Know Your Customer for Insurance

Why Insurers need AML/CFT ?

Insurance policies are prone to abuse by fraudulent persons and criminals. Policies other than life and accident covers, flexible investment opportunities, surrender and withdrawals with ease; pose high risks of fraud and money laundering (ML).

As a registered insurance firm, agent, or broker, you are a “regulated entity”, if you

Carry on the business of arranging contracts for insurance,
Sell the products of an insurance company, or
Request, negotiate or instigate insurance contracts on behalf of an insurer or client.

Risk exposure

Insurance products involve huge disbursements, transfer of ownership/beneficiaries, and various schemes that make it vulnerable to money laundering (ML). Products like single premium policies, annuity policies, policy loans, top-up insurance policies and high regular premium savings policy; are exposed to the risks of being used to launder illicit funds, as they allow the diverting of funds or disposing of huge amounts. Surrender of policies, withdrawals or redemptions and fraudulent claims are other issues that the insurance sector deals face.

Compliance requirements

Insurance is a high-risk area, which involves rigorous risk assessment and underwriting. To keep the bad actors away, a thorough client verification (KYC) and risk scoring at each point of onboarding or transfer of ownership; are mandated. Insurers can remain compliant by identifying the ultimate beneficial owner, ensuring enhanced due diligence (EDD) of high-risk policy products and high-value transactions, and implementing customer due diligence (CDD) right up to the claims stage.

Gaps in compliance

The nature of some of the insurance products creates a barrier to effective AML/CTF compliance. The ability to buy single premium policies or life insurance policies covering huge amounts, are some ways illicit funds can be used. Transfer of ownership, lack of detailed information on the financial status of the client, withdrawal of funds before maturity, deliberate over-payment of premium, a refund of premiums and using payouts for other investments, are ways illegal money integrates into the legitimate economy creating challenges for the insurance sector.

Establish a Compliance Programme

Insurance firms, agents or brokers are expected to establish the framework for a risk-based compliance programme:

Conduct a risk-based assessment for exposure by type of client, insurance policy, service channel, a country in which it operates, size of premiums, changes in client relationships, nature of redemption or payout.
Create risk reduction measures and controls to lessen risk.
Develop an AML/CTF program: client identification, ‘Ultimate Beneficial Owners’, transaction screening, business relationships, and policy-wise EDD.
Implement the risk-based approach with ongoing monitoring of transactions, business relationships, and prioritising of investigations.

Maintain your Compliance Programme

Set up and maintain your compliance programme, as per the laws of your regime. Non-compliance may result in criminal or administrative monetary penalties.

Ongoing compliance involves:

Training staff, and creating awareness among insurance agents and brokers.
Conducting policy-based diligence: KYC and confirming the existence, running checks of PEPs/Sanctions/Adverse Media (for life insurance); CDD when establishing a new business relationship or when there is a material change in the relationship with the client.
Transaction monitoring of your clients and policies in real-time, reporting suspicious transactions.
Establishing procedures at foreign branches, with periodic assessment of money laundering and terrorist financing risks.
Reviewing your compliance program at regular intervals.