Complying With New Patriot Act Rules

o provide for independent testing of the program on a periodic basis.

Insurance companies have discretion to devise specific AML procedures. A risk assessment is key to developing an effective, individualized AML program. Accordingly, insurance companies are expected to take reasonable steps to identify those aspects of their operations that may be vulnerable to money laundering and should use such assessments to develop and implement their AML programs.

Insurance companies are responsible for integrating agents and brokers into their AML programs, for obtaining customer information from agents and brokers, and for using such information to assess risks and identify money laundering “red flags.” Although insurance companies may require their agents to perform aspects of their AML programs, the companies themselves are responsible for the effectiveness of their programs and for ensuring that FinCEN examiners have access to information and records relating to their AML programs.

The AML Program Rule’s training obligations may be met through various means. For example, insurance companies may train brokers and agents directly or, alternatively, may verify that agents and brokers have received training from another insurance company or a competent third party with respect to the covered products offered by the insurance company.

FinCEN also notes that the AML program’s required independent review does not mandate hiring an outside party. FinCEN does require that, whether internal or external testing is used, such testing constitute a fair and unbiased appraisal of the functioning of an AML program. The testing must result in a written report, including improvement recommendations. Insurance companies have discretion to determine the frequency of testing.

One immediate benefit results from coverage under the AML Program Rule: Insurance companies required to establish AML programs also become eligible to share information concerning terrorist financing and money laundering with other financial institutions (such as banks and broker-dealers) that also have been required to establish AML programs under the Patriot Act. Such information may be shared under the Patriot Act, notwithstanding the usual privacy and other safeguards that apply to nonpublic personal information.

What are the requirements of the SAR rule?

Insurance companies covered by the AML Program Rule also are subject to SAR requirements. This means that these insurers must establish and implement procedures reasonably designed to detect activity that gives rise to suspicions of money laundering, terrorist financing and other illegal activities and to report such activity. Specifically, an insurance company is required to report transactions involving $5,000 or more if the firm “knows, suspects or has reason to suspect” that a transaction:

o involves funds derived from illegal activities or is intended to hide funds derived from illegal activities;

o is designed to evade other reporting requirements (such as those that apply to large cash transactions under the Bank Secrecy Act);

o has no business or lawful purpose; or

o involves the use of the insurance company to facilitate criminal activity.

FinCEN’s release accompanying the SAR Rule contains several examples of “red flags” that might indicate suspicious activity in the insurance context. These include a customer’s purchase of a product appearing to be inconsistent with that customer’s needs or a customer’s show of little concern for the investment performance of a product but much concern about the product’s early termination features.

Suspicious transactions generally must be reported to FinCEN no later than 30 days after initial detection. Reporting will take place on a new form (SAR-IC) that FinCEN is developing, and that is expected to resemble the SAR forms used by banks to report suspicious transactions. FinCEN has issued a draft SAR-IC, and this form is available for public comment. Until the SAR-IC form is finalized, insurance companies are directed to file necessary reports on SAR-SFs, which are the forms used by securities firms.

The SAR obligation is limited in certain important ways. Insurance companies only are required to file SARs with respect to transactions involving covered products. Firms also are not required to report submissions of false or fraudulent information to obtain a policy or make a claim unless a company believes that the activity relates to money laundering or terrorist financing.

Complying with the new FinCEN AML Program and SAR rules will require attention to detail, reasonable risk-based diligence, and a recognition that the federal government is looking to life insurance companies to become a partner in the fight against money laundering and terrorist financing.

Caption