Part one of our two-part blog series on AML challenges for insurance companies

For years, the insurance industry was perceived as a lower risk for financial crime compared to the banking sector. As a result, it was spared the intense scrutiny and heavy fines regulators imposed on financial institutions for deficiencies in anti-money laundering (AML) controls.

However, much has changed!

With banks improving risk detection and closing gaps in their AML processes, bad actors needed another conduit to launder ill-gotten gains. Insurance products, particularly those with large lump sum or annuity payments, fit the bill. This development combined with more complex sanctions, which increased compliance challenges and risk, laid the foundation for more stringent regulatory oversight of insurance.

Eye on insurance
The insurance industry has now caught up to its banking brethren. It is monitored for compliance by a host of regulatory bodies, such as the U.S. Office of Foreign Assets Control (OFAC), which administers and enforces economic and trade sanctions. Enforcement actions by these organizations over the last few years have spanned various types of insurance and breaches.

In 2019, for example, Allianz Global Risks (AGR) U.S. Insurance Company was fined by OFAC for actions by AGR Canada. The Canada branch had fronted coverage of travel insurance policies for Canadian residents traveling to Cuba, a jurisdiction where it is not licensed.

Local regulators in APAC have also stepped up enforcement and levied fines for AML violations and non-compliance. For example, the Taiwan Financial Supervisory Commission fined Allianz Taiwan Life Insurance Co. Ltd. for non-compliance with AML regulations in its watch list filtering operation and identification of beneficial owners of corporate customers. Deficiencies were also found in their money laundering and terrorist financing risk assessment process. In another case, People’s Bank of China (PBOC) fined China Life Insurance Co. Ltd. in 2018 for improper storage of customer identity information and transaction records, and failure to submit suspicious transaction reports.

Fines in the above-mentioned cases were all less than $175,000, which is ‘rounding error’ compared with fines levied against financial institutions – but fines don’t tell the whole story.

Enforcement actions against an insurance company could lead to license revocation, loss of customers or investors due to diminished reputational standing, de-risking from reinsurers or banking partners, or financial risk if AML fines increase significantly. Undergoing an audit or investigation also consumes time and resources that would be better spent on day-to-day business. In addition, regulators’ loss of confidence in a company’s compliance controls could compromise an insurer’s expansion plans into new markets.

In other words, while the current level of fines is unlikely to change behavior, the ‘knock-on’ effect of enforcement actions should serve as a compelling reason for insurance companies to take compliance seriously.

All risk is not created equal
Insurance involves people, money and products. That makes all types of insurance – life, general, marine, aviation, health, travel, etc. – vulnerable to money laundering and other financial crime. However, risk is not the same across the board.

Life insurance products pose the greatest risk due to their large lump-sum payouts, cancellation grace periods, and annuity/investment options. With so many parties involved – from agent and policyholder(s) to insured(s), beneficiary(ies), payer(s) and bank(s) – insurers need to carefully monitor transactions and all related parties to identify sanctions, politically exposed persons (PEPs) and other high-risk entities such as those with enforcement actions or adverse media.

Marine and aviation insurance are another area of concern. According to Accenture “The increasingly complex sanctions landscape threatens to open insurers and brokers to more regulatory scrutiny of controls, and potential penalties for identified failings.” Like life insurance policies, marine and aviation insurance involve numerous parties, including agent, forwarding agent, exporter, importer, beneficiary(ies) and bank(s), all of whom must be vetted to ensure a company is not engaging with any sanctioned entity or dealing in prohibited goods.

Because risk varies across different insurance sectors and products, a risk-based approach (RBA) is essential. Insurance companies must identify, assess, and understand their vulnerabilities so they can establish effective preventative measures, meet compliance obligations and mitigate claims and potential losses. The RBA is smart business practice as it enables insurers to allocate their limited resources in the most targeted and efficient way.

Capturing changing risk
The customer relationship encompasses ongoing AML screening with periodic reviews after onboarding to ensure customer information is up-to-date and the risk profile remains valid. With a risk profile established, a RBA can be applied effectively. This includes having specific scenarios for transaction monitoring.

Although different types of insurance must screen different groups, know your customer (KYC) due diligence and compliance checks are critical for all insurance companies to:

Proper and tailored compliance training will help employees identify unusual activity and carry out due diligence. Insurers also need to educate the independent agents and third parties entrusted to sell their products to ensure they too, follow the company’s AML procedures.

Partnering for success
Achieving effective compliance requires synergy between people, processes and technology. Your employees are the first line of defense, but their efforts must be supported by consistent processes that are explainable to regulators and that provide an ongoing and unified view of risk across the enterprise.

The right screening technology can provide effective risk mitigation while bringing greater efficiency to your day-to-day operations. When selecting a screening solution, keep these top five considerations in mind:

Accuity offers advanced screening solutions, dependable data and deep domain expertise. We can assess your AML policies and help you leverage technology to achieve effective and efficient processes that mitigate risk and strengthen compliance.

Visit here or Contact us directly, to learn more on our solutions for insurers, brokers, and re-insurers, giving you a consolidated view of your customers’ risk throughout the policy lifecycle.

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