The IRDA puts new, stringent anti-money laundering
regulations in place.

India's Insurance Regulatory and Development Authority (IRDA) has issued anti-money laundering guidelines that include strict adherence to know-your-customer (KYC) norms by insurance companies.

The insurance regulator has asked insurers to put in place a proper policy framework by 1 July 2006, since the regime will become effective from 1 August this year. The guidelines make it mandatory for insurers to comply with KYC norms by obtaining documents to clearly establish the customer's identity whenever new insurance contracts are made out.

Where the premium is Rs100,000 ($2,260) or more in a year in case of individual policies, a detailed due diligence needs to be exercised to establish KYC. If the insurance premium is paid by a person other than the policyholder, the insurer is required to look into and establish the motive behind it.

The IRDA's new anti-money laundering rules reflect a global trend where regulators are making it mandatory for insurers and reinsurers to follow KYC norms and inhibit drug cartels, terrorists, and the like. For example, new regulations were put in place in the US on 3 November last year which require insurers selling “covered products” to implement anti-money laundering programmes and to file suspicious activity reports on certain transactions.

The US Department of Treasury's Financial Crimes Enforcement Network also issued a notice and request for comment on proposed forms to be used by insurers to report suspicious transactions. The long-awaited regulations are effective from 2 May 2006.

Although reinsurers are not themselves subject to these new compliance requirements, life reinsurers in particular are following these developments with interest because of the impact on their US cedants.

Australia is taking similar steps to curb money laundering through the insurance industry. 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 bill will inhibit the laundering of money through large cash payments for premiums, the traditional money laundering method that is done through insurers or intermediaries.

It will also look askance at money laundering by using illicit funds to purchase high-value goods and then lodging an insurance claim for loss or damage to those goods. The same will apply to the insuring of “phantom” property, with high claims being subsequently made.