How Criminals Are Using Insurance For Money Laundering

An unexpected call comes to a financial adviser or agent: “I have some Sh10 million in cash and a couple of cheques and would like to deposit them into my unit trust account and use some to purchase a life insurance product ASAP. I am travelling early tomorrow, could you urgently send me the paperwork I finalise the transaction before I leave?”

Eyes focused on the potentially huge commission that will be realised soon after this deal, this agent will do anything to ensure the transaction is finalised in the quickest way possible. A couple of days later, the client calls in again: “I have an emergency! My car was shipped earlier than planned and I would like to urgently access my cash right away. What do I need to do? Can I cancel my policy? I have not done my medicals yet, so that shouldn’t be a problem right? Can I also redeem my unit trusts?”

The client is advised and within a couple of days, he receives his refunds less some minuscule transaction costs and early redemption fees depending on whether it was an investment or insurance product.

The client walks away with a seemingly “clean refund” from the company. The above could be one of the many ways insurance and investment companies can be used by criminals to launder illicitly acquired funds.

Many life insurance products, though not likely to be the first vehicle of choice for money laundering, are becoming increasingly popular for money laundering. High-risk life assurance products include unit-linked policies, whole-life policies, fixed and variable annuity, among others. Life insurance products can also be bought as an investment or saving vehicles, some allow clients to borrow against premiums already contributed, some products support estate planning or pension plans while special products are designed for High Net Worth individuals.

Criminals are increasingly using these products to integrate proceeds of crime into the financial system by layering transactions to make the monies to appear as having been “innocently” earned and in the process rendering the tracing of the source of funds and their subsequent confiscation difficult.

According to the Financial Action Task Force (FATF), an inter-governmental body that sets international standards that aim to prevent money laundering and terrorist financing, specific typologies for money laundering include criminals purchasing life insurance policies using illicitly obtained funds and terminating them during the free-look through the period.

This is the grace period, usually one month, within which clients can terminate their policies if they so wish. Once the policies are terminated, the criminals are able to receive a refund from the insurance company. There is also a risk, that funds withdrawn from life insurance contracts can be used to fund terrorism. With banks now relatively advanced in establishing sound anti-money laundering (AML) controls, criminals are seeking alternative avenues where their funds can be easily cleaned without being detected. The insurance sector, therefore, remains particularly vulnerable due to weaknesses in the enforcement of AML controls.

Being an integral part of the financial services industry, this sector cannot afford to be the weakest link in the chain. This calls for insurance companies to not only establish robust anti-money laundering programmes but also to continuously sensitise their staff on money laundering and terrorism financing risks. Kenya’s insurance companies and intermediaries have a moral and legal obligation to help in combating crimes related to money laundering.

Financial services’ regulators in Kenya are working hard to promote strong anti-money laundering and counter financing of terrorism controls. The Financial Reporting Centre (FRC) and Insurance Regulatory Authority (IRA) are steadfast at promoting a strong and comprehensive insurance industry that is committed to combating this risk.

The IRA, for example, issued revised guidelines in February last year aimed at further tightening the monitoring and reporting of money laundering and terrorism financing risks within the insurance industry.

Unlike the banking sector, however, insurance faces unique challenges in fighting money laundering and other financial crimes. The insurance value chain has three key players — the insurance company or underwriter, the insurance intermediaries (brokers and agents who interact with clients and introduce clients to them) and the reinsurers who ordinarily provide balance sheet protection to insurance companies by handling risks that are too large for insurers to handle.

These players have a very close and interdependent relationship. Failure by any of these parties to take effective measures in combating money laundering and terrorism financing may render the entire sector vulnerable.

While most of the insurance and reinsurance companies in Kenya are putting efforts at establishing strong money laundering fighting programmes, challenges arise from the intermediaries’ side.

Being in the first line of defence in terms of having direct access to customers, it is paramount that they too have certain obligations on incorporating and deploying AML/CFT programmes within their institutions.

The Proceeds of Crime and Anti-Money Laundering Act 2009 defines financial institutions that have FRC reporting obligations and that includes “any person or entity, which conducts a business, activities or operation that include underwriting and placement of life insurance and other investment-related insurance falls under that definition.”

As such, insurance brokers placing life insurance business with insurers or reinsurers have statutory obligations that include registration with the FRC as reporting institutions, conducting proper customer due diligence on onboarding clients, commonly known as Know Your Client procedures, reporting of large cash transactions (Sh1 million and above) as well as reporting suspicious transactions in relation to the clients that they deal with.

They are also expected to appoint an anti-money laundering reporting officer and invest in staff training programmes and controls aimed at detecting and deterring financial crimes. Failure to comply with this law exposes them to the risk of fines and penalties.

In spite of these seemingly onerous expectations, complying with the requirements of the law does not have to be a daunting task. Three factors are bound to make it successful for all players within the industry.

One, all industry players must have common standards for compliance without any of them distorting the playing field by cutting corners. Each party should play their active and consistent role in deploying and enforcing money laundering and counter financing of terrorism controls. Due diligence and KYC measures, for example, are a key step in this process and should be enforced by all parties including insurance intermediaries. A concerted and coordinated effort by all players is key.

Two, timely implementation of the AML/CFT programme is vital. Any delays in its implementation will further compound the problem and the industry may miss the golden opportunity to place the risks within this sector under control.

Third, a strong compliance-oriented culture driven by the leadership of an institution (board and senior management play a significant role in the success of any anti-money laundering and counter financing of terrorism programme.

Kiragu is a compliance consultant and a faculty at Strathmore Business School. Maseke is the Group Risk and Compliance Manager at ICEA LION Group.