Additional Sectors Under Scrutiny as Attention for Effective AML Grows – Insurance is Up Next
“It is reasonable that the SFSA sees a need to better understand the current risk environment, and in particular risks that may be involved when the business model involves the use of insurance brokers,” says Ronny Gustavsson, Head of Financial Crime Prevention at Advisense. “What we are seeing is also a greater focus from the SFSA on how companies are able to achieve a risk-based approach in their AML/CTF efforts.”
The Swedish Financial Supervisory Authority (SFSA) announced on the 15th May that thirteen life insurance companies are requested to participate in a new survey. The SFSA sees a need to assess current risk environment with regards to money laundering and terror financing, and will focus on how companies may be exposed to risks through different products and business models. The SFSA will according to its press release assess the use of insurance brokers and what controls companies have in place to manage associated risks.
Anette Hermansson, Head of Insurance Law at FCG, says that money laundering has become a serious issue for life insurance firms. It is time to take a closer look at how AML/CTF policies are effectively implemented, for insurance companies to rest assured of their compliance with applicable regulations, she says.
According to the Financial Action Task Force (FATF), the life insurance industry is generally perceived as low risk for money laundering and terrorism financing. Products are long-term vehicles, not very flexible and do therefore not lend themselves as a first choice for money launderers, notwithstanding the option for premature cash out.
In its guidance from 2018, the FATF emphasizes the importance of the enterprise-wide risk assessment, properly reflecting the nature, size and complexity of the business to establish the group-wide risk appetite and framework.
This is obviously critical to ensuring a risk-based approach and appropriate controls in line with the risk exposure in individual product or service categories or customer segments. Nevertheless, this is an issue many companies still struggle to achieve.
Business models involving third parties such as brokers and agents, or in a wider context, enablers or “facilitators” including trusts, corporate service providers, lawyers across sectors increase the risk for money laundering. Companies outsourcing product distribution to an unregulated third party must make sure that their AML/CFT internal control processes properly reflect the risk exposure that this may involve and the risk appetite, including continuous monitoring the compliance with their AML/CFT programs.
As FATF points out in its 2018 guidance, life insurer retains full responsibility for AML/CFT controls in such an outsourcing arrangement, i.e. the outsourced entity applies the CDD measures on behalf of the life insurer, in accordance with its procedures, and is subject to its control of the effective implementation of those procedures.
“What we see in the marketplace is that the ability to ensure sufficient controls through a third party does remain a challenge. According to our experience, achieving a genuinely risk-based approach is certainly not easy. The customer due diligence processes, in the life insurance industry just like in most other parts of the financial industries, must properly reflect the business wide risk assessment and customer risk classification. In terms of modus operandi, we have recently in the banking industry seen how third parties can systematically serve as gateways to gain access to products and services by way of using fake documentation and insider infiltration.”
Key recommendations:
- Make sure to involve all relevant stakeholders in the organization in the business wide risk assessment process, to ensure properly addressing all products, business areas and most importantly distribution channels such as third parties including brokers.
- Regularly reassess your residual risk to ensure it properly corresponds to the current product offering and business model, considering aspects such as limits for funds held, if and how assets or underlying investments under control of the customer can be transferred etc.
- Evaluate the overall output and performance of your overall AML/CTF program on an annual basis.
For more information on AML/CTF, please contact Ronny or for Insurance Law, Anette Hermansson.
