Money laundering is a widely discussed topic in the financial industry- and one of growing concern for insurers. In 2016, there were 125,000 fraudulant insurance claims valued at £1.3 billion, and a similar number is estimated to go undetected every year. As ML crimes continue to escalate globally, AML regulations become of upmost priority for insurers.
Insurance fraud occurs when money launderers purchase insurance policies with criminal money, then make a fraudulent claim and receive “clean” money back: money that has gone through the financial system and is given by the Insurer. This way, they avoid being caught or tracked down.
There can also be fraudsters who buy a policy with legal money, but then lie about themselves or exaggerate their conditions to make a fraudulent claim. Their purpose is to obtain compensation for accidents that they staged or never happened at all. One of the most popular types of Insurance scams is the “Crash for Cash”, when scammers purposefully collide with innocent drivers to make an insurance claim and receive financial aid.
Usually, each country has its own organisation focused on combating fraud and ML crimes, so you will need to double check this depending on where you are based. If you are based in the UK, you can fill out a form on the IFB (Insurance Fraud Bureau) website or contact the IFB Cheatline directly on 0800 422 0421. Reports are free and confidential.
If you are based in the EU, you can contact OLAF (European Anti-Fraud Office), the organisation responsible for investigating any kinds of fraud that concern EU public funds. You can make a report via a Fraud Notification System (FNS), via a webform or via post. In most cases, the national police can also take insurance fraud reports and direct them to the right team.
In the UK, the Financial Conduct Authority (FCA) is the main authority responsible for setting ML regulations and supervising compliance. As mentioned above, OLAF is the institution responsible for combating Money laundering crimes in the EU. However, it is the European Union as a whole that establishes all ML directives, the most recent version being the 6th AMLD. The UK has opted out of this directive, but continues to follow the previous one- 5AMLD.
In the US, AML is regulated by the Financial Crimes Enforcement Network (FinCEN) and all financial companies must comply with the Bank Secrecy Act (BSA) legislation. However, each state may also have institutions focused on AML, particularly AML in Insurance. All countries have their own national authorities, with FATF operating on a global level. The Financial Action Task Forces (FATF) implements international AML policies and counts with 39 country members from all over the world.
If you are interested in knowing more about each specific authority and how they operate nationally, you can read our previous post on why your business needs an anti-money laundering policy.
Automated AML compliance is a type of software used by financial institutions to more easily detect fraudulent activities. Complying with AML regulations requires more than just an initial Customer Due Diligence screening: all transactions are monitored on an individual basis, which involved handling and reviewing gigantic amounts of data. Naturally, this dries up a lot of resources and money.
This type of software automates AML compliance by handling the data and analysing transactions to detect patterns of fraudulent transactions. This helps financial institutions to free up resources (as there is no manual work required), enables fraud to be detected in real-time and enhances the operational process of reviewing large databases. Overall, it eases the process of complying with national and international AML regulations.
Despite having a lower risk of financial crimes than banks, Insurance companies must also comply with the same Combating the Financing of Terrorism (CFT) and Anti-Money Laundering (AML) regulations. Most CFT and AML procedures such as CDD, record keeping and data monitoring are already common practice, particularly for life insurance policies. Insurers are regulated by the same national financial organisations that regulate banks. In case of the UK, for example, they are supervised by the Financial Conduct Authority (FCA) and HMRC.
Life insurance packages are at particular risk because they involve larger sums of money- exactly what money launderers are looking for. Some of the Life Insurance features that are more exposed to money laundering include:
Where money launderers can dump a large amount of money into a single transaction, merely to safeguard the money they obtained through illicit activity.
The cooling-off period allows customers to cancel their insurance policy within 14 to 30 days after buying it. This gives money launderers the chance to protect their money for 30 days, then get a refund and place the money somewhere else.
Money launderers can pay for premium policies with their funds and receive regular fixed cash flows.
Criminals can pay a small lump sum for their premium to avoid being suspicious, and then regularly deposit a sum of money.
By surrendering their policies, criminals can withdraw their money at surrender value determined by the insurer and stated in their contract.
Money launderers can transfer the ownership of their policies to a third-party who then withdraws the money sum to make it less suspicious.
Know your customer (KYC) is a crucial onboarding step for insurance firms to mitigate fraud risks. It represents a process of verification and risk assessment, where Insurers verify all the data from a customer, including name, address, birthday and social security number, before any contract is signed. These details can help companies determine if a potential customer has been involved in financial crimes. In case there is any false information, insurers must prevent these customers from opening accounts or purchasing insurance policies with them.
If the KYC verification process is done internally, it can be a complex manual process that is subject to loopholes. It also requires a lot of human resources and time, as customer need to be verified on an individual basis. Some Insurance companies are outsourcing this process and automating it to reduce costs and improve efficiency. They partner with third-parties to use their latest software and technology, including AI and machine learning. Imburse can connect you to all the payment providers and technologies so you can automate your KYC and better detect fraud.
Aside from the KYC onboarding process, insurers may look into performing financial sanction checks to confirm whether or not an individual has been excluded from certain industries or activities. This enables insurers to further reinforce their onboarding strategy and to prevent financial crime.
AML regulations enforce Customer Due Diligence policies to all financial firms, because it is an essential framework to prevent ML crimes. Whilst KYC is only an onboarding process, CDD continues throughout the customer relationship, meaning that all customer information is verified regularly. CDD is a bigger framework that includes KYC as one of the measures and can be fully automated.
Compliance with Money Laundering crimes and other types of fraud, whether purposefully or accidentally, has serious repercussions not only for the company’s reputation but also for the whole economy and society. A 2018 PwC Survey found that 62% of global insurers had been subject to fraud or financial crime over the previous 24 months. This growing threat is prompting insurers to invest millions every year to identify fraud, and consider automating their processes for more accurate monitoring.