Financial crime is on the rise worldwide and the insurance sector is by no means immune. According to PwC’s 2018 Global Economic Crime Survey, 62% of global insurers said their firm had been exposed to fraud or financial crime in the previous two years, compared with 37% in 2016 and 35% in 2014.
The most frequent type of fraud identified by the PwC survey is customer fraud, but money laundering is seen as a fast-growing threat in the financial services sector and beyond. Life insurance business is particularly attractive to criminals looking for a conduit to disguise the source of illicit funds due to frequency of high-value lump sum transactions.
This has resulted in rapidly tightening anti money laundering (AML) and counter terrorist financing (CFT) regulation of the insurance sector, led by the recommendations of the Financial Action Task Force, which classifies insurers as non-banking financial institutions. Over the past few years, its AML/CFT, recommendations are being enshrined in law and applied to insurers in jurisdictions around the world.
In China, for example, insurers are required to screen for sanctioned and ‘Red Notice’ persons listed by the People’s Bank of China, and must also undertake Know Your Customer procedures. As recently as 2020, the CBIRC issued a circular asking insurers to increase their investment in AML/CFT screening, and warning that its local offices would include AML/CFT compliance in their supervision activities, including on-site visits.
As regulation of the sector increases, so too are enforcement actions. In 2018, the French banking and insurance regulator fined the insurer CNP €8m for failures in its AML/CFT controls and processes (CNP has taken measures to resolve the issues raised by the regulator). And in December 2019 the US Office of Foreign Assets Control (OFAC) agreed settlements of $170,535 with Alliance Global Risks and $66,212 with Chubb (the successor to the Swiss insurer ACE) over self-reported violations of the Cuban Assets Control Regulations. Both related to travel by insured clients to Cuba.
The impact of enforcement actions on insurers is not limited to financial risk; an action could conceivably lead to reputational damage, derisking by banking partners or reinsurers, or even the revocation of a license to operate in a particular jurisdiction. As a result, insurers around the world are taking steps to increase their defenses against fraud and improve AML/CFT and sanctions screening.
The insurance sector faces particular challenges when it comes to AML screening and Know Your Customer checks. Unlike other areas of financial services, insurance is a low-transaction business model but typically involved multiple parties – which means that more screening points are created than in other financial business. Many contracts, notably commercial insurance of shipping or construction projects, involve multiple parties and data points, each of which need to meet compliance obligations.
If the client is a company, the insurer will also need to establish the identity of the ultimate beneficial owner of the entity, as well as the names, addresses and nationalities of all partners and shareholders with an interest of more than 5%, and in higher-risk situations, screen these individuals for politically exposed persons (PEPs) and adverse media. This complexity and the number of parties involved can lead to the insurer losing sight of the overall risk view of the policy.
What does best practice look like?
With multiple parties typically involved, it’s essential to monitor transactions and screen all related parties carefully. We recommend as best practice:
A risk-based approach. Risk of financial crime is not distributed evenly across the insurance sector, so a risk-based approach is essential to allow insurers to identify and understand where they are vulnerable. A risk based approach will help each insurer to meet their compliance obligations and manage risk by targeting resources exactly where they are needed and most effective. This approach is particularly useful in complex compliance environments such as international shipping.
Automate. Insurers are increasingly turning to automated screening, which allows customers to be onboarded and transactions screened without any disruption to the customer experience. Automated screening drastically reduces the number of false positive alerts, saving time, money and effort on manual screening, and creates a clear audit trail in the event of a regulator query.
Pay attention to data quality. Quality and timely reference data underpins an effective screening programme; an automated system is only as good as the data fed into it. Watchlists issued by bodies are not always consistent and sanctions are constantly being updated – regularly refreshed information supplied by an expert source is essential. Our Firco Global WatchList®, for example, brings together the caution lists from all major sanctioning bodies, law enforcement agencies and financial regulators.
Don’t stop at onboarding. Best practice screening in the insurance sector should include screening customers before a policy is issued, and before premiums or benefits are paid. Because international PEPs lists, and sanctions lists are constantly being updated, we also recommend continuous ongoing screening of policyholders, beneficiaries, insureds and accounts.
How we can help?
We work with companies, helping them meet their compliance obligations and effectively manage risk, while maintaining the best possible customer experience. Our sophisticated systems and comprehensive, reliable databases allow our clients to complete automated AML and Sanctions compliance checks accurately and at speed.
Visit here or contact us directly to learn more on our solutions.