1. RED LIGHTS: MONEY LAUNDERING RISK FACTORS
MONEY LAUNDERING RISK INDICATORS
Hong Kong Insurance

2. Money Laundering Risk
The insurance industry in Hong Kong and elsewhere is at risk for exploitation by persons engaged in money laundering and terrorism financing because of:
Its international character and reach
The savings and investment features of certain insurance products
The relative independence of some insurance industry personnel.

3. Money Laundering Goals
The goal of the money launderer is to obtain the use of funds that appear to come from a legitimate source, such as a payment from an insurance company or product.
Because the insurance and pension sectors are vulnerable to exploitation, those working in the industry should be aware of the indicators of increased risk – caution signals or red lights.

4. Risk Indicators
This list of indicators or “red lights” is not all-inclusive, and the existence of one or more of the indicators may not mean that money laundering or terrorism financing is occurring.
The red light is an indication that the insurance professional should examine the transaction more closely and be prepared to report it as required by law and company procedure.
Refer to the printed “Red Lights: List of Indicators of Money Laundering Risk” accompanying this presentation for additional information.

5. Risk Exposure
The insurance industry is exposed to risk of exploitation by money launderers throughout its interaction with the customer. This includes:
Account opening
Payment and settlement of premiums
Post-inception of policy
Claims

6. Account Opening
At the time the account is opened, the company is obligated by the Anti-Money Laundering and Counter-Terrorist Financing Ordinance Cap. 615, (AMLO) and Section 4A of the Insurance Ordinance, Cap. 41, to conduct Customer Due Diligence to:
identify the customer or beneficial owner and
verify the customer’s identification.

7. Business Relationship
The insurance company must understand the “purpose and intended nature of the business relationship” with the customer. This may require information about:
The customer’s business/occupation/employment
The nature of the activity taking place in the relationship (types of transactions, amounts)
Expected source and origin of funds, source of wealth or income.

8. Account Opening – Red Lights
Customer provides false or fraudulent identification documents to open account
Customer seeks or accepts very unfavorable contract/policy/terms
Customer seeks a policy/transaction that has no business purpose or makes no economic sense

9. Account Opening – Red Lights
Customer requests that details about the account opening or other transaction not be reported to the government (No STR filing)
Customer seeks to corrupt or bribe a company employee regarding customer due diligence
Customer uses corporate vehicles or structures whose only purpose is to avoid transparency.

10. Account Opening – Caution
Customer insists on rapid service without paperwork requirements
Customer is slow in responding to inquiries concerning verification
Customer provides information that is difficult or expensive to verify
Customer avoids contact with company representatives

11. Limiting Risk – Account Opening
The insurance company must identify and verify the identification of prospective customers.  True  False The insurance company’s exposure to risk for exploitation for money laundering ends with the opening of the customer’s account.  True  False

12. Payment and Settlement of Premiums
The payment and settlement of premiums is a normal part of the insurance business. Some customers may make these payments in cash, although the use of checks, electronic transfers, and other methods are more common. While the use of cash is not always a red light or indicator of money laundering, other factors may make these transactions suspicious.

13. Payment and Settlement of Premiums
Other types of payment may also be considered indicators of money laundering based upon factors such as:
Geography – the origin of the funds
Business practice – the nature, size, scope, or structure of the customer’s business
Involvement of other persons or businesses in the transaction

14. Payment and Settlement of Premiums– Red Lights
Funds are received from a country designated as a high risk for money laundering
Premium is paid from a foreign account in a different jurisdiction or domicile than the customer’s residence.
Customer uses multiple sources of funds or types of instruments to settle a transaction.

15. Payment and Settlement of Premiums– Red Lights
Customer overpays a premium and is unwilling to use the overpayment for next installment
Multiple payments for premiums from different accounts which do not exceed a reportable threshold (structuring)
Money passes through a number of different persons or entities, preventing transparency and disguising the source of funds, (layering).

16. Payment and Settlement of Premiums – Caution
Customer (a natural person) makes premium payment with funds from a legal person or corporation.
Customer makes payments outside a normal premium policy or regular schedule
Customer makes several overpayments, then requests reimbursement to a third party.

17. Payment and Settlement of Premiums
Payments from countries that are designated high-risk for drug trafficking or terrorism may increase risk of money laundering.  True  False Use of large amounts of cash to pay premiums or settle accounts is always a red light or indicator of money laundering.  True  False

18. Post-Inception of Policy
The money launderer may attempt to take advantage of the insurance product after it is sold or issued. These transactions are often suspicious because they make little or no business sense or defy economic logic.
The insurance company must report these transactions because it may profit from the customer’s decision and can be accused of colluding in the money laundering scheme.

19. Post-Inception of Policy Red Lights
Customer seeks an early termination or early surrender of investment type policies, especially with penalty or when this makes no economic sense
Customer cancels policy and requests a refund to a third party
Customer overpays a premium, and request payment of the excess to a third party in a foreign currency.

20. Post-Inception of Policy Red Lights
Customer terminates the policy early and requests the refund cheque be issued to a third party
Policyholder changes beneficiaries without the insurer’s knowledge or consent
Customer makes large or simultaneous requests of advance redemption of policies, or uses them to obtain loans – especially accepting disadvantageous conditions.

21. Post-Inception of Policy Red Lights
Policyholder cancels a property casualty policy but retains an interest in the underlying insured risks or assets
Customer uses the insurer or insurance intermediary to move funds
Customer wants to borrow the maximum cash value of a single premium policy soon after payment for the policy.

22. Post-Inception of Policy
Insurers should be alert for transactions and customer decisions that do not make business sense or defy economic logic, as these may be indicators of money laundering.  True  False Many investment type life policies offer considerable flexibility in making addition premiums and early redemption. When such products are used by a policyholder in a manner as one would use a bank account, this can be an indicator of money laundering.

23. Claims
Insurance companies are vulnerable to fraud in the claims process, but the same process can also be used to launder criminal proceeds.
The goal or objective of the criminal is to secure a payment that comes from a completely legitimate source – an insurance claim, which makes the illegal funds appear clean.

24. Claims
In analyzing claims for suspicious activity, consider the possibility of money laundering in addition to fraud. In many cases, the money launderer will not seek the maximum amount possible from a claim, and may even seek or accept a smaller amount or unfavorable settlement in order to get “clean” money.

25. Claims – Red Lights
Customer readily accepts prompt payment of smaller than expected amount when the insurance company questions amount of the claim
Customer unconditionally accepts offer of lower amount of reimbursement
Customer requests “cash only” reimbursement.

26. Claims – Red Lights
The customer is the subject of a law enforcement or other investigation
There is a change of ownership or the assignment of a policy just prior to a loss occurring.
Customer withdraws a claim and gives up his rights when the insurance company requires additional documentation

27. Claims – Caution
Claims requested to be paid to persons other than the insured or legitimate third parties
Customer requests payment to person not naturally associated with the claim
Customer cedes right in favor of a third party (e.g. located in tax haven)
It is important to ensure that all payments are made to legitimate third parties.

28. Claims
Money launderers may use the claims process to obtain “clean money” from a legitimate source.  True  False Money launderers will seek to maximize the amount claimed in order to gain the most benefit from the scheme.  True  False

29. Special Situations – Red Lights
Bogus insurers may be used to place illegal funds with legitimate reinsurers
Involvement of recently established insurance or reinsurance company with a non-transparent background
Conclusion of reinsurance contract with reinsurer in offshore center with low supervision or high risk for money laundering or terrorist financing.

30. Conclusion
Criminals may seek to use insurance companies and insurance products as vehicles for money laundering. This puts the financial system, the companies, and their personnel at risk, and governments worldwide, including Hong Kong require that suspicious activity be reported to the appropriate authorities.

31. Conclusion
In Hong Kong, suspicious transactions are reported to the Joint Financial Intelligence Unit (JFIU) on the Suspicious Transaction Report made under Section 25A of the Drug Trafficking (Recovery of Proceeds) Ordinance or Organized and Serious Crimes Ordinance/Section 12 of the United Nations (Anti-Terrorist Measures) Ordinance. Such reports are confidential and are submitted by all financial institutions, including insurance and reinsurance companies in Hong Kong.