Anti-Money Laundering Overview for Insurance Agents
 

Regulation:

Following the events of September 11, 2001, Anti-Money Laundering legislation was
enacted under the USA PATRIOT Act and the Bank Secrecy Act, which delegated
authority to enforce the legislation to the US Treasury Department and Federal Reserve
Board. The Treasury Department created an internal office known as the Financial
Crimes Enforcement Network (FinCEN) to fight money-laundering and other financial
crimes.

Probably the most important regulation for you to understand is the necessity to report
cash transactions in excess of $10,000. For purposes of reaching this $10,000 threshold,
multiple currency transactions that take place on the same day, to the same account, for
the same person are counted as a single transaction. This is known as the Aggregation
Rule. In simple terms, if you have a client who pays more than $10,000 in cash in a
single day for a life insurance or annuity product, you should notify the compliance
officer of your insurance carrier. The insurance carrier may be required to report this
transaction to the IRS.
 

Definition:

Money laundering is the illegal practice of placing money gained from criminal activity
through a series of apparently legitimate transactions in order to hide the criminal origin
of the money. The goal is to make the money from criminal activity appear to be from
legitimate sources. Although money laundering is usually associated with cash, any
transaction can be a part of a process to hide the origin of the money.
 

Mechanics of Money Laundering:

Although there are many variations to the process of money laundering, it generally
follows three stages:

• Placement: The initial stage in which money from criminal activities is placed in
  financial institutions. One of the most common methods of placement is structuring -
  breaking up currency transactions into smaller portions that fall below the reporting
  threshold for the specific purpose of avoiding reporting or recordkeeping
  requirements. Because most insurance carriers do not accept cash payments, you
  should be on the look-out for cash equivalents.
  

• Layering is the process of conducting a complex series of financial transactions with
  the purpose of hiding the origin of the money from criminal activity and hindering
  any attempts to trace the funds. This stage can consist of multiple securities trades,
  purchase of financial products such as life insurance or annuities, cash transfers,
  currency exchanges or purchases of legitimate businesses.
  

• Integration is the final stage in which apparently legitimate transactions are used to
  return the now-laundered money to the criminal.

These stages can occur simultaneously, separately, or can overlap.
 

Civil & Criminal Penalties

Penalties associated with Money-Laundering are severe.

• The fines may be twice the amount of the transaction up to $1 million.
• Property involved in the transaction may also be subject to seizure and forfeiture.
• Employees of financial institutions can be fined individually and sentenced to up to
  20 years of imprisonment for knowing or being willfully blind to the fact that a
  transaction involves illegal funds.

You can protect yourself and your business from charges of willful blindness by
reporting any suspicious behavior to your insurance carrier's compliance officer and
keeping a copy of your report.

While federal regulations impose penalties upon carriers and individuals for moneylaundering
violations, individual carriers may have their own disciplinary policies and
procedures. Any producer or employee who does not comply with a carrier's anti-money
laundering policy will generally be subject to disciplinary action up to and including
termination of employment and will be reported to the proper legal authorities.

Example: The bank unit of a broker-dealer was fined $10 Million for alleged violations
that included failing to comply with anti-money laundering rules. Specifically, the
aggregate amount rule where a number of smaller transactions not normally associated
with the clients usual activities that totaled over $10,000 were allowed to take place unreported.

Trust is the number one issue when you are dealing with other people's money. Even
being accused of breaking money laundering laws can put an individual or business at
risk of losing its reputation and clients. If you see activity that may indicate money
laundering, report it to your insurance carrier's compliance officer!

Section II: Know Your Customer

The Bank Secrecy Act and the USA PATRIOT Act require companies to include in their
policies and procedures the means to verify the identity of customers and the source of
funds being used to purchase products.

Under the Know Your Customer guidelines included as part of company policy, agents
must collect identifying information about the customer and then verify that information.
Specifically, there are four pieces of information that must be gathered:

• Name
• Date of Birth
• Physical Address (not a P.O. Box, commercial mailbox, or company address)
• Social Security or Tax ID #

Verification of this information must be done through use of a photo ID such as a driver's
license or other government issued picture ID document. Verification through use of
documents without a photo ID is insufficient.

If your client is applying for a policy on behalf of an individual you do not have the
opportunity to meet with, alternative identification verification methods can be utilized.
These methods include:

• Comparing the information gathered with data available from a third party such as a
  credit bureau, or government website.
  

• Contacting the client after the account is opened to verify address, phone numbers,
  and social security numbers are valid.
  

• Physically visiting a site to verify the existence of a client's residence or place of
  business.
  

• Comparing the information provided by the client against fraud and bad check
  databases.
  

• Checking references with other financial institutions.
   

Some potential clients are more worthy of additional due diligence than others. A
client's location, type of business, or affiliation may raise red flags that indicate
additional due diligence is required. Examples of these are individuals which include:

• A senior official in the executive, legislative, administrative, or judicial branch of a
  foreign government
• A senior official of a major foreign political party,
• A senior executive of a foreign owned corporation,
• Any resident of a country that is listed on the "Non-Cooperative Jurisdictions" list
  maintained by the Financial Action Task Force (FATF)
  
   

Activity Reporting and Monitoring

Required Record Keeping

Federal rules require that records mandated under the AML regulations must be kept for
5 years in a reasonably accessible place and manner. Make sure you keep copies of any
information on clients you forward to your insurance carrier along with any information
you submit to your insurance carrier's compliance officer.

Red Flags and Reporting Suspicious Activities:

Whether an activity is suspicious or not will depend upon the type of activity, and your
client's normal activity. Generally, transactions that appear to lack a reasonable
economic basis or recognizable strategy should be reported as suspicious. Other things to
look for include:

• Incomplete information or excessive secrecy (what do you need to know that for?);
• A dramatic change in the pattern of business activities;
• Excessive cash or currency transactions where checks are normally used;
• Payments to or from unknown third parties;
• Unusual early redemptions of insurance or annuity contracts without regard for
  penalties or fees;
• Application for a policy from a potential client in a distant place where a comparable
  policy could be provided "closer to home";
• Use of a "third party check" to pay for a policy;
• A substantial overpayment of the premium; then the client asks for a refund.
• Payment of the premium using foreign currency or lump-sum wire transfer.
• Indifference by the client about details and information normally of interest to a
  person purchasing such a plan (ie: fees, loads, surrender charges);
• Request that a recently purchased policy be surrendered or free-looked with payment
  requested to go to a third party.

If an agent identifies a suspicious activity, contact the carrier's compliance officer.
Make sure that you keep copies of what you submit to the Compliance Officer, Regional
Sales Director or Columbian Representative.

Note: The Banking Security Act PROHIBITS employees and producers from
notifying the individual that their activities have been or may be reported as
suspicious.

Responsibility does not end when the sale is made. If any future interactions seem
suspicious, contact Columbian.