Life insurance policies exposed as money laundering vehicles

Life insurance, annuities entities now face AML programs duties

The U.S. Treasury recently proposed, for the first time, to bring insurance and annuities industries under the Bank Secrecy Act regulatory ambit.

The U.S. Treasury took a historic step on September 18 by proposing, for the first time, to bring the nation’s huge life insurance and annuities industries under the Bank Secrecy Act regulatory ambit for the purpose of creating better controls on money laundering and terrorist financing opportunities through their businesses.

The proposed rule from Treasury’s Financial Crimes Enforcement Network would require an estimated 1,200 life insurance companies and “any insurance company that offers products with investment features or features of stored value and transferability” to establish an “anti-money laundering program.”

No definition of “stored value”

FinCEN’s failure to define “stored value” has caused confusion in the insurance circles. One industry member speculates that the phrase refers to an accumulation of money that can be cashed out or transferred to another fund. Others say the term is also used for electronic “smart cards” that contain monetary value in the form of microchips.

  • Temporary exemption lifted

    The proposed rule implements Section 352 of the USA Patriot Act which requires that all the wide range of businesses that are defined as “financial institutions” under the BSA “shall establish” an AML program (Title 31, USC Sec. 5318(h)). Initially, those AML programs were to be in place by July 24, 2002. Shortly before the deadline, Treasury temporarily exempted several industries, including insurance, until October, so it could sort out difficult definitional questions and further examine their laundering risks (MLA, May 2002).

  • Who’s responsible?

    FinCEN defines insurance company as “any person engaged within the U.S. as a business in” the:

    Issuing, underwriting or reinsuring of a life insurance policy; · Issuing, granting, purchasing or disposing of any annuity contract; or · Issuing, underwriting or reinsuring of any insurance product with investment features similar to those of a life insurance policy or an annuity contract.

    The definition does not cover insurance agents or brokers, even those who operate as “independent” agents. FinCEN justifies this gap by saying that the company that actually develops the products, rather than just sells them, is in the best position to determine laundering risks and defenses.

    Because many companies sell products through agents and brokers, FinCEN says they may delegate elements of their AML programs to the brokers and agents. But the insurance companies are ultimately responsible for the effectiveness of the programs.

  • What insurers would be required to do

    In order to comply with the proposed rule as it stands now, each insurance company’s AML program must:

    Be in writing and be approved by senior management · Incorporate internal policies, procedures and controls based on its assessment of money laundering and terrorist financing risks · Designate a compliance officer · Establish and maintain an ongoing employee training program · Periodically conduct independent audits of the program’s effectiveness. A company employee may perform the audit, but it cannot be the compliance officer or anyone who helps administer the program.

    Analysis of risky products

    The proposed rule says that when a company assesses laundering and terrorist financing risks, it must consider whether it permits customers to: · Use cash or cash equivalents to purchase insurance products · Purchase an insurance product with a single premium or lump-sum payment · Make loans against an insurance product’s value.

    It must also consider whether it conducts transactions involving a jurisdiction, which has been identified by the U.S. State Department as a sponsor of international terrorism.

  • Overseas affiliates

    The proposed regulation does not mention if it applies to international affiliates of U.S. companies. One Washington source confirmed that the rule is not clear about its scope over overseas offices.

    The U.S. branches and affiliates of non-U.S. companies would be required to comply with the rule under the definition of “insurance company.”

  • Who’s covered, who’s not

    FinCEN says the most significant laundering and terrorist financing risks are found in life insurance and annuities products. For that reason, it has decided to leave outside the reach of the proposed regulation companies that provide property, casualty, title or health insurance. They typically do not offer investment features, cash build-ups, the option of transferring funds from one to another, or other means of hiding or moving money, Treasury says.

    It warns that if those insurance lines develop products with those features, the proposed rule’s definition is flexible enough to include them in the future.

    With a whole or term life insurance policy, a money launderer can invest dirty money in a fund, roll it over to another fund or cash out the policy before its due date. Either way, he has muddied the money’s trail.

    Annuity contracts may allow criminals to exchange illicit funds for an immediate or deferred income stream, which usually arrives in the form of monthly payments starting on a specified date.

  • Real-life examples

    FinCEN describes real-life examples connecting laundering and the insurance industry. In one instance, federal enforcement agents discovered Colombian drug lords were hiding drug proceeds by purchasing life insurance policies with cash surrender values in an offshore jurisdiction. Their associates were named as the beneficiaries who later liquidated the policies for their cash surrender value. While they suffered substantial financial losses, their money was effectively laundered.

    In another case, the U.S. Customs Service obtained the forfeiture of drug money paid to purchase three term life insurance policies in Austin, Texas. The purchase had been made with several structured monetary instruments, followed shortly by an attempted redemption of the policies.

    Agents have seen similar attempts to launder funds through variable annuity contracts. Financial institutions have also reported suspicious activity involving the structured purchase of life insurance policies and annuities, followed by pay-outs and the wiring of funds to foreign accounts.

  • Fraud is not laundering

    Insurance companies have long maintained anti-fraud programs. FinCEN says the measures presently used to detect and combat fraud for the most part can be applied or adapted to an AML program. It stresses that the risks associated with fraud and laundering are not the same.

    AML program is no full protection

    Insurance companies should note that even the best AML program will not exempt them from prosecution for money laundering under the criminal code of the U.S. (Title 18, USC Sec. 1956 & 1957) The U.S. Department of Justice enforces those laws, and a battery of agencies, including the IRS, U.S. Customs, the FBI and the DEA investigate possible money laundering violations.

    Those agencies are not impressed with an AML program or BSA compliance. Full compliance is irrelevant to the question of whether a company or its employees laundered money. (Title 18, USC Secs. 1956 and 1957.) And there have been cases in which employees of an insurance company were prosecuted for money laundering. (MLA, Sept. 1995.)

  • The beauty in the beast

    “One of the really important things that came out of the proposed regulations is the flexibility that Treasury has with regard to each insurance company’s AML program,” said Marty Neverla, Director of the Fraud Investigation Division of the Arkansas Insurance Department and chair of the Anti-Fraud Task Force of the National Association of Insurance Commissioners.

    “If you’re a very small domestic life insurance company… with a relatively small book of business… you’re going to be able to put together a reasonable compliance program with the help of perhaps some consultants or attorneys,” said Neverla. “And there wouldn’t be a problem with tacking money laundering compliance responsibilities onto someone who presently has fraud unit responsibilities.”

    Victoria Fimea, Senior Counsel, Litigation for the ACLI, agrees. “I don’t know that all insurance companies will have to have radically different programs from their existing fraud programs,” she told Money Laundering Alert. “Each company can tailor a program that best serves their processes as well as protect their customers.”

    Both Neverla and Fimea said larger companies would incur significantly more costs due to increased workloads on their compliance, legal and fraud personnel and the purchase of software.

  • No duplication, please

    Mike DeGeorge, General Counsel for the National Association for Variable Annuities, said his organization will probably request Treasury to review the stipulation that insurance companies be responsible for any laundering-related activities that take place at the point-of-sale. He contends that any money laundering risks that occur at that time should be addressed by the registered brokers who sell the contracts, not the insurance company.

    “Variable contracts are considered securities and are sold by brokers who are registered with the Securities and Exchange Commission,” said DeGeorge. “Registered brokers are required to have AML programs in place, as well as a customer identification program. It would not be productive to duplicate the processes that brokers have done with regard to money laundering and suspicious activities at the point of sale.”

    FinCEN will accept comments on the proposed ruling until Nov. 25. Comments can be e-mailed to regcomments@fincen.treas.gov, with the caption written as “ATTN: Section 352 – Insurance Company Regulations.”

    The final regulation will probably be issued before the end of January. (See Story Below.)

    Insurance companies could also be filing SARs soon

On Oct. 11, the U.S. Treasury proposed another regulation that would require insurance companies to file Suspicious Activity Reports, just like banks and money services businesses already do and securities dealers will do starting January 1, 2003.

If the rule becomes final, insurance companies would have to file the new Suspicious Activity Report – Insurance Companies (SAR-IC) form if the suspicious transaction involves at least $5,000 (cash or non-cash).

Filing the SAR-IC would be the responsibility of the insurance companies, not their agents or brokers. Companies would have 30 days after detecting the suspicious activity to file the form and may not disclose that they filed the form with anyone except appropriate government agencies.

The supporting documentation pertaining to the SAR would need to be maintained for five years after filing the form.

The public has until December 16, 2002 to file comments about the proposed rule. E-mail comments may be sent to regcomments@fincen.treas.gov and should contain this phrase within the body of the e-mail: “ATTN: Section 352 – Insurance Company Regulations.” (Full details and analysis in the December issue of Money Laundering Alert.)