Anti Money Laundering and International Sanctions guidance for Coverholders
Wed 28 Apr 2010
Share
Coverholders Anti Money Laundering and International Sanctions guidance
Managing Agents have a responsibility to ensure that Coverholders have proper and adequate systems and controls are in place to ensure AML and international sanctions compliance and to ensure compliance by having specific questions relating to AML/international sanctions as part of the coverholder audit process.
Anti Money Laundering
Definition of Money Laundering
- “The process used by criminals to disguise the origin and ownership of the proceeds of their criminal activities in order to avoid prosecution, conviction and confiscation”.
General Anti-Money Laundering Obligations
In the UK, legislation covers most financial sectors which include:
- Criminal offences around engaging in money laundering and/or assisting others to launder the proceeds of crime;
- disclosure/reporting requirements in respect of suspicious activities or transactions;
- tipping off offences: ensuring that law enforcement is not hampered in its investigations by the subject of the suspicion becoming aware of the allegations.
Similar legislation with related requirements and offences will be in force within the jurisdiction that Coverholders operate in but the extent to which AML legislation applies to intermediaries varies.
What might be suspicious?
Activities that might trigger suspicion are:
- Difficulty in obtaining information about, or doubts over the bone fide of, the policyholder or other parties involved;
- Transactions set up and then quickly cancelled for no identifiable reason;
- Transactions involving placements from, or the involvement of intermediaries, in different jurisdictions for no discernible purpose;
- Return premiums, overpayments or claim payments where a third party appears to benefit;
- Transactions where insurance does not appear to be the primary object or make no economic sense;
- Over inflated values (e.g. on jewellery/fine art).
This is not an exhaustive list and the Managing Agent which has delegated authority to the coverholder may have other relevant examples to consider.
Expected minimum standards
Coverholders should adopt written procedures to cover the following:
- Recognition and reporting of suspicious transactions;
- Staff training and awareness; and
- Record keeping.
In order to devise a suitable policy, coverholders should identify and record their own business risks by assessing:
- The risks posed by the products they offer;
- The channels through which business is conducted; and
- The countries in which business is done – when relevant i.e. where the cover is multi jurisdictional.
Coverholders should also review their internal money laundering procedures (as applicable) but particularly in relation to:
- The extent of operational changes and their money laundering impact, if any;
- Ensuring recommendations from any previous reviews are implemented;
- Reviewing the level of understanding of, and compliance with, training issued to staff.
Reporting
The following procedures should be regarded as a minimum standard for coverholders:
- The appointment of a designated person within the company to receive, consider and report to the appropriate authorities any suspicions identified by company employees;
- Report any suspicions to the designated person in your company or the Managing Agents MLRO in London for consideration (subject to compliance with your jurisdiction legislation);
- Document the fact that this has been done;
- Ensure procedures in place for suspicions to be reported to a designated person to consider whether reports need to be made to local authorities and instructions issued to staff;
- Document any decisions made not to report suspicions.
International Sanctions
Background
Coverholders should be aware that for various reasons including the ongoing and increasing threat of terrorism, the scope of international sanctions is widening, with the consequent effect that the number of sanctions notices issued by governmental agencies in different jurisdictions in the last few years has increased dramatically.
Sanctions may, for example, be used to bring about a change in another country’s or individual’s activities or policies particularly if breaches of international law or human rights have occurred, or democracy is under threat. In the UK responsibility for the administration of sanctions falls to HM Treasury (“HMT”) whilst other countries will have similar arrangements e.g. The Office of Foreign Assets Control (''OFAC'') in the US.
There are different types of sanctions, which can be country specific and therefore include bans on financial transactions and trade or they can be targeted at specific entities and or individuals, otherwise known as SMART sanctions. Legal advice should be obtained on any transaction where there is a concern as to whether the transaction would breach sanctions.
All financial sanctions regimes regardless of jurisdiction have a criminal offence for making funds/financial services available to sanctions targets.
Who imposes sanctions?
There are a number of different bodies who impose sanctions, such as the United Nations (''UN'') Security Council who decide and administers the sanctions regimes, which are binding on member states.
Countries that enforce UN sanctions can also impose their own unilateral sanctions which will be enforced by a specific body. For example OFAC, the US Department of Treasury administers and enforces financial and trade sanctions in the US. The US Treasury maintains jurisdiction over all US dollar transactions, and its aims are to ensure no sanctioned countries, entities or individuals engage improperly in US dollar denominated transactions. OFAC is extremely proactive and diligent in enforcing US policy and coverholders do need to consider very carefully the impact of any US sanctions on their business activities.
The countries and regimes, currently subject to US sanctions are listed on US Treasury’s website under OFAC’s section.
What are the types of sanctions?
Financial
Financial sanctions include freezing the funds and/or assets of governments, entities or individuals or may mean that all financial transactions are banned in a particular region. Likewise, export credits or investment transactions may be restricted or not permitted in a certain country.
Trade
Sanctions against trading with a particular country may have a general application such as export/import bans. Alternatively, dealing in particular commodities from certain countries such as oil, timber, diamonds or arms may be embargoed.
SMART Sanctions
SMART sanctions are restrictions against individuals or entities rather than against countries and include financial and/or travel ban measures.
Terrorism
There are specific sanctions in place aimed at preventing terrorism. A UN resolution in 2001 became binding on all states to prevent acts of terrorism worldwide. The resolution denounces terrorism and requires member states to deny financial support for those involved in or supporting terrorism. Additionally, the resolution enforces the sharing of information about terrorists between governments.
Al-Qa’ida and Taliban sanction regime
There is a separate Al-Qa’ida and Taliban sanction regime, where individuals such as Osama Bin Laden, associated individuals and entities are subject to separate specific measures imposed by the UN resolutions.
Diplomatic Sanctions
Diplomatic sanctions may be applied by one country against another (i.e. unilateral sanctions) and could include the expulsion of diplomats from a country, severing of diplomatic ties, suspension of official visits and less frequently, the boycotting of sports and/or cultural events.
US narcotics regime
The US has imposed sanctions against targets thought to be involved in drug trafficking due to evidence that groups such as Al-Q’aida are using narcotic trafficking to fund terrorism. These sanctions prohibit US persons from dealing with them and list Specially Designated Nationals, i.e. individuals suspected of involvement in drug trafficking.
How do sanctions impact on insurance?
In general, sanctions (irrespective of jurisdiction) will impose inter alia the following duties/requirements:-
Disclosure of knowledge or suspicion of a transaction
There are a number of statutory instruments (SI) which implement the relevant sanction. The specifics of the applicable offences are covered in each SI but in general terms “failure to disclose knowledge or suspicion” of a transaction involving a sanctioned person or entity constitutes an offence.
Coverholders must therefore be aware of their reporting obligations and ensure compliance.
Making funds available
Making funds available to a person or entity that is the target of international sanctions will also be an offence. The specifics of the offence are set out under your country’s relevant statutory instruments, but generally it is an offence to make funds, economic resources and financial services available, directly and indirectly, to any person listed under the sanctions regimes.
Commercial entities have a duty to ensure that they are not making funds available to those persons sanctioned. Claims payments and return premiums could be a potential source of foreign currency for sanctioned persons, and so controls and checks should be in place to ensure that monies are not paid to targets on sanctions lists, bearing in mind that policyholders can become targets after a policy has incepted.
Coverholders must make themselves aware of their obligations and ensure compliance.
What are the penalties?
Penalties for breaching sanctions generally involve a fine or in the most serious cases, imprisonment.
What are the coverholder responsibilities to ensure compliance with sanctions?
Coverholders are expected to be aware of their obligations in respect of international sanctions and have adequate systems and controls in place to ensure compliance. Coverholders should expect audits undertaken by Managing Agents to include some focus on international sanctions compliance.
Conclusion
Managing Agents have responsibility for ensuring correct compliance by coverholders in respect of AML legislation and International Sanctions. However, this does not devolve Coverholders of their own individual responsibilities under relevant legislation (both international and local).
Managing Agents and coverholders should therefore work together for their mutual benefit to ensure that adequate systems and controls are in place to fulfil the requisite compliance standards in respect of the class of business undertaken and the coverholders exposure to the applicable legislation.
