Why is this Topic Important to Wealth Managers? This blogticle presents discussion on anti-money laundering with regards to the insurance industry generally and agents and brokers specifically. The information is presented as a review for wealth managers who are subject to program guidelines.

The characteristics of financial products, including certain insurance products, make them potentially vulnerable to those seeking to launder money.  Recognizing the need for a more comprehensive anti-money laundering regime, Congress passed and the President signed into law the USA PATRIOT Act, which, among other things, requires that all entities defined as financial institutions for Bank Secrecy Act purposes establish anti-money laundering programs. An insurance company is defined as a “financial institution” under the Bank Secrecy Act. The USA PATRIOT Act further directs the Secretary of the Treasury to prescribe through regulation minimum standards for such programs.

Under the regulations insurance agents and brokers are not required to establish separate anti-money laundering programs apart from those of the insurance company. However, insurance agents and brokers are an integral part of the insurance industry due to their contact with customers. Insurance agents and brokers typically are involved in sales operations and are therefore in direct contact with customers. As a result, the agent or broker will often be in a critical position of knowledge as to the source of investment assets, the nature of the clients, and the objectives for which the insurance products are being purchased.

Agents and brokers have an important role to play in assisting the insurance company to prevent money laundering. Therefore, the Treasury requires each insurance company to integrate its agents and brokers into its anti-money laundering program and to monitor their compliance with its program. The Treasury also requires an insurance company’s anti-money laundering program to include procedures for obtaining relevant customer-related information necessary for an effective program, either from its agents and brokers or otherwise.

The insurance company remains responsible for the conduct and effectiveness of its anti-money laundering program, which includes the activities of the agents and brokers that are involved with covered products. The insurance company must exercise due diligence, not only in the development of its anti-money laundering program and in the collection of appropriate customer and other information but also in monitoring the operations of its program, its employees, and its agents.

The laws and regulations require an insurance company that issues or underwrites covered products to develop and implement a written anti-money laundering program applicable to its covered products that is reasonably designed to prevent the insurance company from being used to facilitate money laundering. As is true of all of our anti-money laundering program rules, insurance companies must develop a risk-based program. Compliance is risk-based, meaning that a financial institution must devote more compliance resources to the areas of its business that pose the greatest risk.

Under the Bank Secrecy Act, financial institutions are required to identify, assess, and mitigate the risk that their business will be abused by criminals. Risks can be jurisdictional, product-related, service-related, or client-related. Regardless of where those risks arise, financial institutions covered by the regulations must take reasonable steps to mitigate them.

Moreover, the obligation to identify and report suspicious transactions applies only to an insurance company, and not to its agents or brokers. Nevertheless, because insurance agents and brokers are an integral part of the insurance industry due to their direct contact with customers, the Treasury requires an insurance company to establish and implement policies and procedures reasonably designed to obtain customer-related information necessary to detect suspicious activity from all relevant sources, including from its agents and brokers, and to report suspicious activity based on such information.

The Treasury imposes a direct obligation only on insurance companies, and not on their agents or brokers, for a number of reasons. First, whether an insurance company sells its products directly or through agents, the Treasury believes that it is appropriate to place on the insurance company, which develops and bears the risks of its products, the responsibility for guarding against such products being used to launder illegally derived funds. Second, insurance companies, due to their much larger size relative to that of their numerous agents and brokers, are in a much better position to shoulder the costs of compliance connected with the sale of their products. Finally, numerous insurers already have in place compliance programs and best practices guidelines for their agents and brokers to prevent and detect fraud. Thus, it is the Treasury’s position that insurance companies largely will be able to integrate their obligation to report suspicious transactions into their existing compliance programs and best practices guidelines.

For more information about the Treasury Regulations with regards to Anti-Money Laundering see FIN-2008-G004 Issued: March 20, 2008 and FIN-2006-G010 Issued: May 31, 2006.

Tomorrow’s blogticle will continue to address issues surrounding wealth management practice.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

The “3 Hebrew Boys” are headed to prison after their Ponzi scheme collapsed, revealing an $82 million scam. The trio, who named themselves based on the Biblical story of Shadrach, Meshach, and Abednego, promoted their con at churches and near military bases using rhetoric reminiscent of the prosperity gospel televangelists.  In exchange for faith and a cash investment, they promised returns of 200 percent or more on what were claimed to be investments in foreign currency.

During the course of their scam, the 3 Hebrew Boys traveled to churches across the Southeast United States, claiming that their system would allow parishioners to rapidly pay off their mortgages and credit card debts.  Only 1 percent of the money placed with the men was ever invested in foreign currency markets.  Other investments made by the group included a limo service and other small businesses, but most of the money went to purchase luxury items for the men, including high-end automobiles, vacation homes, a $1 million motor home, and a $5 million personal jet.

Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of advisor scams in Advisor’s Journal, see Advisor Fakes Death to Avoid Fraud Charges (CC 10-83).

We invite your questions and comments by posting them in our blog or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? Discusses common reporting requirements in regards to U.S. monetary transactions.  Provides wealth managers with a general overview of the reports clients’ activities may be subject to.

This week’s blogticles discussed compliance reporting generally regarding foreign transactions and activities.  Today, we will continue to explore some of the common reporting requirements that are filed based on domestic and international activity. 

Suspicious Activity Reports

Congress has enacted legislation to the affect that the Secretary of the Treasury requires financial institutions to report any suspicious transaction relevant to “a possible violation of law or regulation.” [1] The Financial Crimes Enforcement Network (FinCEN) maintains theses “reports in a central database and makes the information available electronically to state and federal law enforcement and regulatory agencies to assist in combating financial crime.” [2]

Currency Transaction Reports

Under Federal Statute the Department of the Treasury requires “banks, securities broker-dealers, money services businesses, casinos, and other financial institutions”, to file a “report for each transaction involving the payment, receipt, or transfer of U.S. coins or currency (or other monetary instruments as Treasury may prescribe)” in excess of $10,000. [3]

Report of International Transportation of Currency or Monetary Instruments

There is no Federal law that limits the “total amount of cash or other monetary instruments that a person may bring in or take out of the United States”, nor is there an imposition of “any taxes or customs duties on the import or export of currency or other mediums of exchange.” [4]

Nevertheless, the law “requires persons physically transporting, mailing or shipping cash or other monetary instruments exceeding $10,000 at one time, either into or out of the U.S., to file a report with U.S. Customs and Border Protection declaring the amount being transported.” [5]

The report is currently made on FinCEN Form 105, “Report of International Transportation of Currency or Monetary Instruments”.

Report of Foreign Bank and Financial Accounts (FBAR)

There is also no specific Federal law that prohibits an individual from owning any interest in a financial account in foreign jurisdictions.  “However, because offshore financial accounts can be used to hide criminal proceeds or evade taxes, federal law does require disclosure of such accounts.” [6] The new Hire Act was passed to address this problem.  In addition, FBAR is also used in this regard.  See our blogticles earlier this week for more on the new reporting and FBAR.

Report of Cash Received in a Trade or Business

The Internal Revenue Service/FinCEN Form 8300 “must be filed by any person in a trade or business (other than a financial institution) who receives more than $10,000 cash in a single transaction or in related transactions.” [7]

This includes, wealth managers, “[a]ttorneys, travel agents, jewelry dealers, pawnbrokers, real estate brokers, automobile dealers, and all other non-financial trades or businesses”. [8]

Form 8300 is similar to a currency transaction report for non-financial institutions, but “is required only with respect to receipt of cash, whereas the currency transaction report applies both to receipt and disbursement of cash”. [9]

Next week’s blogticles will discuss bankruptcy.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Title 31 U.S.C. § 5318(g).

[2] Steven Mark Levy .  Federal Money Laundering Regulation: Banking, Corporate and Securities Compliance (FMNYL) § 7.01. Citing, 65 Fed. Reg. 13683, 13685 (March 14, 2000).

[3] Title 31 U.S.C. § 5313(a); 31 C.F.R. § 103.22.

[4] FMNYL § 9.01.

[5] Id.

[6] FMNYL § 10.02.

[7] 31 U.S.C. § 5331. 

[8] Id.

[9] FMNYL § 8.02.