New Money Laundering Rules Proposed

As in the September proposal, the new proposal says that life insurance products pose the greatest risk of money laundering. This is because life insurance and annuities allow a customer to place large amounts of funds into the financial system and seamlessly transfer such funds to disguise their true origins.

Although this problem generally does not apply to property-casualty insurance, the proposed rule contains a functional definition of insurance that could include p-c products that contain investment features, or features of stored value and transferability.

In a footnote, the proposal notes that in theory a money launderer could purchase p-c insurance for a business with tainted funds, and then transfer the business to a confederate who would cancel the policy and obtain a refund of the cleansed funds.

However, the proposal says, underwriting practices generally prevent the conveyance of a p-c policy, except in case of change of control of a public company, in which case the costs and regulatory disclosures involving a change in control would appear to outweigh any potential money laundering benefit.

Also as in the September proposal, the new proposal does not directly involve agents and brokers. However, insurance companies are required to obtain all relevant information necessary to comply with the proposed regulation from their agents and brokers.

While the proposal sets a $5,000 threshold for reporting, it says that insurers are encouraged to report suspicious transactions that fall below the threshold.

Under the proposal, four categories of transactions require reporting, based on what the insurance company knows or suspects.

First are transactions involving funds from illegal activities or attempts to hide funds from illegal activities.

Second are transactions designed to evade the requirements of the Bank Secrecy Act.

Third are transactions that have no business or apparent lawful purpose, and the insurance company knows of no reasonable explanation for the transaction.

Fourth are transactions involving the use of the insurance company for criminal purposes–that is, using legally derived funds for a criminal purpose.

The proposal also outlines a series of red flags that may indicate the need to file a report. These include:

An unusual pattern of purchases.

Any unusual method of payment, especially cash.

The purchase of an insurance product with monetary instruments in structured amounts.

Early termination, especially if it is at a loss or if the refund check is sent to a third party.

The transfer of the benefit to an apparently unrelated third party.

Little or no concern over the performance of the product, but much concern about early termination.

The reluctance of the customer to provide identifying information.

Borrowing the maximum cash surrender value soon after purchasing the policy.

The proposed rule also contains an exception from the reporting requirement for false information involving "routine" insurance fraud that is unrelated to money laundering. However, the proposal asks for comments on whether the exception is appropriate.

In addition, insurance companies that file reports under the proposed requirement aimed at broker-dealers will not have to file a second report under the insurance company proposal.

The proposal says that a suspicious activity report must be filed no later than 30 days after the date of initial detection of facts that may constitute a basis for filing a report. However, this could be extended to 60 days if the insurance company is unable to identify a suspect on the date of the initial detection.

For situations that require immediate attention, such as ongoing anti-money laundering schemes, insurance companies must telephone an appropriate law enforcement authority in addition to filing a timely report.

Formal comments on the proposed rule are due Dec. 16, 2002.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 21, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.