Contents

  • Introduction
  • Section 1: The 3 steps to heaven - Placement, Layering and Integration
  • Section 2: Case studies:
  • Case 1: Purchasing of Single Premium (Investment) Policies
  • Case 2: Bank Accounts, Single Premiums and September the 11th
  • Case 3: A case of the Blind leading the Blind?
  • Case 4: Money Launderers will not always use large investment type life insurance products
  • Section 3: How can a Life Assurance Company protect itself?
  • Conclusion

Introduction

If you were asked to list in order of priority the methods of money laundering most known to you or those you have actually come across, would you include life insurance products? And, if you did, would they be high on your list?

Probably not.

Using life assurance products to launder criminal money might not be the most ‘popular’ money laundering medium.

But the reality is that life assurance products have been used as part of a money laundering operation and that fact remains that life assurance products can be useful to a money launderer.

This point is also emphasised in the FATF’s Typologies Reports.

It has to be admitted that only a few actual money laundering cases are known where life assurance products were used. So the temptation to assume that there is hardly any real threat is, perhaps, an understandable one.

And as if to further prove this point the use of life assurance products is hardly mentioned in the various money laundering publications and conferences.

This begs an obvious and important question ‘Why?’

Is it because only a few money launderers have thought about using life assurance products? Maybe but not likely.

Or is it because insurers have been successful in protecting themselves and money launderers are aware of this and keep away? Wishful thinking, perhaps.

Or is the opposite the truth that, considering the relatively low number of reported suspicious cases, we are in reality not succeeding in identifying suspicious cases? A worrying scenario if this is the case.

MLROs may therefore have to overcome a general misconception and, hence, apathy, (possibly even within their own organisation) that life assurance companies (and insurance intermediaries) are not vulnerable to being used by a money launderer because they offer little, if any, products or services which are of any beneficial use to a money launderer.

Comments, from staff and intermediaries, such as ‘But money launders only use banks!’ or ‘But we don’t usually deal in cash!’ ‘Anyway is it really our problem? ‘, ‘I know my clients - they are not criminal!’ are not unheard of.

Some of an insurer’s staff and intermediaries might feel that anti-money laundering procedures should not really apply to them. In fact some might think that Anti-Money Laundering Procedures are waste of time and a hindrance to doing business. Hence, they rather use and concentrate their resources to more ‘productive’ matters rather than on the setting up and maintaining of Internal AML Procedures, Training and safeguards.

So the (unfortunate) perception is that we, in the insurance industry, have nothing to worry about.

But the truth is that we should, and not just because of our legal obligations under AML Legislation.

Placement, Layering and Integration - The three steps to heaven and the use of life assurance

Life assurance products can possibly be found in all the 3 classical steps (but more likely in the first 2 stages) of a money laundering washing cycle thou at times these cycles sometimes seem to overlap and become rather blurred.

At the Placement stage

The launderer purchases one or more single premium (or a high regular premium) policies by paying cash directly to an insurance company or an intermediary from his criminally derived proceeds e.g. selling of drugs.

Obviously, it is at the stage that the money launderer and/or his accomplices are most vulnerable.

The Money Launderer may also pay additional (single) premiums (Top-Ups) under their already existing policies.

Hence, single large cash payments or a series of apparently ‘linked’ cash payments over a short period of time (e.g.12 months) merit special attention prompting questions by the insurer’s underwriters & MLRO such as:

  1. ‘do the amounts involved and the method of payment make sense when considering the business/occupation/profession and the expected or known income and wealth of the client’ or

  2. ‘Why is the client making numerous purchases in a relatively short period of time?’.

  3. ‘Why is the client paying all this cash? And from where is he getting it?’

At the layering stage

The money launderer purchases the life assurance policy(ies) by paying premiums to the insurer or Broker by cheque/Bank/Wire Transfer after he or his accomplices would have deposited various amounts of cash in one or numerous accounts with a bank.

It is at this stage that the insurer is probably at the most vulnerable stage as it might be difficult to identify such cases, especially without the proper AML Procedures, monitoring and training.

Hence just because an insurer or Broker would have received money from a Bank does not mean that they should lower down their guards and assume there is no need to carry out KYC and other basic client analysis because it is assumed that the Bank would have already done this.

Confusing the audit trail.

To further confuse the audit trail and also reduce the possibility of detection the money launderer might opt to spread his purchases over a period of time rather than make one large single premium payment.

Hence the need by an insurance company when underwriting a new application to look at the whole insurance history the client has with the company and not only at the policy being purchased and ask questions such as :

  1. has the client any other policy with the company?

  2. Does the client have a history of surrendering policies soon after issuing the policy?

  3. Does he always use the same intermediary?

  4. Does he always pay in cash? If he does is in an occupation or business which is a ‘cash generating’ one e.g. restaurant owner, petrol station owner?

Case Studies:

We will now look at some examples of money laundering cases involving the use of Life assurance products and what lessons can be learnt from such cases.

Case 1: Purchasing of Single Premium (Investment) Policies

The Money Launderer has at least two options when purchasing the policies:

1) Buying Direct or using Intermediaries

To purchase the policies in his own name by paying premiums either directly to an insurer or to a Broker:

  1. in cash (placement stage)

  2. or by personal cheques/Bank cheques/wire transfers (layering stage).

In cases where the money Launderer pays an Intermediary such as a Broker, the Broker in turn uses his personal bank account or his clients’ money account to pay the insurance company.

  1. In such cases the insurer should verify how the client paid the Broker; and

  2. the Broker should be suspicious of clients paying large amounts of cash (especially new clients) and obtain follow full and adequate KYC related information.

The Broker may not ask any questions about the source of the cash payments with his client either because he/she does not want to (the commission he is earning is too attractive to risk losing the client!) or because of lack of common sense and basic AML training.

The insurer must have in place adequate ‘Know Your Intermediary’ procedures (even thou at law the insurer may not be responsible for the Broker’s lack of AML compliance) to verify the Broker’s integrity, adequacy of AML Training and Compliance.

Intermediaries are an insurers’ first line of defence and, hence, it is important that they have sound AML Procedures. Insurers should be in a position to establish an Intermediary’s AML Compliance or lack of it before deciding whether to do business with that Intermediary.

An Intermediary who has proper AML Procedures will assist to keep money launderers and their accomplices away from the insurer.

2) Using accomplices

The money Launderer gives cash or personal cheques etc.. , to his accomplices who purchase the single premium policies in the name of the money launderer or in their own name. In case of the latter the accomplice will then at a later stage transfer the beneficial ownership of the policy to the money launderer.

The insurer must establish the relationship between whoever is paying the premium, the Policyholder and the ultimate beneficiary.

Moving to the next ‘washing cycle’.

First Option: Surrendering the Policy

After purchasing the Single Premium policy (usually soon after e.g. within a couple of years) the Launderer or his accomplice(s) surrender(s) the policies even thou there is a penalty thus receiving less than the amount the money launderer would have actually paid.

The launderer receives a cheque from the insurer and uses a stockbroker or a Bank to buy other separate investments e.g. equity or shares in a mutual fund - the money launderer is thus adding more layers in the money laundering operation and soon he would have managed to further ‘integrate’ his money in the financial system.

The insurer should as part of its continuous Internal Transaction Monitoring look at surrenders of Single Premium Policies, especially early surrenders to establish whether there are any particular worrying and suspicious patterns e.g. numerous surrenders originating from or somehow linked to the same client or intermediary.

Likewise the accomplice can surrender the policy and then pass on the cheque from the insurance company to the money launderer or ask the insurance company to directly pay the money launderer

The insurer must verify the relationship between the policy owner (in this case – the accomplice) and the beneficiary of the policy proceeds (in this case the Money Launderer) before paying the policy proceeds. The insurer should also obtain Identification documents of the person receiving the policy proceeds if different from the policy owner.

What about the Stockbroker or the Bank?

This case highlights two issues.

1. To rely or not to rely?

The stockbroker/Bank appointed by the money launderer to purchase the investments utilising the insurer’s cheque notice that the payment came from an insurer and do not raise any questions nor do they consider the transactions as suspicious, especially if it is a well known insurer.

Why should they?

It may be argued that an insurer has its own anti-money laundering obligations and procedures.

So it is assumed that the insurer would have conducted their own KYC Due diligence and would have noticed if there was anything suspicious and that the Stockbroker/Bank are not obliged to carry out any KYC Due diligence because the payment came from a regulated financial institution.

A dangerous reasoning as we should not lower our guards even in such situations. The stockbroker must, in my opinion, still apply basic KYC principles and other AML procedures.

Although, one might agree (to some extent) with such reasoning it would be risky if the stockbroker assumes that he can go into such transactions blindly.

It is very easy (and tempting) in such situations to rely on another financial institution but the reality is that the institution relying on another institution is still responsible and should remain vigilant as otherwise we will be playing right into the money launderer’s hands as they rely on numerous transactions not only to separate the money from the originally criminal money but also to increase the possibility that financial institutions further down the line will ask less questions as the number of transactions increase.

And what is there to guarantee that the Insurance Company did not submit a Suspicious Transaction Report to the FIU but was allowed to proceed with the transaction?

How would the FIU, who might be analysing all transactions linked to the original STR, look at the Stock Broker/Bank in particular at the KYC information obtained or lack of it?

2. Stockbroker/Bank Staff awareness and Training

This also prompts another question of whether staff of other non-insurance financial institutions such as Banks should be aware (and receive training) of how life assurance products can be used in a money laundering operation.

In my opinion they should do so because this increases the Bank’s staff’s awareness and puts them in a much better position to detect a suspicious transaction thus protecting the Bank in areas where it may not be involved as part of its normal banking activities.

It may also serve to show that the Bank has given comprehensive training to its staff.

This is especially important for financial institutions such as Banks who market life assurance products to their clients or who have a more direct involvement e.g. in a Bancassurance network.

Second Option: Securing a Bank Loan

The launderer retains the policy and secures a bank loan to buy a property on the strength of the policy value. Then the loan is repaid by surrendering the policy. The money launderer ends up with the property in his hands which he can retain or liquidate and buy other types of investment to further confuse the trail. The washing cycle is complete.

Again the insurer should as part of its continuous Internal Transaction Monitoring look at surrenders of Single Premium Policies ,especially early surrenders of policies where the policy has been assigned to a Bank or where the surrender proceeds are made payable to a Bank.

Also should not the Bank staff enquire why their client was using a Single Premium Policy to secure a Bank Loan rather than using the money in the first place?

Case 2: Bank Accounts, Single Premiums and September the 11th

An individual resided in a neighbouring country A had opened a deposit account and a savings account in Country B.

The bank that maintained the accounts noticed the gradual withdrawal of funds from the accounts from the end of April 2001 onwards and decided to monitor the accounts more closely.

The suspicions of the bank were subsequently reinforced when a name very similar to the account holder’s appeared in the consolidated list of persons and/of entities issued by the United Nations Security Council Committee on Afghanistan (UN Security Council Resolution 1333/2000).

The bank immediately made a report to the financial intelligence unit (FIU).

The FIU analysed the financial movements relating to the individual’s accounts using records requested from the bank.

It appeared that both of the accounts had been opened by the individual in 1990 and had been fed mostly by cash deposits.

In March 2000 the individual made a sizeable transfer from his savings account to his current account.

These funds were used to pay for a single premium life insurance policy and to purchase certificates of deposit.

From the middle of April 2001 the individual made several large transfers from his savings account to his demand deposit account.

These funds were transferred abroad to persons and companies located in neighbouring countries and in other regions.

In May and June 2001, the individual sold the certificates of deposit he had purchased, and he then transferred the profits to the accounts of companies based in Asia and to that of a company established in his country of origin.

The individual also cashed in his life insurance policy before the maturity date and transferred its value to an account at a bank in his country of origin.

The last transaction was carried out on 30 August 2001, that is, shortly before the September 11th attacks in the United States.

Maybe the insurer could have become suspicious if the insurer’s underwriters (through the standard underwriting procedures) and MLRO (through its process of Transaction Monitoring) had asked certain basic and elementary questions such as:

  1. The policyholder purchased the single premium policy in a foreign country and not his country of origin. Were there no insurers who had similar products in his home country from whom he could have purchased the same or even better product? If there were why did the client purchase the policy in a foreign country?

  2. Did the underwriter establish the client’s connection (besides having a bank account) with the foreign country where the insurer was situated e.g. second residence, work, business?

  3. If it was established that the only connection was the Bank Account and that the client was not even resident in the country where the insurer was situated should not this transaction have been treated as a ‘potential suspicious transaction’?

  4. What Identification and source of funds investigation did the insurer conduct? Is this one of those cases where the insurer ‘blindly’ relied on the Bank assuming they have done their KYC due (and perhaps enhanced) diligence?

  5. Did the insurer ask the Bank whether the client was an established client who was known to them to be a reputable and trustworthy individual?

  6. Did the insurer obtain some form of written confirmation from the bank that they carried the standard and expected KYC due diligence.

  7. It appears that the insurer did not cross check the clients name with the names on the UN lists.

  8. When the policy was surrendered was an explanation as to the reasons for the surrender obtained by the insurer’s staff?

  9. Why was such an unusual transaction not brought to the attention of the MLRO? Was the staff properly trained to recognise such suspicious transactions? Was it a situation where the insurer’s staff did not want to upset the client (and risk losing the sale) with too many questions in view of size of the business?

Case 3: A case of the Blind leading the Blind?

Drug traffickers purchased numerous policies through brokers operating in various jurisdictions.

The Drug traffickers used various accomplices as Beneficiaries under the Policy whilst premiums were paid by Third Parties.

It became evident during the investigations that both the Broker and the insurer were miserably at fault in the most basic prevention and supervision measures which would have enabled them to realize that they were faced with a highly suspicious case.

Salient details

The Broker and the Insurer’s failure

Premiums were paid by Third Parties.

To establish the connection between whoever is paying the premiums, the policyholder and the ultimate Beneficiaries.

Brokers paid premiums out of their own accounts and were reimbursed by the policyholder in cash.

  1. The insurer did not enquiry how the Broker was paid by the clients.

  2. Both failed to seriously enquire as to the source of the funds.

  3. Broker had no limits for the acceptance of cash payments.

  4. The fact that the broker was being reimbursed in cash is reasonable grounds to raise a suspicion;

  5. ‘Negligent’ behaviour by the Broker in accepting large cash payments from clients.

Brokers with little anti-money laundering training were used.

The brokers failed in their obligations to ensure that their staff were properly trained and the internal procedures were in place.

The insurer failed to adopt 'Know Your Broker' procedures and there was little supervision/analysis by the insurer over the business introduced by the Broker.

The same client kept on buying Single Premiums with relative ease.

Basic KYC Procedures were not followed which resulted in insufficient client information which, however, did not preclude the insurer from issuing the policies.

Also, no one at the insurance company was suspicious. It seems that the insurance history of the client (e.g. at the underwriting stage) was not looked at as otherwise the insurer (and perhaps even the Broker) would have realized that there were too many early surrenders linked to the same client

The criminals were routinely liquidating their policies after relatively short periods of time.

There was no transaction monitoring by the insurer.

There seems to have been no monitoring by the insurance company of its own portfolio, namely early surrenders.

Case 4: Money Launderers will not always use large investment type life insurance products

A Broker submits 2 applications for two large Mortgage Protection policies and pays the premium from his own accounts. The insurer enquiries with the Broker who admits being paid in cash (Placement). The insurer raises a Suspicious Transaction Report with their FIAU. Investigations by the FIAU resulted that the clients were well known criminals and that premiums originated from criminal money.

The money launderer may have kept the policies to secure a loan or else cancelled the policies within the ‘cooling off’ period and obtained a full refund from a reputable insurer and used the refund to buy an investment. Paying with the insurer’s (refund) cheque will not (usually) raise any suspicion.

In this case the insurer did the right thing (enquire with the Broker how he was paid) irrespective that the policy in question was not typically used by money launderers.

How can a Life Assurance Company protect itself?

Implementing and following internal anti-money laundering procedures should not be rocket science to a life insurance company nor its staff or intermediaries as it already carries out some of the basic legal obligations and protective measures, albeit for a different purpose e.g. to ascertain whether the client was sold the right type of policy according to his financial capabilities and needs..

1. Know Your Client

Through the discipline of standard professional life underwriting (Financial Underwriting) a life assurance company should be accustomed to establish for each client:

  1. the client’s identity and address (by obtaining reliable sources such as certified copy of ID Card)

  2. details of occupation/business

  3. the client(s)’ financial background

  4. Establishing reason for the business relationship with the insurer i.e. reason for policy

  5. source of premium/funds (confirmation that premiums are paid out of the income generated by the proposer’s occupation/business);

  6. Method of payments i.e. cash, cheques etc;

  7. Insurance history (purchases, cancellations , refunds, surrenders, top-ups etc) of clients (especially of investment type products)

  8. Identification of person who pays the premiums

  9. Identification of person to whom policy proceeds are paid

  10. Identifying the beneficial owner

  11. Monitoring transactions/policies to ensure that the transactions conducted are consistent with our knowledge of that customer

This information is primarily obtained from various sources such as the Proposal Form completed by each client, analysis of an existing client’s insurance records and supplementary reports on the client’s background such as an Intermediary’s Report, Financial Questionnaire, Audited Accounts and Fact Find.

2. Training

In my opinion, an insurer should not only provide training to staff but also to Intermediaries, even if there may be no legal obligation to do so because they are the insurer’s first line of defense and the more trained intermediaries are the better protected the insurer will be.

3. Know Your Distribution Channel

Knowing the Distribution Channel, is a ongoing task as one should periodically analyse the type of business being submitted and the persistency of that business i.e. is a particular intermediary introducing an ‘abnormal level of single premium business paid in cash‘ or ‘why has that particular intermediary a high incidence of early surrenders?’.

4. The Money Laundering Reporting Officer

The MLRO should be conversant with all the company’s products, procedures, training methods, underwriting philosophy and requirements and be aware of the company’s recruitment policy in respect of both staff and intermediaries.

Besides carrying out his legal obligations the MLRO should carry out the following:

a. Random Compliance checks on the company’s staff/subsidiary companies, especially, those operating in overseas countries (since legal requirements differ from one jurisdiction to another).

b. An independent check of the effectiveness of the Company’s Internal Anti-Money Laundering Procedures made in conjunction with the organisation’s external auditors as part of their audit check.

c. Transaction monitoring (through the use of computer generated reports ) which will enable the identification of potential suspicious cases such as Clients/Intermediaries with an usual number of new single premium policies or surrenders, payments by cash, use of Single premium to secure bank loans, overpayments of premiums.

This monitoring will also serve as a check on whether the company's AML Procedures are being followed, to investigate any breaches and to verify their effectiveness and usefulness.

d. Periodical meetings with the various departments e.g. underwriting, Premium Collection, Policy Servicing, in order to verify the adequacy and effectiveness of internal money laundering procedures and to discuss the lessons to be learnt from actual money laundering cases.

Conclusion

It’s not just the imposition of fines or imprisonment or the cost of being subject to an investigation or our reputation which is at stake.

We owe a duty to consumers and shareholders too as they have entrusted their money with us. If the financial sector firms are not able to protect themselves against criminal activity this will result in a weak sector. Having effective internal anti-money laundering procedures will not only benefit the insurance company but the whole industry itself.

Our ongoing challenge is to abide by our legal obligations and to strike a balance between taking the necessary extra precautions whilst ensuring that we are not making it difficult to do business.

I am sure that those organisations who have been fined or even those who may not have been (legally) at fault but could have avoided being involved in a money laundering investigation may regret not taking those extra precautions which could have avoided them from being named in any investigation with all its resultant bad publicity and costs.

Having effective internal anti-money laundering procedures will not only benefit the insurance company itself but the industry itself.

So going back to the original question ‘What’s in Life Assurance for Money Launderers?’ – actually quite a lot but we are (hopefully)getting better and smarter in detecting suspicious transactions and helping to combat money laundering and Terrorist Financing.

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.