Australia is another jurisdiction joining the US in its efforts to tackle money laundering Dean Carrigan and Penny Holloway discuss its potential impact on insurers.
On 15 December 2005, the federal minister for justice and customs, senator Chris Ellison, announced the release of the exposure draft of the Australian Government's Anti-Money Laundering and Counter-Terrorism Financing Bill (the draft bill). The draft legislation, together with the terrorism financing provisions contained in the Government's Anti-Terrorism Act (No 2) is intended to bring the current Australian anti-money laundering (AML) and counter terrorism financing (CTF) regime into compliance with global AML/CTF standards by implementing the Financial Action Task Force's (FATF) Forty Recommendations on AML.
The Forty Recommendations of the FATF are the international anti-money laundering standard. They were first established in 1990 and in 2003 were significantly revised by FATF to address a heightened global concern about money laundering. The current FATF recommendations provide an improved, comprehensive and consistent framework of measures for combating money laundering and terrorist financing. They set minimum standards of action for countries to implement according to their particular circumstances and constitutional frameworks.
Insurance industry vulnerability
The preliminary question raised by many in the insurance industry is "what is the risk?", namely how can contracts of insurance be used to launder money? The FATF report "Money Laundering & Terrorist Financing Typologies 2004-2005" released on 10 June 2005 goes into some detail on the vulnerability of the insurance sector to money laundering.
Cash payments to purchase insurance - Money is laundered by large cash payments for premiums. This is the traditional money laundering method and may be done through insurers or intermediaries.
International transactions - Complex transfers of money through bank accounts or cheques in different jurisdictions can complicate the control/identification of the source of funds by the insurer.
General insurance claim fraud involving goods purchased with illicit funds - Money is laundered by using illicit funds to purchase high value goods and then lodging an insurance claim for loss or damage to those goods. Alternatively, "phantom" property is insured and then claims are made.
Early policy redemption - This occurs where a policy of insurance is taken out and then redeemed early. Often this method is conspicuous in that a customer may opt for early redemption despite uneconomic consequences.
Collusion - Circumstances of collusion arise between the customer and the broker/intermediary or between the broker/intermediary and the insurer where an intermediary may accept illicit funds and transfer those funds in exchange for high commission.
Third party payment of premiums - This method involves payment of insurance premiums by third parties who are not the policyholder and who have not been identified through usual identification procedures when the contract of insurance was entered into.
Life insurance single premium policies - Large sums of money can be laundered by deposit into life insurance single premium policies.
Fraud - The establishment by criminals of complex corporate structures that can then be used to money launder by the investment of illicit funds. This may involve criminal purchase of an insurance or reinsurance company to allow the subject to invest proceeds of crimes behind the veil of an apparently legal insurance or reinsurance company.
Abuse of cooling off periods - Where a cooling off period is offered or required, a subject may take advantage of this by paying a large premium and then cancelling the policy during the cooling off period. The subject would then receive a "clean" refund cheque from the insurer.
Many of the incidents from which the FATF collated the above methods took place in relatively loosely regulated jurisdictions. Although it is not suggested that all of these methods would be available to criminals in the tightly regulated Australian insurance industry, it does demonstrate the complexity and ingenuity of the methods which sophisticated and determined launderers may adopt.
While life insurance appears to be the most attractive type of insurance for money launderers, general insurance and reinsurance are not immune. A number of the methods given by the FATF concern general insurance and some of the methods could be adapted to a reinsurance situation. It is also clear that insurance intermediaries may play a part in the money laundering process.
The FATF flags the following high level issues for consideration in the insurance sector. Generally, insurers and intermediaries should ensure that intermediaries undertake customer due diligence to the required standards. They should be reminded that particular attention should be devoted to international transactions. Intermediaries should be required to file suspicious transaction reports directly to the third party regulator, instead of passing them to the insurers they operate for. The ability of national authorities to exchange information regarding insurance should be enhanced. Particular attention should be paid to supervision/regulatory oversight with respect to intermediaries. Law enforcement organisations should have available insurance expertise. Insurance industry associations could set up industry-wide information sharing facilities in the area of crime prevention and money laundering. And finally, national supervisory bodies could enforce entry and integrity checks in all parts of the insurance sector.
The Draft Bill
The current AML regime in Australia was recently heavily criticised by FATF in its "Third mutual evaluation report on anti-money laundering and combating the financing of terrorism: Australia", released on 14 October 2005. The draft bill is intended to improve on the current regime. It applies to certain designated services provided by the financial services and gambling industry. Once the first stage is implemented, the government has announced that it will consider a second stage of reforms to cover further designated services.
The framework of the new legislation consists of the draft bill as well as regulations, rules and guidelines. The practical, operational detail of the AML/CTF regime will be in the rules that will be drafted by the Australian Transaction Reports and Analysis Centre (AUSTRAC) and will have legislative force. The guidelines will be developed by AUSTRAC in consultation with industry. They will not be legally binding, but will be issued to provide a best practice approach and to assist reporting entities to interpret their obligations.
The draft bill imposes AML/CTF obligations on a wide range of financial service providers, including those in the banking, insurance, managed funds and superannuation sectors, and on the gambling sector. It applies to "reporting entities" who provide certain "designated services". It sets out a comprehensive list of 64 different types of designated services, including the following services that may be relevant to insurers or reinsurers:
- Being involved in funds transfers;
- Issuing or undertaking liability as the insurer under a life policy or sinking fund policy;
- Accepting a premium for or making payment in relation to the above in the capacity of an insurer;
- Providing personal advice as a licensed financial adviser in respect of investing in investments including securities and life policies;
- Issuing pensions or annuities; and
- Exchanging, collecting or delivering currency.
The person providing the designated service will only be deemed to be a reporting entity if the designated service is provided at or through a permanent establishment in Australia; or by a resident of Australia at or through an overseas permanent establishment of that resident; or by a subsidiary of a company that is a resident of Australia at or through an overseas permanent establishment of the subsidiary.
The key obligations of designated service providers under the draft bill include:
- Initial verification of customer identity when accepting business related to a designated service;
- Conducting ongoing risk-based customer due diligence throughout the business relationship;
- Reporting suspicious matters and specified high-value transactions to AUSTRAC whenever reporting obligations are triggered;
- Keeping records of dealings with customers; and
- Developing, maintaining and complying with AML/CTF programmes as prescribed by the rules.
Public and industry submissions on the draft bill may be made until 13 April 2006. The draft bill, or possibly a revised version as a result of issues raised in the submission process, are expected to be introduced into Parliament in May 2006.
Dean Carrigan (firstname.lastname@example.org) is a partner and Penny Holloway a senior associate in the insurance and reinsurance and the anti-money laundering teams at Allens Arthur Robinson, Sydney.
THE DRAFT BILL
A more detailed description of the obligations imposed by the draft bill is set out in the AML section of the Allens Arthur Robinson website ( www.aar.comau/aml ). The Draft Bill and an information sheet on the application of the Draft Bill to the insurance industry are available from the AML website of the Australian Federal Attorney-General ( www.ag.gov.au/aml ). Go to www.fatf-gafi.org/dataoecd/16/8/35003256.pdf for a full copy of the FATF report "Money laundering & terrorist financing typologies 2004-2005".