Part two
Defining suspicious transactions
There are a number of “red flags” that should alert insurance companies. Among these are a) funding a policy using payments from a third party; b) purchasing single-premium investment-linked policies, then cashing them in a short time later; c) payment of premiums from different (multiple and diverse) sources or third-party funding; d) overpayment on a policy, then asking for a refund; e) unusual relationship between the policyholder and the beneficiary; f) practicing “structuring” or purchasing several policies below the reportable limit, instead of purchasing one large policy; g) the customer is more interested about the cancellation terms than about the benefits of the policy; h) making payment of premiums via offshore banks; i) insurance policies with premiums that exceed the client’s apparent means; and j) transactions involving an undisclosed party.
Lower risk in insurance sector
According to a 2004 report of the International Association of Insurance Supervisors (IAIS), the vulnerability of the life-insurance industry is not regarded as being high compared to the other sectors of the financial industry. According to the Financial Action Task Force (FATF) Typologies Report (2004-2005), there is a low level of insurance related STRs in comparison to the total STRs received by the financial investigation units. From 1999 to 2003, 23 jurisdictions had only 3 percent total insurance-related STRs, while only two jurisdictions had more than 20 percent total insurance-related STRs. The FATF stated that earlier typologies research “indicated that there was a low detection of money laundering within the insurance industry in comparison to the size of the industry and in comparison to other parts of the financial services industry.” It furthermore added that “the insurance sector’s relative size within the financial services industry of each jurisdiction is such that one would expect it to be exposed to the risk of being infiltrated by money launderers and criminals in general to a much wider extent than the number of STRs would indicate.” Vincent Schmoll, principal administrator at the FATF secretariat stated that “there would appear to be less of it [money laundering] in the insurance industry than in other financial sectors.” These figures may lead to the conclusion that the number of actual money-laundering cases related to life insurance is low when compared to the actual size of the life-insurance market. It can also lead to a conclusion that insurers are failing to identify suspicious transactions. But it has been pointed out that the insurance industry would “certainly be one of the more complicated and lengthier channels” for ML. The FATF holds an annual exercise to examine the methods and trends—the typologies—of money laundering.
The FATF pointed to the reliance on brokers by the industry and the “lack of an industry-wide commitment to address this risk” as the possible reasons for the low detection of ML within the insurance industry.
According to Steven Emerson of the Investigative Project, a nonprofit organization, “[T]he insurance industry is a kind of second-tier financial services industry. The companies may now have to file suspicious activity reports, but remember that they’re not the ones necessarily setting up accounts all the time or the ones that are receiving the lion’s share of direct deposits. The major share of responsibility always falls on the first tier of financial services, the deposit-taking companies.”
A theory has been forwarded that introduction of money-laundering measures did not really pose that much challenge in the insurance industry because in insurance underwriting the “insurer already had risk-assessment procedures indirectly incorporating features very similar to antimoney-laundering precautions.” These procedures have been put in place not against money laundering but against insurance fraud. Indeed, many state regulators have required the reporting of insurance fraud.
Role of intermediaries
AT the forefront of antimoney-laundering measures are the insurance intermediaries (i.e., the brokers and agents). Intermediaries are the ones in direct contact with the clients and not the insurers. Indeed, “intermediaries are an insurer’s first line of defense.” It is therefore important that intermediaries receive adequate training on AML/FT legislations. According to Franz-Josef Werle, director at the European committee of insurance associations, “Normally it is done by an intermediary, an agent or broker, and normally it’s up to them to take on the identify obligation for the client—it’s up to the intermediary to do the job and verify the client.” Money launderers may deliberately seek out insurance brokers who are not aware of, or does not conform necessarily to, the procedures. It has been observed that intermediaries may be too focused on making a sale and may overlook money-laundering indicators.
To be continued
Dennis B. Funa is currently the deputy insurance commissioner for Legal Services of the Insurance Commission. E-mail: dennisfuna@yahoo.com.