Since the promise of further USA PATRIOT Act promulgation by the U.S. Treasury Department fell away in June, life insurance and annuity companies have been holding their breath, waiting for an imminent vote by the 109th Congress that could add even more regulatory compliance requirements for carriers.And while the final version of Section 352 of the USA PATRIOT Act may be looming, what it will mean for the life insurance industry is still in question.

The PATRIOT Act, passed within a month of Sept. 11, 2001, is considered an amendment or reiteration of the Bank Secrecy Act of 1970. Section 352 of the PATRIOT Act required all financial institutions, as defined by the Bank Secrecy Act, to establish an anti-money laundering (AML) program within six months of the passage of the Act.

Although mutual funds and life broker-dealers were technically included, until after Sept. 11, 2001, Congress had not pushed the U.S. Treasury Department to promulgate regulations that would hold life insurance companies directly accountable.

Since then, regulators' time has been spent figuring out how to track and capture terrorists laundering money via other industries.

Appealing Instruments

However, because life products have stored value and transferability, regulators have acknowledged that organized crime organizations, drug cartels-and terrorists-view life and annuity products as appealing instruments for money laundering.

Specifically, drug rings are purchasing life insurance policies with cash surrender value in offshore jurisdictions, and using those proceeds to purchase term policies, using structured instruments.

With that in mind, final changes may amend the Act to mirror that of the existing requirements for securities, say analysts, along with enhanced requirements for the Suspicious Activities Report form.

"Most federal regulators don't have a hard and fast delivery date [for new USA PATRIOT Act regulations]," Carl Wilkerson, vice president and chief counsel for Securities and Litigation, American Council of Life Insurers (ACLI), told Insurance Networking News. "They have largely completed their work at the staff level and the regulations, in their opinion, do what they are supposed to. Their druthers would be to have them out promptly, but because of natural disasters, such as Katrina, their order of priorities is continuously shifting."

The Treasury Department's delays are partially due to the learning curve for the insurance industry, points out Darren Graves, manager, Financial Products, at Fiserv Insurance Solutions, Cedar Rapids, Iowa. "The United States is one of the only major economies without an AML requirement in place for insurers, making the industry an increasingly attractive target for money launderers."

Many carriers aren't waiting for final regulations, and instead are taking a proactive approach to compliance, Graves says, by establishing effective customer identification and AML compliance programs.

ACLI, Washington, D.C, has set an aggressive pace for making model guidelines available to its members well in advance of any further regulations.

"While we are waiting [for the final version of the Act], we ran the guidelines, which model the broker/mutual fund requirements, by the Treasury Department and they said they looked good," Wilkerson says. "If a company is doing its level best to be in good standing, it would make sense to follow some AML program and the ACLI guidelines are a good place to start."

Some companies, however, are taking a "wait-and-see" approach until the regulations are final.

"Those companies are going to be caught flatfooted," warns Vicki Landon, vice president of Aquilan, a San Antonio compliance software provider.

"The real challenge for a company is setting up its AML compliance staff and program, selecting its compliance officer, working with legal, constructing a compliance plan and defining compliance, reporting and requirements processes," she says.

"These, along with selecting a vendor, take longer than implementing anti-money laundering software."

The insurance industry faces other unique challenges relative to compliance, notes Landon.

"Modified data structures, various administration systems-it will be a challenge for companies to work within their unique parameters to find out how to examine and report on the specific requirements being called for in the regulations," she says.

Monitor what banks do

Plus, insurance companies have to monitor what banks do [to comply with the PATRIOT Act] and more. These include free looks, surrenders with and without penalties, and benefit changes, says Landon.

Yet another challenge lies in the industry's distribution network, notably fixed life products, notes Wilkerson.

"Regulations call for carriers selling fixed life policies to integrate their agents into their AML compliance procedures," he says.

But these carriers have different business models for distribution. For example, he notes, there are career agents devoted to one company and there are independent agents.

Yet another model involves independent distributors who may work for a wholesaler and don't have a direct relationship with the carrier. "In this case, the carrier is two steps removed from the ability to monitor and control compliance," says Wilkerson.

"If you have an agent selling for six carriers, do you follow six AMLs or one? Logistically, this is a challenge, and regardless of promulgation, companies should be looking at this."

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