Countermeasures to AML/CFT Risks in the Insurance Sector

Blog / Countermeasures to AML/CFT Risks in the Insurance Sector

Since the first anti-money laundering regulations were issued, both international and national, the insurance sector, like the credit sectors that include the activities of banks and financial firms, has been formed from the outset as a compulsory subject to regulatory compliance and procedural checks to counter AML/CFT (Anti-Money Laundering/Combating the Financing of Terrorism)  threats. Insurance companies must monitor their customers' activities and financial transactions to identify AML/CFT risks and take measures to mitigate them.

What Are The AML/CFT Risks In The Insurance Sector?

The insurance sector is vulnerable to a variety of AML/CFT risks due to the nature of its products and services. Some of the most significant risks are:

  • Money laundering through insurance policies: Criminals may use insurance policies to launder money by buying policies with illicit funds and then canceling them to receive a legitimate payout.
  • Misuse of insurance products for terrorism financing: Terrorists may use life insurance policies or other insurance products to finance their operations or to provide financial support to their networks.
  • Insuring criminal activities: Insurance policies may be used to protect criminal activities such as smuggling, drug trafficking, or illegal gambling.
  • Third-party money laundering: Insurance companies may be used as a conduit for money laundering by third-party service providers such as brokers, agents, or loss adjusters.
  • Geographic risks: Those that operate in jurisdictions with weak AML/CFT regulations or that have high levels of corruption may face higher risks of money laundering and terrorism financing.

To mitigate these risks, insurance companies must implement robust AML/CFT policies and procedures and monitor their customers, transactions, and third-party relationships effectively. They must also conduct regular risk assessments and training programs for their employees to ensure compliance with regulatory requirements and best practices.

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What Are The AML/CFT Risks In The Insurance Sector?

Developing an appropriate AML/CFT policy for insurance companies involves several key steps:

  • Risk assessment: Insurance companies should conduct a comprehensive risk assessment of their products, services, customers, and geographic locations to identify and prioritize AML/CFT risks.
  • AML/CFT program design: Based on the risk assessment, insurance companies should design an AML/CFT program that includes policies, procedures, controls, and monitoring measures to mitigate the identified risks.
  • Customer due diligence: They should implement customer due diligence (CDD) procedures to verify the identity of their customers, assess their risk level, and monitor their transactions.
  • Independent testing and review: They should conduct periodic independent testing and review of their AML/CFT program to ensure that it is effective and compliant with regulatory requirements.
  • Continuous improvement: They should continuously monitor and evaluate their AML/CFT program and make adjustments as necessary to ensure its effectiveness and responsiveness to emerging risks.

Stringent Regulations: A Focus on AML/CFT

The players in the insurance market are many and varied. They are registered in a special register after passing an examination and then registering in a state register. The term broker is commonly used to mean intermediary, but insurance intermediaries work on their accounts and insurance intermediaries who work for a company.

The insurance regulations governing AML/CFT risk have very stringent measures: for example, the prohibition of using cash when paying monthly, semi-annual and annual premiums for life, savings, and investment covers allows for non-life business only, and a maximum of €600-800 per year. Furthermore, the traceability and financial monitoring system oblige policyholders to use traceable payment instruments such as cheques bearing the indication non-transferable, consenting to payment by bank transfer, and POS (point of safe) payment systems.

On the other hand, the use of the Criptovalute Blockchain for certain insurance services (non-life) is currently being studied and approved by financial regulators. These regulatory peculiarities in themselves reduce the potential riskiness of the insurance industry.

In addition, the regulation requires that whenever one of the parties to the insurance contract (policyholder, beneficiary, insured) changes, customer due diligence takes place. The AML/CFT risk arises in particular for those clients who have taken out insurance cover in the investment, pension fund, savings, and pre-mortgage lines of business; therefore, during the credit disbursement phase, a whole series of personal, economic, and fiscal checks are carried out on the beneficiaries and sometimes SAR's are also sent.

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Importance of Compliance and KYC in the Insurance Industry

Insurance services are available not only from insurance companies but also from banks, post offices, and financial institutions. However, it is important to distinguish between different types of insurance intermediaries in terms of their compliance with due diligence requirements. Banks distributing insurance products have access to all the necessary information to assess the consistency between premiums paid and the economic or capital situation of the policyholder. On the other hand, agents and brokers rely on the information provided by the customer, and it is important for firms to identify cases where additional documentation is required to verify the information provided by the subscriber.

It is crucial to keep in mind that criminals exploit weak spots in the financial system for illicit purposes. Therefore, a vigilant approach is necessary. The KYC regulation is essential because it ensures that all parties involved in the insurance contract are thoroughly surveyed, including the owner, policyholder, beneficiary, and insured, which are not always the same person. This knowledge of the client has two important implications. Firstly, it allows for greater loyalty between the client and the consultant by offering more solutions to the client's daily needs. Secondly, it enables the carrying out of AML checks without great difficulty. Companies are called upon to cooperate with supervisory authorities to build and operate a robust process to collect the necessary information to develop a meaningful risk profile for each customer.

Before opening a new ongoing relationship, it is crucial to identify relationships or transactions characterized by indicators of higher risk or potential anomalies. These must be assessed for possible reporting to the competent financial reporting authorities. It is also important to avoid proposing or concluding insurance contracts for which the customer refuses to provide information or provides incomplete or contradictory information and documents that do not prove the truthfulness of the information given. A robust process of adequate verification of CDD is the prerequisite for effective dynamic partnership, which is the cardinal principle of the legislation.

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