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Money Laundering 'Red Flags': How To Spot Risky Scenarios

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As insurers ramp up their anti-money laundering (AML) efforts to comply with federal regulatory requirements, firms must be aware of important “red flags” that indicate potential money laundering activity–and make sure their agents and brokers learn them as well.

Being able to spot these “red flags” is one of the critical steps in AML compliance, both as a method for insurance companies to strengthen their own AML processes and also to demonstrate to regulators that their AML programs are sound. Under the FinCEN guidelines, an insurance company is responsible for AML compliance for all covered products they sell, whether through their own agents or through non-captive/independent distributors. So it is up to the firm to understand the “red flag” scenarios and integrate these as an ongoing part of AML monitoring for all sales channels.

High-profile money laundering cases

With criminals constantly devising creative new ways to launder money, insurers face a wide range of money laundering behavior from both the “inside” (brokers themselves) and out (the customers). Some examples include these cases reported by the IRS and state authorities:

? A Florida case indicted 5 Colombian nationals on charges of laundering millions of dollars from cocaine sales through single-premium life insurance policies purchased offshore. More than 250 policies were purchased, some for more than $1 million dollars in premium. Many of the policies were cashed out shortly after purchase, with heavy surrender charges.

? A South Dakota agent was imprisoned for promoting a scheme to conceal taxable income from the IRS by transferring clients’ assets into management companies and trusts.

? A life insurance settlements provider purchased more than 9,000 policies with more than $1 billion in combined death benefits before the company was discovered and put out of business by regulators in 2004. According to the U.S. District Attorney and SEC, the company sold unregistered securities to 29,000 investors. One civil court case against the company and its executives alleged that a drug cartel wired large amounts of funds to this company’s account to launder tainted money.

These examples demonstrate the 3 common categories of money laundering risk for insurers, including: 1) when clients misrepresent themselves to agents and insurance companies; 2) when rogue agents victimize their own clients; and 3) when clients and agents conspire together to defraud companies or government entities. These scenarios also indicate the high dollar value of some money laundering schemes, although insurers need to be aware that many criminals pursue much lower amounts to attempt to operate “below the radar.”

“Red flag” behavior

Using existing criminal cases as well as the knowledge of certain patterns in money laundering behavior, firms can compile a library of “red flags” to detect the signs of money laundering–and stop it before it happens.

These “red-flag” scenarios carry an above-average risk for criminal behavior:

o Sales involving unusually large single premiums or a series of large premium payments.

o Sales involving excessive transactions or early surrenders.

o Clients who are keenly interested in how quickly and how much money they can borrow or withdraw from permanent life insurance contracts.

o Sales with a premium paid by a third party or by a premium financing arrangement.

o Clients who are not able to account for the source of funding from their own income or assets.

o Clients who lack roots in the local community or a legitimate reason for doing business with a local agent or agency.

o Purchases of life insurance that are not consistent with a customer’s identified needs.

o Products in which beneficiaries appear unrelated to the owner.

o Agents who are especially secretive about their largest clients, their identities and activities.

How scenarios work in AML monitoring

Insurance companies can employ scenarios as a vital part of their AML monitoring systems in order to detect red flags wherever and whenever they appear. Advanced AML technology is designed to detect hidden patterns and relationships, and the red flags built into these systems can identify the common, as well as not-so-common, money laundering techniques.

But companies can also leverage their own institutional knowledge and experience to develop red flag scenarios. A firm’s AML users can manually create scenarios for the system based on what agents and brokers have seen for themselves in the trenches, helping the organization learn what money laundering looks like in all its constantly changing permutations.

Dramatizing “red flags” for trainingOn top of their use in AML programs themselves, these “red flag” scenarios can be an integral part of AML training, which is also a FinCEN requirement for firms. By building red flags into case studies, AML training can encourage active participation by brokers and agents to be on the lookout for suspicious customers and transactions–as well as internal “red flags” indicating to the firm any improper behavior by the agents themselves.

Scenarios give both managers and employees a very tangible tool for identifying potential money laundering, transforming the process from theoretical “rule following” to a more real-world set of challenges and objectives. Firms who use scenario-training are better able to motivate their employees in the “compliance mission” and achieve a more effective AML program overall.

In sum, insurers must be aware of key money laundering scenarios to better manage their compliance systems as well as their overall regulatory risk. Identifying these “red flags” is the linchpin of developing effective AML compliance programs and making the whole process more efficient for all parties–from management to front-line personnel.

Patrick McGunagle is group executive, advisory services at Fortent. He can be reached via email at


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