The approach of many insurers, reinsurers and other entities operating in the insurance sector to compliance with anti-money laundering (AML) regulations and rules needs to be readdressed. Comments heard on a regular basis are:
"We do not deal in cash" or "we are not a retail bank, so what is the issue" to "money laundering does not happen in the insurance industry". The most common sound bites are "it is not our problem; we rely on the bank/broker/introducer to undertake the requirements" to the extreme of "it is not fair, we are an insurer and we do not meet the clients". Irrespective of these perceptions, it is indeed the individual company's legal and regulatory problem. Entities operating in the insurance sector should heed the warning bells being sounded by regional regulators in recent actions against financial service institutions.
The Dubai Financial Services Authority's (DFSA) is one of the most proactive regulators in the region, taking swift and clear action against firms that do not comply with its AML rules. However, other regulators in the region are also becoming increasingly active in this area. Many entities in the insurance sector do not seem to have recognised the risk of action by regulators.
Recently, Saxo Bank Dubai (Saxo) was publicly sanctioned by the DFSA for not complying with the AML rules. Saxo was not fined in this instance and the public statement in relation to this action extends beyond AML and includes breaches of market conduct rules including failing to classify and identify clients; sign client agreements; perform ongoing due diligence; adequately monitor client transactions; and maintain appropriate systems and controls in relation to politically exposed persons. The DFSA stressed that Saxo's regulatory breaches increased the risk of its business being used for money laundering purposes, but noted that there was no evidence that any money laundering had actually taken place. The censure noted that no fines would be imposed on Saxo.
Following swiftly on the heels of the action taken against Saxo was an enforceable undertaking by the DFSA on E*Trade for failures of systems and controls in relation to AML requirements. In addition to the public sanction, E*Trade also agreed to pay a financial penalty of USD $300,000 and E*TRADE fulfilling a number of undertakings to many aspects of their current practices.
The warning bells sounded by these actions should be heeded by those entities in the insurance sector. Regional regulators have introduced new AML rules and requirements and issued messages that financial crime is increasingly an issue on which they are focused. The time has passed for the insurance industry to appreciate AML risks and to implement robust systems and controls. The insurance sector needs to recognise that:
- the life insurance sector is particularly vulnerable
- general insurance and the takaful sector is not immune
- the AML regulations apply equally to reinsurance
- unique exposures arise from the long distribution chain used in insurance and, in particular, the fact that there is heavy reliance at the beginning of the chain for Customer Due Diligence
- there is a low understanding of AML and terrorism financing in the insurance sector
- few entities have conducted a full financial crime risk assessment
- internal compliance monitoring of AML and other financial crime risks is currently low
- employee and management training in relation to AML needs to be implemented
- overall the industry has weak compliance practices that need to be reviewed and revised
There is no doubt that the prevention of financial crime is a focus of regulators and firms must demonstrate not just compliance with the rules but also the spirit of the rules.
For those who take the view that simply paying fines to regulators is easier then complying with the AML rules, senior management should consider that, on average, its costs a firm eight (8) times more to undertake the subsequent rectification work than the fine itself. There is also a real risk of criminal sanctions in the event of actual money laundering arising from the failure to implement adequate systems and controls. Additionally, it is impossible to measure the cost of reputational damage to your firm and market counter parts if you are "named and shamed" by a regulator for non-compliance or worse, money laundering actually happening through your business. Just picture your company's name in this article instead of the ones quoted!
The choice is now yours – heed the bells or prepare to face the consequences.
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