Money laundering has been an increasing problem for the financial sector. In fact, the International Monetary Fund has estimated money laundering to be between 2%-5% of the world’s GDP. In this article, you’ll learn everything that you need to know about anti-money laundering (AML) in the insurance industry!
Table of Contents
- Key Takeaways
- 8 Insurance Products That Are Prone To Insurance Money Laundering Methods
- Anti Money Laundering Life Insurance Regulations
- Complying With Insurance Sanctions
- How Do Insurance Companies Comply With AML/CFT Regulations?
The risks of money laundering are particularly large when it comes to life insurance firms. This is due to massive sums of money flowing in and out of businesses offering (life) insurance products. Large sums of money make it difficult to organize and keep track of the cash trail leading to opportunities for money launders to take advantage of businesses active in the insurance sector.
As a result of this increase in criminal activity within the financial and insurance sector, governments and international authorities have worked to enact a series of anti-money laundering regulations. Insurance firms, in particular, life insurance firms, are facing strong regulations as part of their legal obligations. The penalties for non-compliance with laws and regulation and/or money laundering are serious and include fines and, in some countries, even prison sentences for individuals.
- Money laundering has become a serious issue for life insurance firms.
- Effective Anti Money Laundering (AML) and Counter-Terrorist Financing (CTF) policies need to be implemented.
- Insurance companies must comply with applicable regulations.
- Automation might be a particular support mechanism to efficiently adhere to obligations.
8 Insurance Products That Are Prone To Insurance Money Laundering Methods
The following is a list of money laundering-prone products and mechanisms of life insurance:
- Annuity policies/high regular premium savings: Annuity policies and high regular premium savings are two loopholes that allow criminals to receive a legitimate income after paying the premiums with their illegal funds.
- Refund of Premiums: During a cooling-off period, money launderers will purposefully overpay premiums, forcing insurers to directly reimburse them.
- Single premium policies: These policies allow money launderers to dump large sums of cash through a single transaction (applicable for those insurance companies that are still accepting cash).
- Policy surrender: To regain possession of funds, money launderers can surrender the policy for a penalty.
- Top-ups: Once clients pay an initial premium to avoid drawing unwanted attention, money launderers can ‘top-up’ with additional payments to hide their money. These top-up payments can be one large deposit or a series of smaller ones.
- Policy loans: Once a substantial amount of funds are paid, money launderers can take out loans on their life insurance policies. These loans use the cash amount in the account as collateral. Life insurance policy loans do not always have strict money laundering checks. The loan and interest will then be deducted from the benefits received at the time of death rather than needing to be repaid.
- Transferring ownership: Life insurance policies can be purchased and transferred to a third-party individual. They would then have ownership and be able to withdraw the money as they please.
- Secondary life market: When customers are ill or in poor health, they can sell their life insurance policy to third-party criminals rather than defer their policy. This makes money launderers the new owners of the life insurance policy.
Anti Money Laundering Life Insurance Regulations
Global efforts have been made, and laws and regulations were enacted, to get a better grip on money laundering. These anti-money laundering life insurance regulations are set up to monitor transactions within accounts and regular screenings.
The Bank Secrecy Act (BSA) is a financial regulation used to monitor transactions. Under this act, transaction monitoring is required to be applied to annuity contracts, permanent life insurance policies, and any insurance products with cash value.
In addition to monitoring transactions, the BSA requires firms to submit suspicious activity reports (SARs) when finding suspicious transactions. This form contains sensitive information on the client from multiple sources, including different insurance agents.
Life insurance agencies also need to take into account specific red flags that could indicate money laundering, including:
- Purchasing insurance plans that do not seem to fit the needs of the customer
- Cash purchases
- A reluctance to provide personal information at the time of purchase
- Taking loans at the maximum amount from the insurance soon after purchase
- A lack of concern for the investment returns after purchase
- Early surrender of insurance causing the customer to make a loss
- Refunds directed to third parties after the surrender of the insurance
The Financial Action Task Force (FATF) is a policy-making, intergovernmental body that works to protect against trade-based money laundering. This is done by implementing guidelines for the member states. The guidelines are created by the FATF and the private insurance companies so that the regulations are as relevant and effective as possible.
Complying With Insurance Sanctions
Insurance firms are also oftentimes required to complete screenings as part of their AML programs. In accordance with the laws of particular countries, they might also be required to block any transactions made by the sanctioned individuals and report them to the respective authorities.
Many countries’ authorities have sanctions lists that comprise the names of individuals related to financial crimes, including money laundering and terrorist financing. There is a common, international objective of preventing financial terrorism. Selected elements of effective sanctions compliance programs are:
- Assessing risk by selecting sanctions watchlists to match their customers and area of jurisdiction
- Firms need to continuously screen customers
- A confirmation process to ensure the customer’s identity
- Error detection processes to ensure employee errors are caught
How Do Insurance Companies Comply With AML/CFT Regulations?
Insurance firms must also oftentimes include customer due diligence or CDD in their AML/CFT programs. Customer due diligence ensures the customers are who they say they are. Information from these processes might be further used for transaction monitoring and transaction screening.
Transaction monitoring and transaction screening can be a difficult task given the mass of information. Because of this, many insurance companies opt to use smart technology and artificial intelligence to automate their AML/CFT programs. By using automated programs, sorting through the information for sanction screening and transaction monitoring will be quicker and more accurate than before.
AML laws and regulations are complied with by implementing specific processes in insurance companies around the world to fight against financial terrorism and money laundering. Automation and advanced technologies might be a particular support mechanism to efficiently adhere to obligations.