Laundry Duty

A little more than a year ago, the American life insurance industry became subject to the U.S. Treasury Department's Financial Crimes Enforcement Network, which placed the Internal Revenue Service in charge of regulating carriers' anti-money laundering (AML) efforts. The professional services company Ernst & Young recently surveyed the industry and found insurers' AML efforts have turned up only a small amount of suspicious activity.

Dan Higgins, principal in charge of technology enablement with E&Y, believes the manual process used by insurers to combat AML is one reason for the lack of suspicious activity. "There still is quite a bit of manual activity around these processes, and that may drive some lower volumes at this stage," he says.

Don't expect those manual processes to stay around for long, though, according to John Sabatini, senior manager in charge of the technology compliance area for E&Y. "As we meet with some of the insurance companies, we are finding they are building out transaction-monitoring systems and they are becoming more automated," he says.

Steve Beattie, AML services leader for E&Y, indicates as the industry becomes more informed on different intervention strategies, there will be an increased understanding of risk within the industry. "My expectation is [insurers] are going to be able to deploy more sophisticated solutions and we'll see an increased use in technology," he says.

This will parallel with what has been seen in banking and other financial services, Beattie contends, which have been dealing with AML for much longer than insurance.

He cites three reasons for advancement of AML efforts: a normal progression of increased sophistication, more awareness, and greater effectiveness of technology solutions as they mature. "There have been no major industry [AML] events noted recently, but I think one driver is the life and annuity products bring a different risk dimension than, say, international private banking activity," he points out. Higgins agrees: "[AML compliance] still is at a point where many firms have not finished their independent testing to determine their efficiency and effectiveness."

The IRS is in the first year of its exam cycles, adds Beattie. "It's a growing process for the IRS, as well," he says. "It's early in terms of the initial evaluations of program effectiveness."

The E&Y report notes an even split among the respondents regarding whether they have a centralized reporting unit to deal with AML issues. There are a number of factors that may drive insurers toward centralized solutions, asserts Beattie. "When regulators come in and undertake a review, they are going to be asking for certain information–independent assessments, documents, and other information," he says. "Much of that information, if it's broadly distributed across a global organization, is in a decentralized model. It will be difficult to retrieve [the information] and manage a dialogue with your regulators, particularly if the organization has grown through acquisition and doesn't have technology that is integrated and communicating well."

Higgins anticipates future IRS AML examinations are going to include an IT component, which could incorporate some transactional testing that will require access to the insurance company's systems and allow regulators to generate their own reports and assess the insurer's effectiveness.

Niche vendors will crop up to address this specific industry segment, expects Higgins, but he also predicts established banking participants will join the parade. Banking vendors have mature AML solutions, and Higgins believes they can expand their model to include some of the monitoring and alert management algorithms they use in banking or other financial services along with some of the characteristics associated with insurance products.

Most current software solutions are being developed in-house, according to Higgins, with a combination of analytic tools applied across or on top of legacy systems. "[Analytics tools] also may include enhancements to those legacy applications that produce alerts and reporting," he says.

In the first year of regulations, Beattie explains there was a need for expediency to get new procedures in place. "Over time, I think there's more latitude and flexibility to build and buy dedicated technologies whose purpose is to monitor for money laundering risk," he says. "That's where we see the landscape maturing over time."