The insurance industry should beware of money launderers - they're everywhere. Michael Connor and Charles Suchett-Kaye warn insurers what they should look out for.

Money laundering TRACES its origins back to Chicago of the 1930s. Al Capone, wanting to disguise the source of his illegal bootlegging activities, invested the cash they produced into other cash producing but legitimate businesses, a favourite being laundrettes (the origin of the term "money laundering") and an industry was born.

Money laundering is the process by which the identity of "dirty money" and its true ownership are changed, so that it appears to originate from a legitimate source.

There are three stages, any or all of which occur during a money-laundering scheme. The first is placement where cash proceeds are dispersed: channelled through a foreign bank or used to buy high value goods or property.

Second is layering, where illegal proceeds are distanced from their criminal source by creating layers of financial transactions. Money may pass in and out of trusts and company bank accounts.

The last stage is integration. Sooner or later the laundered proceeds will enter the financial system as clean money.

In the context of insurance one can see the payment of bogus claims by bogus foreign insurers or reinsurers as a way of integrating funds into the financial system. Fictitious disputes between connected companies, with the sole object of paying what appear to be genuine arbitration awards, are also a possibility.

Criminal activity
The UK money laundering regulations do not include general insurance within their scope. However, section 93A-H of the Criminal Justice Act 1988 prohibits anyone from actually assisting in money laundering. It requires the reporting of any knowledge or suspicion of money laundering. This position continues to apply under the Financial Services Authority (FSA) regime.

Current law defines money laundering as "conversion, transfer, concealment, disguise, acquisition, possession or use of property knowing such property was derived from criminal activity" and then prohibits "aiding, abetting, facilitating and counselling" money laundering.

It also imposes on credit and financial institutions the key requirement of "identification of their customers by means of supporting evidence when entering into business relations". Also necessary is a record-keeping system to be put in place with records being kept for five years. And there is a duty to report everything that "might be an indication" of money laundering.

It is illegal to carry out a transaction that you "know or suspect" is related to money laundering without (i) disclosure and (ii) obtaining authority to proceed.

The law requires firms to appoint money laundering compliance and reporting officers and there is a requirement for compulsory education and training.

Compliance is the responsibility of the FSA. Its current rules cover most regulated activities carried on by FSA-regulated firms.

Evidence of identity for individual clients would normally include meeting them face to face and having sight of their passports, together with evidence of proof of address. For corporate clients it is sight of statutory documentation to confirm existence, together with identification of the directors.

If there is suspicion of money laundering, disclosure is to the National Criminal Intelligence Service (NCIS). You can proceed with the transaction only with NCIS approval. Disclosure and authorisation is a defence against criminal and regulatory charges.

The compliance and reporting officers must be FSA-approved. They should also be registered with the NCIS.

There are two important points to note:
It is an offence to inform a suspected money launderer or any third party that disclosure has been made to NCIS, or that it is acting in connection with an investigation. This is the offence of "tipping off", and making a disclosure should not be a breach of client confidentiality.

Last year, the EU adopted proposals for the extension of its money laundering directive to be implemented within 18 months. It will substantially widen the definition of money laundering.

Suspicious transactions come in all shapes and sizes, but the following situations should cause intermediaries to pause for thought:

  • A customer whose verification of identity proves unusually difficult or evasive and who is reluctant to provide full details
  • A client with no discernible reason for sing the firm's service, such as someone with a distant address who could find the same service nearer home or requires assistance with the firm's business and could be more easily serviced elsewhere
  • A request to insure goods in transit to or from countries known for drugs production
  • Early cancellation of policies with return of premium with no discernible purpose or in circumstances that appear unusual
  • Assignment of policy interest to apparently unrelated third parties
  • Substantial premiums settled in cash
  • Premium overpayment with a request to refund excess to a third party or different country
  • Payment of claims requested to a third party without any apparent connection to the policyholder
  • Regular, small claims within premium limit
  • Abnormal loss ratios for the nature and class of risk under a delegated authority.

    Case study
    A is a specialist motor insurance intermediary in South East England. He receives a telephone call from B, an overseas intermediary from a country notorious for drug trafficking. B explains he has a client, C, who is a rich motor enthusiast with a collection of rare vintage cars he wishes to insure. B says he has been informed A is an expert in this type of business and has good contacts in the London Market, where such risks may be insured. A has never dealt with B or C before. The premium (and commission) for the risk are substantial.

    Question 1
    Should A accept the business?
    a Yes, it sounds like good business in his area of expertise

    b No, it's clearly a scam

    c Maybe, subject to ensuring he can establish the identity and bona fides of the client, the risks and the overseas intermediary to his and the insurers' satisfaction.

    Question 2
    C settles the substantial premium to A in cash. What should A do?

    a Nothing, it improves his firm's cash flow

    b Make further enquiries about B and C before placing the risk

    c Immediately get insurers to cancel thepolicy as this is clearly a money laundering situation.

    Question 3
    The police approach A and explain they have suspicions about C's (and B's) involvement in the laundering of drug proceeds. A has his own concerns. Should A co-operate?

    a No, general insurance is not covered by the reporting requirements of the Criminal Justice Act 1988

    b o, he owes B and C a duty of confidentiality

    c Yes, the Criminal Justice Act 1988 requires the reporting of any knowl-edge or suspicion of actual money laundering in the course of business.

  • This week's CPD has been contributed by Charles Suchett-Kaye and Michael Connor of Reynolds Porter Chamberlain. Suchett-Kaye is a partner in the corporate department. Connor is a solicitor and was formerly principal regulatory officer in Lloyd's regulatory division.

    Thus CPD page is edited by RW Associates, specialists in training, competence and compliance. Email: ruy.lopez@rwassociates.softnet.co.uk

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