The prevention of money laundering 2002 which came into effect from 2005 act as a benchmark stipulated by the government to curb the money laundering, fraud transactions, siphoning of money, embezzlement and to cut the long story short, the turning of black money to white. This law is applicable to be followed by all financial institutions across India and insurance companies are no exception. By following the act and its recommendations insurers ensure that no hawala money is used in purchasing insurance products, life or general. Insurance regulatory and development authority (IRDAI) has set up its own guidelines keeping the law in mind and has come with Guidelines on anti-money laundering programme for insurers in 2006. We will discuss the various aspects of this guideline in detail to understand the connection between AML and Insurance.
The three common stages of money laundering are (1) Placement: Here the money which is generally cash proceeds, acquired through illegal and illicit means and activities is physically disposed. (2) Layering: These proceeds are very carefully separated from their source by creating multiple and complex, global financial transactions which is difficult to trace and audit using general methods. (3) Integration: Using the money by showing its source to be perfectly legitimate and legally correct. To curb the above processes to complete within an insurance company, as per the guideline they need to comply with the anti-money laundering act program at minimum set up internal policies, procedures and control, appoint a principal compliance officer, recruitment and training of employees and/or agents, and perform internal audit.
For setting up the internal procedures the guideline highlights the below points to be taken care by the insurance company as per the AML program. The AML policy should be approved by the board of the insurer and duly filed with the regulator (IRDAI) for information purposes. Also this should be reviewed by the board annually and changes made as per experience and working profile of the insurer.
- KYC (Know your customer): Confirming the identity of the customer requesting for insurance coverage is a good starting point to prevent any laundering. A list of documents have been prescribed in annexure 1 as per the guideline that insurer needs to collect, verify and then further process the request. Minimum one document is mandatory to establish the identity. The more the amount of premium is involved the level of due diligence at the insurer end should be more stringent.
- Products to be covered under the guideline: Insurance products which are vulnerable to financially fraudulent activities are listed in annexure 2 of the guideline. These are primarily medical and health insurance products, reinsurance and retrocession contracts, group insurance business, term life insurance contracts etc.
- Fund source: Customer net worth and the source of fund is one important aspect which the insurer cannot ignore. Proposal form thus haves questions regarding income, bank details and source of funds. Annexure 3 in the guideline also lists out income proofs that can be asked and should be submitted by the insurance purchaser.
- Defining and reporting of suspicious transactions: The guideline requires insurers to submit the STR (Suspicious transaction report) and CTR (cash transaction report) to FIU – IND (Financial intelligence unit – India) in prescribed formats. An illustrative list of such possible transactions is listed in annexure 4.
- Monitoring and reporting of cash transactions: Premium beyond 50k cannot be transacted in cash and is to be deposited through cheque, demand draft, credit card or banking channels. Insurance companies are mandated to report integrally connected cash transactions beyond 10 lakh for possible financial fraud and laundering.
- Verification at time of redemption/surrender and record keeping: All payments are only made through account payee cheques to the beneficiary of the policy after proper scrutiny and investigation. The insurer and intermediaries are required to keep records of types of transaction mentioned in rule 3 of PMLA rule 2005.
A principal compliance officer is to be appointed by the insurer, who in addition to other of duties and responsibilities shall take care of the AML program, related necessary filings and compliance of the same. The name of the officer mandatorily should be communicated to IRDAI and FIU. The compliance officer ensures that the board approved AML program is effected in the company properly and the agents or employees are trained enough and knowledgeable with the aspects of the guideline issued in this context.
The selection process of individual and corporate agents and the practices followed by them in concluding a sales is most important one as these are major source of business for many insurers. In this light their training and compliance becomes quite important in these guidelines. The committee hiring, managing and overseeing the practices and performance of the agents must be doing so in adherence to laid down processes in an ethical and strict view. Their training should be standardized with proper instruction manuals, which should be followed by period reviews and audits. This should be applicable to all those old and new or old agents and employees who are concerned with the financial transactions in the insurance company. With a stricter and bolder approach towards money laundering and fraudulent financial practices insurers can ensure that they can help minimize the same and help the nation to grow stronger economically, for this they need to follow the rules, process and guidelines issued by the authorities in this area.