New perspectives: Combating money laundering in insurance sector

BY RONALD ZVENDIYA

Money Laundering (ML) is the process by which criminals attempt to conceal the true origin and ownership of the proceeds of criminal activities.

If successful, the criminal property can lose its criminal identity and appear legitimate, meaning that criminals can benefit from their crimes without the fear of being caught by tracing their money or assets.

Terrorist financing (TF) is the financial support, in any form, of terrorism or those who encourage, plan or engage in terrorism.

Terrorist financing differs from money financing in that the source of funds can either be legitimate, such as an individual’s salary, or illegitimate such as the proceeds of fraud, or drug trafficking.

Proliferation financing (PF) can be in many forms, but ultimately involves the transfer or export of technology, goods, software, services or expertise that can be used in programmes involving nuclear, biological or chemical weapons, and their delivery systems such as long range missiles.

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The insurance sector is potentially at risk of being misused for money laundering and terrorist financing.

This exposes the sector to legal, operational and reputational risks.

Hence, entities in the insurance sector are expected to assess ML, TF and PF risks focusing on the ability and likelihood of a money launderer or terrorist financier to use a particular financial product to store and move funds through the financial system for illicit purposes.

According to the 2013 Financial Action Task Force Guidance for Life Insurance, an entity should have a compliance function which may or may not be held by same person administering other compliance issues in an organisation.

Thus, an insurance company should have a compliance officer which is a statutory requirement in terms of Section 25 (2) of the Money Laundering and Proceeds of Crime Act [Chapter 9:24].

The AML-CFT compliance officer’s duties must be clearly defined and appropriately pitched at the right management level.

The AML-CFT compliance officer has the overall responsibility of implementing and monitoring compliance of institution’s AML-CFT programme, including the activities of its agents, brokers, and other delivery channels.

The compliance officer must ensure that the AML-CFT programme is updated as and when necessary and that the appropriate persons are capacitated and trained.

Money laundering and terrorist financing risks are mainly found in life insurance with annuity products, as they allow a customer to place funds into the financial system and potentially disguise their criminal origin or to finance illegal activities.

Some of the life insurance products and features that can make them vulnerable to ML and TF risks includes unit-linked or profit single premium contracts; single premium life insurance policies; second hand endowment policies; and products with acceptance of very high value or unlimited value payments or large volumes of lower value payment.

The 2019 National Risk Assessment that was done to identify overall vulnerabilities of the sector in terms of products, delivery channels, types of clients and transactions in the life insurance value chain rated the insurance sector medium-low on vulnerability to money laundering.

Therefore, to reduce the vulnerability level, entities in the insurance sector should assess their money laundering and terrorist financing risks facing and institute preventative measures guided by the risk based approach.

The risk assessment should be done regularly to consider material changes in risk factors and the record of the assessment should be maintained by every entity.

The insurance entities should also transition from identifying suspicious transactions manually to an AML-CFT automated system.

Identification of beneficiaries of insurance products through customer due diligence is one of the control measures for dealing AML-CFT risks in the insurance sector.

The customer due diligence procedures include the identification of the ultimate beneficial owner, and taking reasonable measures to verify the identity of the beneficial owner such that the insurer or intermediary is satisfied that it knows who the beneficial owner is.

For legal persons and legal arrangements this should include understanding the intermediaries of ownership and control structure of the customer.

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 before maturity or surrender, so that the payments are made by the insurer to a new beneficiary.

Therefore, the Financial Action Task Force Recommendation 10 requires that companies should identify the beneficiary of life insurance and other investment-related insurance policies as soon as the beneficiary is named or designated, which could occur at the time of the pay-out but before the funds are disbursed.

The entities in the insurance sector needs to identify the insurance delivery channels.

To reduce the  level of inherent delivery risks, entities should use mostly face-to-face delivery channels to distribute its products and services.

However, due to Covid-19, criminals may bypass customer due diligence measures by exploiting temporary challenges in internal controls caused by remote working situations to conceal and launder funds.

Furthermore, when identifying the risks associated with delivery channels and the management of the product, an insurer should also take into account the reliance on any third-party; and whether the arrangement is under a third party reliance or outsourcing model.

In case of third-party reliance, insurers should satisfy themselves that the intermediary is a financial institution, as defined in the Financial Action Taskforce, regulated, and monitored or supervised for AML-CFT, including customer due diligence and record keeping requirements.

In the event insurers outsource a part of their AML-CFT function including the distribution of the products to a third party which is not regulated, supervised or monitored for AML-CFT, they should include these third parties in their own AML-CFT internal control processes, and monitor them for compliance with their AML-CFT programmes.

The insurance companies should deal with agents and bancassurance partners registered with the Insurance and Pensions Commission (IPEC), where they are also required to comply with matters such as a certificate of   proficiency and be subject to fit   and proper requirements.

The insurance companies should desist from doing business with individuals, entities and countries identified on the United Nations sanctions lists.

Therefore, sanctions screening must be performed as part of the customer due diligence process when on-boarding a new customer and for on-going monitoring during the business relationship.

Where sanctions screening identifies a potential match between a customer and a name on a sanction list, an insurance company must investigate to determine whether the match is true, that is, checking if the customer and the sanction list entry is the same person or entity.

If a match appears to be true, the insurance company should notify the Financial Intelligence Unit, refuse to proceed with the business relationship and freeze the customer’s account, in accordance with prescribed regulatory timelines.

Good record keeping is also critical as records evidence good corporate behaviour.

Insurance companies must develop and implement policies, procedures, and controls to comply with applicable record keeping requirements.

At a minimum the records must be retained for at least five years.

In conclusion, combating money laundering, terrorist and proliferation financing is an on-going process since risk levels change as new products or services are offered, new markets are entered, and high-risk customers open or close business relationships.

As such the anti-money laundering, combating financing of terrorism and combating proliferation financing programmes needs to be updated regularly to incorporate changes in the risk profile.

• Ronald Zvendiya is an independent economist, rzvendiya@gmail.com
• *These weekly articles are coordinated by Lovemore Kadenge, an independent consultant, past president of the Zimbabwe Economics Society and past president of the Chartered Governance and Accountancy Institute in Zimbabwe. Email: kadenge.zes@gmail.com and mobile no. +263 772 382 852