Money laundering is the act of concealing illegally obtained funds (“dirty” money) by filtering them through legitimate businesses (hence, making the money “clean”). Criminals use a variety of business types, but insurance companies are particularly vulnerable to these schemes. Many insurance brokers and agents are unaffiliated with the company that writes the policies, and they don’t know how to spot suspicious transactions. Both of these factors make insurance companies more susceptible.
Typically, there are three stages to laundering money:
- Placement, in which illegitimate money is paid into legitimate financial accounts
- Layering, in which the money is disguised by being moved in numerous transactions
- Integration, in which now-clean money is put back into circulation to fund other activities
Criminals use insurance companies for money laundering primarily by buying insurance and then submitting claims to retrieve their funds. Sometimes, they take advantage of insurance products structured as investments, such as variable annuities and certain life insurance policies. By overfunding and moving money in and out of policies, the launderers can establish a stream of “innocent” wire transfers or checks — all for the relatively low cost of early-withdrawal penalties.
Know your customer
To protect against these and other sophisticated forms of money laundering, insurers must, first and foremost, implement and enforce know-your-customer procedures. This means not only obtaining identification for all new accounts and monitoring those accounts for suspicious activity, but also revisiting the transaction records of existing customers periodically.
Warning signs of money laundering include customers who frequently change beneficiaries, use policies as bearer assets or as collateral for wider schemes, or opt to cash in investment-type policies early — even when there’s no financial advantage to doing so. Finally, insurers should check whether customers are included on any watch lists maintained by U.S. and other law enforcement authorities.
Now more than ever
Increasingly, money is being laundered to fund terrorist activities. That’s why insurance companies need to adhere to U.S. Patriot Act rules and investigate customers and the source of their money. Having this knowledge is the best defense against infiltration by criminals.
If you have questions or are concerned your insurance company is an unwitting accomplice in a money laundering scheme, JLK Rosenberger can help. For more information, call us at 949-860-9902 or click here to contact us.