Keeping it Clean

To paraphrase a well-placed lawyer in the Canadian property and casualty (P&C) insurance world, Canadian anti-money laundering (AML) legislation does not mention P&C insurance and no one is in any hurry to add to their regulatory burden.

For the most part, this statement is accurate. Canadian AML legislation does not explicitly make reference to P&C insurance (although references are made to life insurance).  This, however, should not be taken to mean money cannot be laundered through P&C products (a growing base of cases refute this idea). Nor should it be taken to mean P&C agents, brokers, dealers or other insurance professionals are free from regulatory obligations with regards to AML. These obligations come into play when the insurance product in question originates from an insurance company that operates out of a country that does have P&C-related AML obligations, such as the United Kingdom. These obligations often extend extra-jurisdictionally; they relate in particular to situations when the jurisdictions in which the product is being sold do not meet the same standards as those of the originating country. This is of particular concern to Lloyd’s coverholders in Canada, for example, and
other Managing General Agents (MGAs) that underwrite on behalf of foreign P&C insurers.

What do money laundering and terrorist financing schemes related to P&C products look like? What are the red flags? What do Canadian P&C insurance professionals need to know about AML compliance to be on the right side of the law? In particular, what do they need to know about products originating from companies based in the United Kingdom and in the U.S.A.?

Recent Cases

The Financial Action Task Force (FATF) is an inter-governmental body that develops and promotes national and international policies to combat money laundering and terrorist financing. Their 2003-04 typologies report (available at www.fatf-gafi.org) included a special section on the insurance sector, highlighting a number of red flags and discussing several sample cases. The report states: “Financial institutions view payments originating from insurance companies as commonplace. The money is assumed to be clean and the payments do not attract attention. If money launderers can place funds into an insurance policy, then they will have made significant steps in layering and integrating the funds into the international financial system.” In addition, at the placement stage of the laundering cycle, for example, the industry has been used through the outright purchase of insurance products with criminal cash proceeds. In these cases, money launderers have exploited the fact that insurance products are often sold by brokers – that is, agents who are not acting directly under the control or supervision of the company that issues the product.”

These observations are more meaningful in the context of the money laundering cycle, a process involving three stages – placement, layering and integration – depicted below. Through these stages, the proceeds of crime (often in cash) are placed into the legitimate financial system and the source of the funds is systematically obfuscated through a series of transactions. The goal of these transactions is to make the funds appear legitimate.

All financial services professionals should consider ways money laundering might be possible given the products and services being offered. Terrorist financing often uses many of the same steps as money laundering, although the goals in this case are somewhat different. Terrorist financing aims to fund terrorist groups and activities. For many of the same reasons money launderers wish to hide the source of their funding (they do not want the underlying crimes to be detected), terrorists also do not wish for the source of the funds to be connected to their groups or actions.

Figure 1 above is adapted from the International Association of Insurance Supervisors (IAIS) AML Guidance from January of 2007 (available at www.amlcft.com). It depicts some ways in which insurance products might be incorporated at each stage of the cycle.

For those in the life insurance business, which has been covered under Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and associated regulations (PCMLTFR) since 2008, everything stated thus far should feel a bit like a review of annual AML and CTF training. P&C insurance professionals, on the other hand, are not covered under the current Canadian legislation. However, this does not mean there have been no money laundering or terrorist financing cases related to P&C insurance products.

Many examples exist of P&C insurance for luxury personal items or large commercial risks being used to launder funds.  These schemes may, but do not always, include an element of fraud. One of the most common methods is to make a fraudulent claim against a property policy. This ensures the funds received in settlement come from a reputable source and appear legitimate.

The case study below is detailed in the U.S. Department of the Treasury’s Financial Crimes Enforcement Network’s (FINCEN) Anti-Money Laundering Program and Suspicious Activity Reporting Requirements For Insurance Companies (available at www.naic.org).

Case study: P&C Products and Money Laundering

Four broking agencies were forced to freeze funds after U.S. court action followed an investigation into Latin American drugs smuggling. The Drug Enforcement Agency (DEA), based in the U.S.A., coordinated the drug trafficking investigation, code-named ‘Golden Jet.’ The Federal Bureau of Investigation (FBI) and the United Kingdom authorities were also involved. The funds frozen by the court action related to commercial aircraft insurance policies.

The brokers affected by the court order included some of the largest U.K. insurance brokers. The case highlighted the potential vulnerability of the insurance market to sophisticated and large-scale drug trafficking and money-laundering operators. The court order froze aircraft insurance policies taken out by 17 Colombian and Panamanian air cargo companies and by nine individuals. The action named 50 aircraft, including 13 Boeing 727s, one Boeing 707, one French Caravelle and two Hercules C130 transport aircraft. The British end of the action was just one small part of a massive anti-drug trafficking action coordinated by the DEA. Officials of the DEA believe Golden Jet is one of the biggest blows they have been able to strike against the narcotics trade.

Led by the DEA, American authorities swooped in on an alleged Colombian drug baron, seizing tons of cocaine valued at many billions of dollars. A massive cocaine- processing factory located in Colombia, together with aircraft valued at more than $22 million, were destroyed in the DEA-coordinated action. According to the indictment, the cargo companies were responsible for shipping tons of cocaine from South to North America throughout the 1980s and early 1990s, providing a link between the producers and the consumers of the drugs. Much of the cocaine flowing into the U.S.A. was transported into the country by air. During this period, the Colombian cartels rose to wealth and prominence, aided by those transport links.

Although certain elements of this case may seem dated, it is important to remember it can take a number of years for a case to move through the court system; until the case is finalized, law enforcement is often not at liberty to discuss the specifics. It is also worth noting the elements that facilitated money laundering through P&C products in this case persist today.

Red Flags

A number of confirmed red flags should prompt action by P&C insurance professionals. It is important to remember a red flag does not necessarily mean the client is a criminal or that money laundering or terrorist financing are occurring. All suspicious activ
ity should be investigated as a matter of good corporate governance. The following is an aggregate list of the red flags noted by FATF, IAIS and FINCEN:

• unusual payment methods such as large cash payments or cash equivalents such as money orders are used;
• attempts are made to use a third-party cheque to make a proposed purchase of a policy;
• an applicant requests to make a lump sum payment by a wire transfer or with foreign currency;
• an applicant is reluctant to provide identifying information when purchasing a policy, or provides minimal or unverifiable information without supporting documentation;
• early termination of a policy is requested where cash was tendered and/or the refund cheque is to a third party;
• transfer of the benefit of a product or claim settlement to an apparently unrelated third party is requested;
• an applicant shows heightened interest in the cancellation terms;
• an applicant appears to have policies with several institutions through different brokers;
• an applicant purchases policies with insurance limits that appear to be beyond the customer’s apparent means or needs;
• an applicant purchases a high premium insurance policy using cash; within a short time, he or she cancels the policy and requests the cash value returned, possibly payable to a third party;
• an applicant wants to borrow the maximum cash value of a single premium policy soon after paying for the policy (life insurance);
• an applicant uses a mailing address outside the insurance broker’s normal territory;
• an applicant cannot be contacted directly via telephone;
• an insured makes frequent claims and the claims amounts are conveniently under a limit that would be flagged, such as a claim settlement authority limit in a binding authority agreement.

Further to the above red flags, internal staff may be involved. As a result, ensure internal controls and governance are strong, especially in the cash receipt and claims areas. Any transaction involving an undisclosed third party should be suspect.

In the fight against money laundering and terrorist financing, our first line of defense is always the education, instincts and diligence of front-line people. In order to deter, detect and prevent we must first recognize the signs of illegal money-laundering activity and make sure all staff is aware of the issue and trained to spot suspicious activity.

The Bottom Line

Canadian insurance professionals who do business with insurance companies domiciled in the United States, United Kingdom or other international jurisdictions should be aware the insurer may choose to – or be required to – impose the same standards on their international business as on their domestic business. If your firm works closely with a company headquartered outside of Canada, you should be aware of the rules imposed by that country and company.

The good news is that the nature of insurance often involves the collection of the types of information required to build solid AML and CTF controls. The challenge is to make sure internal policies and procedures reflect the actions your firm is undertaking to detect, deter and prevent money laundering and terrorist financing. Your documentation should be aligned with requirements applicable to you and your business.

This article was written with the assistance of Allison Murray, A.M. Associates Insurance Services Ltd.