Life Insurance and Annuity Products
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.
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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 dollars in drug profits. Over 250 investment-type
insurance policies were purchased through brokers and funded with
checks and wire transfers submitted by brokers or other third-party
entities. |
Term Life Insurance
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 had been 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])
Insurers Brought into the Fold
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 in place sophisticated, extensive programs 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.
Layering and Integration Stages
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’s 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 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.
Let’s take a closer look at the money laundering process now.
Definition of Money Laundering
Money laundering is the process of making dirty money—that is, money derived from illicit drug, terrorist, or other criminal activities—appear legitimate. The term money laundering conveys a perfect visual picture of what actually takes place. Illegal or dirty money is put through a cycle of transactions designed to hide the source of the funds and make them appear clean or legitimate. Laundered funds can then be used without restriction.
Money laundering is a process that criminals use to make the proceeds from their crimes (dirty money) appear legitimate or clean.
Rough Estimates
Stages of Money Laundering
AML Requirements
Now, let’s look at the specifics of these regulations as they apply to insurance companies.
Included Companies
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. In this context, the definition of 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. FinCEN Per 31 C.F.R. §103.137
Excluded Agents
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 create an anti-money laundering program. For the moment, the regulatory agencies responsible for drafting the anti-money laundering rules believe that the insurance company is in the best position to design an effective program based on the nature of its business and the risk assessment it 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 their payment are exchanged in the market.
Minimum Requirements
Design AML Program to Company Profiles and Risks
Covered Products
Covered products are those insurance products that are likely to present a higher degree of risk for money laundering.
The following are not included in the definition of 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 insurance companies in 2007–2008 filed a total of 37 suspicious activity reports (discussed below) involving noncovered products that were not third-party or other life settlement products. Twenty-two of these (59%) are related to term life policies.
AML Program Minimum Requirements
The last three items are the core components of the AML program requirement.Risk Assessment
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 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 whoe government has been identified as a sponsor of international terrorism, has been designated noncooperative with international anti-money laundering principle, or warrants “special measures” per the secretary of the Treasury due to money laundering concerns?
Policies, Procedures, and Internal Controls
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 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. Any transactions conducted between a payer or its agent and the recipient during a 24-hour period are called related transactions. Transactions are related even if they occur over a period of more than 24 hours if the recipient knows, or has reason to know, that each transaction is one of 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.
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For the purpose of the anti-money laundering regulations and Form 8300 reporting, the term cash can refer to currency, a cashier's check, a money order, a bank draft, or a traveler's check. |
Form 8300 may be filed voluntarily for any suspicious transaction for use by FinCEN and the Internal Revenue Service (IRS), even if the amount of money involved is less than $10,000. In this context, a suspicious transaction is any activity in which it appears that 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.
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 that implement that requirement have been finalized and are now part and parcel of the Bank Secrecy Act's anti-money laundering compliance program. Each financial institution must develop a CIP that is tailored to its profile and its specific money laundering risks, but 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 whether 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 that the AML program may 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.
Role of Agents
Compliance Officer
Education and Training
Program Testing and Assessment
Exempt Organizations
Suspicious Transactions
Purposes of Suspicious Transaction Reporting
Suspicious Transaction Reporting Rules
The four categories of transactions that require reporting are:- 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 whether 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.
Source of Funds
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 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.
On the Safe Side
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
- 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
Risky
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 the 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 that 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 in order to make 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.
Importance
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.
Goals of a Policy
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:
- 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; and
- maintaining an awareness of unusual transactions or disproportionate activity relative to the customer’s income or worth.
Identifying Information
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 that the AML Program will be effective.
Information Gathered by an Agent
An agent should verify the information that the client has provided as much as possible.Customer Due Diligence
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 that 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.
Customer due diligence (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 5 (Customer Due Diligence and Record-Keeping) of its 40 Recommendations, which is recognized as the international standard for combating money laundering activities.
The CDD measures set out in Recommendation 5 do not require financial institutions to identify and verify a customer’s identity every time that a 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 that the customer’s account is operated that is not consistent with the customer’s business profile.
Non-documentary Verification
If an individual cannot legitimately present an unexpired government-issued identification that bears a photograph or if the agent may 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.
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 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:
- 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 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
Agent and Broker Involvement
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 kind of 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 who are using products or services that may be more susceptible to abuse in money laundering activity.
Suspicious Activity Reports: First Two Years of Mandatory Reporting
Under what is called the suspicious activity reporting rule, beginning May 2, 2006, 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 at least $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 suspicious activity reporting. Of this total, 641, or 33%, were filed in the first year of mandatory reporting (May 2, 2006–May 1, 2007) and 1,276, or 67%, were filed in the second year (May 2, 2007–April 30, 2008) nearly double that of the first year.
FinCEN anticipates an increased number of filings and qualitative improvements in those filings 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 on various suspicious methods of payment.
Filing Suspicious Transaction Reports
Civil and Criminal Penalties
Both civil and criminal penalties may be imposed against businesses and their employees who 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 asserted 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.
Recordkeeping
FATF Recommendation 12 states that all financial institutions should maintain all necessary records on transactions for at least five years so that 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.
Economic Sanctions
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). 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. The list can be found at www.ustreas.gov/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 blocking profiles to help the financial institution determine which transactions to block. All blockings must be reported to OFAC within 10 days of their occurrence.
OFAC requires more than just blocking of transactions. 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.
OFAC Violations
Maximum penalties for OFAC violations were increased in October 2007 when President 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 that was involved.
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, Principe, and the northern part of Cyprus, and urged all jurisdictions to pay special attention to transactions dealing with Iran and Uzbekistan. In 2008, FATF also 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, 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 High-Risk and Non-Cooperative Jurisdictions
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.
FATF is currently coordinating a project to ultimately facilitate the implementation of international AML/CFT standards.
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 the greater of $500,000 or twice the value of the transaction. 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.
Damaging a Reputation
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, whether or not true, 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 a victim of their customer’s money laundering activities and therefore due diligence in its transactions and in those of its agents and brokers is paramount.
Question
Which of the following civil penalties may be asserted against an insurance company for failure to file a SAR due to negligence?Question
Which of the following organizations maintains a list of SDNs?Individuals convicted of money laundering can spend up to how many years in prison for each money laundering transaction?
Regulation
As a result of the terrorist attacks on
September 11, 2001 (9/11), Congress enacted the “Uniting and
Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism” Act. This act, commonly referred to as
the USA PATRIOT Act, was signed into law by President George W. Bush on October 26, 2001.Section 352 of the USA PATRIOT Act, in part, requires financial institutions to establish an anti-money laundering (AML) program. Financial institutions must develop and implement AML programs that, at a minimum, include the following:
- The development of internal policies, procedures, and controls;
- The designation of an AML compliance officer;
- An ongoing training function; and
- An independent audit function to test the program.
When FinCEN (Financial Crimes Enforcement Network) in the Department of the Treasury wrote the PATRIOT Act’s Anti-Money Laundering (AML) Program Regulations for insurance companies, it did not require agents and brokers to establish their own AML programs as part of their responsibilities under the Regulations. Instead, FinCEN relied on the adequacy of the company’s AML program to integrate its agents and brokers into the program, but left open the possibility of revisiting that decision.
FinCEN has designated the IRS to examine insurance companies’ AML programs. An IRS examiner may contact or visit you to assess your AML knowledge—whether you “know your customers,” know what “red flags” are, and know what to do if you encounter one.
FinCEN’s PATRIOT Act AML Program Regulations state that:
The penalties associated with money laundering are severe.
- Insurance companies’ AML programs “must include procedures for obtaining all relevant customer-related information necessary for an effective program, either from its agents and brokers or from other sources.”
- “An insurance company is responsible for integrating its agents and brokers into its anti-money laundering program, for obtaining relevant customer-related information from them, and for using that information to assess the money-laundering risks presented by its business and to identify any ‘red flags’.” (emphasis added)
- "Insurance agents and brokers will play an important role in the effective operation of an insurance company's AML program. By not placing an independent regulatory obligation on agents and brokers, we do not intend to minimize their role and we intend to assess the effectiveness of the rule on an ongoing basis. If it appears that the effectiveness of the rule is being undermined by the failure of agents and brokers to cooperate with their insurance company principals, we will consider proposing appropriate amendments to the rule." (emphasis added)
Violations
Financial institutions, their
employees, and producers must maintain strict compliance with AML
regulations. Individuals and organizations can be held liable for
violations of AML laws in the following ways:
Negligence
A failure to comply with regulatory standards that is not willful or
intentional. Ignorance of the standard or improperly filling out the
necessary documentation is not a defense.
Willfull Blindness
A deliberate effort to avoid or ignore information that could lead to
the discovery of unlawful activity. For example, an individual is
considered to be willfully blind if he or she has suspicions regarding a
client’s transaction activity or has reason to question the true
identity of the beneficial owner of an account, but deliberately chooses
not to follow up on those suspicions, preferring instead to remain
ignorant of the true circumstances. Willful blindness is punishable
under the law with a severity similar to that of an intentional
violation.
Intentional Non-Compliance
This includes one or more of the following:- Failing to complete the required AML training or having another party complete the training on one’s behalf.
- Knowingly engaging in laundering money that comes from criminal activity or that will be used to finance terrorism.
- Knowingly engaging in a transaction involving property representing the proceeds of criminal activity.
- Structuring, or advising others to structure, transactions to avoid AML reporting requirements.
- Causing, or attempting to cause, an institution to fail to file a required report or to file a required report with material omissions or misstatements of fact.
Ramifications
The penalties associated with money laundering are severe.- Fines may be twice the amount of the transaction up to $1 million.
- Property involved in the transaction may also be subject to seizure and forfeiture.
- Employees and producers of financial institutions can be fined individually and sentenced to up to 20 years of imprisonment for knowing or being willfully blind to the fact that the transaction involved illegal funds. You can protect yourself from charges of willful blindness by reporting any suspicious behavior to the carrier's compliance officer and keeping documentation of your report.
- Reputational risk to you, your firm, and the company you represent.
Stages of Money Laundering
Money laundering is the illegal practice
of placing money gained from criminal activity through a series of
apparently legitimate transactions in order to hide the criminal origin
of the money. The goal is to make money from criminal activity appear to
be from legitimate sources. Although money laundering is a complex
process, it generally follows three stages. These stages can occur
simultaneously, separately, or can overlap.
Most
money laundering through insurers occurs at the layering and
integration stages. It is less common, but it can happen, during the
placement stage when illicit funds first enter the financial system. IRS
examiners want to know that if a carrier prohibits payments by cash,
you would know what to do if a client attempts to pay with cash.
It
is important to distinguish between the client information that
insurance companies are required to obtain and the Customer
Identification Program (CIP) Regulations that apply to broker-dealer AML
programs and their Registered Representatives who sell variable life
and variable annuity products.
Below is an excerpt from FinCEN’s Frequently Asked Questions about the PATRIOT Act insurance company AML regulations.
Stage 1: Placement
The initial stage in which money from criminal activities is placed
in financial institutions. One of the most common methods of placement
is structuring – breaking up currency transactions into portions
that fall below the reporting threshold for the specific purpose of
avoiding reporting or recordkeeping requirements. Because most carriers
do not accept cash payments, you should be on the look out for cash
equivalents. Methods may include:- Payments of premiums for policies or segregated fund annuities
- Large number of transactions
- Using cash or cash equivalents rather than through banking channels
Stage 2: Layering
The process of conducting a complex series of financial transactions,
with the purpose of hiding the origin of money from criminal activity
and hindering any attempt to trace the funds. This stage can consist of:- Multiple transactions
- Borrowing against insurance policies
- Termination of policies
- Early termination of annuities
Stage 3: Integration
The final stage in which an apparently legitimate transaction is used
to return the now-laundered funds back to the criminal. Criminals use
"laundered funds" to purchase legitimate assets, such as:- Money assets
- Fixed assets
- Businesses
Stages of Money Laundering (continued)
Most
money laundering through insurers occurs at the layering and
integration stages. It is less common, but it can happen, during the
placement stage when illicit funds first enter the financial system. IRS
examiners want to know that if a carrier prohibits payments by cash,
you would know what to do if a client attempts to pay with cash.
CIP
It
is important to distinguish between the client information that
insurance companies are required to obtain and the Customer
Identification Program (CIP) Regulations that apply to broker-dealer AML
programs and their Registered Representatives who sell variable life
and variable annuity products. Below is an excerpt from FinCEN’s Frequently Asked Questions about the PATRIOT Act insurance company AML regulations.
Presently,
insurance companies are not subject to a rule requiring them to
implement a Customer Identification Program and obtain minimum mandatory
information verifying the identity of a customer. Nevertheless, other
applicable Bank Secrecy Act regulations require insurance companies to
obtain and retain identifying information from customers in certain
situations. For example, insurance companies must obtain all relevant
and appropriate customer-related information necessary to administer an
effective anti-money laundering program.
CIP
It
is important to distinguish between the client information that
insurance companies are required to obtain and the Customer
Identification Program (CIP) Regulations that apply to broker-dealer AML
programs and their Registered Representatives who sell variable life
and variable annuity products. Below is an excerpt from FinCEN’s Frequently Asked Questions about the PATRIOT Act insurance company AML regulations.
Presently,
insurance companies are not subject to a rule requiring them to
implement a Customer Identification Program and obtain minimum mandatory
information verifying the identity of a customer. Nevertheless, other
applicable Bank Secrecy Act regulations require insurance companies to
obtain and retain identifying information from customers in certain
situations. For example, insurance companies must obtain all relevant
and appropriate customer-related information necessary to administer an
effective anti-money laundering program.
CIP Regulations applicable to broker-dealers under the PATRIOT Act impose specific requirements on them to verify client information. FINRA rules replicate CIP requirements for the AML programs of its member firms. Those rules apply to all securities products, including variable annuity and variable life insurance products.
Regardless of whether a CIP is required on the product that an agent or a broker sells, he or she should know who his or her client is and the source of the client’s funds.
As many agents and brokers offer both registered and non-registered products, this course addresses both the information required by insurance companies and by the CIP of broker-dealers who distribute variable life and variable annuity products of insurance company manufacturers.
Since variable products must be sold by a broker-dealer, the broker-dealer’s CIP procedures apply to the client information Registered Representatives collect in order to “know their customers.”
CIP requirements include:
- Obtaining client information:
- The name of the individual or entity,
- Date of birth for an individual,
- A physical residential address for an individual or a business address for a business, and
- An identification number (e.g., Social Security Number or Taxpayer Identification Number).
Verifying identity:
- Documentary methods of verification, or
- Non-documentary methods of verification.
CIP requirements include:
Maintaining records of all information obtained, including:
- All client information obtained.
- Description of the document relied on, noting the type of document and its identification number, if any, place of issue, and, if any, date of issue and date of expiration.
- Description of methods and results of non-documentary verification.
- Description of the resolution of each substantive discrepancy discovered when verifying the information obtained.
Verifying Identity – Documentary Method for Individuals
To
verify the client’s information obtained from an individual, the
broker-dealer’s CIP may require the recording of information from a
current, government-issued identity document that includes a photograph
of the person. Examples of identity documents are:
- Driver’s license
- U.S. passport
- State photo ID card
- U.S. military ID card
- Resident alien ID card (green card)
Information that must be recorded includes:
- The type of document reviewed, and its identification number, if any
- The place of issue
- The date of issue, if this is on the document
- The expiration date
Verifying Identity – Documentary Methods for Entities
If
the client for a variable annuity or variable life insurance is an
entity – such as a trust, a corporation, or a partnership – copies of
the following documents, as relevant to the type of entity, may be
required by the broker-dealer:- Trust Instrument
- Certified Articles of Incorporation
- Certificate of Good Standing
- L.L.C. Operating Agreement
- Partnership Agreement
- Government-Issued Business License
Verifying Identity – Non-Documentary Methods
If
the variable annuity or variable life insurance sales process is not
conducted in person, or if the broker-dealer does not require the review
of an identity document for a client when meeting in person, the broker
dealer will use one or more non-documentary methods to verify the
client information obtained.Under CIP regulations, a broker-dealer’s non-documentary methods may include:
- Contacting the client directly;
- Comparing information provided by the client with information obtained from a consumer reporting agency, public database, or other third-party source;
- Checking references with other financial institutions; and
- Obtaining a financial statement.
Know Your Customer
The products for which insurance companies must obtain sufficient client information to meet their regulatory requirements for identifying and reporting suspicious activity are those that have features of cash value and investment. The required information is name, address, date of birth, and a Social Security, Taxpayer Identification, or other identifying number.
Since it is the producer that has direct contact with the client, the carrier relies on the producer to collect the necessary information, to notify the carrier if there are red flags related to information the client provides, and to respond to company requests for client information.
Knowing your customer decreases the chance that you or a carrier will be used to facilitate money laundering. Knowing your customer makes it more likely to identify red flags when they occur, which may be the single most important deterrent to money laundering.
When a company has identified red flags during its review of applications or during monitoring of ongoing transactions, it is necessary to provide client information that will help the company determine whether the red flags warrant filing a Suspicious Activity Report (SAR). Knowing your customer will make this possible.
“Know your customer” involves developing a comprehensive profile for every person or entity who is a client. The comprehensive client profile is also part of a good needs analysis and can support meeting applicable suitability requirements. In addition, LIMRA research shows that a client who receives a needs analysis is more likely to buy and remain a client; thus it benefits the business to know your customer.
Completing a client profile is relevant for all agents and brokers. The client profile is in addition to the information required by insurance companies on annuity and life insurance application forms (i.e., name, street address, date of birth, an identification number, such as SSN or TIN, for insureds/annuitants and, when different, for owners).
Client Profile
Information collected and retained on a client should include items like the following:- Details about the client’s business, occupation, or profession.
- The source of the client’s wealth (i.e., how the client obtained his or her wealth).
- The source of funds to be used as payment for a policy (e.g., salary income, investments income, or savings versus a one-time windfall such as inheritance or lottery winnings).
- The client’s current income and the source of his or her income.
- The client’s assets and net worth.
- The client’s involvement in governmental entities or activities, and whether he or she was elected or appointed, or volunteered.
- The client’s involvement in his or her community.
- How he or she came to be a client.
The information will help in reviewing
transactions and identifying red flags as they occur. It is also
critical to assessing the risk associated with a particular client and
identifying clients who may pose a higher risk of money laundering, such
as those owning cash-intensive businesses or who are politically
exposed persons (PEPs). Since a vast majority of clients are not
involved in money laundering, it is important to be able to recognize
red flags quickly in instances where they may appear.
Enhanced Customer Due Diligence
When client information is collected and
the client profile is completed, information may be identified that
makes a client a higher risk for engaging in money laundering. However,
such information does not mean the client is a money launderer or the
client is likely to use an annuity or a life insurance product to
launder funds. Nonetheless, it is a “best practice” to be aware of what factors make a client a higher risk and why.
- A client in a cash-intensive business may be a conduit for money launderers who provide cash to the client to place into an insurance policy and then retrieve it during a free-look period, or during early, full, or partial surrender(s), or by taking loans against the policy.
- A client in a cash-intensive business may present you with cash to convert to a monetary instrument to avoid paying taxes on those funds.
- A client in an elected or appointed government position (particularly in a foreign government) is considered higher risk due to possible corruption, misappropriation of funds, or bribery. These persons are known as politically exposed persons, PEPs, or politically exposed foreign persons, PEFPs.
C
lients from certain locations in the U.S. or from certain foreign countries are considered higher risk because those places:- Are known to be high financial crime locations in the U.S. (HIFCAs).
- Are known to be high intensity drug trafficking locations in the U.S. (HIDTAs).
- Are countries cited by the U.S. Department of State, Department of the Treasury, or the Financial Action Task Force (an international AML watchdog) to have weak anti-money laundering regulations or weak enforcement of their regulations, or to be centers of financial crime or drug trafficking.
In the U.S., those areas are generally the border states and the major counties and cities within them. You can search the Web for the acronyms to see the lists of HIFCA and HIDTA locations. You also can perform a Web search on the Department of State site to see “State Sponsors of Terrorism,” the Department of the Treasury site to see FinCEN “Country Advisories” and countries and entities subject to “Special Measures,” and the Financial Action Task Force site to see a list of jurisdictions with weak, or weakly enforced, anti-money laundering regimes.
Red Flags Overview
The
purpose of obtaining client information is to ensure the client is who
he or she claims to be, and to know enough about the client to be able
to identify red flags related to the information the client provides or
the types of transactions he or she may make. Red flags
are communications, oral or written, and actions that raise
suspicion—they don’t feel right or sound right, they don’t make business
sense, or they are inconsistent with what you know or expect.Red flags can show themselves at any point in the relationship with a client—during pre-sale information gathering, during needs analysis and writing an application, when closing a sale and placing the business in-force, and at any time after a policy is in-force.
The following screens review red flags which may be encountered:
- During the sales process,
- When closing the sale and funding the policy, and
- During the life of the policy.
Red Flags during the Sales Process
- Client is evasive or unwilling to provide customary information or an identity document for verification.
- Information client provides is inconsistent with what you know about him/her or that can be corroborated through other sources.
- Client provides a post office box for address and does not have, or refuses to provide, a street address.
- Client wants life insurance coverage, or to invest funds in an annuity, for an amount that is inconsistent with the financial information obtained.
- Client is more interested in product liquidity than in its cost and performance.
- Client has questions about government reporting that will be required if he purchases.
- Client is from a distant place and wants to do business with you without a credible explanation.
- You suspect client is acting as a “front” for an undisclosed third party.
- Client was introduced by an agent or a referral source in an area known for a high level of financial crimes or drug trafficking.
Red Flags when Closing the Sale and Funding the Policy
- Client presents cash for the purchase and requests that it be changed into a form the company will accept.
- Client wants to pay by a cash equivalent method of payment when payment would normally be made by personal or business check.
- Client wants payment to be made by a third party, without a credible explanation.
- Client wants to make payment in a foreign currency or wants it to be wire-transferred from a foreign jurisdiction.
- Client wants to endorse to the company a third-party check made payable to him or her.
- Client presents several payment instruments in place of a single instrument for payment of the premium (structuring); if cash equivalents, they are higher risk payment methods.
- Client makes a large overpayment, requesting a refund of the excess amount.
Red Flags during the Life of the Policy
- Client surrenders the policy early or during the free-look period without a credible explanation.
- Client wants to pay by a cash equivalent method of payment when payment would normally be made by personal or business check.
- Client wants payment to be made by a third party, without a credible explanation.
- Client wants to make payment in a foreign currency or wants it to be wire-transferred from a foreign jurisdiction.
- Client wants to endorse to the company a third-party check made payable to him or her.
- Client presents several payment instruments in place of a single instrument for payment of the premium (structuring); if cash equivalents, they are higher risk payment methods.
- Client makes a large overpayment, requesting a refund of the excess amount.Course SummaryOverview
- Insurance companies are required to develop and implement anti-money laundering programs.
- Violations may be due to negligence, willful blindness, or intentional non-compliance.
- Potential penalties associated with money laundering include fines, imprisonment, seizure and forfeiture of the property associated with the crime, and damage to the reputation of the parties involved.
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