering via their life insurance products, whether by proxy or by transfer of ownership.