Life Insurers, Agents Gird For Patriot Act Compliance

The life insurance industry is getting signals from the Treasury Department that the industry will have to comply with anti-money laundering and suspicious activity regulations by March 2005 at the latest even though the agency has not disclosed how it will deal with the complex issue of how insurers can be held responsible for the actions of independent agents and financial advisors.

There are 3 provisions with which the industry will have to comply. One provision, called Suspicious Activity Reports, requires insurers to disclose to Treasury on separate forms the name of a person paying for a policy with $5,000 or more in cash. The threshold was formerly $10,000, but it was lowered awhile ago in the wake of information on how the people who participated in the 9/11 attack arranged their finances.

The second provision is an anti-money laundering program. Among its provisions is a requirement that a policy detailing anti-money laundering enforcement mandates be in place, and that they must be adopted and supported by senior managers of each insurance company.

A third provision, mandated by the Patriot Act, requires implementation of customer identification programs (CIP). Rules implementing that provision of the law will likely go into effect later next year, industry sources said.

The law has been interpreted as encompassing primarily life products, those with stored value and transferability, that is, those with investment features.

Therefore, property/casualty companies and agents are deemed as not covered under the law because their products dont have stored value. Workers compensation issuers and agents also are defined as not covered, as are reinsurers.

Banks have had to comply with various anti-money laundering and suspicious activity rules since 1970, and they have presented a minefield. In the latest example, allegations of failure to comply with money laundering rules recently resulted in a huge fine for venerable Riggs Bank in Washington, D.C., and its decision to merge with PNC Bank within weeks of enforcement action by various federal agencies and even a well-publicized Senate hearing.

Aware of the issues and the potential for enforcement action as well as bad publicity for the industry, the American Council of Life Insurers has sought repeatedly to explain, through detailed comment letters and meetings with officials of the Treasury Department and the Financial Crimes Enforcement Network unit of the agency, the complexity of working through the issues.

The American Council of Life Insurers has brought to the attention of the Treasury that there are acute issues regarding the integration of [independent] agents into the companies anti-money laundering programs, said Victoria E. Fimea, ACLI senior counsel for litigation.

ACLI stated in its comment letter, As currently drafted, the proposed rule inaccurately assumes the nature of the various relationships between life insurers and their independent agent distribution channels. These inaccuracies make compliance for life insurers impossible under the current draft of the proposed rule and, thus, these inaccuracies must be addressed. She added that, It is important to note that agents, whether captive or independent, are required to cooperate with insurance companies on this.

For its part, officials of the National Association of Insurance and Financial Advisors pointed to their comment letter on the issue. In its comment letter, NAIFA said it supported FinCENs decision to apply anti-laundering compliance program requirements to insurance companies and only indirectly to agents and brokers. It explains, Insurance companiesas opposed to agents and brokersare in the best position to monitor money laundering risks. Insurers are also in the best position to bear the administrative costs of compliance, it adds.

But, Fimea states emphatically, language in the proposed law that insurers must integrate agents into their anti-money laundering program leaves the impression that agents dont have to do anything to comply, and that is not quite accurate.

In its comment letter, ACLI notes that, …when the requirements of the proposed rule are overlaid upon the contractual relationship between the life insurer and the independent agent, extraordinary difficulties and burdens are imposed upon the life insurer.

NAIFA also urged FinCEN to clarify that there can be flexibility in the training provisions of compliance programs so agents and brokers do not need to expend time and money on duplicative training sessions. The comments were filed in November and December 2002, and in July 2003.

Fimea said that Treasury and FinCEN have told her a final rule will be published sometime this fall, with a 90-day to 120-day compliance date, so that regardless of how complex the rules are, compliance programs will likely have to be in place by next March.

For example, in its comment letter, the ACLI notes that one of the issues Treasury must deal with is that the anti-money laundering programs of life insurers may conflict with one another, causing confusion for the [independent] agent.

It also notes that to require training in the anti-money laundering program of every insurer which has appointed the independent agent would sap valuable marketing time away from the independent agents schedule, deprive the agent of servicing his or her customers, and result in unwarranted duplicative training.

One bright spot, Fimea said, is that many large life insurers with multiple business lines already have implemented anti-money laundering and SAR programs. Thats because they operate such affiliates as broker-dealers and mutual funds. For insurers with these types of affiliates, they already have these programs in place; it makes more sense to have these programs apply across-the-board for all your affiliates. At the same time, because of the complexity of the independent agent distribution channel, complying with the rule will represent a huge burden for insurance companies, she said.


Reproduced from National Underwriter Edition, August 19, 2004. Copyright 2004 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.