AML/ CTF in Life Insurance

Contents

AML/ CTF in Life Insurance

The life insurance sector, a pivotal component of the global financial landscape, faces unique challenges and responsibilities in combating money laundering (ML) and terrorist financing (TF). Understanding the intricacies of Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) within this sector is crucial for compliance, ethical practices, and the overall integrity of financial markets.

  • The Role of Life Insurance in AML/CTF Life insurance policies, particularly those with investment elements, can be susceptible to misuse for ML/TF purposes. Given this, the sector is subject to rigorous AML/CTF regulations and guidelines. These measures are designed to prevent financial crimes while ensuring the security and trustworthiness of life insurance institutions.
  • Risk-Based Approach (RBA) A key strategy in AML/CTF compliance is the Risk-Based Approach (RBA), as advocated by the Financial Action Task Force (FATF). This approach requires life insurance companies to identify, assess, and understand their exposure to ML/TF risks. They must implement appropriate mitigation measures, focusing their efforts on higher-risk areas, including certain products, customers, and geographic regions.
  • Product Risk Factors in Life Insurance Product risk factors in life insurance, such as the flexibility of payments, ease of access to accumulated funds, and the nature of distribution channels, can impact the vulnerability of products to ML/TF. Insurers need to periodically assess these factors, especially when introducing new products or services.
  • Customer and Geographic Risk Factors The life insurance sector must also be vigilant about customer and geographic risk factors. Rapid growth in customer base, difficulties in identifying customers, and connections to high-risk countries are all aspects requiring enhanced scrutiny. Customer profiles, including their financial background and political exposure, play a crucial role in risk assessment.
  • AML/CFT Supervisory Frameworks The European Supervisory Authorities (EBA, EIOPA, and ESMA – ESAs) have been pivotal in enhancing AML/CFT supervisory frameworks. They advocate for clear legal grounds to revoke licenses for serious AML/CFT breaches and emphasize the importance of integrating AML/CFT compliance into the authorization process.
  • Conclusion The life insurance sector’s commitment to robust AML/CTF practices is not just a regulatory requirement but a cornerstone of its trustworthiness and resilience. By adopting a comprehensive and dynamic approach to AML/CTF, the industry plays a critical role in safeguarding the financial system from illicit activities.

FATF RBA Guidance for the Life Insurance Sector

The FATF RBA Guidance for the Life Insurance Sector outlines the fundamental aspects of implementing a risk-based approach (RBA) in combating money laundering and terrorist financing (ML/TF) within the life insurance sector:

  1. Core Concept of RBA: Central to the FATF Recommendations, RBA involves supervisors, financial institutions, and intermediaries identifying, assessing, and understanding their exposure to ML/TF risks and implementing suitable mitigation measures. This allows for a focused allocation of resources towards higher-risk areas.
  2. Guidance Objectives: The guidance supports the implementation of RBA, considering national ML/TF risk assessments and AML/CFT legal and regulatory frameworks. It offers specialized guidance for life insurers, intermediaries, and their supervisors, developed collaboratively with the private sector to incorporate industry expertise and best practices.
  3. Life Insurance Sector Specifics: The guidance addresses unique aspects of the life insurance sector, particularly noting that the ML/TF risk associated with life insurance products is generally lower than other financial products. It provides indicative risk ratings for life insurance products and discusses the role of intermediaries in distributing life insurance and the resulting impact on AML/CFT responsibilities.
  4. Importance of Risk Assessment: Developing an ML/TF risk assessment is a critical first step in applying RBA for life insurers and intermediaries. The complexity of the risk assessment should align with the business’s nature, size, and complexity, with consideration for group-wide risks if part of a larger entity.
  5. Risk Mitigation Measures: The intensity of risk mitigation measures, including customer due diligence, varies based on the identified ML/TF risks. The guidance emphasizes the importance of understanding the identity and status of parties involved in life insurance contracts, especially in cases involving Politically Exposed Persons (PEPs). It also highlights the role of internal controls and the involvement of senior management.
  6. Reporting Obligations: The requirement to report suspicious transactions is unconditional, irrespective of transaction amounts, and does not exempt entities from other AML/CFT responsibilities.
  7. AML/CFT Supervision: The guidance emphasizes a group-level approach to mitigating ML/TF risks, including the development of group-wide ML/TF risk assessments and information sharing among supervisors. It suggests organizing supervised entities with similar characteristics and risk profiles into groups for more effective supervision.

Risk Factors

The FATF RBA Guidance for the Life Insurance Sector categorizes various risk factors associated with customers, products, distribution channels, and geography. Each category encompasses different examples of risk factors and descriptions:

Customers and Related Third Parties

  1. Customer Base Growth: Rapid increase or turnover in customer base, especially with high net worth life policies by new customers, poses higher ML/TF risks.
  2. Identification Difficulties: Challenges in identifying individuals involved in transactions, particularly with third-party involvement.
  3. Complex Ownership Structures: Difficulty in identifying beneficial owners due to complex structures like trusts or other non-transparent arrangements.
  4. Unusual Business Circumstances: Activities inconsistent with the customer’s known profile or lacking economic rationale.
  5. PEPs Exposure: Involvement of Politically Exposed Persons, requiring additional caution.

Payment Methods and Source of Wealth

  1. Payment Methods: Use of cash, payments from different or unrelated accounts, fostering anonymity.
  2. Source of Wealth: Unclear or suspicious sources of wealth or funds.
  3. High-Risk Individuals: Customers classified as higher risk, including those in high-risk industries or professions.

Products and Services

  1. High-Risk Payment Products: Products favoring international customers, cash, third parties, and complex payments.
  2. Large Fund Accumulation: Products designed for accumulating large funds and allowing large transactions.
  3. Anonymity or Transferability: Products favoring anonymity or easy transferability.
  4. Early Surrender Options: Products allowing early surrender with a surrender value.
  5. Low Value, Simple Products: Products with simple features and low value, carrying lower ML/TF risks.

Distribution Channels

  1. Non-Face-to-Face Sales: Sales channels without physical customer interaction, lacking adequate identification safeguards.
  2. Reliance and Outsourcing: Dependence on intermediaries or third parties not subject to the same AML/CFT obligations.
  3. Customer Payment Management: Intermediaries managing investments and fund flows on behalf of customers.

Geography

  1. Products and Services: Marketed or sold in higher ML/TF risk countries.
  2. Customers: Based in or linked to higher ML/TF risk countries.
  3. Intermediaries: Based in or selling to higher ML/TF risk jurisdictions.

These categories and risk factors provide a comprehensive framework for assessing and managing the potential ML/TF risks in the life insurance sector.

25 Factors that can influence the risk levels

The FATF RBA Guidance for the Life Insurance Sector outlines various factors that can influence the risk levels in life insurance contexts. Each attribute is classified with examples of both lower and higher risk scenarios:

1. Ability to Hold Funds or Transact Large Sums

  • Lower Risk: Products that don’t hold a balance or allow withdrawals (e.g., group benefits).
  • Higher Risk: Products allowing fund holding on behalf of the customer, high-value or unlimited-value premium payments.

2. Customer Anonymity or Third-Party Transactions

  • Lower Risk: Products allowing transactions only from identified customers.
  • Higher Risk: Products permitting third-party deposits and non-face-to-face transactions (e.g., mobile apps).

3. Liquidity

  • Lower Risk: Significant fees or penalties for early withdrawals.
  • Higher Risk: No or minimal fees for early withdrawal.

4. Time Horizon

  • Lower Risk: Products typically held for long periods (until retirement or death).
  • Higher Risk: Products typically held for shorter periods.

5. Purpose and Intended Use of Product

  • Lower Risk: Product design facilitating easy identification of unintended use.
  • Higher Risk: Product design complicating the identification of unintended use.

6. Difficulty to Trace Ownership of Funds

  • Lower Risk: Preprinted cheques, bill payments, EFT payments with verified banking records.
  • Higher Risk: Cash, bearer form bank drafts, travelers‘ cheques, some digital currencies.

7. Customer is Not the Payer or Recipient of the Funds

  • Lower Risk: Funds moved from/to another financial institution.
  • Higher Risk: Third-party payers or recipients not previously disclosed.

8. Payment Source or Recipient Based Outside of Country

  • Lower Risk: Owner in a low-risk country.
  • Higher Risk: Owner in a high-risk country or third-party outside of country.

9. Number of Transactions

  • Lower Risk: Low number of transactions typical for the product.
  • Higher Risk: Large number of transactions back and forth.

10. Transactional Patterns

  • Lower Risk: Regular and expected customer account activity.
  • Higher Risk: Significant unexplained changes in typical activity.

11. Distributor has AML/CFT Obligations

  • Lower Risk: Distributor subject to AML/CFT laws.
  • Higher Risk: Distributors not subject to AML/CFT requirements.

12. Payment to Life Insurer

  • Lower Risk: Direct payment from customer’s bank account.
  • Higher Risk: Payment via a distributor, potentially obscuring payment source.

13. Direct Relationship of Customer to Life Insurer

  • Lower Risk: Contracted agents and banking consultants.
  • Higher Risk: No face-to-face relationship, online or telephone sales without adequate identification safeguards.

14. Identification

  • Lower Risk: Customer provides photo ID or identifiable through third-party sources.
  • Higher Risk: Difficulty in producing identification or questionable authenticity.

15. Third-Party Relationships

  • Lower Risk: No third-party involvement.
  • Higher Risk: Control by a third party, multiple indicators of third-party deposits/payments.

16. Customer’s Legal Form

  • Lower Risk: Living person or large publicly traded entity with clear ownership.
  • Higher Risk: Legal entity with complex structure or nominee shareholders.

17. Source of Funds and Wealth

  • Lower Risk: Low-risk industry or business.
  • Higher Risk: High-risk industry or occupation, unexplained high-value deposits.

18. Depth and Duration of Relationship with Customer

  • Lower Risk: Long history with additional information on file.
  • Higher Risk: New customer with little or no history.

19. Customer Only Holds Accounts with Lower Risk Products and Services

  • Lower Risk: Policies or accounts registered with the government.
  • Higher Risk: Non-registered policies or accounts.

20. Other Factors

  • Lower Risk: No negative news, or media confirms known information.
  • Higher Risk: Ties to sanctions lists, history of predicate offenses, negative news.

21. Political Exposure

  • Lower Risk: No ties to politically exposed persons.
  • Higher Risk: Politically exposed foreign person.

22. Higher Crime Regions

  • Lower Risk: No residence in high crime regions.
  • Higher Risk: Residence in high crime regions.

23. History of High-Risk Activity or Fraud

  • Lower Risk: No residence in regions with high incidence of high-risk activity or fraud.
  • Higher Risk: Residence in regions with high-risk activity or fraud.

24. Foreign Tax or Physical Residency of Customer

  • Lower Risk: Low-risk countries.
  • Higher Risk: High-risk countries.

25. Foreign Ties or Transactions

  • Lower Risk: No indicators of foreign residency or transactions.
  • Higher Risk: Transactions with ties to high-risk countries.

These attributes help in assessing and managing the risks associated with life insurance products, guiding insurers in applying appropriate AML/CFT measures.

Assessing and managing risks

The FATF RBA Guidance for the Life Insurance Sector provides a detailed framework for assessing and managing risks associated with life insurance products, customers, and geographic factors. Here is a summary of the key risk factors outlined in the guidance:

Customer Risk Factors

  1. Risk Assessment: Assess the vulnerability to ML/TF threats based on customer characteristics. This includes customer identity, third-party involvement, source of wealth/funds, political exposure, and known criminal or terrorist connections.
  2. Mitigation Measures:
    • Verify customer identity through identification review and underwriting information.
    • Consider customer profile factors such as relationship length, transaction history, and law enforcement notices.
  3. Red Flags:
    • Legal entities with opaque structures.
    • Policy holders or beneficiaries with complex ownership structures.
    • Customers with low-income occupations but high policy deposits.
    • Reluctance to provide identifying information or providing minimal or fictitious information.
    • Early contract transfers or terminations.
    • Unusual or excessive changes in insured sum or premium payments.

Product Risk Factors

  1. Risk Assessment: Assessing product risk involves evaluating how susceptible a product is to ML/TF based on its design. This should be done periodically and when significant changes occur in product offerings.
  2. Higher Risk Features:
    • Flexibility in payments (e.g., allowing payments from third parties, high-value or unlimited premium payments, cash payments).
    • Easy access to accumulated funds (e.g., allowing partial withdrawals or early surrender).
  3. Distribution/Intermediary Risk Factors:
    • Non-face-to-face sales without adequate identity safeguards.
    • Intermediaries involved in claims management.
    • Long chains of intermediaries.
    • Use of intermediaries in unusual circumstances.
  4. Lower Risk Factor: Distribution through companies offering life insurance as part of employee benefits packages.

Third-Party Involvement

  1. Increased Risk: Involvement of third parties can elevate ML/TF risks.
  2. Enhanced Due Diligence: Includes verifying the relationship and source of wealth of third parties.
  3. Red Flags:
    • Use of gatekeepers (accountants, lawyers) holding policies on behalf of others.
    • Unrelated third-party assignments or beneficiary changes.
    • Regular third-party payments without an apparent relationship to the policyholder.

Geographic Risk Factors

  1. Periodic Assessment: Life insurers should periodically assess geographic risk based on connections to regions and countries with higher perceived ML/TF risks.
  2. Domestic Risk Factors: Assessing risk based on regional crime data relevant to money laundering.
  3. International Risk Factors: Higher risk for customers with connections to high-risk countries.
  4. Red Flags:
    • Unexplained geographic distance between the customer and the insurer.
    • Inconsistencies in tax residency information.
    • International communications without foreign residency ties.
    • Ties to high-risk countries.
    • Premiums or settlements through financial institutions in high-risk jurisdictions.

Red Flags

Red Flags related to the involved persons

Identification

    • Delay or discontinuation of identification when requested or expanded.
    • Submission of photocopies of identification documents.
    • Multiple customers present identical identification documents.
    • Submission of obviously forged or tampered documents.
    • Difficulty in determining the identity of the beneficial owner.

    Customer Data and Characteristics

    • Frequent changes in account or contact details.
    • Known investigative procedures against the customer or the beneficiary.
    • Multiple customers sharing the same address (collective address).
    • Implausible information about the policyholder, insured person, beneficiary, or beneficial owner.
    • Policyholder and insured person or beneficial owner in different countries, especially in high-risk countries.
    • Customer from or in offshore financial center, tax haven, or high-risk state.
    • Involvement of a politically exposed person (PEP), their family member, or close associate.

    Consultation Conversation

    • Avoidance of direct contact beyond the usual extent.
    • Noticeable haste, nervousness, aggressiveness, or uncooperativeness.
    • Nervousness or evasiveness in conversation, getting entangled in contradictions.
    • No plausible connection between the choice of intermediary and the residence/business location of the customer.
    • Accompanied by a supposed beneficiary without a close personal connection.
    • Inquiries about cash disbursements or premium payments via foreign accounts.
    • Interest in disbursements to third parties or premium payments by third parties without a plausible reason.
    • Lack of interest in interest/performance, instead focus on cancellation options and early payout.
    • Inquiry about compliance rules and anti-money laundering prevention measures.

    Red Flags related to premium payments

    Premium Payments

      • Inappropriate premium amount relative to the customer’s economic background.
      • Desire for cash payment of premiums.
      • Premium payment via payment slip (cash transfer).
      • Desire for payment in foreign currency.
      • Additional premium payments of significant amount.
      • High one-time amount without a traceable source of funds.
      • Payment via a third party’s account without a traceable reason.
      • Higher amount than agreed and subsequent refund request to a different account.
      • Payment via multiple accounts of the customer.
      • Premiums of different policyholders via the same account.
      • Payment from a country known as an offshore financial center, tax haven, or high-risk country.

      Red Flags related to Insurance Contracts

      Contract Conclusion and Changes

      • Rapid contract conclusion with high premium/insurance sum.
      • Conclusion of multiple insurance contracts with lump-sum payments.
      • Multiple similar contracts in a short time without economic traceability.
      • Uneconomical or implausible contract changes.
      • Contract replacement with high lump-sum premium despite tax disadvantages.
      • Many contracts with various beneficiaries or payers.
      • Beneficiary without personal connection.

      Cancellation / (Partial) Repayment

      • Short-term (partial) repayment after contract conclusion.
      • Payment of high premiums and prompt cancellation for (partial) repayment.
      • Noticeably uneconomical buy-back without a plausible explanation.
      • Transfer of rights to a shell company with prompt cancellation by it.
      • Early dissolution of a contribution account without a plausible explanation.
      • Unusual method of disbursement without a traceable reason.
      • Assignment or further transfer of the disbursement/repayment claim to third parties without a traceable reason.

      Sources:

      https://www.fatf-gafi.org/en/publications/Fatfrecommendations/RBA-Life-Insurance-Sector.html

      https://www.fatf-gafi.org/en/publications/Fatfgeneral/Public-consultation-guidance-life-insurance.html

      https://www.eiopa.europa.eu/esas-highlight-money-laundering-and-terrorist-financing-risks-eu-financial-sector-2019-10-04_en

      https://www.eiopa.europa.eu/consultations/joint-consultation-anti-money-laundering-and-countering-financing-terrorism_en

      https://www.eiopa.europa.eu/esas-publish-joint-report-withdrawal-authorisation-serious-breaches-amlcft-rules-2022-06-01_en

      https://www.zoll.de/DE/FIU/Fachliche-Informationen/fachliche-informationen_node.html