Prevention of Money laundering in Insurance Business

The word "laundering" literally means washing  dirty clothes. Money laundering means  conversion or laundering of money which is illegally obtained. The most common definition is  given by  "The Financial Action Task Force on Money Laundering"  which defines money laundering as "the Processing of criminal proceeds to disguise their illegal origin'  in order to legitimize the ill gotten gains of crime.

In simple words we can say, Money Laundering is a moving of illegally acquired cash through financial systems so that it appears to be legally acquired.

In the past, the term "money laundering" was applicable only to financial transactions related to organized crime. Today its definition has been expanded by government regulators to include any financial transaction which generates an asset or a value as the result of an illegal act.

Seeing the importance of the prevention of the money laundering  in today’s context where the crime is at hike and to put a bar on it, the  government enacted an Act  to prevent money laundering and to provide for confiscation of property derived from, or involved in, money laundering and for matters connected therewith or incidental thereto. It aims at combating channellising of money into illegal activities, provides for attachment and seizure of property and records, stringent punishment . The Act, in line with India ‘s commitment to fight all forms of economic crimes and desires of the system to become neat and clean.

Thus the Government to keep check on this type of financial transaction enacted the  Act , called as ‘The Prevention Of Money Laundering Act,2002â€�. Its application is extended to all over  India . This Act is applied on all the banking companies , financial institutions(which includes insurance institutions) and other Intermediateries.

In order to further strengthen the existing legal framework and to effectively combat money laundering, terror financing and cross border economic offences, an amendment Act, 2009 was passed by the parliament .The new law seeks to check use of black money for financing terror activities. Finanacial Intermediaries like full fledged money changer, money transfer service providers such as credit card operators have also been brought under the ambit of the prevention of Money-Laundering Act. The new law would check on misuse of ‘proceeds of crime’’ be it from sale of banned narcotics substances or breach of unlawful Activities(prevention) Act.

The government of India established the financial intelligence unit – India(FIU-IND) as the central  national agency accountable for receiving, processing, analyzing and disseminating information relating to suspect financial transactions. The Prevention of Money Laundering Act, 2002  and the rules notified there under came into force with effect from July 1, 2005.

The term ‘ money Laundering’ given in the PMLA,2002 has been defined as :  

That whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of money laundering.

The terminology have been taken in broader aspect covering any act done knowingly or unknowingly  in relation with  any property or assets  ,whether corporeal or incorporeal, movable or immovable, tangible or intangible including deeds and instruments  evidencing title to ,or interest in, and such property wherever located is, when derived or obtained, directly or indirectly, by any person as a result of criminal activity. Such an Act or assistance  falls under purview of the commission of the money laundering and shall be guilty of commission of the offence.

There are three common stages of money laundering through which the potential criminal activity may be undertaking  in the form of normal business transactions. Placement, layering, and integration. Placement  refers to the initial point of entry for funds derived from criminal activities.  Layering refers to the creation of complex networks of transactions designed to disguise the source of money so as to block out the link between the initial entry point and the end of the laundering cycle.  Integration refers to the return of funds to the legitimate economy for later extraction.

Money laundering and the insurance business

 The insurance Institution is very much prone to money laundering as compared to other financial institution. Insurance product is more diverse as compared to banking product due to lack of thorough assessment of the insurance products in terms of money laundering. This is  because  in this business  the mode of payment in the form of high premium payment ,is the most striking factor to money launderers. Here the cash transfer  make impossible to trace out the  audit track whenever subsequent investigation  being carried out.

The application of anti-money laundering measures to the insurance companies in particular, has also been emphasized by international regulatory agencies as a key element in combating money laundering.

Establishment of anti money laundering programs by financial institutions is one of the central recommendations of the Financial Action Task Force & also forms part of the Insurance Core Principles of the International Association of Insurance Supervisors (IAIS).

Accordingly, the authority (IRDA) has decided to put in place regulatory Guidelines / Instructions to the Insurers, Agents & corporate agents as part of an Anti Money Laundering Programme (AML) for the insurance sector.

The obligation to establish an anti-money laundering program applies to an insurance company and other intermediaries. Hence the responsibility for guarding against insurance products being used to launder unlawfully derived funds or to finance terrorist acts, lies on the insurance company, which develops & bears the risks of its products.

Procedure of money laundering

There are three common stages of money laundering as detailed below which are opted by the Launderers and Insurance institutions which may unwittingly get exposed to a potential criminal activity while undertaking normal business transactions:-

a.          Placement- the physical disposal of cash proceeds derived from illegal activity.

b.         Layering- separating illicit proceeds derived from their source by creating complex layers of financial transactions designed to disguise the source of money.

c.          Integration- creating the impression of apparent legitimacy to criminal derived wealth.

If the layering process has succeeded, integration schemes place the laundered proceeds back into the economy in such a way that they re-enter the financial system appearing to be normal business funds.

Financial institutions such as insurers are therefore placed with a statutory duty to make a disclosure to the authorized officer when knowing or suspecting that any property, in whole or in part, directly or indirectly, representing the proceeds of drugs trafficking or of a predicated offence, or was or is intended to be used in that connection is passing through the institution.

Prevention of money laundering in Insurance business

In order to comply with the provisions of the Prevention of Money Laundering Act, 2002, the IRDA has issued guidelines for implementation of the recommendations made by the Financial Action Task Force (FATF) on Anti money laundering standards to be followed by the Insurance Companies in India.

Each insurance company has to establish and implement policies, procedures, & internal controls in its anti-money laundering program .

To introduce ,Know Your Customer (KYC) policy,  so that they can make reasonable efforts to determine the true identity of all customers requesting for its services and to verify all the relevent documents at the time of accepting the risk for compliance with KYC requirement for individuals and others.

Legal names and any other names used (documents Required) ( Insurance Contracts with individual)

1. Passport
2. Pan
3. Voters Identity Card
4. Driving Licence
5. Letters from a recognised public authorities or public servant verifying the identity and residence of the customer.
6. Personal identification and certification of the employees of the insurer for identity of the prospective policy holder
7. Written confirmation from the banks where the prospect is a customer regarding identification.

Proof of Residence (Documents required)

1.       Telephone Bill

2.       Bank Account Statement

3.       Letter from any recognized public authority

4.       Electricity Bill

5.       Ration Card

6.       Written confirmation from the banks where the prospect is a customer, proof of residence.

7.       Valid lease agreement alongwith rent receipt, which is  not more than 3 months old as a residence proof.

8.        Employers Certificate as a proof of residence.

9.       Bank Account statement includes any bank account opened by the customer wherein his permanent/present residence address is available . However the statement should not be older than 6 months as on the date of acceptance.

Telephone Bill pertaining to any kind of telephone connection (mobile, Landline, wireless etc. is a valid proof of residence, provided it is not older than 6 months from the date of insurance contracts.

In addition to the above,  the company will also assist upon income proof if the policyholder paid a premium exceeding Rs. 100000/- and preferred a claim or premium refund exceeding Rs. 1,00,000/-

It is mandatory to obtain any one of the above documents to clearly establish the customer identity consistent with risk profile in respect of all new insurance contracts.

The degree of due diligence to establish KYC could be decided by the insurers where premium is below Rs one Lakh per annum.

For premium of Rs. 1,00,000 per annum in case of individual policies should be considered as a limit for exercising detailed due diligence, what ever be the payment mode.

KYC and Risk Profile of the Customer

Because of the very large base of the insurance customers  and the significant differences in the extent of risk posed by them, the companies are advised to classify the customer into high risk and low risk, based on the individual profile  and product profile, to decide upon the extent of due diligence.

1. Individuals (other than high net worth) & entities whose identities  and sources of wealth can be easily identified and transactions in whose accounts by and large conform to the known profile may be categorized as Low Risk. Examples of low risk customers could be salaried employees whose salary structures are well defined, people belonging to lower economic strata of the society, Govt. departments & Govt. owned companies, regulators & statutory bodies etc.
2. In such cases,( Low Risk) the policy may require that only the basic requirements of verifying the identity & location of the customer are to be met.
3. For the high risk profiles, like for customers who are non-residents, high net worth individuals, trusts, charities, NGO’s & organizations receiving donations, companies having close family shareholding or beneficial ownership, firms with sleeping partners, politically exposed persons (PEPs), & those with dubious reputation as per available public information who need higher due diligence, KYC & underwriting procedures should ensure higher verification & counter checks. Source of Funds should also be Identified)

Sources of Funds:- Customer’s source of funds, his estimated net worth etc. should be documented properly and the Advisor &/ or employee shall obtain income proofs to establish his need for insurance cover. Proposal form may also have questionnaires/ declarations on sources of fund, & details of bank accounts. Large single premiums should be backed by documentation, to establish source of funds.

Income Poofs

·         Standard Income Proofs:

1. Incomes tax assesment orders/ Income Tax Returns
2. Employer’s certificate .
3. Audited Company accounts.
4. Audited firm accounts & partnership deed.

•          Non-standard Income Proofs:

1. Chartered Accountant’s Certificate.
2. Agrricultural Income Certificate.
3. Agricultural-land details & Income assessments.
4. Bank cash-flows statement, pass-book.

Note:- The List is only illustrate & not exhaustive.

Defining Suspicious Transactions (including Suspicious Cash Transactions):

1. The AML program envisages submission of suspicious transactions reports (STR)/ Cash Transactions Reports (CTR) to a Financial Intelligence Unit – India (FIU-IND) set up by the Govt. of India to track possible money laundering attempts & for further investigation & action.
2. It is extremely difficult to give an exhaustive list of suspicious transactions. An illustrative list of such transactions is  provided in Annexure IV below.

Illustrations  of Suspicious Transaction

·      Cash based suspicious transactions for payment of premium & top ups over & above Rs.5 lakhs per person per month. It should also consider multiple DDs each denominated for less than Rs.50,000/-.

·      Overpayment of premiums with a request for a refund of the amount overpaid.

Reporting of Suspicious Transactions:- Insurance companies should report the suspicious transactions immediately on identification. When such transactions are identified post facto the contract, a statement may be submitted to FIU-IND within 7 working days of identification in the prescribed formats.

Monitoring & Reporting of Cash Transactions:

Premium/ proposal deposits beyond Rs.50,000 should be remitted only through cheques, demand drafts, credit card or any other banking channels.

1. For premium amount greater than Rs.50,000 in a calendar month should be examined more closely for possible angles of money laundering. This limit will apply at an aggregate level considering all the roles of a single person-as a proposer or life assured or assignee.
2. Insurance companies have to report integrally connected cash transactions above Rs.10 lakhs per month to FIU-IND by 15th of next succeeding month.

Record Keeping:

1. The insurer/ agents/ corporate agents are required to maintain the records of types of transactions mentioned under Rule 3 of PMLA Rules 2005 & the copies of the cash / suspicious Transactions reports submitted to FIU as well as those relating to the verification of identity of clients for a period of 10 years.
2. Sharing of information on customers may be permitted between different organizations such as banks, insurance companies, Income tax authorities, local Govt. authorities on request. Records can also be in electronic form.
3. Insurance institutions should implement specific procedures for retaining internal records of transactions both domestic or international, to enable them to comply swiftly with information requests from the competent authorities.

4.       Such records must be sufficient to permit reconstruction of individual transactions (including the amounts & types of currency involved (if any) so as to provide, if necessary, evidence for prosecution of criminal activity

5.       In situation where the records relate to ongoing investigations, or transactions which have been the subject of a disclosure, they should be retained until it is confirmed that the case has been closed where practicable, insurance institutions are requested to seek & retain relevant identification documents for all such transactions & to report the offer of suspicious funds.

6.       In case of customer identification data obtained through the customer due diligence process, account files & business correspondence should be retained for at least 10 years after the business relationship is ended.

To strengthen the level of control on the agents & corporate agents engaged by the insurers

Appointment of Principal Compliance Officer:- The companies should designate a principal compliance officer under AML rules. The name of the principal compliance officer should be communicated to IRDA & FIU immediately to look into the matter.

 Conclusion

Thus from above discussion we can conclude that , money laundering has now become one of the foremost concerns of international financial community as effecting the whole world. Money Laundering is not just an attempt to veil the money, derived from illegal activities. Rather, money laundering is involvement in any transaction or series of transactions that conceals  the nature or source of proceeds derived from illegal activities, including terrorism, organized crime, fraud and many other crimes. The Insurance Business is most effected area due to involvement of series of  financial transcations. Infact it is the easiest mode of acquiring illegally obtained money by conversion of it into legal money.

Contributed by Nisha Gupta

Executive Officer,ICAI, Noida

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