It is a requirement that Lloyd’s managing agents have appropriate systems and controls in place to mitigate the risk of financial crime. Particular areas of focus are anti-money laundering, international sanctions and bribery act compliance.
Managing agents also have to demonstrate that appropriate systems and controls in place for those parties acting on their behalf, such as their appointed coverholders.
Money laundering
Money laundering is defined as the process used by criminals to disguise the origin and ownership of the proceeds of their criminal activities so it appears that monies in their possession have come from a legitimate sources. This assists criminals to avoid prosecution, conviction and confiscation of their proceeds of crime.
Money laundering occurs in 3 stages:
Stage 1 – Criminal proceeds are physically disposed of (usually as cash).
Stage 2 – The money is distanced from its source by creating layers of transactions.
Stage 3 – The money is reintroduced as ‘clean’ into the financial system.
How does anti-money laundering (AML) compliance impact on coverholders?
Coverholders are expected to have written procedures (agreed with the managing agent) and to have implemented the following:
- Appointment of designated individual within the company as the named AML Officer.
- Recognition and reporting of suspicious transactions (including designated individual responsible for AML).
- Staff training and awareness.
- Record keeping.
International sanctions
The scope of International sanctions and the number of sanctions targets is increasing. Sanctions are implemented for a number of reasons, for example 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 seen to be under threat.
In the UK responsibility for the administration of sanctions falls to HM Treasury whilst other countries will have similar arrangements for example, the Office of Foreign Assets Control in the US.
There are different types of sanctions implemented, which can either be country-specific and include bans on financial transactions and certain types of trade, or they can be targeted at specific entities and or individuals, otherwise known as SMART sanctions.
Regardless of jurisdiction, a criminal offence will be committed in the event that sanctions are breached, so if a coverholder makes funds or financial services available to a sanctioned target.
How do sanctions impact coverholders?
Coverholders are required to be aware of their obligations in respect of International Sanctions, have adequate systems and controls in place to ensure compliance with their local and UK legislation, and can expect audits undertaken by managing agents to include some focus on sanctions compliance.
Coverholders are required to:
- Have controls in place to ensure any sanctions targets within their client base are identified.
- Comply with sanctions disclosure requirements.
- Ensure that no funds or economic resources are made available to a sanctioned person or entity.
UK Bribery Act 2011
The UK Bribery Act came into force 1 July 2011 and provides for four offences: bribing a person, being bribed, bribery of a foreign public official and failure of a corporate entity to prevent bribery being committed on its behalf. This last offence includes failure of commercial organisations to prevent bribery undertaken by an ‘associated person’ and the only defence which exists is for a commercial organisation to demonstrate that it has “adequate procedures” in place to prevent bribery or corruption.
What impact does the Bribery Act have on coverholders?
Under the Act, a coverholder is seen as an associated person of the managing agent. Therefore, managing agents are required to conduct a risk-based assessment of their coverholders, who must also comply with the Bribery Act and have their own anti-bribery adequate procedures in place.
Coverholders also need to be aware of and comply with any local legislation in respect of bribery and corruption.
Where can I get further information on financial crime?
Further information on Anti-Money Laundering, International Sanctions and the Bribery Act can be found on the Lloyd’s system known as Crystal (1) (see relevant links and guidance for link).
Lloyd’s Market Bulletin Y4510, provides further guidance on financial crime implications for coverholders and the binding authority contracts entered into with Lloyd’s managing agents. This includes a model “financial crime endorsement” that managing agents are encouraged to include within the binding authority agreement (see relevant links and guidance for link).
A suite of e-learning modules are being made available to coverholders covering:
- Anti-Money Laundering
- International Sanctions
- UK Bribery Act
These will be available on www.lloyds.com later in 2011.
What is a conflict of interest?
The meaning of a "conflict of interest" may vary depending on circumstances or the law that applies to that Coverholder. Generally it means any circumstance which may give rise (or could be perceived to give rise) to a situation which may pose a risk of damage to the interests of managing agents or a policyholder or which may compromise the objectivity of the coverholder’s performance of its obligations.
How does conflict of interest apply to coverholders?
Lloyd’s expectations for managing conflicts of interest by a coverholder are as set out in the coverholder’s undertaking to Lloyd’s by which coverholders undertake that they “will manage any conflicts of interest, between ourselves, our customers and Lloyd’s managing agents in a fair and open way.”
What impact does conflict of interest have on coverholders?
Lloyd’s expects all coverholders to (a) establish a conflicts policy (b) operate suitable conflicts management arrangements and ensure those arrangements apply to all key staff (c) ensure appropriate disclosures are made. Managing agents are expected to monitor those arrangements and conflict procedures as part of the coverholder audit.
Examples of managing conflicts of interest could include considering:
- Any issues that may arise if a coverholder acts as a retail broker for the policyholder and an agent for the managing agent
- Segregating underwriting and claims functions
- As an agent of the managing agents, disclosing any financial interests in or earnings received from loss adjusters or TPAs.
