Life insurers be on guard: How money laundering is impacting the insurance industry and tips to mitigate the threat on your organization

Broadly speaking, anything that has a high cash value would be an attractive tool to launder money because buying and selling it can obscure the source of illicit funds. In the life insurance space, there are several ways this could be accomplished:  

• Annuities can be used to convert illicit funds into a legitimate income stream. By purchasing an annuity, launderers can receive regular payments that appear legitimate. They are also attractive because they can be paid out almost immediately. Annuities often involve large premium payments and allow for early surrender or withdrawals which enables launderers to withdraw the funds and essentially “clean” the money. They are also complex and lack transparency, which enables layers of transactions to obscure the money trail. Annuities can even provide deferred income streams where criminals can invest illicit funds into an annuity and later receive clean money as regular income payments. Adding another level of complexity, annuities might also involve brokers and agents in their sale which makes it much harder to detect suspicious activity  
• Cash surrender policies or policies that have a high cash surrender value are attractive to illicit actors because they can cancel the policy early, receive cash back and therefore have what appears to be legitimate funds. One example is purchasing multiple small policies to avoid detection, rather than a single large policy  
• Another mechanism is overfunding policies which is where someone pays more than the required premium into the policy. Illicit actors would then be able to withdraw those excess funds and disguise the origin of the money  

The methods that money launderers use have evolved in recent years due to the increased use of digital platforms that offer anonymity and ease of access. The focus on making the customer experience as optimal as possible has the unpleasant side effect of making it easier for launderers to purchase and manage policies without as much direct oversight as in the past.  

Another trend that has been on the rise is layering multiple smaller policies through different jurisdictions to avoid detection. Different countries have different regulatory environments and may be more prone to money laundering in general, which can make this a big challenge. Integration with legitimate business operations such as using business accounts to pay premiums and receive payouts can also obscure what funds are legitimate vs. illegitimate.   

Key things that life insurers can implement to help combat money laundering is robust ‘know your customer’ (KYC) continuous monitoring and enhanced due diligence on high-risk customers. It is also important to leverage advanced data analytics and artificial intelligence (AI) technologies for things like monitoring to detect suspicious patterns of activity, and collaborating with regulatory bodies to better track cross-border transactions.  

Red flags include:  

• The overpayment of premiums followed by requests for refunds to third parties  
• The purchase of a policy that does not align with the customer’s financial situation or needs. For example, when a young individual with no dependents, minimal financial obligations and a modest income purchases a high value life insurance policy with a significant cash surrender value  
• Any reluctance to provide personal information or providing inconsistent information  
• The act of terminating a policy early, especially if they show no concern for penalties that they will have to pay  
• Frequent changes in the beneficiaries or ownership of a policy  

It is important to keep a close eye on:  

• Discrepancies and changes to the source of the funds/wealth  
• Discrepancies around address and TIN  
• Requests to change beneficiaries or the ownership of a policy  
• Multiple policies for the same customer that could be attempting to avoid one large policy being scrutinized  
• Customers that don’t care at all about investment performance but care a lot about early termination  

• In 2022, 23 people were charged for participating in a scheme defrauding 10 different life insurance carriers out of at least $26M by submitting fraudulent applications and misrepresenting the identity of deceased individuals to claim death benefits. This could have been detected by performing a KYC check and enhanced due diligence procedures on the parties involved as well as documenting beneficial ownership and performing a KYC check on those parties as well  
• In 2023, a North Carolina man that happened to be a former insurance executive was indicted for masterminding a scheme involving life insurance organizations. He used the funds from these organizations to support his lavish lifestyle by executing a slew of complex financial investments and transactions intended to evade regulator detection, disguise the health of the insurance organizations and conceal the scheme. Since 2019, several of his insurance organizations have been placed into rehabilitation or liquidation. This example shows us how fraud and money laundering often go hand in hand. When you commit fraud, you are going to try to conceal where funds come from and therefore launder money. Fraud risks should also be monitored especially with regards to money laundering implications like suspicious activity reporting.  

Current regulation and industry practices are moving the needle in the anti-money laundering (AML) efforts, but there are still challenges.  

Things that work:   

• Risk-based AML programs: The key to this is making sure that you start with a risk assessment. Look at the customers you serve, the geographies you have a footprint in, the products and services you offer or will offer and ask the questions: Where are the risks of money laundering highest? What is being done to mitigate these risks? How often are you updating your risk assessment?   

Ideally, we look for at least annual updates to risk assessments given the pace of change in money laundering tactics and the increased use of digital products and the borderless nature of business. More often if there are significant changes to the company – merger and acquisition (M&A) activity that expands your geographic footprint, a new product that is rolling out, marketing to a new customer segment, a partnership with an Insurtech company, etc. – you should update your risk assessment right away and get involved in those strategic discussions as early as possible to determine your money laundering risk. Grounding your AML program in an up-to-date and comprehensive risk assessment that looks at your data over time and considers the controls in place is also critical.  

For reference, product risk includes products with cash payouts and products that allow large overpayments of premiums that can be reimbursed. Customer risk includes geographic location, whether they are a politically exposed person, whether they have negative media about them, do they have a larger number of policies than is typical, are they reluctant to provide personal information or are they asking questions about early terminations, etc.  

• Regulatory frameworks: Regulators attempt to establish best practices and expectations for preventing and detecting money laundering and are especially helpful when they offer industry specific guidance. In the United States, the Financial Crimes Enforcement Network (FinCEN) oversees all AML regulations across the financial institution spectrum and establishes regulations to help the cause. It can be tricky to apply these regulations to the variety of industries that must comply, but regulatory bodies that enforce them are great partners to ensure you are doing everything you can from a compliance standpoint.   

In the European Union, the insurance industry is regulated at the national level and partial oversight for the European Insurance and Occupational Pensions (EIOPA). The EU also has a sanctions regime in place.   

In the United Kingdom, the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA) oversee AML and advise insurers to have strong controls in place.   

The Financial Action Task Force (FATF) is an international watchdog that establishes guidelines in its 40 recommendations that it benchmarks member states adherence to. This helps you better understand the geographic risks and level of regulation and maturity a specific country might have. In general, tight collaboration across international regulatory bodies, transparency and information sharing are all helpful.  

• Know your customer practices: There has been a lot of innovation with the tech space coming up with solutions to help insurers tackle challenges like KYC screening and transaction monitoring. In particular, for KYC screening, the best practice is what’s referred to as a perpetual KYC, or continuous monitoring. This mean that you leverage technology to monitor your customer base continuously and in real time respond to alerts that are generated. These tools often look at things like sanctions and watch lists, adverse media, politically exposed persons databases and more source to help you make sure you not only know who your customer is, but critical information about the risks they may pose to your organization. By doing this continuously, you can get alerts like when a sanction list changes, or a news story about your customer hits, address those in real time and take necessary action.  

Challenges and opportunities:   

• Complex and evolving products pose challenges with regulating financial institutions across the board. As mentioned previously, there has been a large focus on the customer experience in recent years, increased digital transformation, personalized solutions, solutions that embed insurance into other financial services and consumer products. All these things are great but can expose you to enhanced or new AML risks.  

When it comes to digital products and other types of innovation, it is important to have your compliance team involved from day one to ensure AML risks are considered at the forefront. Additionally, third parties that are involved in the sales process also can pose additional risks if they don’t have as much rigor to monitor for money laundering red flags or perform KYC activities. You have to make sure you understand what third parties are doing and then monitor to make sure they are doing what they committed to in the first place.  

• Regulatory enforcement, when done right, does work. It may create a burden for your organization and it may be costly, but when regulatory penalties are on the line people tend to pay more attention. It is also important to think about the bigger picture. AML regulations are established so they can fight financial crime and corruption. Financial services organizations, including life insurers, are uniquely positioned to help with this. It may not be the first thing that comes to mind, but cornerstones of AML regulations like KYC can be a strategic benefit as well. You can develop a much more detailed understanding of your customer profiles and segmentations, helping you understand their needs, how they use your products and their future needs to inform your strategies. Regulations can also help to prevent and detect fraud before it totally disrupts your business.  

That’s the optimistic viewpoint. Getting more into what this would look like and the impact – across jurisdictions, the amount of AML regulation and enforcement can vary widely. It can also be tricky to navigate privacy laws across borders – this makes it challenging to operate in a global environment effectively. You really need to make sure you work closely with financial intelligence units and regulators in your jurisdictions to make sure you are doing everything you can. Ultimately, this is a challenge that needs to be addressed with better public-private partnership.