What Will The Patriot Act Mean For Life And Annuity Producers?

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Anti-money laundering, customer identification, scrutinizing large dollar transactionsthese are not exactly top-of-mind issues for many annuity or life insurance producers.

Yet they soon will be, due to proposed regulations now being finalized by the Treasury Department. These regs, developed under Section 352 of the USA Patriot Act of 2001, require financial institutions to establish anti-money laundering programs.

Broker-dealers are among those that already are subject to such regulations, so variable annuity and variable life insurance reps already are processing business accordingly, points out Carl Wilkerson, chief counsel-securities and litigation for the American Council of Life Insurers, Washington, D.C.

But within a few months, perhaps this fall, more of the insurance communityincluding the fixed product sector–will also be subject, he says.

(Section 326, dealing with obtaining customer identity information, will also apply to insurance, when the regs come out.)

Some fixed producers are only vaguely aware this is coming. “No one I know talks about it,” says one advisor contacted by NU.

But many are curious about how the new regs will impact their business. Will insurance producers need to ask existing clients probing questions? What kinds of identification must they obtain? Will the procedures impact client relationships, pro or con? Will compliance take a lot of time?

Registered representatives already subject to the regs offer some insight.

“The broker-dealers have provided us with training,” says Ben Baldwin, president and owner of Baldwin Financial Systems, Arlington Heights, Ill. “They teach you the procedures and what you need to know about your clients in different situations. My guess is that 99% of National Underwriter readers already know their clients, so this will not be onerous.”

The industry is in an especially good position to adjust, he adds, because “insurance producers have moved toward financial planning and advisory services, and you cant do that kind of work without knowing your clients, where their assets are and related financial information.”

In short, the planning environment is itself a deterrent to money laundering, Baldwin says.

Adjusting to the regulations does takes some time, say reps. “Ive heard its a big paperwork burden at the broker-dealers,” says Thomas E. Nugent, investment consultant with Wealth Management Services, Hilton Head Island, S.C. But his own firm is a small boutique money manager, so “the impact on us is de minimis,” he adds.

“We know our clients and we take new clients mostly through referrals. And a lot of our business entails retirement plan rollovers, so this gives us the documentation we need.”

But “its a whole different scene” at larger firms, especially those working in areas where there are a lot of wire transfers, says Nugent, citing comments made to him by peers at those firms. “At the larger firms, reps sometimes have to fill out a lot of forms, go back to the prospect, and do a lot of give me this and give me that.”

Baldwin, the Illinois rep, agrees that when the new forms related to the regulations came out, “there was a lot of complaining. I complained, too.”

But that probably had more to do with the fact that the forms were not yet woven into the applications than the extra work entailed, he adds. “Now, the forms are included in the applications, and it doesnt feel like that much more work.”

His view is that there is no point in getting upset about the changes. “It doesnt do any good. These regulations are here, and we all have to deal with them. Its a level playing field.”

As for worrying about whether a client might balk at being asked to show identifying information or to indicate the source of large sum deposits, Baldwin says these are natural questions to ask. And most clients wont be upset providing the answers.

For example, if a client comes in with a $50,000, “the rep might greet the client with a smile and say, Congratulations! How did you get so lucky?” or something of the kind, he says.

“You expect the person to answer and most do. In fact, if I didnt ask, the person would probably wonder why.”

If someone is reluctant to provide the information, Baldwin adds, “just explain that the regulators require me to get this information.”

Sometimes, the reluctance might be because divorce is in the air, he says. But if the rep doesnt get the information needed, even after asking direct questions, “thats reason to walk away,” says Baldwin. “Its probably a piece of business you dont want.”

As indicated earlier, advisors who sell fixed insurance products do not yet have to meet the requirements. But when they do, it should not be a problem, sources predict.

“I would have no compunction about asking an applicant for a fixed annuity or life policy for a photo ID or other identifying information, even if I have known the person for 20 years,” says J. Brendan Ryan, vice president of Robert A. Ryan Insurance Agency Inc, Cincinnati, Ohio.

This is so even though the large majority of his business for the past three years has been fixed. Many of his clients are high-net-worth individuals, he points out. “They would understand, and they would not be offended.”

As for new clients, “I would approach it as a matter of routine,” says Ryan. Like Baldwin, he says that if a client did have compunction about providing the information, “Id get worried.”

Ryan, who is also securities licensed, says his broker-dealer provided an online training course on the subject. Reps were required to take the course to maintain their securities license. “It helped everyone to be familiar with the regulations,” he says. “It was enlightening, too.”

Such training is integral to the regulations under the Patriot Act, points out ACLIs Wilkerson. Once the regulations for insurance companies come out, insurers will also be required to provide this training, he says.

To sum up, the insurance producer will need to ask the consumer more questions when the insurance regs come out, says Victoria Fimea, senior counsel-litigation with ACLI. “But this will become a normal part of business, so the customer and agent should not be nervous about it.

“Just remember, all roads lead back to the Patriot Act.”

The consequences for not complying are “profound,” adds Wilkerson, noting that penalty and fines per transaction are $1 million.

The Treasury Department did anticipate that the insurance industry has direct as well as face-to-face transactions, says Wilkerson. So, the regs for the insurance sector will allow firms to custom tailor their documentation methods. One firm might, for example, require display of a passport or drivers license while another might rely on source documents such as credit bureau checks, mortgage statement evidence and other such records.

“The insurance industry has not been a source of extensive money laundering activity,” stresses Wilkerson. “The reports from Treasury show it is not systemic.”

But some insurance products have transferability and residual value to them, so that is why the government is applying the regs to the industry, he says. A whole life policy is an example.

Exclusions are being sought for insurance products, like term life and property-casualty insurance, that do not have those characteristics, he adds.

Fimea believes the new rules will serve to sharpen the anti-fraud measures the insurance industry already has.

And, she says, “insurance will likely not become a target for money launderers, partly because we have so much paperwork.” Examples include underwriting information, completed applications, medical record checks, etc. “Also, companies increasingly are requiring that insurance apps be submitted with checks, money orders or something drawn on a financial institution–not cash.”

The message for would-be launderers? “If you want to use life insurance products for this, it will snag you,” says Fimea.

And for producers? No one expects them to be investigators or part of law enforcement, says Wilkerson. “Just be the eyes and ears,” and if something is not right, “follow the instructions you have been given.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 17, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.