Money Laundering and Insurance Companies
Insurance companies are especially at risk for individuals who are attempting to launder money because they can structure transactions, enforce appropriate reports, and force employees to collaborate to create the appearance of legitimacy.
Single-premium contracts are one of the most common tools that perpetrators use to take advantage of insurance companies to launder money. These criminals will purchase a single-premium insurance contract with illicit funds, then try to get their money back by submitting fraudulent claims.
Annuity policies and other high premium savings vehicles can also be used as a tool for money laundering. By purchasing the product with illegally acquired funds, they can receive legitimate income once they begin receiving income from the insurance contract.
Cooling-off periods pose another opportunity for money laundering to occur. Individuals can request a refund of premiums paid during this cooling-off period, or they can overpay premiums on purpose to trigger a refund. The same thing occurs when money launderers surrender their policy at a loss so that they can get a refund of the money they deposited.
Top-ups, which is when someone pays a small initial premium to avoid attracting any regulatory attention only to then offload additional payments is another way that criminals can take advantage of the insurance industry to legitimize illegal funds.
Criminals can also launder money through insurance companies by transferring the ownership of insurance policies, taking out policy loans, or selling their life insurance policy to customers in poor health in the illegal third-party market.
As you can see, there is no shortage of avenues for perpetrators to try and commit money laundering through the insurance industry. This is why insurance companies must focus on complying with all AML regulations and implementing proper procedures to prevent these activities from occurring.
AML Regulations in the Insurance Industry
There are several anti-money laundering regulations for insurance companies. This includes knowing your customer requirements, sanctions screenings, transaction monitoring, and appropriate supervision.
Know Your Customer Requirements
All insurance companies are required to establish know your customer procedures so that they can identify the individuals they are doing business with, as well as assess the risk level associated with working with them.
This process involves collecting personal information to verify an individual’s identity. Not only does the insurance company need to collect this identifying information, but they also need to verify that the credentials they received are valid and accurate. Firms must identify individuals, legal entities, and foundations that purchase an insurance product from them, and they should also verify the ultimate beneficiary ownership.
As they collect this information, employees should assess the risk level associated with each customer. Does the purpose of the insurance policy seem suspicious, or is the product that they are purchasing one that is commonly associated with money laundering?
The know your customer process should answer all of these questions who and allow your company to make compliant business decisions.
Alongside the know your customer requirements, insurance companies must also perform sanctions screenings. This means that they have to verify that a potential customer does not appear on a list that shows individuals or other entities that are barred from purchasing certain life insurance products.
Every life insurance firm should have sanctions screening measures incorporated into their AML programs so that they can identify these customers and take steps to block transactions or freeze assets if necessary. Similarly, they may be required to report the attempted purchase of a life insurance policy to the relevant authorities.
There are many sanctions lists across the world, but insurance companies should focus on those that align the most with the risks presented by their specific customers and their jurisdiction. Not only does the screening have to occur during customer onboarding, but there should also be ongoing screening measures that ensure that the firm will become aware of any changes in a customer’s risk profile.
If a potential client matches to a sanctions list, your organization must have a procedure in place to confirm their identity to be sure that they should be on that list. Sanctions programs typically have error detection included to catch employee mistakes or attempts to circumvent the screening process.
Transaction monitoring is another key aspect of AML compliance for insurance companies. Per the Bank Secrecy Act, insurance companies must monitor transactions related to permanent life insurance policies, annuity contracts, and any other insurance Product that accumulates cash value or has investment features.
They must file suspicious activity reports – SARs – to the Financial Crimes Enforcement Network if a suspicious transaction is detected concerning those covered products. The form that they fill out is unique to insurance companies and is different from the one completed by a bank.
The information on the form must contain client information from a wide variety of sources, including insurance brokers and agents.
There is a threshold of $5,000, and the form must be filed if there are red flags such as an insurance product that does not meet a customer’s needs, an early surrender where the customer pays a penalty, or payments or refunds directed to a third party. Other red flags include unusual payment methods and reluctance to provide personal information during the buying process.
To ensure that all of the measures just discussed are properly implemented and enforced, there needs to be adequate supervision within the insurance company. The board of directors is responsible for executing the AML program, as well as hiring an AML compliance officer.
They have to ensure that AML risks are being managed and monitored and that all activities are performed in a compliant manner.
The compliance officer should have expertise relating to anti-money laundering processes and should serve as a resource for the company when designing and implementing their compliance programs.
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