Get documents about "business money
Shared by: tomsgreathits
Categories
Tags
business & money, money for starting a business, free money to start a business, free business money, how can i get money to start my own business, raise money to start a business, where can i get money to open a business, how to start a business with no money, business earn money online opportunity, business money
-
Stats
- views:
- 51
- posted:
- 3/28/2009
- language:
- English
- pages:
- 4
Document Sample
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@
irdaonline.org)
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
Related docs
