Anti-money Laundering (AML) Regulations for the Insurance Sector

Why is AML Compliance Necessary in the Insurance Sector?

Globally, the insurance sector has reported exposure to financial crime. A study conducted by PWC in 2018 revealed that 62% of the examinees had been vulnerable to financial fraud in the previous two years. The Financial Task Force (FATF), an intergovernmental regulatory body responsible for eradicating money laundering, notes that even though most of the products under insurance companies may not be the initial target for money launderers/criminals, they are still at risk of being a vehicle for laundering the money. For instance, the criminals use their illicit funds to buy life insurance annuity contracts. Alternatively, the opposite scenario occurs, where they withdraw money from life insurance contracts to fund other illicit activities. The agents/brokers working for insurance companies are mostly unaware of such false scenarios and subsequently fall prey to money laundering schemes.

Under the Bank Secrecy Act (BSA) of 1970, the insurance companies come under the term “companies/financial institutions”. This means that they need to establish and implement the compliance regulations same as other companies/financial institutions. The compliance program for the insurance sector covers their annuity contracts, life insurances, and other products. The act requires that insurance agencies maintain necessary records and file reports which will help law enforcement to investigate criminal activity and other financial crimes like tax fraud.

How to Practice AML in Insurance Companies?

While it is required that firms and insurance companies practice the AML compliance program, they should also ensure that they are not accountable for any crimes related to money laundering. The process of money laundering involves going through different stages that may not be as highly associated with the insurance companies as compared to other financial sectors. However, in certain cases, their involvement may be considered a crime. For instance, if the insurance company participates/engages with illicit funds, all while knowing its true origin, then they will become a part of the money laundering crime. Having full knowledge of the nature of the criminal proceeds and still choosing to hold any transactions with the funds means that the individual or company is oblivious to the situation and chooses to act without reporting or investigating the case involving the illicit funds. When an individual is suspected of being involved in illegal activities or has funds that are illicit proceeds, then this will be considered as a crime if the company chooses to escalate the situation. Other than allowing transactions, if the company or an employee/agent chooses to allow payment with the illicit money while having full knowledge and not investigating the source of funds, then they will be held accountable.

This means that the company should establish best practices of KYC compliance regulations, to prevent such scenarios and the integrity of the company from being harmed. The employees should start with the basic knowledge of the client, such as their name, DOB, and home address. If the client is revealed to be a Politically Exposed Person (PEP), then they should be screened against available databases for any link to criminal activity or corruption. In case of a scenario where the employee is suspicious of the customer, then they can report the suspicious individual with their details to the senior management as well as the compliance officer of the firm, both of whom can further connect with regulatory agencies.

If there are any violations of the BSA regulations, then those involved (individual/company) will incur severe criminal or civil penalties and risk of reputation. There will be additional regulatory enforcement actions by the Treasury, FinCEN, and other regulatory bodies. In order to prevent such violations, the insurance companies must develop an effective BSA/AML compliance program to mitigate any possible ML risks and protect the company from engaging in any criminal activity.

Anti-Money Laundering (AML) Compliance Program for Insurance Companies

In order to maintain a comprehensive, risk-based compliance program, which has effective processes and procedures that comply with AML regulatory requirements, the insurance company must abide by the following:

1. The insurance company should develop risk-based policies and processes along with internal controls in order to comply with BSA requirements for recordkeeping and reporting
2. They should designate a compliance/BSA officer who ensures daily compliance, checks the effectiveness of the BSA program, trains employees on an ongoing basis, and regularly updates the program when required
3. The ongoing training includes providing training about respective duties to the company’s agents, associates, and appropriate employees
4. Independent testing of the BSA program is completed by the officer at regular intervals
5. To get the customer’s required data that is necessary for the BSA/AML compliance program
6. To run regular risk assessments of the insurance company’s covered products

The Role of the Insurance Company when it comes to Anti-money Laundering (AML) Regulations 

The following are the role and responsibilities of the insurance company to maintain AML/BSA compliance within the organization:

Role and Responsibility of:

• Board Members: The company’s board faculty will supervise the senior manager and guide them accordingly as to how to comply with the BSA regulatory requirements and establish the policies. The BSA officer will share the compliance reports, based on the results of independent testing and risk assessments, with the board members, who will review them on a regular basis. It is the board’s responsibility to assign necessary resources and funding for implementing the BSA compliance function in the company
• Senior Manager: The senior manager’s duty is to execute the compliance program efficiently, along with the appropriate policies and processes. The senior manager works above the BSA officer and overlooks the necessary procedures and internal controls that are being operated successfully. The manager will set the tone for the company to follow the guidelines. These are necessary for compliance and to maintain a compliance culture throughout the company
• BSA Compliance Officer: It is the BSA officer’s responsibility to establish and implement the compliance program in the company:
• They need to develop the BSA initiative and update the compliance program when it is required and present the updated program to the board for approval
• They must review the risk assessment along with the internal controls that will be added to the program
• They will assess the new requirements for compliance, along with standards and procedures, and make the necessary changes according to the existing program
• They will ensure compliance with the BSA/AML regulatory requirements for reporting cash transactions, cross-border shipping, and transferring currency or any other financial asset/instruments
• They need to investigate any suspicious activity and file the SARs when it is necessary. They also need to review the process for identifying any suspicious activity within the company
• They must ensure that compliance training is provided to the appropriate employees, board members, and senior management
• They need to recommend the necessary resources and technology for maintaining compliance in the organization
• They must ensure that CDD processes include all the customer’s relevant data, along with the necessary documents, under the BSA compliance.

Read More: About the Financial Action Task Force (FATF) organization.

Read More: What is the role of a Money Laundering Reporting Officer (MLRO)?

Read More: Which countries are stated in the FATF Grey Countries List?

By Tookitaki | March 25, 2021

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