As evident in my other articles, money laundering and/or terrorist financing can happen in any industry, which the insurance industry is not an exception. Because money laundering/ terrorist financing is gaining popularity in Ghana, the Financial Intelligence Center (FIC) and the National Insurance Commission (NIC) jointly issued guidelines on Anti Money Laundering/ Combating Terrorist financing (AML/CFT). But the question is, do these insurance companies and/ or brokers really know how vulnerable their activities (products and/ or services) are to money laundering/ terrorist financing?
Much of the education and awareness of money laundering/ terrorist financing is centered on the financial institutions, especially banks, operations. Criminals are now shifting their attention to the insurance industry to wash their dirty money. It is because of this reason why I want to create the awareness of money laundering/ terrorist financing vulnerability in the insurance industry with this article.
Money laundering, according to the United Nations 2000 Convention Against Transnational Organized Crime:
- Is the conversion or transfer of property, knowing it is derived from a criminal offense, for the purpose of concealing or disguising its illicit origin or of assisting any person who is involved in the commission of the crime to evade the legal consequences of his actions.
- Is the concealment or disguising of the true nature, source, location disposition, movement, rights with respect to, or ownership of property knowing that it is derived from a criminal offence.
- Is the acquisition, possession or use of property, knowing at the time of its receipt that it was derived from a criminal offense or from participation in a crime.
Money laundering is the generic term used to describe the process by which criminals disguise the original ownership and control of the proceeds of criminal conduct by making such proceeds appear to have been derived from a legitimate source. Money Laundering in simple terms means making dirty money look clean.
Terrorist financing on the other hand, is the process by which terrorists fund their operations in order to perform terrorist acts. Terrorists need financial support to carry out their activities and to achieve their goals.
For money laundering to exist, there should be an identified criminal activity, which the criminal is enjoying or has enjoyed some profit or benefits from the crime. These criminal activities are illegal arms sales, counterfeiting, computer fraud schemes, tax evasion, child trafficking, prostitution, brothel, narcotics trafficking. Smuggling, embezzlement, insider trading, bribery etc.
Iife insurance products that have investment features are vulnerable to money laundering and/ or terrorist financing because these criminals uses their dirty money to pay for the premium of the life insurance product purchased. Because of the investment feature on these products, the criminal has right after a period of time to redeem the insurance without any penalty. The insurance company issues a cheque or makes a transfer directly to the criminal’s bank account. The transaction will be considered as normal with the explanation “redemptions of insurance”.
Annuity contracts/ policies also pose a significant money laundering risk in the insurance industry because they allow criminals to exchange their illicit funds for an immediate or deferred income stream.
Another way criminals wash their dirty money through the insurance industry is by taking advantage of the “Free Look Period”. This is the period which allows new life insurance policy owner to terminate their policy without penalties, such as surrender charges. The free look period is for the benefit of a policyholder. It provides additional time to review a new life insurance policy in depth, and have the policyholder’s agent, lawyer or company representative review the policy’s terms and conditions. Criminals take advantage of this period by buying a life insurance product with the dirty money and cancels the contract by giving one excuse or the other and ask for a refund of the his or her money. Guess what the insurance company will do? Issue out a cheque or make a direct transfer to the criminal’s bank account.
Purchasing a general insurance policy to insure some high-value goods/ properties is one of the techniques used by criminals to launder their dirty money. Criminals usually insure their high-value properties (including properties of associates and business partners) such as mansions, Ferrari, Bugatti with their ill-gotten money and make a false and/or genuine claim against the policy. As usual, the insurance company will issue a cheque or make a direct transfer to the criminal’s bank account. This gives legitimacy to the dirty money introduced.
Also insurance products and/or policies purchased through insurance brokers poses a high risk for the insurance companies as at times the identity of the policyholder might not be known to the insurance company. Criminals use these brokers to hide their identity and source of fund to wash their ill-gotten funds.
Mention can also be made of purchasing marine and casualty insurance cover for a phantom ocean-going vessel, as one of the ways to launder ill-gotten fund in the insurance industry. The criminal will pay for the large premium on the policy with the dirty money.
Criminals can also wash their dirty at the layering stage by purchasing a life insurance policy through an intermediary check/direct debit and use the policy to secure a bank loan. The money launderer then surrenders the policy to repay loan soon after.
Terrorist also perpetuate their criminal activities through the insurance industry by taking a life and/or funeral insurance policy covers for their workers (those who carry out the act of terrorism). They then make a claim against the policy when these workers die in the act of terrorism.
The following activities and behaviors (not exhaustive) may be considered as suspicious and staff of insurance companies and brokers should take note and perform further due diligence. These activities and behaviors might be genuine but need to be reported for investigations to be carried out.
- Paying a large “top up” into an existing life insurance policy
- Purchasing a general insurance policy, then making a claim soon after
- A customer who usually purchase small policies, suddenly request for a large lump-sum contract
- A customer who wishes to fund policy using payment from a third party
- Purchasing one or more single-premium investment-linked policy, then cash them in a short time later
- Where the relationship between the policy holder and beneficiary seems unusual
- Using the free look period.
- Structuring- ie purchasing several policies just under the reportable limit, instead of purchasing one large policy (in some countries all transactions over a certain limit must be reported to the appropriate authority)
- Where the customer is more interested in learning about cancellation terms than about the benefits of the policy
- Redemption of a policy which is unusually early or does not make good economic sense
- Purchasing product which are inconsistent with the buyers’ age, income, employment or history. Eg. 60 year old buying an education policy for him or herself.
- The funds coming from another country particularly high-risk jurisdiction.
A customer who want to pay a large premium with foreign currency or by way of wire transfer.
“Know Your Customer” (KYC) principles is one of the best ways to fight the issue of money laundering and/or terrorist financing in the insurance industry. Rigorous, effective and ongoing customer due diligence practices in the daily activities of the insurance companies at the on-boarding stage will help gather much information about the customers and the transactions they want to undertake. At least the identity of the customer and the source of the fund will be known. Enhanced Due Diligence (EDD) should be perform on all high risk customers such as Politically Exposed Persons (PEP), Financial Exposed Persons (FEP), NGOs etc. Also the insurance companies need to do KYC on their brokers to know the real owners behind the brokerage firm and the firm’s compliance level towards money laundering/ terrorist financing risk. This will help evaluate a situation where one or more red flags are raised.
Another way insurance companies and brokers can fight money launder and terrorist financing is constant training of their staff (including cleaners and security men). This will create the necessary awareness about the issue and reduce the tendency of “willful blindness” and “tipping off” (which are criminal offences). It will also help staff to identify red flags and/or suspicious activities.
Insurance companies and brokers should appoint a senior management staff to handle all suspicious transactions and behaviors and be the liaison officer between the company and the government agency (Financial Intelligence Centre). There should be procedures put in place to identify and report all suspicious transactions and behaviour to the Anti Money Laundering Reporting Officer (AMLRO. The AMLRO investigate these suspicious transactions and behavior reported before reporting them to FIC.
In order to ensure compliance to the Anti-Money Laundering Act, 2008 (Act 749), the Anti-Terrorism Act, 2008 (Act 762) and the Anti-Money Laundering Regulations, 2011 (L.I.1987) insurance companies need to have their Anti Money Laundering program tested on an annual basis by an independent body. This will make them invulnerable to the risk of money laundering and terrorist financing and regulatory sanctions.
Imbibing the risk culture among industry players will also help in preventing criminals from laundering their dirty money and/or financing terrorist activities. The statement “it would not happen to me” should be discouraged but rather encourage the statement “can happen to me” or “I could be used”. Having the right mind-set and sound risk culture will help formulate the right frameworks, policies and processes against money laundering and terrorist financing.
The fight against money laundering and terrorist financing must be embraced by every Tom, Dick and Harry, as criminals are using every means possible to launder their ill-gotten funds.
If you require further information on this article, please contact Richieson @ [email protected]
By Richieson Gyeni-Boateng (CAMS)