Retirement Plans Review

Employer sponsored nonqualified retirement plans: payroll deduction plan, deferred compensation, Section 457(b) plan

Qualified retirement plans: funded by before tax dollars, money grow tax deferred, everything taxed at distribution as ordinary income taxes

Traditional IRA

• Qualification - anyone with earned income under age 70.5
• Limits - 100% of earned income, catch up contributions at age 50+, spousal IRA (for spouse with min or no income, must be set up as two separate IRAs, must file a joint tax return)
• Investments by IRA participants may self direct contributions, 6% penalty for excess contribution
• If covered by retirement plan, contribution may or may not be tax deductible, depends on adjusted gross income (AGI).
• Withdrawal of funds: if funded with qualified contribution, the entire amount is taxed, payout allowed between ages 59.5 and 70.5 without penalty
• Pre-59.5 payments subject to ordinary income tax plus 10% penalty, exceptions: death or disability, education or first time home purchase, health insurance premium for the unemployed, medical expenses in excess of defined AGI limits, Rule 72-t (annutize prior to age 59.5)
• Post-70.5 insufficient distribution subject to ordinary income tax plus 50% penalty, MRD by April 1 of the year following the year of turning 70.5
• Rollovers: from one trustee to you to another trustee, initial within 60 days of distribution, once every 12 months
• Transfers: no limit on how often 

Roth IRA

• Limits: 100% of earned income, not to exceed indexed maximum, offset by traditional IRA contribution
• Contributions not deductible
• Earnings accrue tax deferred
• Withdraws are tax free if account held 5 years and owner is at least 59.5
• Prior to age 59.5: contributions are withdrawn tax free, withdrawals of earnings from account held 5 years are tax free in the event of death, disability, first time home purchase up to $10000
• Withdrawals of earnings are subject to tax but no 10% penalty in case of life annuity, education expenses, medical expenses, health insurance for the unemployed
• No 70.5 age rule - not for contributions, not for distributions

Employer sponsored Qualified retirement plans

Simplified employee pension (SEP IRA)
Employer sponsored contributions to individuals IRAs established for employees

Simple Plan
For small businesses, fewer than 100 employees
Employee makes pre-tax contributions

Keogh plan - HR-10

• Self-employed persons, unincorporated businesses
• Tax deductible contributions
• Withdrawals of funds: entire amount is taxed, pre-59.5 distributions subject to 10% penalty, excess accumulation - insufficient distributions after 70.5 subject to 50% penalty
• Eligible employees covered at same rate as owners

Corporate Sponsored Plans

Defined contribution plan: annual contribution is predetermined, retirement benefits are uncertain, younger employees benefit most
Defined benefit plan: annual contribution is determined by yearly actuarial calculations, retirement benefits are targeted for a certain amount, older employees benefit most, fully funded by employer

Profit Sharing Plans
Annual contribution is not mandatory

401(k)
Fully funded by employee - salary reduction
Contributions not included in income and earnings tax deferred
Distributions 100% taxable

Self-employed 401(k) Plan
Company with no full time employees (excluding owner/spouse)

Roth 401(k) Plan
After-tax contributions/earnings tax deferred
No income limitations
Premits employer match to traditional 401(k)

403(b) Plans
Available to employees of public educational institutions, 501(c)3 tax-exempt organizations
Salary reduction, employer may match contributions
Investment options: typically an annuity but other investments are available, no life insurance policies
Distribution: follows the same rule for all qualified plans

Coverdell Education Savings Account (ESA)
After-tax contribution, must be established for beneficiary before 18 old, max $2000 per child per year until 18th birthday
Subject ot income limitations
Money grows tax deferred, withdrawn tax-free for qualified education expenses (very broad, academic tutoring, transportation, etc.)
Must be used by age 30 or passes to beneficiary unless redesignated, otherwise subject to income tax and 10% penalty

Section 529 Plans

• Plans vary from state to state
• After-tax contribution, no income limitation
• Distributions federally tax-exempt if used for qualified post-secondary (college) education
• Two types of plans: pre-paid tuition (offers inflation protection), college savings plan (3rd party contract with professional money mgrs, investment risk, contributions limits vary by state, subject to Fed gift tax rules, 5-year aggregate rules), distributions federally tax exempt, money distributed for other than qualified education is subject to income taxes plus 10% penalty on earnings

ERISA
Established 1974
Establishes guidelines on eligibility: 21 years of age or older, one year of service, worked 1000 hours in the previous year
Funding: funds contributed must be segregated, plans trustees have a fiduciary responsibility
Fiduciary responsibilities: establish and follow a written investment policy for the plan, diversify plan assets, monitor investment performance, not engage in prohibited activities
Vesting schedules: gradual, cliff
Nondiscrimination

Anti-Money Laundering 101

The banking sector has been on high alert for money laundering issues, now the attention has been shifted to the insurance sector which traditionally has low level of suspicious activities.  But with online transactions on the rise, and technology advancement, and heightened regulatory requirements, be on the look out.  This blog is everything about the insurance transactions and anti-money laundering.

What is Money Laundering?

Money laundering is a process, often complicated, criminals use to make proceeds from their crimes legitimate. It’s just like washing clothes: you put in dirty clothes and after being washed, the clothes are clean.

Can it happen in insurance? Sure, it can. A life insurance policy that can be cashed in is an inviting money laundering vehicle because it allows criminals to put “dirty” money in and take “clean” money out in the form of an insurance company check.

What Are the Stages of the Money Laundering Process?

The money laundering process involves three stages:

1. Placement
The first stage, placement, involves putting the dirty money into financial institutions or the retail economy, thus separating the money from the crime. Placement is the most dangerous step in the money laundering process for the launderer because it involves the actual, physical movement of illegal money and the step most closely associated with the crime. It is at this stage that launderers are at the greatest risk because the illegal funds are most susceptible to detection.

During the placement stage, smurfing may occur. Smurfing is the money laundering technique whereby the money launderer divides large cash deposits or transactions into smaller amounts to avoid reporting requirements.

2. Layering
The second stage, layering, involves putting the money through a series of complex financial transactions to hide the trail leading to the crime. Layering occurs with the purchase of traveler's checks, bank drafts, money orders, letters of credit, securities, and bonds with other monetary instruments, transferring funds between accounts, and using wire transfers.

3. Integration
The third and final stage, integration, involves putting the money back into the financial system disguised as legitimate business earnings (securities, businesses, or real estate) and mixing it with other assets so it cannot be distinguished. The dirty money is now clean and ready for use.

According to experts, including the International Association of Insurance Supervisors (IAIS), the insurance industry is most vulnerable to money laundering during the layering and integration stages of the laundering cycle. Layering involves the launderer using multiple and complex financial transactions to hide illicit funds and obscure the audit trail. Integration occurs when the washed funds are put back into the legitimate economic and financial system and integrated with legitimate earnings in the economy.

It is at these points in the money laundering process that indicators of illegal doings are less obvious. The trail that links the money to the launderer and the activity fades. An insurance company's anti-money laundering program should take these facts into consideration and incorporate different or enhanced due diligence procedures to account for these phases.

What's the Relationship Between Money Laundering and Insurance?

Today, money laundering is becoming an increasingly international and complex crime because of the rapid advances in technology and the globalization of financial services. Financial systems allow criminals to transfer millions of dollars instantly through computers and satellites. In addition to banks, money is now laundered through currency exchanges, stock brokerages, gold dealers, casinos, automobile dealerships, as well as insurance companies.

The insurance industry is attractive to money launderers because insurance products are often sold by independent agents or brokers who do not work directly for insurance companies. The agents and brokers are often unaware of the need to screen clients or to question payment methods. In some cases, such agents and brokers have even joined criminals against insurers to facilitate money laundering.

How Serious Is the Problem in Insurance Industry?

Due to the underground nature of money laundering activities, only rough estimates have been put forward to give some reality to the scale of the problem. For example, in 1996, the International Monetary Fund (which monitors the world’s economies) estimated the aggregate size of money laundering in the world to be somewhere between 2% and 5% of the world’s gross domestic product (GDP). Using 1996 statistics, these percentages indicate that money laundering affected between $590 billion and $1.5 trillion. “The International Monetary Fund (IMF) is an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”

These are just estimates. The Financial Action Task Force (FATF) has concluded it is impossible to provide a reasonable estimate of the amount of money laundered and declines to attempt it.

The FATF is an international organization that develops and promotes global standards for combating money laundering and terrorist financing, which are set out in the FATF 40 Recommendations and the IX Special Recommendations on Terrorist Financing. The FATF 40 Recommendations is the international standard for combating money laundering activities. We’ll discuss the FATF in more detail later in this course.

What Are the Possible Signs of Money Laundering in Insurance?

• A customer borrows against the cash surrender value of permanent life insurance policies, particularly when payments are made to apparently unrelated third parties.
• A customer purchases a product that appears outside the customer’s normal range of financial means or estate planning needs.
• A customer purchases insurance products using a single, large premium payment, particularly when payment is made through unusual methods such as currency or currency equivalents.
• A customer purchases products with termination features without concern for the product’s investment performance.
• Policies are purchased that allow for the transfer of beneficial ownership interests without the knowledge and consent of the insurance issuer. This would include secondhand endowment and bearer insurance policies.
• A customer is known to purchase several insurance products and uses the proceeds from an early policy surrender to purchase other financial assets.
• A customer uses multiple currency equivalents, for example, cashier’s checks and money orders, from different banks and money service businesses to make insurance policy or annuity payments.
• A customer terminates an insurance product early, including during the free look period.
• A customer designates an apparently unrelated third party as the policy’s or product’s beneficiary.

An insurance agent should focus on reporting such suspicious activities, rather than on trying to determine whether or not the transactions are, in fact, linked to money laundering, terrorist financing, or some other crime.

What Is the Bank Secrecy Act (BSA)?

The Bank Secrecy Act (BSA) of 1970 was intended to prevent financial institutions from being used for money laundering purposes. Criminals launder money obtained through illegal means to hide the trail that links the money to the crime, as well as to the criminal. The BSA attempts to prevent money laundering by imposing strict reporting and recordkeeping requirements on financial institutions. These requirements create trails for law enforcement investigators to follow.

When it was passed, the BSA gave the secretary of the Treasury broad discretion in defining the entities that are subject to the law and detailing the procedures, reports, and records that must be kept. The BSA has been amended a number of times to expand its scope and enhance law enforcement effectiveness.

What Is the Money Laundering Control Act (MLCA)?

In 1986, the Money Laundering Control Act (MLCA) made money laundering a criminal activity and, in 1994, the Money Laundering Suppression Act required regulators to enhance examination procedures and upgrade examiner training to improve the identification of money laundering schemes in financial institutions. In 2001, the USA PATRIOT Act further appended BSA by bringing all financial institutions under its regulations. Now, every financial institution (including insurance companies) must establish a formal anti-money laundering program.

How Does the USA PATRIOT Act Affect Anti-Money Laundering?

On October 26, 2001, following the September 11 terrorist attacks, President George W. Bush signed the USA PATRIOT Act into law. Title III of the PATRIOT Act, referred to as the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, imposed new anti-money laundering provisions and amendments to the Bank Secrecy Act to make it easier to prevent, detect, and prosecute money laundering and the financing of terrorism. The USA PATRIOT Act brought all financial institutions under regulations. Now, every financial institution defined by the AML regulations—not only depository institutions—must establish a formal anti-money laundering program. The nature of the program and the regulations to which it must conform vary depending on the type of institution.

Although the insurance industry includes companies that ultimately may be exempt from the AML program requirements, it is very clear that issuers of life insurance and annuity products face significant exposure to money laundering and terrorist financing schemes and threats. For these companies, the challenge is to design anti-money laundering programs that fit their businesses and address the potential laundering and terrorist financing risks posed by customers, operations, products, and services.

What Are the Minimum Requirements of an Anti-Money Laundering Program?

The portion of the USA PATRIOT Act that extends the federal anti-money laundering requirements to insurance companies follows:
Section 5318(h) of Title 31, United States Code, is amended to read as follows:

1. In general.—In order to guard against money laundering through financial institutions, each financial institution shall establish anti-money laundering programs, including, at a minimum
   • the development of internal policies, procedures, and controls;
   • the designation of a compliance officer;
   • an on-going training program; and
   • an independent audit function to test programs.
2. Regulations.—The Secretary of the Treasury, after consultation with the appropriate Federal functional regulator...may prescribe minimum standards for programs established under (1), and may exempt from the application of those standards any financial institution that is not subject to the provisions of the rules in part 103 of title 31 of the Code of Federal Regulations...

On October 31, 2005, the US Treasury Department issued final regulations with respect to AML programs for insurance companies.

How Life Insurance and Annuity Products Can Be Used for Money Laundering?

To understand why anti-money laundering regulations encompass insurance companies, it is imperative to understand how insurance companies and their products can be used for money laundering.

The most significant money laundering and terrorist financing risks in the insurance industry are found in life insurance and annuity products. These products allow individuals to deposit large amounts of money into the financial system, available for later redemption, with the origin of the funds hidden. Permanent life insurance policies are especially attractive for this purpose: the cash value account is available for surrender, and partial withdrawals or loans are available within a relatively short time after policy issue.

On December 6, 2002, the first known case of money laundering in the insurance industry was reported on the front page of the New York Times. The article “New Hiding Place for Drug Profits: Insurance Policies” reported how Columbian cocaine traffickers used life insurance policies to launder $80 million in drug profits. More than 250 investment-type insurance policies were purchased through brokers and funded with checks and wire transfers submitted by brokers or other third-party entities.

Annuity contracts also pose a significant money laundering risk because they allow a money launderer to exchange illicit funds, in the form of a single premium deposit or multiple premium deposits, for an immediate or deferred income stream. Viatical settlements can also be used to hide and transfer illegal monies. The use of viatical settlements for money laundering purposes would also require the use of a fronting person—in this case, someone with a critical illness.

Property and casualty, title, and health insurance policies do not generally include elements that enable any kind of refund and would not generally come under the umbrella of the anti-money laundering rules. However, to the extent that these products have investment or stored value features with transferability, the anti-money laundering rules would include them. The spotlight of the anti-money laundering regulations is on the ability of a money launderer to use a particular financial product to store and move illicit funds through the financial system. Therefore, any insurance product that enables this type of activity is (as of this writing) included within the reach of the anti-money laundering regulations.

Term life insurance also poses a risk of money laundering because it possesses elements of stored value and transferability that make it attractive to money launderers. For example, a narcotics trafficker based in a foreign country could purchase a term policy from a US insurer with a large, up-front premium composed of illicit funds, using an elderly or ill front person as the insured, and collect the proceeds when the insured dies.

It should be noted that many interested parties have framed the other side of this argument. It has been argued that the issuance of a large term policy on an elderly or ill individual is subject to close scrutiny during underwriting and that, even if such a policy were issued, the criminal would be forced to wait for the insured to die to collect the proceeds.
Nonetheless, it is possible for term insurance to be used to launder money. In fact, US customs officials in Austin, Texas, obtained the forfeiture of illicit drug money that was paid to purchase three term life insurance policies. The purchase was made with a number of structured monetary instruments, followed shortly by an attempt to redeem the policies. (In the Matter of Seizure of the Cash Value and Advance Premium Deposit Funds, Case No. 2002-5506-000007 [W.D. Tex. 2002])

Non Insurance Fraud and Money Laundering?

Bringing insurance companies and insurance policies into the fold of federal anti-money laundering regulations may appear to be overkill. After all, insurers have long had sophisticated, extensive programs in place to detect and combat fraud. Notably, these measures come into play during the field and policy underwriting phases. However, the risks associated with fraud are not the same as those associated with money laundering.

As the anti-money laundering rules make clear, an insurer's antifraud policy is concerned that premium payment checks clear, not that they are made with structured instruments or derive from suspicious sources.

Similarly, a person who buys a life insurance policy with a single lump-sum premium and shortly thereafter surrenders it for its cash value may not, in so doing, commit any type of fraud or cause harm to the insurance company. However, this same person might have followed this procedure solely for the purpose of laundering illicit funds. An associated fee or penalty is not an issue for money launderers; their objective is simply to transform illegal funds into seemingly legal tender.

After passage of the USA PATRIOT Act, the US Treasury Department, along with the Financial Crimes Enforcement Network (FinCEN)*, the Department of Homeland Security, and the Department of Justice, began drafting regulations that would serve to implement the many revisions of the Bank Secrecy Act.

These regulations are designed to make financial transactions more transparent and provide the government with more information about financial activity in new sectors. They are also intended to fortify the financial industry—and its many segments—as the first line of defense against money laundering, terrorist financing, and other financial crimes.
Broadly, as they apply to all financial institutions, the anti-money laundering regulations require:

• the establishment of an anti-money laundering program;
• the creation of customer identification and verification programs;
• enhanced recordkeeping and reporting; and
• enhanced suspicious activity reporting.

Following are the specifics of these regulations as they apply to insurance companies.

*Note that FinCEN is a bureau of the US Treasury Department that provides US policymakers with strategic analysis of domestic and worldwide money laundering developments, trends, and patterns.

Which Companies Are Included in Anti-Money Laundering Programs?

Only those companies in the insurance industry that pose a significant risk of money laundering and terrorist financing must comply with the anti-money laundering regulations. According to the regulations, an insurance company is:

any person engaged in the United States as a business in (1) the issuing, underwriting, or reinsuring of a life insurance policy; (2) the issuing, granting, purchasing, or disposing of any annuity contract; or (3) the issuing, underwriting, or reinsuring of any insurance product with investment features similar to those of a life insurance policy or an annuity contract, or which can be used to store value and transfer that value to another person.

Which Agents are Excluded?

At this time, the definition of insurance company does not include insurance agents or brokers; consequently, agents and brokers are not, individually or independently, required to implement an anti-money laundering program. For now, the regulatory agencies responsible for drafting the anti-money laundering rules believe insurance companies are in the best position to design effective programs based on the nature of business and the risk assessment they must perform. However, because this risk assessment will be based in part on the company’s distribution system, agents and brokers will likely be involved with their company’s anti-money laundering program because the company must incorporate policies, procedures, and internal controls that address how its products and payment are exchanged in the market.

Insurers that meet the definition for inclusion in the anti-money laundering requirements must develop and implement a company-wide anti-money laundering program. The purpose of the program is to prevent the company, its products, and its agents from being used for money laundering or terrorist financing purposes. To this end, the company must identify the risks it faces based on its products, customers, distribution system, and geographic location.

How to Establish an AML Program?

Given the vast differences between the products, distribution methods, and customer bases of insurance companies, regulators recognize there is no one-size-fits-all anti-money laundering program for insurance companies. Consequently, the regulations provide insurers with a great deal of flexibility so they can design their programs to meet their specific profiles and risks.

Federal law requires insurance companies to establish anti-money laundering programs to prevent money laundering through their products. Life insurance companies are responsible for developing and implementing their own anti-money laundering programs that comply with applicable laws and regulations. They must train all key employees and all insurance agents on the anti-money laundering program in effect.

Each insurance company must develop its own anti-money laundering program because it must be tailored to fit each company’s specific business, practices, and products. The insurance company does, however, have the flexibility to train its agents and brokers directly. Insurance companies may also allow their agents and brokers to receive the required training from another insurance company or competent third party, provided it covers products offered by the insurance company.

Which Products Are Covered by AML Programs?

AML programs must focus on those covered insurance products with features that make them susceptible to use for money laundering or financing terrorists. These are known as covered products and include the following:

• A permanent life insurance policy, other than a group life insurance policy
• Any annuity contract, other than a group annuity contract
• Any other insurance product with features of cash value or investment

Covered products are those insurance products that are likely to present a higher degree of risk for money laundering. The following are not covered products:

• Term life (including credit life) insurance
• Group life insurance
• Group annuities
• Charitable annuities (i.e., products offered by charitable organizations)
• Reinsurance, retrocession contracts, and treaties
• Contracts of indemnity
• Structured settlements, including workers’ compensation payments
• Insurance products offered by:
  • property-casualty insurers,
  • title insurers, and
  • health insurers

These insurance products are not included because they pose a lower risk for money laundering. Although term life insurance is not identified as a covered product, it should be noted that in 2007–2008, insurance companies filed 37 suspicious activity reports involving noncovered products that were not third-party or other life settlement products. Twenty-two of these (59%) related to term life policies.

The rules focus on covered insurance products with features that make them susceptible to being used for money laundering or for financing terrorism. Consequently, the rules apply to life insurance transactions that include cash value products like whole life, universal life, and annuities. To the extent that term life insurance, property and casualty insurance, health insurance, and other kinds of insurance do not exhibit these features, they are not products covered by the rules.

What Are the Minimum Requirements?

There are minimum requirements to which every insurance company must adhere to and include in their anti-money laundering program:

• The program must be in writing and made available to the US Treasury Department upon request.
• The program must be approved by senior management.
• The program must contain policies, procedures, and internal controls based on the insurer's assessment of the money laundering and terrorist financing risks associated with its specific products, clients, distribution channels, and location.
• The program must ensure that the company facilitates and obtains all the information necessary to make its anti-money laundering efforts successful. This includes collecting and maintaining relevant customer identification information. (The specific means to obtain such information is not mandated, but it is likely that a company's agents and brokers will be required to be actively involved with this stage of the program.)
• The company must designate a compliance officer who will be responsible for the administration, implementation, and upkeep of the program.

The last three items are the core components of the AML program requirement.

According to the regulations, the company's risk assessment (which is to set the foundation for its anti-money laundering program) must include "all relevant information." While this appears quite broad, the following questions can be used as guideposts:

• Does the insurer allow customers to use cash or cash equivalents to purchase its products?
• Can the insurer's products be purchased with a single premium or lump-sum amount?
• Does the design of the insurance company's products permit loans against the products' cash values?
• Does the company transact business with or in a jurisdiction whose government has been identified as a sponsor of international terrorism, has been designated noncooperative with international anti-money laundering principles, or warrants "special measures" per the secretary of the Treasury due to money laundering concerns?

What Policies, Procedures, and Internal Controls Must Be In Place?

On the basis of a risk assessment, the insurer must then construct its specific anti-money laundering program, which would include designing and implementing policies, procedures, and internal controls that ensure compliance with applicable BSA/USA PATRIOT Act requirements.

One of the requirements applicable to insurers is the obligation to make currency transaction reports on IRS Form 8300. A currency transaction report is generally required when an insurer receives more than $10,000 in cash in one transaction or in two or more related transactions. Any transactions conducted between a payer or his agent and the recipient during a 24-hour period are called related transactions. Transactions are related even if they occur over more than 24 hours if the recipient knows or has reason to think that each transaction is in a series of connected transactions.

Form 8300 captures:

• the identity of the individual from whom the cash was received;
• the person on whose behalf the transaction was conducted;
• a description of the transaction and the method of payment; and
• the name of the business that received the cash.

Form 8300 may be filed voluntarily for any suspicious transaction for use by FinCEN and the Internal Revenue Service, even if the amount of money involved is less than $10,000. In this context, asuspicious transaction is any activity in which it appears a person is attempting to prevent the filing of Form 8300 or cause a false or incomplete filing, or any transaction in which there is an indication of possible illegal activity.

In September 2012, FinCEN made the following announcement concerning Form 8300:

“Each person who is engaged in a trade or business that, in the course of that trade or business, receives more than $10,000 in cash in one transaction or in two or more related transactions, must file Form 8300. It also may be filed voluntarily for any suspicious transaction, even if the total amount does not exceed $10,000." The information contained in these reports, when added to the FinCEN database, can be cross referenced with other FinCEN reports such as Suspicious Activity Reports and Currency Transaction Reports to establish money trails and expose hidden criminal trends and patterns. Last year, FinCEN received almost 200,000 paper filings of Form 8300.

“E-Filing is a free, Web-based electronic filing system that allows businesses to submit their FinCEN reports through a secure network. Compared with the traditional paper filing process, businesses find E-Filing a faster and more convenient, secure, and cost-effective method of submitting their reports as well as for receiving confirmation of their report’s acceptance. The greater use of the E-Filing system also assists FinCEN in providing important information relating to money laundering and terrorist financing to law enforcement in the quickest manner possible. Almost all FinCEN reports must currently be E-Filed. Paper Form 8300 filings will continue to be accepted for the near future, though businesses are encouraged to begin to take advantage of the benefits of E-Filing now.”

What Are Customer Identification and Verification?

Insurers must conform to the customer identification and verification requirement. The mandate that financial institutions establish a customer identification program (CIP) was set forth in Section 326 of the USA PATRIOT Act. The rules implementing that requirement have been finalized and are now part and parcel of the Bank Secrecy Act's anti-money laundering compliance program. While each financial institution must develop a CIP tailored to its profile and its specific money laundering risks, every program must contain the following elements.

• Customer identity verification procedures. The customer must provide identifying information and the company must verify the accuracy of the information provided.
• Verification recordkeeping. The information provided by the customer must be recorded and maintained for five years after the account is closed.
• Government list comparison. The company must determine if the customer's name appears on any list of known or suspected terrorist organizations issued by the federal government (the Office of Foreign Assets (OFAC) list) within a reasonable time after the customer's account is opened or a product is purchased.
• Notification to customers. The company must provide customers with adequate notice that it is requesting information to verify their identities.

The policy or contract owner has control over the flow of funds into and out of the insurance contract and, therefore, has the ability to use the insurance product to launder money. AML standards for insurers treat the policy or contract owner as the “customer” for purposes of verifying identity. The information to be collected for identification purposes depends on whether the insurance product is at a low or high risk for money laundering.

Even in the lowest risk situations, insurers must gather and verify basic information about the new owners so the AML program can be effectively implemented. Fairly extensive owner verification procedures might be appropriate for insurance products that are at a high risk for money laundering, such as a high face value permanent life insurance policy or annuity.

What Are the Role of Insurance Agents?

As highlighted in the regulations, insurance companies typically conduct their operations through agents and third-party service providers. Specific elements of the compliance program will best be performed by these people. Insurance companies can delegate the implementation and operation of the customer identification/verification aspect of their anti-money laundering programs, but they may have to modify their current agent and broker agreements to do so. However, this would not negate the insurer's responsibility for enhanced recordkeeping and compliance with BSA regulatory requirements. The company must continue to monitor the operation and effectiveness of its program.

Insurers are required to collect client information from agents and brokers to support their AML programs and to detect and report suspicious transactions. Agents and brokers are critical to this process.

Agents and brokers should collect and retain information needed to assess the risk involved with particular transactions. This would involve information about the source of investment assets, the nature of the client, and the reason why the particular insurance product was purchased.

Agents and brokers must also identify clients in high-risk businesses or high-risk locations.

Agents must not knowingly conduct business with any person or business whose transactions are intended to further, finance, or support terrorist activities. An agent who knows of any facts that indicate suspicious activity must contact the AML compliance officer and report any violations of policy. An agent must comply with all anti-money laundering laws and regulations.

An agent must assist the compliance officer in the gathering of information necessary for reporting requirements. The compliance officer will know on a case-by-case basis what information is needed.

An agent may not let a suspect know that the suspicious activity has been reported.

Another required component of an insurer's anti-money laundering program is a designated compliance officer who is responsible for its administration. The compliance officer may be an individual or a committee. Whoever performs the function should be competent and knowledgeable about BSA requirements and money laundering issues and risks. In addition, the compliance officer must be empowered to develop and enforce appropriate policies and procedures, and ensure that company personnel are appropriately trained and educated. A full-time person is required if the level of risk or the volume of transactions so warrants.

An insurance company's anti-money laundering program must include training for all appropriate persons. In addition to orienting employees to the company's anti-money laundering program, the training should provide an understanding of money laundering risks in general so red flags can be recognized and associated with both existing and potential customers.

The regulations do not prescribe the nature or scope of a training program other than require it to prepare those with anti-money laundering responsibilities and obligations to perform their duties effectively. The training should be ongoing and include periodic updates.

All agents who sell covered products must receive training on money laundering and terrorist financing.Agents and brokers are crucial to preventing and detecting suspicious activity and, therefore, must undergo training on anti-money laundering and their responsibilities.

Each life insurance company will design its own program so characteristics of its particular business may be taken into account. This will include the role that agents and brokers play in conducting business for that company.

Agents and brokers should receive risk-based guidance from each insurer they represent and specific guidance on the business practices and product mix of that particular insurer.

Which Are Exempt Organizations?

If an insurance company is registered with the Securities and Exchange Commission (SEC) (e.g., an insurer that sells variable annuities), it will be deemed to have satisfied the insurance anti-money laundering program requirements to the extent it complies with the anti-money laundering rules applicable to SEC-registered companies and SEC-registered products. To the extent that the insurer issues a product or conducts activity that is not covered by an SEC (or self-regulatory organization) anti-money laundering program rule, then that product or that activity would be subject to the insurance company’s anti-money laundering requirements.

What is Suspicious Transaction Reporting?

Another element of anti-money laundering regulations with which insurance companies must comply is reporting suspicious transactions to the US Treasury Department via FinCEN. These are known as suspicious activity reports (SARs). This reporting requirement was added to the Bank Secrecy Act in October 2002 as an additional measure in creating a strong regulatory force against money laundering activities.

Specifically, the requirement authorizes a financial institution to report any suspicious transaction that is relevant to a possible violation of law or regulation. When such reports are made, the financial institution may not notify the individual involved with the transaction that these activities were reported, nor can the government or its agents make such a disclosure. Additionally, the requirement absolves an institution from any liability it might otherwise face for the disclosure.

As noted in the anti-money laundering regulations, one of the reasons suspicious activity reporting was extended beyond banks to all relevant financial institutions is the intense scrutiny to which banks have been subject. This scrutiny has made it far more difficult for money launderers to use banks for their illicit purposes. However, as measures to counter money laundering are put into place, money launderers revise their methods and turn to nonbank financial institutions. The fact is money laundering requires the involvement of a financial institution either to conceal the illegal funds or to recycle those funds back into the economy. If banks pose too great a risk for the money launderers, they must turn to other financial institutions, such as insurance companies.

Another reason suspicious activity reporting is required of financial institutions is that their officers and employees are more likely than law enforcement officials to know or sense when financial transactions are not as they should be. Those closest to the business are more readily able to evaluate when specific activities or transactions lack a legitimate connection to or use of the company's products, services, or offerings.

Suspicious activity reporting is not confined to financial institutions in the United States. The international community also recognizes such reporting as essential to effective anti-money laundering efforts. The FATF is an intergovernmental organization established in 1989 to develop policies to combat money laundering and terrorist financing. The FATF reports money laundering trends.


In April 1990, less than one year after its creation, the FATF issued a report containing Forty Recommendations, which provide a comprehensive plan of action to fight money laundering. In 2001, the development of standards in the fight against terrorism financing was added to the FATF’s mission. In October 2001, the FATF issued its Eight Special Recommendations to deal with terrorism financing. The continued evolution of money laundering techniques led the FATF to comprehensively revise its standards in June 2003. In October 2004, the FATF published a ninth Special Recommendation, further strengthening the agreed international standards for combating money laundering and terrorism financing with the 40+9 Recommendations.

FATF currently represents 34 countries and territories and 2 regional organizations around the world. One of the FATF recommendations in the international fight against money laundering is as follows: “...if financial institutions suspect that funds stem from a criminal activity, they should be required to report promptly their suspicions to the competent authorities.”

The language in this recommendation was originally more permissive. That FATF revised its position in 1996 to require institutions to report suspicious activity indicates the importance it places on this issue. Then and now, the definition of financial institution for FATF includes insurance companies.

What is Financial Action Task Force (FATF)?

In February 2012, after more than two years of efforts by member countries, the FATF adopted revisions to its recommendations to strengthen global safeguards and further protect the integrity of the financial system by providing governments with stronger tools to take action against financial crime. At the same time, new standards were adopted that address new priority areas, such as corruption and tax crimes. The recommendations are used by more than 180 governments to combat these crimes.

The revised FATF Recommendations now fully integrate counter-terrorist financing measures with anti-money laundering controls, introduce new measures to counteract the financing of weapons of mass destruction, and better address the laundering of proceeds of corruption and tax crimes. They also strengthen the requirements for higher risk situations and allow countries to take a more targeted, risk-based approach.

During the revision process, the FATF considered a customer due diligence measure for life insurance. The life insurance sector provided feedback that there should be a clear distinction between a beneficiary of a life insurance policy and the beneficial owner, and that verification of beneficiaries may not always be possible at the beginning of the business relationship. These views were accepted by the FATF, and the revisions seek to clarify the customer due diligence measures required and stress that beneficiary verification need only occur at the time of payout. Reasonable measures should be taken to identify and verify the beneficial owner of the beneficiary, including whether or not the beneficial owner is a politically exposed person, at payout.

What Are Suspicious Transaction Reporting Rules?

The specifics of how insurers are to conform to the suspicious transactions reporting rules are set forth in Section 103.16(b) of the Bank Secrecy Act. They can be summarized as follows:

• An insurance company is obliged to report suspicious transactions that involve, separately or in the aggregate, at least $5,000 in funds or other assets.


• An insurance company is encouraged to report any activity that appears to violate the laws, regardless of the amount of the transaction.


• Four categories of transactions require reporting:
• when it is known or suspected that funds associated with the transaction derived from illegal activity or that the transaction is intended to hide or disguise funds from illegal activity;
• when the transaction is designed to evade the requirements of the Bank Secrecy Act;
• when the transaction lacks apparent business or lawful purpose and the insurer, after reviewing all available facts, sees no reasonable explanation for it; and
• when the transaction involves the use of the insurer to facilitate criminal activity (this is intended to ensure that transactions involving legal funds that the insurer believes are being used for an illegal purpose are indeed reported).

What Constitutes a Suspicious Activity?

Given the nature of money laundering and the clandestine practices that attend to it, there are no hard and fast rules that define exactly if or when a suspicious activity report is required or warranted. As noted earlier, every insurer that is included in the BSA definition of financial institution must conduct its own assessment to evaluate the money laundering risks it faces on the basis of its products, customer base, and customer activity. From this assessment will come a suspicious activity monitoring and reporting program that is unique to the company and its business.

Methods of Payment

In order to fulfill an agent’s obligations under the USA PATRIOT Act, an agent must know the source of the funds that a customer uses to purchase a life insurance policy or annuity.

Certain forms of payment can be used in the placement stage of money laundering. This includes cash, money orders, and cashier’s and traveler’s checks. An insurance company must manage the risk and may set limits on what types of payment it will accept and the amounts acceptable for different forms of payment. The goal is to lessen the chance that an insurance business will be involved in money laundering, without excluding types of payment with a legitimate business purpose.

Insurance companies generally consider the following to be methods of payment (when made payable to the insurance company) that have less chance of being used to launder money:

• Personal checks and wire transfers, except as noted below
• Cashier’s checks from a US bank from the remitter’s account when the cashier’s check remitter is the owner or annuitant
• Third-party checks that originate from an insurance company or a financial institution and are properly endorsed to the appropriate insurer
• 1035 exchange checks, as well as other transfer checks, received from an insurance company or financial institution
• Credit card payments for an initial premium payment

Insurance companies generally consider the following methods of payment as being more susceptible to money laundering activities:

• Cash
• Checks made payable to cash
• Money orders
• Traveler’s checks
• Checks or wire transfers from a foreign bank
• Agent or agency check or wire transfer where the agent is the originator (unless the agent is the owner or annuitant)
• Personal checks or cashier’s checks not made payable to the insurer
• Checks drawn on the account of someone other than the owner or annuitant (an unrelated party)
• Starter or temporary checks without the name or address of the owner or annuitant on the check (written or typed)
• Credit card payments for premiums other than the initial premium, if allowed by state law

An unacceptable method of payment submitted by a customer should be returned immediately to the customer, and the AML compliance officer should be notified.

In that agents and brokers collect at least the first policy premium, they may be asked to notify customers of the insurer’s rules and to enforce them.

Wire Transfers

Wire transfers played a critical role in providing the hijackers with necessary funds to carry out the September 11, 2001, terrorist attacks. Wire transfers are a speedy and effective way to move funds and can, therefore, be easily used for terrorist purposes. Complex wire transfer schemes can create an intentionally confusing audit trail so the source and destination of funds intended for terrorist use cannot be determined. Only a limited number of indicators (i.e., source and destination of the funds and the names of involved individuals, where available) help identify potential terrorist wire transfers.

FATF uses the term wire or funds transfer to refer to any financial transaction carried out for a person through a financial institution by electronic means with the intent to making an amount of money available to a person at another financial institution. In some cases, the sender and the receiver could be the same person.
Wire transfers include transactions that occur within the national boundaries of a country or from one country to another. Given that wire transfers do not involve the actual movement of currency, they are a rapid and secure method for transferring value from one location to another.

Wire transfers, however, should be monitored so that an insurer does not accept or send funds to an OFAC-blocked party. Companies should also monitor wire transfers to ensure that intermediary financial institutions or beneficiaries of the account do not appear on OFAC’s Specially Designated Nationals (SDN) list.

Financial institutions are required to trace the source of all funds belonging to foreign persons or institutions when a primary money laundering concern has been identified.

How to Know Your Customer?

A customer’s personal and financial profile is the best benchmark against which the transactions she performs or the business relationships she engages in should be measured.

To fulfill many of the requirements of the BSA, financial institutions and their employees must continuously strive to know their customers. Although not specifically required by the act, if an institution does not effectively know its customer base, it is virtually impossible to determine when suspicious activities occur, who might qualify as an exempt customer, or which transactions would be exempt.


The primary goals of an effective know your customer policy are to ensure compliance with regulatory guidelines of the BSA, to properly service reputable clients, and to minimize the institution’s susceptibility to illegal activities. Various enforcement agencies have outlined broad guidelines that financial institutions should follow when establishing a policy. These include the following:

• Making a reasonable effort to determine the true identify of all customers requesting services of the financial institution
• Taking particular care to identify the ownership of all accounts and of those using safe-custody facilities
• Obtaining identification from all new customers
• Verifying the identity of customers conducting significant business transactions
• Monitoring activity in an account
• Identifying the source of funds (or wealth of the client) for an account
• Maintaining awareness of unusual transactions or disproportionate activity relative to the customer’s income or worth

One important aspect in preventing money laundering in the insurance industry is for agents to know their customers. No business should be conducted with individuals who refuse to provide identifying information. Many institutions find that the establishment of customer profiles assists them in meeting the objectives discussed.

FinCEN has not issued a separate regulation for insurers as it has for other types of financial institutions. Insurers, however, must collect sufficient information about their customers so the AML program will be effective.


As part of the know your customer program, an agent should collect the following types of information about a potential client:

• Full name (first, middle initial, last)
• Home address—just a P.O. box is unacceptable
• Mailing address, if different from the home address
• Date and place of birth
• Social Security number or tax identification number
• Previous experience with owned financial products
• Financial objective in purchasing product
• Net worth, liquid net worth, and annual income
• Citizenship status

An agent should verify as much as possible of the information the client has provided.




Criminals frequently use financial institutions to transfer funds to launder money or to finance terrorism. Financial institutions are most vulnerable to abuse for those purposes. For their own protection, financial institutions must have adequate controls in place so they know with whom they are dealing. Adequate due diligence on new and existing customers is key to this process.

There must be rigorous customer due diligence (CDD) measures in place in financial institutions. Basic measures require appropriate identification of a customer and/or beneficial owner, verification of the identity of the customer or beneficial owner, and collection of information on the customer’s objective and nature of the business relationship.
CDD must be applied upon creation of a business relationship or in preparation of a specific cash transaction in excess of a certain amount. CDD must also be applied whenever there is a suspicion of money laundering or terrorist financing.

For higher-risk categories, financial institutions should perform enhanced due diligence (EDD). The critical components of EDD are the reliability of the information and the information sources, the type and quality of sources used, and the proper training of individuals who know where to find information and how to interpret it.


Standards for due diligence have been set by FATF in Recommendation Five—Customer Due Diligence and Record-Keeping of its Forty Recommendations. The FATF Forty Recommendations are recognized as the international standard for combating money laundering activities.

The CDD measures set out in Recommendation Five do not require financial institutions to identify and verify a customer’s identity every time that customer conducts a transaction. It may rely on the identification and verification steps already undertaken unless something causes doubt about the veracity of that information.
Examples of situations that might lead an institution to have such doubts might be:

• a suspicion of money laundering in relation to that customer; or
• a material change in the way the customer’s account is operated that is not consistent with the customer’s business profile.

If an individual cannot legitimately present an unexpired government-issued identification that bears the individual’s photograph, or if the agent is not be familiar with the documents presented,nondocumentary verification should be performed by matching the information provided by the customer to a certified public information database. A customer’s application will be in pending status until the nondocumentary verification procedures have been completed.

What are Red Flags?

Red flags are actions or items that point to a suspicious activity (i.e., an activity that is outside normal business procedures). The type of activity and the client’s normal activity influence whether or not an activity should be considered suspicious.

Red flags associated with suspicious activity involving insurance companies and insurance products may be found in anti-money laundering program regulations and International Association of Insurance Supervisors (IAIS) committee reports.


Red flags include, but are not limited to, the following:

• The purchase of an insurance policy that appears to be beyond a customer's means or normal pattern of business
• Any unusual method of payment, notably cash or cash equivalents
• The purchase of an insurance product with monetary instruments in structured amounts
• The early termination of an insurance contract, especially at a loss
• The early termination of an insurance contract for which the refund check is to be paid to a third party
• An overpayment on an insurance contract for which the refund check is to be paid to a third party
• The transfer of the benefit of an insurance contract to an apparently unrelated third party
• Customer who shows little or no concern for the performance of the insurance product but much interest about the early termination or surrender of the product
• Customer who is reluctant to provide identifying information or who gives minimal or fictitious information
• Undue delay in receiving information necessary to validate or verify an applicant's identity
• Borrowing the maximum cash surrender value from a life insurance policy soon after its purchase
• Any unusual financial activity on the part of an existing customer, compared with that customer’s usual activities
• Any unusual financial transaction in the course of some usual financial activity
• Payment of claims, benefits, or commissions to an unknown intermediary
• Application for a policy from an individual who lives somewhere else, when a comparable policy could be obtained closer to the individual’s home
• Any transaction involving an undisclosed party
• Purchase of a policy with a large lump sum when the purchaser typically makes small, periodic premium payments
• Use of a third-party check to purchase an insurance contract
• Premium payments made by a wire transfer or with foreign currency
• Applicant for an insurance policy who appears to own similar policies with several different insurers
• Payment of a large amount broken into small amounts, which appears to be an attempt to avoid depositing funds that may be reported to the federal government as a large transaction
• Owners or beneficiaries on an insurance policy who are foreign nationals
• Purchase of multiple small policies on the same individual rather than one large policy, with no valid reason
• Repeated policy cancellations in a short period of time for significant amounts of money
• Customer request for an insurance product that has no discernible purpose and customer is reluctant to explain the reason for the investment
• Substitution during the life of the insurance contract of the beneficiary with a person with no apparent connection to the policyholder
• Any proposed action that doesn’t make sense and appears to be suspicious

A red flag does not automatically require the filing of a suspicious activity report (SAR), but should be reported immediately to the AML compliance officer. Only an insurer is obligated to file SARs. The insurer’s agents and brokers are not required. Insurers are required to obtain customer information from all relevant sources, which includes its agents and brokers, and must report suspicious activity based upon information from those sources.

As previously stated, the regulations specify that the responsibility to identify and report a suspicious transaction falls on the insurance company involved with the activity. Insurance agents and brokers are currently not required to do this. However, there are a couple of significant caveats.

First, an insurance company's suspicious activity monitoring program must ensure that the company is provided with customer information at the point of sale. Obviously, to comply with this regulation, companies that rely on an agency or broker field force must depend, in part, on these individuals for this data.

In addition, to the extent that a transaction is conducted through an agent or broker, the company's monitoring program must address how information relevant to evaluating suspicious activity is to be captured. Changes to the way agents conduct fact-finding interviews, needs analyses, or revisions to a company's application form may be warranted so that customer information necessary for compliance with the regulations is captured. Agents may be required to adjust the manner in which they maintain client data (e.g., to include their personal observations and assessments of clients).
An insurer’s AML program is risk-based. Therefore, agents and brokers are in the best position to collect and retain information needed to assess the risk associated with the particular business. They are also in the best position to know which customers are in high-risk businesses or high-risk geographic locations, or are using products or services that may be more susceptible to abuse in money laundering activity.

Suspicious Activity Reports (SARs): First Two Years of Mandatory Reporting

Under the suspicious activity reporting rule, certain insurance companies are required to report any transaction that appears relevant to a violation of law or regulation and are required to report any transaction involving $5,000 or more in funds or other assets if the insurance company knows, suspects, or has reason to suspect that the transaction:

• involves funds derived from illegal activity or is intended or conducted to hide or disguise funds or assets derived from illegal activity;
• is designed, whether through structuring or other means, to evade the requirements of the BSA;
• has no business or apparent lawful purpose, and the insurance company knows of no reasonable explanation for the transaction after examining the available facts; or
• involves the use of the insurance company to facilitate criminal activity.

Insurance companies submitted 1,917 SARs in the first two years of mandatory reporting. Of this total, 641 (33%) were filed the first year of mandatory reporting (May 2, 2006–May 1, 2007). There were 1,276 (67%) filed the second year (May 2, 2007–April 30, 2008)—nearly double the first year.

FinCEN anticipates an increasing number of filings and qualitative improvements in them as the insurance industry’s compliance programs evolve.

During the second mandatory reporting year, FinCEN found that eight insurers filed 10 reports on scams involving variable annuities with maximized death benefits, and identified four other SARs filed in connection with allegations of terrorist financing.

Many of the SARs filed by insurance companies in the second year were reporting various suspicious payment methods.

Note that the process of sharing information between financial institutions and federal law enforcement agencies involves FinCEN communicating the names of suspected terrorists and money launderers to financial institutions.


To avoid unnecessary reporting, the regulations currently exempt filing (for AML purposes) any report of false information submitted to the insurer for the purpose of obtaining an insurance policy or supporting a claim. However, if there is reason to believe that false information such as this is related to money laundering or terrorist financing, the insurer must report it and file an SAR-IC.

Insurance companies and their employees are prohibited from disclosing to anyone outside appropriate law enforcement circles that a suspicious activity report for insurance companies (SAR-IC) has been filed, nor can they share any information about the report. The AML regulations, as amended by the USA PATRIOT Act, provide protection from liability for the filing of suspicious transactions and for not disclosing that they have made such a filing.

SARs generally must be filed with FinCEN no later than 30 calendar days after the date of the initial detection of facts that constitute the basis for the filing of the SAR.

An agent or broker must report to the AML compliance officer:

• transactions of more than $10,000 that are paid in cash or in cash-like instruments, such as a money order, traveler’s check or cashier’s check;
• suspicious transactions of $5,000, either as an individual transaction or in the aggregate for related transactions; and
• any red flag suspicious activity.

What are the Penalties for Non-Compliance with BSA Requirements?

Both civil and criminal penalties may be imposed against businesses and their employees that fail to comply with the law. Penalties may be assessed for the following infractions:

• Failure to secure identifying information
• Failure to maintain required records
• Failure to file a report or filing a report containing any material omission or misstatement

Civil Penalties
A civil penalty of $500 may be imposed against an insurance company for failure to file a SAR due to negligence. A civil penalty for willful failure to file a SAR can be assessed against any domestic financial institution and its partners, directors, officers, or employees in the amount of the transaction (not to exceed $100,000), or $25,000, whichever is greater.

The penalty for recordkeeping violations can be up to $1,000 per violation.

Criminal Penalties
In addition, a person may be subject to a fine of $250,000 or imprisoned up to five years for failure to file a SAR. If the violation is committed during a violation of another federal law or as a pattern of illegal activity involving transactions exceeding $100,000 in any 12-month period, the fine is increased up to $500,000 and/or 10 years in prison. Any person who knowingly makes any false, fictitious, or fraudulent statement or representation in the SAR may be fined up to $10,000 and/or imprisoned up to five years.

For recordkeeping violations, the penalty may not exceed $1,000 per violation and/or up to one year in prison. The fine increases to $10,000 and/or up to five years in prison if the violation was committed in furtherance of another federal crime.


FATF Recommendation 12 states that all financial institutions should maintain all necessary records on transactions for at least five years so they may quickly comply with information requests from law enforcement authorities. Some jurisdictions, including the United States, require that records be retained as long as the insurance policy or contract is in effect and for five years thereafter.

All relevant records should be kept in a readily retrievable form, which may consist of original hard copy, microform, or electronic data.

What is Office of Foreign Asset Control (OFAC)?

The US Treasury’s Office of Foreign Asset Control (OFAC) plays an extremely important role in the fight against money laundering. OFAC regulations specify which accounts and transactions are subject to economic sanctions. The terrorist attacks on September 11, 2001, and our national security have made it even more important to comply with OFAC regulations. Although OFAC regulations apply to all US businesses, financial institutions face intense scrutiny because they might be knowingly or unknowingly involved in money laundering.

At the core of OFAC regulations is the requirement that the financial institution identify the activity of specially designated nationals (SDNs). A SDN is viewed as a threat to the United States and is subject to a specific governmental sanctions program. OFAC maintains a SDN list that contains the names of individuals and entities that are subject to sanctions. The list can be found atwww.ustreas.gov/offices/enforcement/ofac.

In accordance with the regulations, a financial institution must block or freeze the assets of certain SDNs as they are identified. These funds or assets may not be released without the permission of OFAC. OFAC has created profiles to help financial institution determine which transactions to block. All blockings must be reported to OFAC within 10 days of occurrence.

OFAC may require the financial institution to refuse to do business with certain individuals, entities, and countries. OFAC has created rejection criteria to guide financial institutions on how to handle specific transactions. Any institution that doesn’t comply with OFAC regulations will be subject to fines and even criminal penalties.

Maximum penalties for OFAC violations were increased in October 2007 when President George W. Bush signed the International Emergency Economic Powers Enhancement Act.

Failure to follow OFAC guidelines could result in serious penalties. Criminal penalties ranging from $50,000 to $1,000,000 and/or imprisonment ranging from 10 to 30 years for willful violations may be imposed. Civil penalties range from $250,000 or twice the amount of each underlying transaction to $1,075,000 for each violation. The amount of any penalty that may be imposed will vary depending upon the type of violation and the country or SDN involved.

What are FATF High-Risk and Non-Cooperative Jurisdictions?

Between 2000 and 2006, FATF listed 23 jurisdictions as noncooperative countries and territories (NCCTs) due to a lack of an effective anti-money laundering/combating the financing of terrorism (AML/CFT) system. All of these jurisdictions were successfully removed from the listing by October 2006. FATF considers jurisdictions as “high-risk and non-cooperative when they have detrimental rules and practices in place which constitute weaknesses and impede international co-operation in the fight against money laundering and terrorism financing.”

In 2008, FATF expressed concerns about the AML/CFT deficiencies in Iran, Uzbekistan, Pakistan, Turkmenistan, São Tomé and Principe, and the northern part of Cyprus, and urged all jurisdictions to pay special attention to transactions dealing with Iran and Uzbekistan. Also in 2008, FATF began strengthening its procedures to respond to high-risk jurisdictions.

In February 2009, FATF called for additional countermeasures to protect financial sectors from money laundering and terrorist financing risks emanating from Iran. In June 2009, FATF adopted new procedures to identify noncooperative and high-risk jurisdictions and began reviewing the AML/CFT regimes of a limited number of jurisdictions. Upon completion of that process, jurisdictions found to be high risk or noncooperative at that time will be publicly identified and will require enhanced scrutiny and the establishment of appropriate countermeasures needed to protect financial systems.

FATF urges countries to attach criminal, as well as civil, liability to money laundering activities. In addition, countries are advised to adopt legislative measures that would allow for the confiscation of:

• property laundered;
• proceeds from money laundering offences; and
• instrumentalities used in the commission of these offenses.

It further recommends that countries adopt these measures of confiscation without requiring a criminal conviction.

FATF is currently coordinating a project to ultimately facilitate the implementation of international AML/CFT standards.

What are the Penalties for Money Laundering?

In view of the devastating events of September 11, 2001, it is not surprising that Title III of the USA PATRIOT Act put tougher penalties in place for failing to comply with legislative mandates related to money laundering.
Penalties for money laundering can be severe. Individuals convicted of money laundering face up to 20 years in prison for each money laundering transaction. Businesses and individuals face fines up to $500,000 or twice the value of the transaction, whichever is greater. Any property involved in the transaction or traceable to the proceeds of the criminal activity may be subject to forfeiture.

Under the provisions of the Controlled Substances Act of 1978, the Money Laundering Control Act of 1986, and the Anti-Drug Abuse Act of 1988, real or personal property purchased with laundered money is subject to government seizure and forfeiture.


Finally, an insurer and insurance agent must be diligent to protect against damage to the insurance company’s reputation and against damage to the personal and professional reputation of its agents and brokers.
Any adverse publicity about an insurance company’s business practices, associations, and employees, true or not, will cause a loss of confidence in the integrity of that institution and its agents.

Insurance companies are especially vulnerable to reputational damage because they can so easily become victims of their customer’s money laundering activities. Therefore, due diligence in transactions and in those of agents and brokers is paramount.

Review

• Money launderers as well as anti-money laundering organizations, such as the Financial Action Task Force (FATF) and the US Treasury’s Office of Foreign Asset Control (OFAC), are showing an ever increasing interest in the insurance industry.
• Money laundering is a process used to make money derived from criminal activities appear legal. In other words, make dirty money clean.
• Money laundering usually takes place in three stages: placement, layering, and integration.
• Insurers and insurance agents and brokers are most vulnerable to money laundering during the layering and integration stages of the money laundering cycle.
• It is at the layering and integration stages of the money laundering process that indicators of illegal doings are less obvious and the trail that links the money to the launderer and his activity fades. An insurance company's anti-money laundering program should take these facts into consideration and incorporate different or enhanced due diligence procedures to account for these phases.

The following are some examples of suspicious activities insurance professionals may encounter:

• A customer purchases a product that appears outside the customer’s normal range of financial means or estate planning needs.
• A customer uses multiple currency equivalents, like cashier’s checks and money orders, from different banks and money services businesses to make insurance policy or annuity payments.
• A customer designates an apparently unrelated third party as the policy’s or product’s beneficiary.

An insurance agent should focus on reporting such suspicious activities, rather than on trying to determine whether or not the transactions are in fact linked to money laundering, terrorist financing, or some other crime.

• The Bank Secrecy Act (BSA) of 1970 was intended to prevent financial institutions from being used for money laundering purposes. The BSA details the procedures, reports, and records that must be kept.
   
• The Money Laundering Control Act (MLCA) of 1986 made money laundering a criminal activity and, in 1994, the Money Laundering Suppression Act required regulators to enhance examination procedures and upgrade examiner training to improve the identification of money laundering schemes in financial institutions.
   
• Combating money laundering became a compelling priority for financial institutions on October 26, 2001, when President George W. Bush signed the USA PATRIOT Act into law. This act amended the BSA to bring all financial institutions under its regulations. Now, every financial institution (including insurance companies) has to establish formal anti-money laundering programs.

As they apply to all financial institutions, the anti-money laundering regulations require:

• the establishment of an anti-money laundering program;
• the creation of customer identification and verification programs;
• enhanced recordkeeping and reporting; and
• enhanced suspicious activity reporting.

• Only those companies in the insurance industry that pose a significant risk of money laundering and terrorist financing must comply with the anti-money laundering regulations.

• Insurers that must comply with the anti-money laundering requirements must develop and implement a company-wide anti-money laundering program. The purpose of the program is to prevent the company, its products, and its agents from being used for money laundering or terrorist financing purposes. To this end, the company must identify the risks it faces based on its products, customers, distribution system, and geographic location.

AML programs must focus on those covered insurance products with features that make them susceptible to being used for money laundering or for financing terrorists. These are known as covered products and include the following:

• A permanent life insurance policy, other than a group life insurance policy
• Any annuity contract, other than a group annuity contract
• Any other insurance product with features of cash value or investment

Covered products are those insurance products that are likely to present a higher degree of risk for money laundering.


There are minimum requirements to which every insurance company must adhere and include in their anti-money laundering program. These are as follows:

• The program must be in writing and made available to the US Treasury Department upon request.
• The program must be approved by senior management.
• The program must contain policies, procedures, and internal controls that are based on the insurer's assessment of the money laundering and terrorist financing risks associated with its specific products, clients, distribution channels, and location.
• The program must ensure that the company facilitates and obtains all the information necessary to make its anti-money laundering efforts successful. This includes collecting and maintaining relevant customer identification information. (The specific means to obtain such information is not mandated, but it is likely that a company's agents and brokers will be required to be actively involved with this stage of the program.)
• The company must designate a compliance officer who will be responsible for the administration, implementation, and upkeep of the program.

On the basis of a risk assessment, the insurer must construct its specific anti-money laundering program, which would include designing and implementing policies, procedures, and internal controls that ensure compliance with applicable BSA/USA PATRIOT Act requirements.

One of the requirements applicable to insurers is the obligation to make a currency transaction report on IRS Form 8300. A currency transaction report is generally required when an insurer receives more than $10,000 in cash in one transaction or in two or more related transactions.


Every financial institution must develop a CIP tailored to its profile and its specific money laundering risks, and each program must contain the following elements:

• Customer identity verification procedures. The customer must provide identifying information and the company must verify the accuracy of the information provided.
• Verification recordkeeping. The information provided by the customer must be recorded and maintained for five years after the account is closed.
• Government list comparison. The company must determine if the customer's name appears on any list of known or suspected terrorist organizations issued by the federal government (the Office of Foreign Assets (OFAC) list) within a reasonable time after the customer's account is opened or a product is purchased.
• Notification to customers. The company must provide customers with adequate notice that it is requesting information to verify their identities.

Agents and brokers should collect and retain information needed to assess the risk involved with particular transactions. This would involve information on the source of investment assets, the nature of the client, and the reason why the particular insurance product is being purchased.

An agent who knows of any facts that indicate suspicious activity must contact the AML compliance officer and must report any violations of policy. An agent must comply with all anti-money laundering laws and regulations.


The compliance officer should be competent and knowledgeable about BSA requirements and money laundering issues and risks. In addition, the compliance officer must be empowered to develop and enforce appropriate policies and procedures and ensure that company personnel are appropriately trained and educated.

An insurance company's anti-money laundering program must include training for all appropriate persons. In addition to orienting employees to the company's anti-money laundering program, the training should provide an understanding of money laundering risks in general so red flags can be recognized and associated with both existing and potential customers.

An insurance company's anti-money laundering program must provide for independent testing on an ongoing basis to ensure that it complies with the regulations and continues to function as it was designed.

If an insurance company is registered with the Securities and Exchange Commission (SEC) (e.g., an insurer that sells variable annuities), it will be deemed to have satisfied the insurance anti-money laundering program requirement to the extent it complies with the anti-money laundering rules applicable to SEC-registered companies and SEC-registered products.

What is SAR?

Another element of anti-money laundering regulations with which insurance companies must comply is reporting suspicious transactions to the US Treasury Department via FinCEN. These are known as suspicious activity reports (SARs).

The specifics of how insurers are to conform to the suspicious transactions reporting rules are set forth in Section 103.16(b) of the Bank Secrecy Act. They can be summarized as follows:

• An insurance company is obliged to report suspicious transactions that involve, separately or in the aggregate, at least $5,000 in funds or other assets.


• An insurance company is encouraged to report any activity that appears to violate the laws, regardless of the amount of the transaction.


• Four categories of transactions require reporting:
  • when it is known or suspected that funds associated with the transaction derived from illegal activity or that the transaction is intended to hide or disguise funds from illegal activity;
  • when the transaction is designed to evade the requirements of the Bank Secrecy Act;
  • when the transaction lacks apparent business or lawful purpose and the insurer, after reviewing all available facts, sees no reasonable explanation for it; and
  • when the transaction involves the use of the insurer to facilitate criminal activity (this is intended to ensure that transactions involving legal funds that the insurer believes are being used for an illegal purpose are indeed reported).

Every insurer must conduct its own assessment to evaluate the money laundering risks it faces on the basis of its products, customer base, and customer activity. From this assessment will come a suspicious activity monitoring and reporting program that is unique to the company and its business.

In order to fulfill an agent’s obligations under the USA PATRIOT Act, an agent must know the source of the funds that a customer will use to purchase a life insurance policy or annuity. Certain forms of payment can be used in the placement stage of money laundering. This includes cash, money orders, and cashier’s and traveler’s checks. An insurance company must manage the risk and may set limits on what types of payment it will accept and the amounts acceptable for different forms of payment. The goal is to lessen the chance that an insurance business will be involved in money laundering, without excluding types of payment with a legitimate business purpose.

Criminals frequently use a financial institution to transfer funds to launder money or to finance terrorism. Financial institutions are most vulnerable to abuse for those purposes. For their own protection, financial institutions must have adequate controls in place so they know with whom they are dealing. Adequate due diligence on new and existing customers is key to this process.

A red flag does not automatically require the filing of a suspicious activity report (SAR), but should be reported immediately to the AML compliance officer. Only an insurer is obligated to file SARs. The insurer’s agents and brokers are not. Insurers are required to obtain customer information from all relevant sources, which includes its agents and brokers, and must report suspicious activity based upon information from those sources.

To the extent that a transaction is conducted through an agent or broker, the company's monitoring program must address how information relevant to evaluating suspicious activity is to be captured. Changes to the way agents conduct fact-finding interviews, needs analyses, or revisions to a company's application form may be warranted so that customer information necessary for compliance with the regulations is captured. Agents may be required to adjust the manner in which they maintain client data (e.g., to include their personal observations and assessments of clients).

SARs generally must be filed with FinCEN no later than 30 calendar days after the date of the initial detection of facts that constitute the basis for the filing of the SAR.

An agent or broker must report to the AML compliance officer:

• transactions of more than $10,000 that are paid in cash or in cash-like instruments, such as a money order, traveler’s check or cashier’s check;
• suspicious transactions of $5,000, either as an individual transaction or in the aggregate for related transactions; and
• any red flag suspicious activity.

Insurance companies and their employees are prohibited from disclosing to anyone outside appropriate law enforcement circles that a suspicious activity report for insurance companies (SAR-IC) has been filed. Nor can they share any information about the report. The AML regulations, as amended by the USA PATRIOT Act, provide protection from liability for the filing of suspicious transactions and for not disclosing that they have made such a filing.

FATF Recommendation 12 states that all financial institutions should maintain all necessary records on transactions for at least five years so they may quickly comply with information requests from law enforcement authorities. Some jurisdictions, including the United States, require that records be retained as long as the insurance policy or contract is in effect and for five years thereafter.

The US Treasury’s Office of Foreign Asset Control (OFAC) plays an extremely important role in the fight against money laundering. OFAC regulations specify which accounts and transactions are subject to economic sanctions. At the core of OFAC regulations is the requirement that the financial institution identify the activity of specially designated nationals (SDNs). An SDN is viewed as a threat to the United States and is subject to a specific governmental sanctions program. OFAC maintains an SDN list that contains the names of individuals and entities that are subject to sanctions.