business money by tomsgreathits


									                                            MONEY LAUNDERING

           Money Laundering in Insurance Business

                                                             The rampant spread of money laundering is evi-
                                                          dent from the International Monetary Fund’s esti-
                                                          mations that the aggregate of money laundering in
                                                          the world could be somewhere between two and five
                                                          per cent of the world’s gross domestic product.

                                                          What is Money Laundering?
                                                             The process of creating an appearance that large
                                                          amounts of money obtained from serious crimes,
                                                          such as drug trafficking or terrorist activity, origi-
                                                          nated from a legitimate source.
                      B. Padmaja
                                                          Where Does Money Laundering Occur?
         (The author is Assistant Director-Life at           Generally, money launderers tend to seek out
        IRDA and can be reached at padmaja@
                                                          areas in which there is a low risk of detection due
                                                          to weak or ineffective anti-money laundering pro-
   The rampant spread of money laundering                 grammes. Because the objective of money launder-
   is evident from the International Monetary             ing is to get the illegal funds back to the individ-
   Fund’s estimations that the aggregate of               ual who generated them, launderers usually prefer
   money laundering in the world could be                 to move funds through areas with stable financial
   somewhere between two and five per cent                systems. Money laundering is a threat to the good
   of the world’s gross domestic product. The             functioning of a financial system. However, it can
   Insurance Sector is one of the most vulner-            also be the Achilles heel for criminal activities.
   able when it comes to money laundering
   and terrorist financing. The article provides          Origin of the Concept
   an insight into the concept.                              The term “money laundering” is said to have
                                                          originated from the Mafia ownership of Laundro-
                                                          mats (a self-service laundry (service mark Laun-

T       he ‘9/11’ showed to the world how bar-            dromat) where coin-operated washing machines
        barous terrorism can be. But the attack on        are available to individual customers) in the United
        World Trade Centre and Pentagon in the US         States.
in 2001 is just one of the many dreadful acts of             Gangsters there were showing the illegally earned
the million-headed monster called terrorism. Such         money from a legitimate source by purchasing out-
acts of terror require a steady source of high level,     wardly legitimate businesses and to mix their illicit
efficiently concealed funding mechanisms. While           earnings with the legitimate earnings they received
terrorist organisations may be funded by contribu-        from these businesses. Laundromats were chosen by
tions and gifts, criminal acts may also contribute to a   these gangsters because they were cash businesses.
steady influx of operational capital for their nefari-    One Al Capone, prosecuted and convicted in Octo-
ous designs.                                              ber 1931 for tax evasion, is presumed to be the first
    Ever since 9/11, the international concern over       launderer of money using Laundromats.
terrorists having wealthy backers and a sprawling            Meyer Lansky (affectionately called ‘the Mob’s
global network of funds has grown manifold. Such          Accountant’) had discovered the first real launder-
dirty money from crime is turned clean by putting         ing technique, by the use of the ‘loan-back’ concept,
it through some process, which disguises its ori-         which meant that hitherto illegal money could now
gin in a series of transactions, and this is money        be disguised by ‘loans’ provided by compliant for-
laundering.                                               eign banks, which could be declared to the ‘revenue’

1640 The Chartered Accountant May 2006
if necessary, and a tax-deduction obtained into the          In Operation Green Ice, law enforcement from
bargain.                                                 Italy, Colombia, the United Kingdom, Canada,
                                                         Spain, Costa Rica, the Cayman Islands, and the
Money Laundering in Present Form                         United States co-operated together to expose the fi-
    ‘Money laundering’ as an expression is one of        nancial infrastructure of the Cali mafia wherein they
fairly recent origin. The original sighting was in       could seize over $66 million in cash and property,
newspapers reporting the Watergate scandal in the        14, 000 pounds of cocaine, 16 pounds of heroin,
United States in 1973. The expression first appeared     arrest almost 240 people world-wide
in a judicial or legal context in 1982 in America es-        In 1998 the Geneva Convention recommended
sentially within a drug trafficking context.             the establishment of an effective money launder-
                                                         ing enforcement programme. Action at the inter-
Stages of Money Laundering                               national level to combat money laundering began
    There are three common stages of money laun-         in 1988 with two important initiatives— The Basel
dering during which their numerous transactions          Committee on Banking Regulations and Supervi-
can be made by the launderers.                           sory Practices and the United Nations Convention
(a) Placement wherein cash proceeds from ille-           against Illicit Traffic in Narcotic Drugs and Psycho-
     gal activity is disposed physically.                tropic Substances, which has now been ratified by
(b) Layering wherein illicit proceeds are sepa-          over 140 countries.
     rated from their source by creating complex
     layers of financial transactions                    Financial Action Task Force (FATF)
(c) Integration wherein an impression is created             Financial Action Task Force (FATF) an inter-
     of apparent legitimacy to criminally derived        governmental body was formed in 1989 by the
     wealth.                                             G7-summit at Paris, with the purpose to develop
    If the layering process has succeeded, integration   and promote the policies, both at national and in-
schemes place the laundered proceeds back into the       ternational levels, to combat money laundering and
economy in such a way that they re-enter the finan-      terrorist financing. It is a “policy-making body”
cial system appearing to be normal business funds.       that works to generate the necessary political will
    A simple example can be used to understand           to bring about legislative and regulatory reforms
the intricacies of money laundering. Suppose a           in these areas. The membership has now steadily
person has made large sums of cash through drug          grown to encompass 33 nations, most of them from
trafficking, without getting caught. If he was to        the Organisation for Economic Co-operation and
make large deposits into his bank account, some          Development (OECD). Over the years, the FATF
regulator might notice the unusually large deposits,     has developed about 40 recommendations to guide
thereby increasing the chances of getting caught.        states in their attempts to strengthen their financial
To launder the money, the criminal might simply          systems that have come to be regarded as world
use the cash to make purchases (placement) and           standards. Since 2001, the FATF has also expanded
then resell the items (Layering) in a legitimate mar-    its activities to include the financing of terrorism
ket. The revenue gained from these sales is ‘cleaner’    and as a result, there are now nine special recom-
and the criminal is drawing less attention to him-       mendations.
self (Integration).                                          The recommendations set minimum standards
    Investigators like to “follow the money” and that    for action for countries to implement the detail ac-
was difficult in the days when transactions were per-    cording to their particular circumstances and consti-
formed in cash.                                          tutional frameworks.
International Dimension of Money                         Who Can be a Member of FATF?
Laundering                                                   A Country can be a member of FATF if it is:
    The international dimension of money launder-        l    A strategically important country which is a
ing was evident in a study of Canadian money laun-            full and active member of FATF-style Region-
dering police files. They revealed that over 80 per           al Body;
cent of all laundering schemes had an international      l    With a letter from an appropriate Minister or
dimension. “Operation Green Ice” (1992) showed                person of equivalent political level making a
the essentially transnational nature of modern mon-           political commitment to implement the FATF
ey laundering.                                                recommendations within a reasonable time-

                                                                         May 2006 The Chartered Accountant   1641
    frame and to undergo the mutual evaluation            International Association of Insurance
    process; and                                          Supervisors (IAIS)
l   Effectively criminalise money laundering and              The 40+9 recommendations of FATF are appli-
    terrorist financing;                                  cable to all the financial institutions, which include
l   Make it mandatory for financial institutions          insurance institutions. The need to implement
    to identify their customers, to keep customer         these recommendations in the insurance industry
    records and to report suspicious transactions;        is strongly realised by insurance supervisors around
    and                                                   the world who have emphasised the importance of
l   Establish an effective FIU (Financial Intel-          combating the financing of terrorism and money
    ligence Unit), so that the country will be as-        laundering.
    sessed fully or largely compliant with recom-             The IAIS has given anti-money laundering and
    mendations;                                           combating the financing of terrorism high priority.
                                                          New Insurance Core Principles (ICP) 28 was intro-
Anti Money Laundering in India                            duced, dealing specifically with anti-money laun-
   India has criminalised money laundering under          dering and combating the financing of terrorism.
two parts of legislation in line with Recommenda-         According to it, recommendations of the FATF ap-
tion 1 of the FATF. Section 8A of Narcotics and           plicable to the insurance sector and to insurance su-
Psychotropic Substance Act (NDPS), 1985 and sec-          pervision must be satisfied to reach this objective.
tion 3 of the PMLA 2002 and is an active member                One of the new elements of the recommen-
of Asia/Pacific Group (APG) on Money Launder-             dations is the concept of Customer Due Diligence
ing— a style regional body of FATF. It is in the          (CDD). One aim of the guidance paper is to give
process of gaining observer status closely following      guidance with respect to CDD tailored to the spe-
China, which was awarded the same in January 2005.        cific features of the insurance industry and its su-
The purpose of the APG on Money Laundering is to          pervision. The guidance paper offers a range of
facilitate the adoption, implementation and enforce-      possible measures, procedures and best practices
ment of internationally accepted standards against        from which the supervisor should select those most
money laundering and the financing of terrorism.          appropriate to deal effectively and efficiently with
                                                          the risks.
Vulnerability of the Insurance Sector
    The worldwide insurance industry generates pre-       ICP 28 Anti-Money laundering
miums in the range of USD 2.4 to 2.6 trillion and is      combating the financing of terrorism
highly vulnerable to money laundering and terrorist       (AML/CFT)
financing. The vulnerability is more for life insur-          The supervisory authority requires insurers and
ance and less for general insurance as a result of        intermediaries, at least those insurers and intermedi-
which anti-money laundering rules have generally          aries offering life insurance products or other invest-
focused on the former in countries like USA. In           ment related insurance, to take effective measures to
some of the countries like Luxembourg, Mauritius          deter, detect and report money laundering and the
and Hong Kong, AML guidelines in insurance sec-           financing of terrorism consistent with the recom-
tor applies even to non-life insurance companies.         mendations of the Financial Action Task Force on
    The most common form of money laundering              money laundering (FATF).
that insurance institutions will encounter takes the          It also requires them to comply with the provi-
form of a proposal to enter into a single premium         sions of AML/CFT requirements, which are con-
contract, lump sum top-ups to an existing life con-       sistent with the FATF recommendations applicable
tract. These contracts in themselves may be merely        to the insurance sector including:
one part of a sophisticated web of complex transac-       l    Performing the necessary Customer Due Dili-
tions, which will often have their origins elsewhere           gence (CDD) on customers, beneficial owners
in the financial services sector.                              and beneficiaries
    Money laundering is confused to the fraudulent        l    Taking enhanced measures with respect to
practices prevalent in industry like fraudulent claims.        higher risk customers
It is also thought to be relatable to foreign exchange    l    Maintaining full business and transaction re-
transactions, and both of these are some of the mis-           cords, including CDD data for at least 5 years
conceptions about money laundering. They may be           l    Monitoring the complex, unusual large trans-
merely one of the stages of laundering money.                  actions, or unusual patterns of transactions,

1642 The Chartered Accountant May 2006
    that have no apparent or visible economic or          l    An ongoing ‘employee training programme’.
    lawful purpose                                        l    An audit function to test the system.
l   Reporting suspicious transaction to the FIU               Insurance Regulatory and Development Author-
l   Developing internal programmes (including             ity (IRDA) has issued guidelines on Anti-Money
    training), procedures, controls and audit func-       Laundering to insurers, which require insurers to
    tions to combat money laundering and terror-          implement AML programme from 1st August 2006.
    ist financing                                         According to these guidelines, companies that of-
l   Ensuring that their foreign branches and sub-         fer standalone medical/health insurance, reinsur-
    sidiaries observe appropriate AML/CFT mea-            ance and retrocession contracts, group insurance
    sures consistent with the home jurisdiction           business, term life insurance contracts where the
    requirements.                                         business is less vulnerable to laundering of money
                                                          do not presently come under the ambit of AML
Indian Scenario                                           guidelines.
    In an effort to adopt and implement measures              According to it, each company should have
designed to counter the use of the financial system       an AML policy and file a copy with IRDA. These
by criminals, India is implementing the 40+9 rec-         guidelines are in accordance with ICP 28 and also
ommendations of FATF in AML/CFT.                          the various recommendations of FATF. Here are
    As per FATF’s Recommendation 26, the Finan-           some areas vis-à-vis the recommendations:
cial Intelligence Unit-India (FIU-IND) has been           1. FATF Recommendation 5: Due diligence would
set up at New Delhi with a view to coordinate and              be exercised based on the sources of funds
strengthen collection and sharing of financial intel-          of the customer and a threshold premium of
ligence through an effective national, regional and            Rs. 1 lakh per annum. Due diligence would
global network to combat money laundering and                  also be carried on existing customers from
related crimes. The FIU-IND, a multi-disciplinary              01.04.2004
unit for establishing links between suspicious or un-     2. FATF Recommendation 6: Risk categorisation
usual financial transactions and underlying criminal           based on the customer profile and the product
activities and a central national agency is responsible        profile, to exercise due diligence.
for receiving, processing, analysing and disseminat-      3. FATF Recommendation 8: Exercise of due dili-
ing information relating to suspect financial transac-         gence in case of non-face to face transactions
tions.                                                         within 15 days of issue of policy.
    While Anti-Money Laundering programmes are            4. FATF Recommendation 9: The obligation to es-
already in place in case of banks, Insurance sector            tablish an anti-money laundering programme
has recently laid down programme to combat mon-                applies to an insurance company, and not its
ey laundering in India (as required by FATF Recom-             agents or brokers
mendation 25)                                             5. FATF Recommendation 10: It emphasises the
    In India, it is a statutory duty of any person in          need for record keeping and the need for em-
insurance sector, who knows or suspects that any               ployee/agent training programmes
property in whole or in part, directly or indirectly      6. FATF Recommendation 11: It emphasis proper
represents the proceeds of drug trafficking or of              documentation of the customer profile, to
an indictable offence, or was or is intended to be             have record of sources of funds.
used in that connection, to make a disclosure to the      7. FATF Recommendation 13: It defines suspicious
Director, FIU-IND.                                             transactions and impose a duty to report to
    In order to discharge the statutory responsibility         FIU-IND
to detect possible attempts of money laundering or        8. FATF Recommendation 14: Protection under law
financing of terrorism, every insurer needs to have            for lawful disclosures.
an AML programme, which should, at a minimum,                 India is keen in combating money laundering
include the following as per FATF Recommenda-             and terrorist financing. It is taking progressive steps
tion 15:                                                  in the process of implementing AML/CTF pro-
l    The development of internal policies, pro-           grammes in all the financial institutions. With sys-
     cedures and controls, including appropriate          tems and procedures taking good shape, let us hope
     compliance management arrangements, and              to be one of the member countries of FATF and
     adequate screening procedures to ensure high         join our hands in the international efforts to combat
     standards when hiring employees.                     money laundering and terrorist financing. r

                                                                          May 2006 The Chartered Accountant   1643

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