Anti-Money Laundering: How to Spot Money Laundering in Insurance

The following contains an excerpt from Kaplan’s Anti-Money Laundering Rules for Insurance Companies course for Insurance Continuing Education.

Updated: July 27, 2017 

Today, money laundering is becoming an increasingly international and complex crime because of the rapid advances in technology and the globalization of financial services. Financial systems allow criminals to transfer millions of dollars instantly through computers and satellites. In addition to banks, money is now laundered through currency exchanges, stock brokerages, gold dealers, casinos, automobile dealerships, as well as insurance companies.

The insurance industry is attractive to money launderers because insurance products are often sold by independent agents or brokers who do not work directly for insurance companies. The agents and brokers are often unaware of the need to screen clients or to question payment methods. In some cases, such agents and brokers have even joined criminals against insurers to facilitate money laundering.

What is Money Laundering?

Most financial transactions leave a trail that connects a person to the funds. In an illegal financial transaction, money laundering is used to hide the trail.

So, what is money laundering? Money laundering is a process that criminals use to make dirty money—that is, money derived from illegal drug, terrorist, or other criminal activities—clean money, that is, legitimate money.

The term money laundering conveys a perfect visual picture of what actually takes place. Illegal money is put through a cycle of transactions designed to hide the source of the funds and make them clean or legitimate. Money laundering is similar to washing clothes—you put in dirty clothes and after being washed, the clothes are clean. Laundered funds can then be used without restriction.

For example, a life insurance policy that can be cashed in is an attractive money laundering vehicle because it allows criminals to put dirty money in and take clean money out in the form of an insurance company check.

This illegal money is derived from criminal activities such as the following:

• Drug trafficking
• Terrorism
• Illegal arms sales
• Prostitution
• Smuggling
• Counterfeiting
• Insider trading
• Other serious crimes

Possible Signs of Money Laundering in Insurance

Let’s look at some examples of potentially suspicious activities insurance professionals may encounter that could be an indication of money laundering or terrorist financing activities.

• A customer borrows against the cash surrender value of permanent life insurance policies, particularly when payments are made to apparently unrelated third parties.
• A customer purchases a product that appears outside the customer’s normal range of financial means or estate planning needs.
• A customer purchases insurance products using a single, large premium payment, particularly when payment is made through unusual methods such as currency or currency equivalents.
• A customer purchases products with termination features without concern for the product’s investment performance.
• Policies are purchased that allow for the transfer of beneficial ownership interests without the knowledge and consent of the insurance issuer. This would include secondhand endowment and bearer insurance policies.
• A customer is known to purchase several insurance products and uses the proceeds from an early policy surrender to purchase other financial assets.
• A customer uses multiple currency equivalents, such as cashier’s checks and money orders, from different banks and money service businesses to make insurance policy or annuity payments.
• A customer terminates an insurance product early, including during the free-look period.
• A customer designates an apparently unrelated third party as the policy’s or product’s beneficiary.

An insurance agent should focus on reporting such suspicious activities, rather than on trying to determine whether the transactions are, in fact, linked to money laundering, terrorist financing, or some other crime.

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Interested in learning more about this topic? Enroll in Kaplan’s Anti-Money Laundering Rules for Insurance Companies course in our Insurance CE library. Simply visit the Insurance CE page and select your state to get started.