Insurance (1) Mr X Broker Policyholder Insurer Transaction 3: $100,000 cash Transaction 2: $100,000 cash Transaction 1: $50,000 cash Insurer Policy premium transferred from broker to insurer Broker Mr X Policyholder Life insurance policy Purchase value £250,000 Use of insurance policies for money laundering – example The example is derived from a real case. The customer purchased a life insurance policy from a broker, for £250,000. The £250,000 purchase price was paid in three cash lump transactions of £50,000, £100,000 and £100,000. The broker accepted these cash payments and banked them, apparently without question. The broker then paid the policy premium to an insurance company, who then activated the policy on behalf of the customer. The insurance company had no reason to know that the policy had been paid for by the policyholder via three suspiciously large cash transactions. They trusted the broker to have carried out adequate due diligence. The intermediary relationship shown in this example and the heavy reliance of insurance providers on the integrity and competence of the brokers who broker their business is typical of many insurance transactions and is one of the insurance industry’s greatest vulnerabilities. Copyright Lessons Learned Ltd 2016 Copyright Lessons Learned Ltd 2007

Copyright Lessons Learned Ltd 2016 Insurance (2) Key facts Vulnerable sector: historical issues with lack of training and inconsistent regulation Inherent risks: prevalence of intermediaries and agents; named beneficiary often not the named policyholder Basic techniques: cash purchase of policies; overpayment of premiums; early redemption; false claims on policies Money launderers’ perspective Use of third party intermediaries/brokers to effect transactions Funds deposited under cover of insurance companies Products can be used both to launder and earn income Relative ease with which products can be transferred between beneficiaries Key facts Historically the insurance industry has been inconsistently regulated and training has generally not been provided. As a result, awareness of anti-money laundering is not always at such a high level as in other financial service sectors. The industry is also one which is particularly vulnerable because of the nature of the products it sells and the way in which those products are sold. The products themselves are insurance policies – life, general, etc. The beneficiaries of these policies are quite normally someone different from the named policyholder. The benefit of policies can also, quite normally, be transferred from one beneficiary to another (e.g., when the primary beneficiary of a life policy dies the benefit passes to the next named beneficiary, and so on). The fact that the beneficiaries to a policy can be so readily changed makes it easier for launderers to transfer the benefit of policies, and this makes them attractive as instruments for money laundering. The method of sale is also helpful from the money laundering point of view, because the heavy reliance on intermediaries and agents means that they may never need to present personally to the company that insures them. All they need to is find themselves an unscrupulous or unsuspecting and careless agent who is prepared to transact business without asking too many questions. Money launderers tend to exploit insurance products using a number of basic techniques: Placing criminal cash in the financial system by using the cash to purchase the product Overpaying premiums and then claiming back the overpayment from the insurer Taking out a fixed term policies which are then cancelled or redeemed (the launderer pays a penalty, but the money returned to him is now clean) Paying a heavy insurance premium and then redeeming the money indirectly, via a number of false insurance claims paid by the insurer. Money launderers’ perspective From the money launderers’ point of view the common use of intermediaries and brokers in the industry greatly assists them in concealing the identities of the named policyholders and/or beneficiaries to policies. Whilst the insurance companies themselves might insist on rigorous due diligence they have to trust the brokers to do what is required, and if the broker does not do this the company is at risk of being used for money laundering. Furthermore, the insurance companies that provide the policies will obviously pay the proceeds of those policies into their own bank accounts. The account holding bank is very unlikely to question the origin of the funds paid in, since the funds are paid in under the insurer’s name and the bank will assume that the funds are from a legitimate source. Another benefit from the launderers’ point of view is that insurance products can generate money as well as laundering it. False claims on an insurance policy give additional revenues and income earning policies accrue value, so the launderers earn legitimate income from their insurance investments at the same time as they are using these products to launder the proceeds of crime. Finally, the relative ease with which products can be transferred between beneficiaries is obviously advantageous in that it can be used to disguise the legal and beneficiary ownership of any funds that they policy may pay out. Copyright Lessons Learned Ltd 2016 Copyright Lessons Learned Ltd 2007

Copyright Lessons Learned Ltd 2016 Insurance (3) Possible ‘red flags’ Pre-signed policy application forms Purchase of products which do not make economic sense or do not fit the policyholder’s apparent business needs Payment for products via unrelated third parties Payment for products using large amounts of cash Unusual overpayments of premiums followed by request to return overpaid amounts Early redemption of policies which cannot be satisfactorily explained Change of beneficiaries which cannot be satisfactorily explained Unusual and frequent claims on policies, especially when payout is made to an unconnected third party Transaction features and behaviours that could give cause for concern in relation to insurance products include the following@ Use of pre-signed application forms, presented via an intermediary to avoid the ultimate policyholder or beneficiary from having to meet the broker in person Purchases and product choices which do not make economic sense and do not fit with what is known about the named policyholder (e.g., very heavy insurance beyond what is needed for the policyholder to be covered) Payments that are made via unrelated third parties or unusually large payments in cash Overpayment of premiums followed by demands for the overpaid amounts Cancellation or early redemption of policies which do not seem to make economic or practical sense Changes of beneficiaries which cannot be explained or which do not seem to make sense, given what is known about the policyholder Unusual and frequent claims against policies, particularly where instructions are given to pay the money to an unconnected third party. Copyright Lessons Learned Ltd 2016 Copyright Lessons Learned Ltd 2007