Money laundering: Vulnerabilities of insurance sector

The willingness to spend money to hide the origin of the funds attracts the assistance of professional intermediaries, most commonly lawyers, accountants and bankers (every profession has its ethically challenged members), who have appeared in significant numbers to provide their services. Experts who have the ability to cover up the source of funds maintain public offices, and often times high-profile positions, creating and supporting the purported legitimacy of their methods. This comfortable existence, and the profits generated by these activities, has enabled illicit funds to gradually infiltrate the legitimate financial and economic markets.

Over time, this service industry has grown and matured, with the involved professionals assisting in the maintenance of individual criminals and expansion of corruption through their activities. Co-ordination of money movements with legitimate proceeds, in particular, is organized by these service providers to further limit the likelihood of discovery and recovery. These service providers use careful management of the financial balances and the changing jurisdictional rules to prevent or avoid the attention of the regulatory system - sometimes using multiple round trip financial transactions to reduce the possibility of detection.

As facilitators of money laundering, service providers in concert with criminals, seek countries that demonstrate less respect for the global AMI legislation. They use or create shelters, which are often in offshore banking centers that provide both banking services and commercial secrecy. They also supply the human face of trust, which is used to cover large-scale co-ordination of assets controlled by and for the benefit of the criminal money launderer. In this background, this paper seeks to study how money is laundered through insurance policies.

INSURANCE SECTOR Life insurance policies having a cash surrender value are of particular interest to money launders as they provide attractive a money laundering vehicles. The cash value of policies can be redeemed by a money launderer or may be used as a source of further investment of tainted funds, for example, by taking out loans against such cash value of the policy. These policies operate in the same manner as unit trusts or mutual funds ie, a launderer can over-fund the policy and move funds into and out of the policy for the cost of early withdrawal. Annuity contracts pose a significant money laundering risk because they allow a money launderer to exchange his illicit funds for an immediate or deferred income stream. With-profits insurance bonds invested in a mix of shares, fixed-interest securities and property; they become one of the most popular types of lump-sum investment. They are generally promoted as low-risk investments because returns are passed on to policyholders through bonuses and this aspect is very appealing even for those who intend to invest through.1

Payments originating from insurance companies are considered as commonplace by the financial institutions. The money is assumed to be clean and the payments do not attract attention. By placing funds into an insurance policy, money launder makes a significant step in layering and integrating the funds into the financial system. This happens because the beneficiary of an insurance product is often different from the policyholder, hence it is difficult to determine when and for whom to perform customer due diligence?

In cases where an outright purchase of insurance products with criminal cash proceeds has been made, money launderers exploit the fact that insurance products are often sold by brokers and these agents are not acting directly or under the control or supervision of the company that issues the product. The launderer thus seek an insurance broker who is not aware of or does not conform to required procedures, or those who simply fail to recognise or report wanting information in respect of possible money laundering..

For example, a money launderer may purchase marine property and casualty insurance for a phantom ocean-going vessel. He may pay a large premium on the policy so that regular claims are made and payment received. However, such players are careful to ensure that these claims are less than the premium payments, and in this way the insurer enjoys a reasonable profit on the policy;2 and the money launderer are able to receive claim checks which can be used to launder funds. Such funds come from a reputable insurance company, and few question the source of the funds having seen the name of the company on the checks or wire transfer.

There is an inherent risk both in dealing with and in receiving payments from unregulated intermediaries, as they often fail to ensure that thorough due diligence has been conducted on the funds being placed into its policies. It has been noted by a number of experts that insurance firms in many jurisdictions often conduct additional due diligence procedures to manage this particular risk.

Another method used for laundering through insurance policies - specifically used as investment vehicles - is through over payments of the policy premiums and then making request for its reimbursement to a third party. The launderer thus continues to retain the policy as an investment product, while laundering funds are laundered through the additional policy contribution/redemption.

Clients in several countries use the services of an intermediary to purchase insurance policies. Identification is usually taken from the client by way of an ID card, but the details are missing in the documents provided to the local by institution. Such institutions only rely on the intermediary doing due diligence checks.

Another way is that the policy is put in place and the relevant payments are made by the intermediary to the local institution. Then, after a couple of months, the institution receives notification from the client stating that there is now a change in circumstances, and they would like to close the policy due to losses and as a result they come out with a clean checks from the local institution. On some other occasions, the policy would be left to run for a couple of years before being closed with the request that the payment be made to a third party done by.

For example, in a case customs officials in Country X initiated an investigation which identified a narcotics trafficking organisation who utilized the insurance sector to launder proceeds. Investigative efforts by law enforcement agencies in several different countries identified narcotic traffickers were laundering funds through Insurance firm Z located in an off-shore jurisdiction.

Insurance firm Z offers investment products similar to mutual funds. The rate of return is tied to the major world stock market indices so the insurance policies were able to perform as investments. The account holders would over-fund the policy, moving monies into and out of the fund for the cost of the penalty for early withdrawal. The funds would then emerge as a wire transfer or checks from an insurance company and the funds become apparently clean. It is estimated that over USD 29 million has been laundered through this scheme.

VULNERABILITIES The risk may be even more acute when the relative lack of anti-money laundering requirements or other relevant regulations for this sector come into play. Certain jurisdictions with substantial insurance industries have very low numbers of insurance-related suspicious transaction reports, despite rigorous reporting requirements.

Cases involving insurance-related money laundering show that the insurance sector has been significantly used by money launderers, however, due to lack of expertise cases of money laundering has not been detected by the concerned. Some of the experts are of the view that given the size of the insurance industry, its vulnerabilities are too great for money launderers to ignore.

In order to better understand, how and to what degree the various parts of the insurance sector could be used by money launderers, it is proposed that sharing of information on typologies relevant to the insurance sector, can help (both within the industry and between it), law enforcement and supervisory agencies. For example there is high risk:

---- Where business involves cross-border intermediaries and same being not affiliated with or under the control or supervision of the company.

---- Wherever cash is accepted placement risks also exist and it includes intermediaries who do not follow rules or are untrained.

---- Issues of CDD arise where beneficiary and the policyholder are often different - the issues may relate to policyholder only or also for the beneficiary?

In laundering cycle the point of the integration and layering stages are the indicators which may be less obvious, and a different type or degree of diligence is required to identify money laundering. Basic customer identification procedures may be insufficient without more comprehensive customer due diligence.

(The writer is an advocate and is currently working  with Azimuddin Law Associates)

1. Rohan Bedi, Are Insurers Considering Money Laundering Risks?, Insurance Asia, April/May/2005.

2. FATF, Report on Money Laundering Typologies, 2003-2004.