Follow the Money: The Insurance Industry and the PATRIOT Act

By Keefer, Wendy J. | Risk Management, June 2007 | Go to article overview

Follow the Money: The Insurance Industry and the PATRIOT Act


Keefer, Wendy J., Risk Management


With the advent of new insurance products with investment potential, the U.S. government expanded application of the Bank Secrecy Act's anti-money laundering requirements to insurance companies. Though the initial insurance industry concern following September 11 was the financial risk posed by policies insuring the people and property who were direct victims of those attacks and ways to minimize future risks of that magnitude, enactment of the USA PATRIOT Act made insurance companies---as well as their agents and brokers--a vital part of the fight against terrorism.

Originally enacted in 1970 as the Currency and Foreign Transaction Reporting Act, the Bank Secrecy Act (BSA) has applied to banks for over 30 years. Its "know your customer" and recordkeeping and reporting requirements are well known to these traditional financial institutions. Recognizing that other types of financial institutions, including insurance companies, could be used to launder money and finance terrorism, Congress passed the USA PATRIOT Act in October 2001. This act included an expanded definition of financial institutions to which the BSA requirements would apply.

Covered Products

Though recently promulgated Treasury Department regulations currently limit application of the BSA only to those insurers offering types of insurance that have a cash value, such as life insurance and annuities ("covered products"), all insurers should be aware of the potential use of insurance products to hide an illegal source or purpose for funds. More importantly, those who do offer these "covered products" must ensure compliance with the BSA.

As a newcomer to the BSA and an industry to which the BSA's applicability could be further expanded by new regulations, now is the time for all insurers to understand why and how they, though not alone, now stand on the front lines of U.S. counterterrorism efforts.

Effective just last year, all insurance companies offering "covered products" must have a formal, written antimoney laundering policy in place that has been approved by the company's board of directors or other governing body. In addition to putting a policy in place, employees who have any responsibility for implementing the policy must receive training. Often the only entities with actual face-to-face contact with the customer, insurance companies must not only train their employees but also ensure that brokers and agents are adequately trained. Though this requirement does not necessitate an insurance company's actual training of these individuals, the insurance company is tasked with confirming that brokers and agents are sufficiently trained to verify customer identification, recognize suspicious activity and report certain currency, transactions.

Anti-money laundering efforts, and the policies implementing those efforts, include several key' aspects. Insurance companies need to take sufficient steps to confirm a customer's identity. This requirement is often referred to as the "know your customer" requirement. For individual customers, this may require gathering identifying information such as name, address, date of birth, social security' number or, if the customer is not a U.S. citizen, passport or alien identification card number.

Once identification is confirmed, the next step is to understand your customer. This includes understanding the customers insurance needs, financial means or sources of funds, and anticipated transaction types or frequency'. Only with this kind of knowledge will suspicious activity be recognizable. The purpose of gathering this information is to enable the insurance company to comply with the reporting and recordkeeping requirements of the BSA, such as the reporting of suspicious activity.

Monitoring Suspicious Activity

The purpose of knowing and understanding a customer is to fulfill perhaps the most important task in preventing money laundering and terrorist financing activity--reporting suspicious activity. …

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