India: IRDA’s Money Laundering Notification

Last Updated: 11 September 2007
Article by Neeraj Tuli

In 2002 the Indian parliament passed the Prevention of Money Laundering Act 2002. The Act is applicable to every banking company, financial institution and intermediary. It extends to the insurance industry as well.

The implementation of the Act was deferred until 1st July 2005 while issues raised by various parts of the financial services industry were addressed. Those issues primarily concerned practical problems in implementing the provisions of the Act. The issues raised by the insurance industry took longer to resolve, but on 31st March 2006 the Indian insurance industry regulator, the IRDA, notified its Anti Money Laundering (AML) Guidelines effective from 1st August 2006.

The thrust of the guidelines is essentially as follows:

  1. The IRDA has made life Insurers responsible for spotting any suspicious or dubious financial transactions, and notifying these to the Office of the Director - Financial Intelligence Unit, Government of India.
  2. A suspicious transaction is a transaction (whether or not effected in cash) which gives rise to a reasonable ground for suspicion that it may involve the proceeds of any crime. The Guidelines provide an illustrative list of suspicious transactions, including those where the prospect insists on anonymity or frequently requests a change in his address details.
  3. Insurers must have in place internal policies, procedures and controls to ascertain the true identities of its customers. These include:
    1. Appointing a compliance officer.
    2. Training existing and new employees and agents.
    3. Conducting internal audits and checks.
    4. Having a policy for dealing with customer acceptance, customer identification and transaction monitoring. This policy must be filed with the IRDA and be reviewed annually.

  4. Insurers may not accept premium of more than Rs.50,000 (c $1,222) in cash.

The Know Your Customer (KYC) provisions have been the subject of particularly heated debate. One of the requirements is obtaining a recent photograph of the policyholder on all new Insurance contracts. Certain Insurers questioned the need for this in cases where policy payments were made via banks, as banks were also subject to the KYC rules and would have taken photographs of account holders. The question was why Insurers need to duplicate the process already undertaken by the banks, when it was just as effective to rely on the bank’s procedures.

Insurers made a number of representations to the IRDA on this and other issues. On 27th July 2006, the IRDA responded by relaxing the requirements in 2 respects. First, it dispensed with the need for the retrospective application of the AML guidelines from 1st April 2004, and directed compliance from 1st January 2006. Second, it ruled that the AML requirements would not apply to those insured’s whose premium fell below Rs.100,000 (c. $2,380).

These were significant concessions, but the IRDA continued to receive further representations seeking clarification and exemption, particularly regarding the need for photographs. It responded by way of a Circular issued in September 2006 in which:

  • It relaxed the requirements in relation to the type of documentation required from policyholders for KYC purposes, but ruled out general reliance on documentation that could be easily forged, eg business cards and driving licenses without photographs.
  • It refused to relax the requirement for proof of permanent residence and current residence.
  • Based on feedback from the Financial Intelligence Unit, the IRDA would not relax the need for photographs ‘till further orders’.

The Circular noted that the IRDA had considered other requests but was unable to issue further modifications to the rules.

The IRDA subsequently received a representation from General Insurers seeking a complete exemption from the AML given that general insurance products were short term contracts and therefore less susceptible to money laundering problems, and also because losses were investigated and assessed before claims were paid. On 9th November 2006, the IRDA directed that:

  • General Insurers could not have a blanket exemption from the AML, but it would only need to follow the AML at the time when a claim was made and payment was proposed to be made, or if a policy was cancelled and a refund was due.
  • General Insurers are subject to the KYC procedures if a claim payment or premium on a policy is more than Rs.100,000.
  • General Insurers may not effect any transactions with a blacklisted entity or individual, including individuals with suspected criminal backgrounds or terrorist links.
  • General Insurers must have in place procedures to ensure they do not cover assets which may have been purchased through the proceeds of money laundering.

These modified guidelines were made applicable to policies coming into force on or after 1st January 2007.

The industry continues to press the IRDA to review the AML, particularly the issue of photographs. These are a significant operational and financial issue for Insurers in circumstances where premium payments are low and the cost of obtaining photographs disproportionately high, especially in rural areas. The further representations seem to be having some effect: On 2nd March 2007, the IRDA relaxed the need for photographs on all individual policies where the annual premium is less than Rs.10,000 (c. $240). There are also exemptions in place for standalone medical and health insurance.

This toing and froing is likely to continue. Insurers do not dispute the AML’s objective or desirability, but question its application and particularly its impact on a relatively young industry (as far as new players are concerned) which is incurring significant expenditure in setting up operations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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