With the chief objective of fighting money laundering activities in the country and preventing reintroduction of criminal proceeds into regular economy, the Indian Government had introduced a series of targeted measures by enacting the Prevention of Money Laundering Act 2002 (“PMLA”) and the Prevention of Money- Laundering (Maintenance of records) Rules 2005 thereunder (“PML Rules”). This framework imposed various obligation on banking companies, financial institutions and various intermediaries to verify the identity and source of funds of their customers, maintain records, and furnish information in the prescribed form to the Financial Intelligence Unit – India (“FIU-IND”).
In exercise of its powers as a regulatory authority under the PMLA and PML Rules, the IRDAI has notified guidelines on anti-money laundering for Insurers from time to time and now, most recently, notified the “Master Guidelines on Anti-Money Laundering/ Counter Financing of Terrorism (AML/CFT) 2022” on 1 August 2022 (“AML Guidelines 2022”), in furtherance of an exposure draft issued on 1 June 2022. The AML Guidelines 2022 shall come into force from 1 November 2022.
The AML Guidelines 2022 have consolidated and updated the earlier guidelines for General (including Health) and Life Insurers, under the “Anti-Money Laundering /Counter Financing of Terrorism (AML/CFT) - Guidelines for General Insurers” of 7 February 2013 (“2013 Guidelines”) and the “Master Circular on Anti Money Laundering/Counter Financing of Terrorism for (AML/CFT) – Guidelines for Life Insurers” of 28 September 2015 (“2015 Guidelines”). In addition, the AML Guidelines 2022 also repeal various IRDAI Circulars on the subject of money laundering and terrorism financing.
Scope and Applicability
The AML Guidelines 2022 are applicable to Insurers carrying on all classes of life, general or health Insurance business, except “Re-insurance business carried out by the ‘Indian Insurance company' or ‘foreign company' in India”.
A brief summary of the salient points as well as some key changes under the AML Guidelines 2022 is set out below:
- The AML Guidelines 2022 entrust the Insurer's senior management with establishing “internal policies, procedures, controls and compliance arrangement” for prevention of money laundering and terrorist financing (“AML/CFT Program”) and ensuring their effectiveness and compliance. These policies and procedures include a client due diligence program, maintenance of records, compliance with relevant statutory and regulatory requirements and specify the role of the internal audit or compliance function in ensuring compliance with AML/CFT Policies.
- The AML Guidelines 2022 expand upon the Know Your Customer (“KYC”) norms for establishing customers' identity as stipulated under the 2013 Guidelines and 2015 Guidelines, and inter alia, include various KYC processes such as e-KYC authentication, video-based identification process (“VBIP”) and retrieval from the central KYC records registry (“CKYCR”).
- The AML Guidelines 2022 requires Insurers to conduct client due
diligence as follows:
- New customers: Insurers are now required to follow identification procedures, ie, KYC for all customers at the time of commencement of the account-based relationship with the customer, and monitor their transactions on an on-going basis. Earlier, for certain kinds of policies, client due diligence was required to be followed at the time of claim/payout stage.
- Existing customers: If KYC documents are not available for existing clients, then they are required to be collected within 2 years (for low-risk customers) and within 1 year (for high-risk customers).
- Ongoing Due Diligence: Besides verification of the identity of the customer at the time of initial issuance of the contract, risk assessment and on-going due diligence is suggested to be carried out at times when additional/ subsequent remittances are made.
- At the time of making pay-outs/claims (ie, redemption/surrender/ partial withdrawal/ maturity/ death/ refunds/reimbursements, etc), additional verification is required to be carried out. No payments should be made to third parties except as provided for in the contract or in cases such as superannuation/gratuity accumulations and payments to beneficiaries/ legal heirs/assignees in the case of death benefits.
- The AML Guidelines 2022 specify that along with classifying customers into high risk and low risk categories, Insurers may follow a “Simplified due diligence” process where the aggregate insurance premium is not more than Rs. 10,000/-, and mandatorily carry out an “Enhanced due diligence” where high risk categories of customers are involved.
- For the high-risk profiles, such as for customers that are non - residents, high net-worth individuals, trusts, charities, NGOs and organizations receiving donations, companies having close family shareholding or beneficial ownership, firms with sleeping partners, politically exposed persons (PEPs), and those with dubious reputation as per available public information who need higher due diligence, KYC and underwriting procedures should ensure higher verification and counter-checks.
- An annual compliance certificate is required to be submitted to the IRDAI within 45 days of the end of every financial year as proof of a robust AML/CFT Program.
- For group Insurance (life/general/health), Insurers are required to collect KYC of the group master policyholder/juridical person/legal entity, and the respective Beneficial Owners.
- Insurers are required to regularly monitor their transactions and ensure that suspicious transactions shall be regularly reported to the Director, FIU-IND. Additionally, Insurers must have robust software systems to track suspicious transactions and categorize risks.
- The AML Guidelines 2022 update the procedures specified earlier for implementation of §51A of Unlawful Activities (Prevention) Act 1967 (“UAPA”) to bring them in line with the Central Government's order re “Procedure for implementation of Section 51A of the Unlawful Activities (Prevention) Act, 1967” of 2 February 2021.
The AML Guidelines 2022 bring about a significant overhaul to the existing measures aimed at preventing money laundering and terrorist financing activity. They are expected to have a considerable impact on the operational set-ups and KYC processes that most Insurers have in place at present.
Press reports also indicate that Insurers have already commenced review of their existing Board policies and upgradation of their technical systems and related infrastructure for complying with these new/additional obligations.
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.