On November 3, 2005, FINCEN issued final regulations at 31 CFR 103.137 requiring insurance companies to establish anti- money laundering programs pursuant to the requirements of the USA Patriot Act.
Insurance companies, as many other financial institutions, are vulnerable to being used for money laundering or the financing of terrorism, and therefore are required under the final regulation to establish an anti-money laundering program for those insurance products with features that put them at a heightened risk for being used by those who need to launder money or finance terrorism.
It is clear that certain life insurance policies, typically those with a cash surrender value or investment features, are potential money laundering vehicles. In 2005, a federal grand jury in Florida indicted Columbian drug cartels who were laundering narcotics money by purchasing large numbers of life insurance policies, some with face amounts up to $1.9 million. The policy holders would allow unrelated third parties to withdraw money from the cash value or cash out the policies early, paying the penalties, which were viewed merely as a business cost of using the insurance policies to launder the illicit money.
The final rule focuses on insurance companies, rather than agents or brokers, and certain products subject to manipulation by criminal enterprises and terrorists because of their cash value.
Insurance companies, meaning those in the business of issuing or underwriting a covered product, not its agents or brokers, have the direct obligation to establish an anti-money laundering program. An insurance company, due to its larger size, is viewed by regulators as better able to bear the administrative burdens and costs of complying with the regulation’s requirements. However, this does not mean that agents and brokers are off the hook altogether. Because insurance agents and brokers are an integral part of the distribution chain in insurance products, insurance companies must establish and implement policies, procedures and controls designed to integrate its agents and brokers into its anti-money laundering program, and to monitor their compliance with the program.
An insurance company that is registered with the Securities and Exchange Commission as a broker-dealer is already required to establish an anti-money laundering program under separate regulations, and therefore is exempt from establishing a duplicate program under the final regulation, as long as its program is comprehensive enough to address its product line and is in compliance with that program.
Not all insurance products will cause an insurance company to come within the scope of the rule. Products that pose little or no risk of being used for money laundering are not covered by the regulation. For example, the regulation makes a distinction among property and casualty insurance, term life insurance, reinsurance and retrocession contracts, group life insurance and annuities and charitable gift annuities. Given the lack of investment elements and cash surrender values to an individual and the underwriting scrutiny for term products, it would be impractical, and therefore the risk greatly reduced, that these products would be used as money laundering vehicles. Thus, insurance companies with an array of products do not necessarily need a company-wide anti-money laundering program; only one that addresses the risk that the covered products could be used in money laundering or terrorism financing.
By May 2, 2006, each insurance company must develop and implement a written anti-money laundering program applicable to its covered products. The program must be approved by senior management and is required to incorporate policies, procedures and internal controls based upon the insurance company’s risks associated with its covered products. The program must also designate a compliance officer to be responsible for, among other things, ensuring the program is implemented effectively, including monitoring compliance with the program by its insurance agents and brokers, obtaining training for appropriate personnel, and providing independent testing to monitor the adequacy of the program.
The training component of any program should address “red-flags” indicating potential money laundering risks, such as when there is the purchase of an insurance product inconsistent with the customer’s needs; payment with cash; early termination of a product, especially at a cost to the customer; the refund check is directed to an apparently unrelated third party; a customer who borrows the maximum amount available soon after purchasing the insurance product; and a customer who shows little concern about the investment performance, but much concern about the early termination features of the product.
* Susan B. Hollinger is admitted in New Hampshire, Vermont and Massachusetts.