ERM guru

The process of money laundering and financing of terrorism

Money laundering is the processing of the proceeds of crime to disguise their illegal origin. Once these proceeds are successfully ‘laundered’ the criminal is able to enjoy these monies without revealing their original source. Money laundering can take place in various ways.

Financing of terrorism can be defined as the willful provision or collection, by any means, directly or indirectly, of funds with the intention that the funds should be used, or in the knowledge that they are to be used, to facilitate or carry out terrorist acts. Terrorism can be funded from legitimate income.

Vulnerabilities in insurance

Life insurance and non-life insurance can be used in different ways by money launderers and terrorist financiers. The vulnerability depends on factors such as (but not limited to) the complexity and terms of the contract, distribution, method of payment (cash or bank transfer) and contract law. Insurers should take these factors into account when assessing this vulnerability. This means they should prepare a risk profile of the type of business in general and of each business relationship.

Examples of the type of life insurance contracts that are vulnerable as a vehicle for laundering money or terrorist financing are products, such as:

• Unit-linked or with profit single premium contracts
• Single premium life insurance policies that store cash value
• Fixed and variable annuities
• (second hand) endowment policies.

When a life insurance policy matures or is surrendered, funds become available to the policyholder or other beneficiaries. The beneficiary to the contract may be changed − possibly against payment − before maturity or surrender, in order that payments are made by the insurer to a new beneficiary. A policy might be used as collateral to purchase other financial instruments. These investments in themselves may be merely one part of a sophisticated web of complex transactions with their origins elsewhere in the financial system.

Non-life insurance money laundering or terrorist financing can be seen through inflated or totally bogus claims, e.g. by arson or other means causing a bogus claim to be made to recover part of the invested illegitimate funds. Other examples include cancellation of policies for the return of premium by an insurer’s cheque, and the overpayment of premiums with a request for a refund of the amount overpaid. Money laundering can also occur through under-insurance, where a criminal can say that he received compensation for the full amount of the damage, when in fact he did not.

Money laundering and the financing of terrorism using reinsurance could occur either by establishing fictitious (re)insurance companies or reinsurance intermediaries, fronting arrangements and captives, or by the misuse of normal reinsurance transactions. Examples include:

• the deliberate placement via the insurer of the proceeds of crime or terrorist funds with reinsurers in order to disguise the source of funds
• the establishment of bogus reinsurers, which may be used to launder the proceeds of crime or to facilitate terrorist funding
• the establishment of bogus insurers, which may be used to place the proceeds of crime or terrorist funds with legitimate reinsurers.

Insurance intermediaries − independent or otherwise − are important for distribution, underwriting and claims settlement. They are often the direct link to the policyholder and therefore intermediaries should play an important role in anti-money laundering and combating the financing of terrorism. Regulators allow insurers, under strict conditions, to rely on customer due diligence carried out by intermediaries. The same principles that apply to insurers should generally apply to insurance intermediaries. The person who wants to launder money or finance terrorism may seek an insurance intermediary who is not aware of, or does not conform to, necessary procedures, or who fails to recognize or report information regarding possible cases of money laundering or the financing of terrorism. The intermediaries themselves could have been set up to channel illegitimate funds to insurers. In addition to the responsibility of intermediaries, customer due diligence ultimately remains the responsibility of the insurer involved.

The following examples may be indicators of a money laundering activity:

• Application for a policy from a potential client in a distant place where a comparable policy could be provided “closer to home”
• Application for business outside the policyholder’s normal pattern of business
• Introduction by an agent/intermediary in an unregulated or loosely regulated jurisdiction or where organised criminal activities (e.g. drug trafficking or terrorist activity) or corruption are prevalent
• Any want of information or delay in the provision of information to enable verification to be completed
• Incidence of pre-payment of insurance premiums
• The client accepts very unfavorable conditions unrelated to his or her health or age
• The transaction involves use and payment of a performance bond resulting in a cross-border payment ( wire transfers) = the first ( or single) premium is paid from a bank account outside the country
• Large fund flows through non-resident accounts with brokerage firms
• Insurance policies with premiums that exceed the client’s apparent means
• The client requests an insurance product that has no discernible purpose and is reluctant to divulge the reason for the investment
• Insurance policies with values that appear to be inconsistent with the client’s insurance needs
• The client conducts a transaction that results in a conspicuous increase of investment contributions
• Any transaction involving an undisclosed party
• Early termination of a product, especially at a loss, or where cash was tendered and/or the refund cheque is to a third party
• A transfer of the benefit of a product to an apparently unrelated third party
• A change of the designated beneficiaries (especially if this can be achieved without knowledge or consent of the insurer and/or the right to payment could be transferred simply by signing an endorsement on the policy)
• Substitution, during the life of an insurance contract, of the ultimate beneficiary with a person without any apparent connection with the policyholder
• Requests for a large purchase of a lump sum contract where the policyholder has usually made small, regular payments
• Attempts to use a third party cheque to make a proposed purchase of a policy
• The applicant for insurance business shows no concern for the performance of the policy but much interest in the early cancellation of the contract
• The applicant for insurance business attempts to use cash to complete a proposed
• transaction when this type of business transaction would normally be handled by cheques or other payment instruments
• The applicant for insurance business requests to make a lump sum payment by a wire transfer or with foreign currency
• The applicant for insurance business is reluctant to provide normal information when applying for a policy, providing minimal or fictitious information or, provides information that is difficult or expensive for the institution to verify
• The applicant for insurance business appears to have policies with several institutions
• The applicant for insurance business purchases policies in amounts considered beyond the customer’s apparent means
• The applicant for insurance business establishes a large insurance policy and within a short time period cancels the policy, requests the return of the cash value payable to a third party
• The applicant for insurance business wants to borrow the maximum cash value of a single premium policy, soon after paying for the policy
• the applicant for insurance business use a mailing address outside the insurance supervisor’s jurisdiction and where during the verification process it is discovered that the home telephone has been disconnected.

The above indicators are not exhaustive. Vietnamese insurance industry is growing rapidly, and every now and then there have been foreign players in to the local insurance market, as such the risk of money laundering has been ever increasing in the local market.

Further, in the recent past we can see a trend of insurers issuing new and advanced products to the market such as unit linked; universal life type products which further increases the risk of money laundering as typically these products are the targets of the money launderers.

Therefore, all players in the market should be aware of the potential risk and should design appropriate policies and procedures to minimize the risk of being a part of the schemes of the money launderers.