‘Money Laundering’ Through Insurers on the Increase

The conversion of illegal funds into legitimate accounts and investments, commonly known as “money laundering,” is a growth business.

According to the International MonetaryFund, money laundering could account for 2 percent of global Gross Domestic Product. Based on 1996 figures, that puts it between $590 billion and $1.5 trillion. Other estimates range between $800 billion to $2 trillion. The actual amounts are by definition extremely hard to calculate. The whole point of money laundering is to disguise illegal cash.

As banks and related financial institutions come under increasing international pressure to adopt procedures making it more difficult to launder illicit funds, the launderers are exploring other avenues, including insurers, to clean dirty money.

The Financial Action Task Force (FATF) on Money Laundering, a 31-member organization set up by the Organization for Economic Cooperation and Development (OECD) in 1989, is the most active global body specifically directed at preventing money laundering. It gives an overall view as follows: “The goal of a large number of criminal acts is to generate a profit for the individual or group that carries out the act. Money laundering is the processing of these criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardizing their source.

“Illegal arms sales, smuggling, and the activities of organized crime, including for example drug trafficking and prostitution rings, can generate huge sums. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits and create the incentive to ‘legitimize’ the ill-gotten gains through money laundering.”

A three-stage process
Cataloguing all the ways employed to launder money would require several volumes, but the basics are relatively simple. The FATF describes the rudiments as follows: “In the initial or placement stage of money laundering, the launderer introduces his illegal profits into the financial system. This might be done by breaking up large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of monetary instruments (checks, money orders, etc.) that are then collected and deposited into accounts at another location.”

The second or “layering” stage takes place when the money is moved away from its source. “The funds might be channeled through the purchase and sales of investment instruments, or the launderer might simply wire the funds through a series of accounts at various banks across the globe.” Many of these banks are located in countries that have looser financial rules than the U.S. or Europe; the FATF has focused most of its attention on this phase of the operation.

The third phase is “integration,” when the money is injected back into the legitimate economy through investments in financial products, real estate and legitimate businesses, or purchases of luxury goods and fungible commodities.

The insurance angle
Insurance products can be employed in both the second and third stages. Patrick Moulette, the FATF’s Executive Secretary recently wrote, “Insurance—notably life, property and long-term capitalisation bonds—is another possibility. Launderers generally pay for the insurance with cash and then request early redemption of the policy or make a claim against their property insurance, thus obtaining payment in bank money from the insurance company.”

The first and second stages closely involve both banks and electronic transfers. Many, but by no means all, of these banks are located on Caribbean or Pacific Islands, and don’t bear much resemblance to your local branch of the Bank of America. They observe strict secrecy concerning their customers’ transactions; local authorities have very little oversight on their activities, and they don’t ask a lot of questions about the origins of the deposits they accept. They may be “banks” in name only. Some island havens allow anyone to set up a bank with as little as $50,000.

As of the beginning of September, the FATF had 20 countries that don’t “meet international norms” for the processing of financial transactions on its blacklist. The number is well down from the 35 countries it had listed in June 2000. Many Caribbean countries including Bermuda, The Bahamas, Barbados and the Cayman Islands have gotten off the list by promising to enact reforms. Most European tax havens, including Jersey, Guernsey, Monaco, Liechtenstein and Gibraltar have made similar pledges.

How diligent they’ll be in fighting money laundering, and how effective the OECD guidelines are, will depend largely on how much commitment and incentive there is in each country. However, there’s no shortage of new candidates to welcome the world’s illegal money. In addition to other island nations, the FATF has listed Russia, Ukraine, Israel, Indonesia, Egypt, Hungary and the Philippines as countries that don’t have sufficient safeguards in place.

Watching for red flags
The “Forty Recommendations” which the FATF has adopted to give governments a blueprint for reforming their financial regulations can also serve as a guide to insurers, who want to avoid problems with money laundering. While many of the provisions are technical, a few of them are just common sense, starting with “Know your customer,” and be suspicious of cash transactions, including money orders and cashier’s checks.

A recent report from KPMG also lists some red flags, especially for life insurers. Be suspicious of situations involving large single payment premiums for life or annuity policies, beneficiaries who are either unidentified or located in known laundering havens such as Colombia, multiple policies with multiple insurers, early policy cancellation and the use of insurance policies as collateral for loans.

Unfortunately, the FATF has gotten caught up in the debate over whether tax avoidance constitutes money laundering. There should be a fundamental difference between funds that are obtained from criminal, i.e. illegal, activities, and financial transactions that don’t originate from criminal activity. A whole body of international law and global debate focuses on the insurance industry’s use of offshore vehicles, i.e. companies domiciled outside of the U.S. or Europe. Most of them are legitimate business enterprises that take advantage of favorable tax laws in order to reduce the levies imposed on their earnings by European and American tax authorities.

Using offshore entities to reduce taxes and using them to legitimize dirty money shouldn’t be lumped into the same category, but it often is. As one French banker put it, “The real money launderers are only too happy to pay taxes on their companies; it makes them look legitimate.” Tax planning—some would say tax evasion—has exactly the opposite goal, and while the U.S. and European countries may consider it a problem, it shouldn’t be confused with legitimizing the profits from criminal activity.

The main reason to try and stop money laundering is the pervasive corruption it creates. Nigel Morris-Cotterill, writing in the May/June issue of Foreign Policy, stated, “From Moscow to Buenos Aires, laundering scandals sap economies and destabilize governments… Without unified rules governing global finance, outlaws will always exploit disparate legal systems to stash the proceeds of their crimes.”

One only has to look at what drug money has done to countries like Colombia or Panama to see the links between illicit funds, and the breakdown of entire segments of society from the effects of bribery, influence peddling, random violence and the distortion of the economy. Agents, brokers and insurers need to be more aware of the methods money launderers employ, and the possibilities they can exploit in the industry.

Topics USA Carriers Europe