Life Insurance: Money Laundering's Unlikely Friend

Money laundering is a global financial crime that involves integrating illicit funds into the legitimate economy, often obscuring their origins. While traditionally associated with banking, money laundering has increasingly penetrated non-banking sectors, including the insurance industry. The life insurance industry, in particular, is vulnerable to money laundering due to the extensive flow of funds and the flexibility of certain investment-type products. Criminals may exploit life insurance policies by purchasing them with illicit funds, overpaying premiums, surrendering policies prematurely, or making fictitious claims to cycle the dirty money back as legitimate payouts. Additionally, independent agents or brokers who sell insurance products may be unaware of the need to screen clients or question payment methods, making it easier for criminals to facilitate money laundering. To combat this, life insurers must understand the risks and implement robust mitigation strategies, such as enhanced due diligence and advanced data analytics.

Annuities and other high-value policies

Annuities are attractive to money launderers for several reasons. Firstly, they typically involve large premium payments, providing an opportunity to inject a significant amount of dirty money into the policy. Secondly, they allow for early surrender or withdrawals, enabling launderers to quickly access and "clean" the funds. Thirdly, the complex nature and lack of transparency associated with annuities enable layers of transactions, making it difficult to track the money trail.

Additionally, annuities may involve brokers and agents in their sale, which further complicates the detection of suspicious activity. Money launderers can collude with unscrupulous agents or brokers, who can assist in creating or modifying policies to facilitate the laundering process.

Another important aspect of annuities is the potential for deferred income streams. Criminals can invest their illicit funds into an annuity and, after a certain period, start receiving clean money as regular income payments. This time delay can be advantageous for money launderers as it helps to distance the source of the funds from the legitimate-looking income stream.

The risk associated with annuities and other high-value policies is further exacerbated by the flexibility they offer. For example, some policies allow for single premium payments, enabling criminals to dispose of substantial amounts of money in one go. The ability to make early withdrawals or surrenders, even with a penalty, provides money launderers with an opportunity to regain possession of their money, albeit at a loss.

To mitigate the risk of money laundering through annuities and other high-value policies, insurance companies must implement robust "know your customer" (KYC) practices and continuous monitoring. Enhanced due diligence on high-risk customers, leveraging advanced data analytics and artificial intelligence, can also help detect suspicious patterns of activity. Additionally, collaboration with regulatory bodies is crucial to better track cross-border transactions and stay informed about evolving AML regulations.

Overpaying premiums

To combat money laundering, insurers should implement robust "know your customer" (KYC) continuous monitoring and enhanced due diligence on high-risk customers. Advanced data analytics and artificial intelligence technologies can also be used to detect suspicious patterns of activity.

Early termination of policies

Early termination of life insurance policies can be a red flag for money laundering, as it may indicate that the customer is attempting to "clean" their money by withdrawing funds from an insurance policy. This is especially true for annuities, which can be used to convert illicit funds into a legitimate income stream. Criminals can purchase annuities and then surrender or withdraw the policy early, allowing them to withdraw the funds and disguise their origin. This is also possible with cash surrender policies, which allow policyholders to cancel the policy early and receive cash back, appearing as legitimate funds.

Another way that early termination can be used for money laundering is through the overfunding of policies. This involves paying more than the required premium into the policy, and then withdrawing those excess funds, disguising their origin.

In addition, the early termination of policies can be a sign of premium fraud, where criminals purchase insurance policies with illicit funds and then cancel the policies, requesting refunds and effectively laundering the money through the insurance company.

To mitigate the risk of money laundering through early termination of policies, life insurers should implement robust "know your customer" (KYC) continuous monitoring and enhanced due diligence on high-risk customers. They should also leverage advanced data analytics and artificial intelligence (AI) technologies to detect suspicious patterns of activity and collaborate with regulatory bodies to better track cross-border transactions.

Fake insurance companies

These fake companies can offer policies at significantly lower costs than the market price, attracting consumers who are trying to save money. Consumers are provided with documents that appear legitimate, and these policies may even be represented by legitimate insurance agents who have themselves been misled.

Trade-based money laundering

TBML methods include:

• Over-invoicing: The exporter submits an inflated invoice to the importer, generating a payment that exceeds the value of the shipped goods.
• Under-invoicing: The exporter submits a deflated invoice to the importer, shipping goods with a greater value.
• Multiple-invoicing: The exporter invoices multiple times for the same shipment, transferring greater value from the importer to the exporter.
• Over- or under-shipment: The exporter ships more or fewer goods than agreed, thereby transferring greater value to the importer or exporter, respectively.
• Misrepresentation of quality: Goods shipped to importers are misrepresented as being of higher quality, thereby transferring greater value to the exporter.

Some risk indicators for TBML include:

• Unusually complex or illogical corporate structures, such as the use of shell companies or companies in high-risk jurisdictions.
• Trading entities registered at mass registration addresses with no reference to a specific unit, such as high-density residential or commercial buildings.
• Trading entities with addresses that do not reflect the business in which they are engaged.
• Trading entities with no online presence or an online presence that does not reflect their stated business activities.
• Negative news media involving a trading entity or its employees.
• Trading entities with unexplained periods of dormancy.
• Trading entities with names that mimic more established competitors.

To combat TBML, firms should strengthen their AML and KYC controls in trade finance and correspondent banking. They should also consider coordinating with other organisations, law enforcement agencies, and government authorities to share information and address specific instances of TBML.

Frequently asked questions