Money laundering is on the rise and the insurance industry has been a major target. Mr Katsigeire Justus a Certified Anti-Money Laundering Specialist, highlights the red flags and also suggests possible considerations by the insurers.
In simple terms, money laundering refers to the process by which someone undertakes to make money obtained illegally seem if it was obtained legally.
Criminals do not want these funds to be detected by law enforcement or revenue agencies, so they convert their dirty money into an asset which appears legitimate, such as an insurance policy, bank deposit, casino cheque or even real estate.
Worldwide, the insurance industry generates massive flow of funds some of it might not be as clean as we would like to think. Most significant laundering risks in the insurance industry are found in life insurance and annuities products.
While many life insurance policies are generally structured to pay a certain sum upon the death of the insured, others have an investment value which can create a cash value if the policy holder wishes to cancel the policy.
Life insurance policies that have an investment feature, which can increase the death benefit as well as the cash value of the policy, are often referred to as whole life or permanent life.
Annuities are another type of insurance policy that has a cash value. An annuity is an investment that provides a defined series of payments in the future in exchange for an up-front sum of money.
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.
One indicator of possible money laundering is when a potential policy holder is more interested in a policy’s cancellation terms than its benefits. In both cases, a policy holder can place a large sum of money into a policy with the expectation that it will grow based on the underlying investment, which can be fixed or variable. In a number of ways, the sector’s susceptibility to money laundering is similar to that of the securities sector.
Examples of how money can be laundered through the insurance industry include:
- Certain insurance policies operate in the same manner as unit trusts or mutual funds. The customer can overfund the policy and move funds into and out of the policy while paying early withdrawal penalties.
When such funds are reimbursed by the insurance company (by cheque for Example), the launderer has successfully obscured the link between the crime and the generated funds.
- The purchase and redemption of single premium insurance bonds are key laundering vehicles. The bonds can be purchased from insurance companies and then redeemed prior to their full term at a discount. In such cases, the balance of the bond is paid to a launderer in the form of a “sanitized” check from the insurance company.
- Use of the free-look period: A free-look period is a feature that allows investors, for a short period of time after the policy is signed and the premium paid, to back out of a policy without penalty. This process allows the money launderer to get an insurance check, which represents cleaned funds. However, as more insurance companies are subject to AML program requirements, this type of money laundering is more readily detected and reported.
- Early redemption: One indicator of possible money laundering is when a potential policyholder is more interested in the cancellation terms of a policy than the benefits of the policy. The launderer buys a policy with illicit money and then tells the insurance company that he has changed his mind and does not need the policy. After paying a penalty, the launderer redeems the policy and receives a clean check from a respected insurer.
Although there are no documented cases of money laundering in Uganda’s insurance sector since the enactment of the Anti-Money Laundering Act 2013, the sector’s has seen annual growth in gross insurance premium average 20.3% from 2009 to 2014 and life insurance a product with the most significant money laundering risks grow at an average of 29.9% for the same period.
This therefore calls for vigilance by the insurers and their regulatory body in order to comply with obligations under section6 of the AML Act 2013.
During a long-term drug trafficking investigation in the 1990s, agents from the U.S. Immigration and Customs Enforcement (ICE) in Miami learned that Colombian drug cartels were laundering large sums of money through the purchase of life insurance policies in Europe, the United States and offshore jurisdictions.
Based on this information, ICE launched Operation Capstone in 2000. The probe found that Colombian cartels, using a small number of insurance brokers, were buying investment-grade life insurance policies with cartel associates as beneficiaries.
The policies were purchased with drug proceeds sent to the insurance companies via wire transfers and checks by third parties around the globe. The investigation revealed that the cartels were then cashing out these policies after short periods of time, despite the financial penalties invoked for early liquidation.
The cartel beneficiaries would then receive a check or wire transfer from the insurance company that appeared to be legitimate insurance/investment proceeds. The cartels could then use these “clean” funds.
Agents determined that the cartels had used this scheme to purchase at least 250 life insurance policies and launder some $80 million in drug proceeds.
In December 2002, ICE announced the seizure of nearly $30 million, the arrest of nine individuals, and charges against five additional individuals as a result of this joint probe by authorities in the United States, the Isle of Man, the United Kingdom, Colombia and Panama.
In conclusion therefore, when an insurance company assesses laundering risks, it must consider among others 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.
- Borrow money against an insurance product’s value.
The author is an officer of Uganda Revenue authority and a Certified Anti-Money Laundering Specialist.