Anti-money laundering (AML) Compliance Prog-ram: Hopefully, this term is not new to you, because the deadline for 31 CFR 103.137 compliance is May 2, 2006.This regulation, which is part of the USA PATRIOT Act, was developed to better protect a class of financial institutions from potential abuse by criminals and terrorists, which will in turn enhance protection of the U.S. financial system, according to the Federal Register.

If you are a term life, P&C or health insurer, you can breathe easy; this regulation doesn't apply to all insurers. Insurance companies are covered only to the extent that they handle covered products:

  • Permanent life, but not group.
  • Annuity contracts, but not group.
  • Any other insurance product with cash value or investment features.
  • Specific products now explicitly excluded by The Financial Crimes Enforcement Network (FinCEN) guidance, which include term life, P&C, health and other kinds of insurance that do not exhibit these features (i.e., reinsurance and title insurance).

Why the exclusions? According to the Federal Register, the rule focuses on products that are susceptible to being used for money laundering or the financing of terrorism.
For example, because life insurance policies have a cash surrender value, cash value can be redeemed by a launderer or can be used as a source of further investment of tainted funds.

Annuity contracts can enable a money launderer to exchange illicit funds for an immediate or deferred income stream or to purchase a deferred annuity and obtain clean funds upon redemption.

Because these risks do not exist to the same degree in term life insurance products, group life insurance products, group annuities, or in insurance products offered by P&C insurers or by title or health insurers, they are excluded.

Will that change? It is possible. But Nancy Creedon, a partner at New York-based Deloitte & Touche LLP where she focuses on financial services regulatory functions, doesn't believe it will.

"I don't want to front-run the regulators, but they've been pretty clear in their language that unless there's a reason to include [property/casualty], I don't think they are going to," she says.

FinCEN outlines four minimum requirements and notes, "companies that offer a diversity of insurance products may decide to adopt institutionwide anti-money laundering programs regardless of the types of products offered."

The four requirements are:

  • A compliance officer who is responsible for ensuring the program is implemented effectively.
  • Policies, procedures and internal controls.
  • Ongoing training of appropriate persons concerning their responsibilities under the program.
  • Independent testing to monitor and maintain an adequate program.

BROKER/AGENT EXEMPTION

Insurance agents and brokers are not required by the final rule to have separate AML programs. But they are the ones with direct contact with customers, so the rule requires each insurance company to integrate its agents and brokers into its AML program and to monitor their compliance with its program.

Compliance also requires an insurance company's AML program to include procedures for obtaining relevant customer-related information necessary for an effective program, either from its agents and brokers or otherwise.

This, says Creedon, could benefit insurers that have brokers-who have most likely had AML training-compared with insurers without brokers when it comes to meeting the deadline.

LIFE INSURANCE FURTHER ALONG

"The life insurance companies that have brokers/dealers should be further along by virtue of having an AML program for them in place," she says. "I think some of the life insurers that don't have brokers/dealers are really hustling to meet the deadline."

New York Life Insurance Co., based in New York, has had AML programs in place for its affiliated brokers/dealers and investment companies since April 2002.

"Since then, we have applied many of the requirements, such as customer-identification programs and suspicious-activity monitoring to our fixed insurance products in anticipation of the release of the USA PATRIOT Act AML program and suspicious activity monitoring regulations for insurance companies," says Brian Loutrel, vice president and AML compliance officer of New York Life.

However, the broker/agent exemption could also have a downside when it comes to training, since there are many brokers/agents who represent multiple companies and will need training from each. "Each insurer has an obligation to make sure their agents and brokers are trained," Deloitte & Touche's Creedon explains.

"So you have the challenge of two types of training: general AML training and company-specific training-procedures, policies, that sort of thing. Agents and brokers who represent multiple companies are not going to want to go through multiple courses of AML training.

While New York Life sells most of its products through its captive agents, it still does a considerable amount of business through third-party distribution channels such as banks, unaffiliated brokers/dealers, broker general agencies and independent agents.

Loutrel knows what Creedon is talking about. He explains that integrating independent distributors of New York Life's products into its AML program and suspicious activity monitoring process has been its biggest challenge and will continue to be even after May 2.

"Specifically, meeting the AML training requirement and the requirement to monitor our independent distributors for compliance with our program has required a substantial amount of effort," says Loutrel.

New York Life's captive agents receive their AML training through an internal computer-based training system the company purchased a number of years ago, says Loutrel. Third-party distributors receive training through either the LIMRA AML computer-based training module or training offered by the bank or broker/dealer they work for.

"With respect to agents and brokers reporting suspicious activity, they are provided with an extensive list of red flags of money laundering that could occur in the sales process through the AML training program and in their manuals," Loutrel explains.

"Both the training and the manuals inform them that they must report any red flags they see to their manager or the zone standards officer. In addition, the annual supervisory interview and inspection for our captive agents provides agents with the opportunity to inform the company of any red flags of money laundering they see," he adds.

THE TECHNOLOGY CHALLENGE

While training could be the most challenging part of this compliance, learning the technologies and finding a solution that best suits your business may prove to be just as difficult.

There are a number of different packages on the market that have been focused on retail banking and areas outside insurance, says Sterling Daines, a principal of Deloitte Financial Advisory Services LLP, a New York-based subsidiary of Deloitte & Touche USA LLP.

"These packages don't have an extensive track record in being implemented in the insurance industry," Daines points out, "so one of the challenges companies are facing is how to implement these products and tune them for the insurance sector."

According to Daines, these packages help to identify potentially suspicious activities in transactions. There are traditional rules that are often used to identify suspicious activities, whether it be large cash activity or funds coming in from unusual locations or unusual customers-behavior that you wouldn't expect from a particular customer in their transactions.

And there are a number of packages out on the market that look for certain types of red flags and transactions and then raise alerts that can be investigated by the institution ).

He goes on to say many insurers have tried to rely on exception reporting of different types. And implementing a system for an enterprisewide view of suspicious activities is difficult.

But in the end those types of systems provide much more robust protection against AML and identifying suspicious activities, according to Daines.

He warns carriers to be wary of comparing anti-fraud analysis and anti-money laundering analysis.

"Obviously many people in the insurance sector are familiar with how to analyze transactions to identify suspicious activity," he says. "Whether they've ever done so to identify transactions in the insurance sector for anti-money laundering in an automated way is another question. And certainly not many institutions have implemented the systems to do so."

The solution for New York Life is its own software. Its corporate technology department is developing suspicious activity monitoring software, which will address a variety of red flags and transactions and then raise alerts that can be investigated by the institution.

"It is being implemented in phases throughout 2006 and will complement the existing processes (both automated and manual) that are already in place," says Loutrel.

Insurers need to be patient implementing the new software. "Implementing the software is a challenging process especially integrating it with legacy systems, so doing so in the short time frame is a very difficult proposition," says Daines.

"The basic motif of the systems is not incredibly opaque in the sense of what they're trying to do," he says, pointing out that the systems gather information about transactions, customers and policies.

Then, the systems run rules and certain types of statistical analysis against them to look for transactions that look high risk, or that could be potentially suspicious.

RED FLAGS TO WATCH FOR

After May 2, make sure you are reporting the following red flags to possible money-laundering activity:

  • The purchase of an insurance product that appears to be inconsistent with a customer's needs.
  • Any unusual method of payment, particularly by cash or cash equivalents (when such method is, in fact, unusual).
  • The purchase of an insurance product with monetary instruments in structured amounts.
  • The early termination of an insurance product, especially at a cost to the customer, or where cash was tendered and/or the refund check is directed to an apparently unrelated third party.
  • The transfer of the benefit of an insurance product to an apparently unrelated third party.
  • Little or no concern by a customer for the investment performance of an insurance product, but much concern about the early termination features of the product.
  • The reluctance by a customer to provide identifying information when purchasing an insurance product, or the provision of minimal or seemingly fictitious information.
  • The borrowing of the maximum amount available soon after purchasing the product.

Source: Federal Register

FILING PROCEDURES

Within 30 days after an insurance company becomes aware of a reportable suspicious transaction, the business must report the transaction by completing a Suspicious Activity Report by Insurance Companies (SAR-IC) and filing it in a central location to be determined by the Financial Crimes Enforcement Network.

The SAR-IC will resemble the Suspicious Activity Report forms used by depository institutions to report suspicious transactions, and a draft form will be made available for comment in accordance with the requirements of the Paperwork Reduction Act and the Office of Management and Budget's implementing regulations. Supporting documentation relating to each SAR-IC is to be collected and maintained separately by the insurance company and made available to appropriate law enforcement and supervisory agencies upon request.

Source: Federal Register

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