WHEN ONE THINKS of money laundering, the images that come to mind are usually of drug dealers using the banking system to camouflage dirty money transactions. Hardly ever would the insurance industry come to mind. This was largely the thinking up to 2003 and the landmark event, Operation Capstone.
Operation Capstone was the code word for a two-year multinational investigation, involving the United States Bureau of Immigration and Customs Enforcement (ICE), the Isle of Man Customs and Excise Service, and Colombia’s Departmento Administrativo de Seguridad (DAS), that revealed Colombian drug trafficking organisations, through a small number of insurance brokers, were purchasing investment grade life insurance policies in the United States, the Isle of Man and other locations, with cartel associates as the beneficiaries.
The policies were purchased with tens of millions of dollars which were really the proceeds of drug trafficking. The drug lords paid third parties to write cheques, make wire transfers, and cash payments to pay premiums. They would then cash in investment grade policies and did not mind paying heavy penalties once they were receiving clean cheques from the insurance companies.
It was discovered that more than 250 insurance policies were linked to drug proceeds and over US$29 million in various assets were subsequently seized by the relevant authorities. This was the catalyst for widespread studies by the various regulatory bodies which led to the discovery that though the insurance industry does not facilitate money laundering on the scale that banking does, significant illicit activity was taking place and needed to be curbed and prevented.
In 2005, the Financial Action Task Force (FATF) published an indepth study of the vulnerability of the insurance industry to money laundering. Overall FATF had considered 94 cases that had been reported out of which 65 per cent related to life insurance, 30 per cent to general insurance and five per cent to reinsurance.
From these 94 cases the following types of money laundering were identified in the following proportions: risks involved in international transactions (14 per cent), general insurance for goods likely to have been purchased with illegal funds (13 per cent), early redemption of policies (12 per cent), large premium deposits funding annual premium (nine per cent) collusion of customer, broker, intermediary, insurance employee (nine per cent), third party payments (nine per cent), single premium life insurance (seven per cent), cash payments to purchase insurance (seven per cent), fraudulent customers, insurance companies and reinsurance (seven per cent), others (two per cent).
As a result of this and other studies, international regulatory organisations ramped up regulatory protocols. The United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN) provided an early lead in issuing comprehensive rules for insurers; the international watchdog FATF also issued guidance.
More significantly, the voluntary membership organisation the International Association of Insurance Supervisors (IAIS) of which Barbados is a member has issued comprehensive anti-money laundering guidance for the industry. The IAIS is an organisation of insurance supervisors and regulators from more than 200 jurisdictions. The mission of the IAIS is to promote effective and globally consistent supervision of the insurance industry in order to develop and maintain fair, safe and stable insurance markets for the benefit and protection of policyholders and to contribute to global financial stability.
It is the international standard setting body responsible for developing and assisting in the implementation of principles, standards and other supporting material for the supervision of the insurance sector. In Barbados the regulatory body for insurance companies, the Financial Services Commission, has issued anti-money laundering guidance for insurers and their intermediaries. Insurance companies are required to ensure that their intermediaries, agents and brokers adhere to anti-money laundering policies which allow the insurance companies to satisfy regulatory requirements.
The anti-money laundering regulations for insurers revolve around the design features of some products which make them susceptible to misue. The point should be made that there is nothing intrinsically wrong with the design of these products but that like all financial and investment products they are open to money laundering abuse by unethical persons. Not all insurance products carry the same level of money laundering risk. The major gateway to money laundering lies in investment type products involved large cash/premium payments and pay out values. To a lesser extent, general insurance, pension funds and re-insurance may also be used for money laundering.
But how, you may ask, could insurance be possibly used for money laundering? Money laundering can take place at application, during the life of the contract and at redemption/pay out stages. In the next article, we will look more closely at how money launderers attempt to use insurance products.
Louis Parris is a certified compliance professional, consultant and publisher of the Caribbean Banking Intelligence Anti-Money Laundering Compliance Newsletter. Email: louisp@caribsurf.com.