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.
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