Financial crime and the insurance industry
19 Sep 2019

The insurance industry is open to abuse by criminals, including money launderers and terrorist financiers. Fraud and financial crime in the insurance space has risen sharply in recent years. According to PwC’s 2018 Global Economic Crime Survey, 62 percent of respondents from the global insurance community said their firms had been exposed to fraud or financial crime within the previous 24 months, compared to 37 percent in 2016 and 35 percent in 2014.

Regulatory pressures

Global focus on money laundering and the financing of terrorism has grown markedly in recent years. As criminals have developed new and innovative tactics to perpetrate their crimes, global financial regulations have evolved to try and stay one ahead. The European Union (EU), for example, has introduced a number of new financial regulations. The Fourth and Fifth Anti-Money Laundering Directives (AMLD4 and 5), the Payments Services Directive (PSD2) and the updated Markets in Financial Instruments Directive (MiFID II), among others have been implemented to address issues the financial services industry has experienced over the last decade or so.

A report from the Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance’s, co-rapporteur Jeppe Kofod, said: “Europe has a serious money laundering and tax fraud problem. We have the world’s largest, richest and most integrated single market with free movement of capital, but little to no effective cross-border supervision and 28 differing national anti-money laundering and anti-tax fraud provisions…We need tougher EU-level regulation.”

The rise of fraud and financial crime, the increasing sophistication of criminals and the evolution of the regulatory landscape have reshaped the financial services industry in recent years. Financial institutions, including insurers, have been required to develop new processes and systems. Today, they are obliged to regularly assess areas of their business vulnerable to financial crimes. These risks must be mitigated with appropriate internal safeguards.

Enforcement action

Enforcement action against companies which have failed to meet shifting global regulatory standards has also increased in recent years. According to encompass Group, 2019 is on track to be year a record year for anti-money laundering (AML) fines, overtaking the $10.89bn levied in 2014. Between January and April 2019, $7.7bn of AML fines were handed out compared to $1.16bn in the same period in 2018. US-based regulators are responsible for the largest amount of fines, followed by the UK. Though banks are still the most likely recipient of financial penalties, there is a burgeoning focus on insurance providers.

Yet, historically, there has been limited risk of money laundering in the insurance space, according to Livia Benisty, financial crime expert and adviser at ComplyAdvantage. “AML is typically a cross-border activity that moves through multiple entities; insurance does not allow for much space in that area,” she explains. “The industry is typically at higher risk of fraud than AML activity as customers buy a product and work with a provider who will payout directly to them, rather than insurers dealing with a high velocity of transactions moving through various institutions.” According to a 2004 report by the International Association of Insurance Supervisors, the insurance industry was not considered to be particularly susceptible to money laundering compared with other areas within the financial services industry.

However, insurance products, particularly life insurance, do provide opportunities to launder money, given the significant flow of funds. As a result, AML regulations are evolving. Insurance firms operating in the US that issue or underwrite covered products which may pose a higher risk of money laundering, for example must comply with Bank Secrecy Act/anti-money laundering (BSA/AML) programme requirements. A covered product includes an annuity contract other than a group annuity contract, a permanent life insurance policy, other than a group life insurance policy and any other insurance product with cash value or investment features. 

Read more at Financier Worldwide Magazine

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