NOVEMBER 2005
Anti-Money Laundering
Department of Treasury Requires Insurance Companies
to Establish Anti-Money Laundering Programs and to
Report Suspicious Transactions
On Thursday, November 3, the Department of the
Treasury’s (“Treasury”) Financial Crimes
Enforcement Network (“FinCEN”) published in the
Federal Register final rules requiring insurance companies to implement an anti-money laundering program (“AML Program”) and to report suspicious
transactions (together, the “Final Rules”), originally
proposed in 2002 (the “Proposed Rules”). The compliance date for the Final Rules is May 2, 2006.
These Final Rules are codified at 31 CFR §103.137
and §103.16, respectively. A copy of the implementing releases for the Final Rules may be found at
http://www.access.gpo.gov/su_docs/fedreg/a051103c.html.
Separately, FinCEN proposed and is seeking comment on a new Form SAR-IC, the suspicious transaction reporting form for insurance companies. A copy
of the proposal may be found at www.fincen.gov.
WHO IS COVERED UNDER THE FINAL RULES
Insurance companies issuing or underwriting “covered products” are subject to the Final Rules. In general, the term “covered product” means: (i) a permanent life insurance policy, other than a group life
insurance policy; (ii) any annuity contract, other than
a group annuity contract; and (iii) any other insurance
product with features of cash value or investment.1
The AML Program requirement applies only to “covered products” offered by an insurance company; an
insurance company offering a variety of insurance
products in addition to “covered products” need not
adopt a company-wide AML Program applicable to
these other insurance products.
1
Agents and Brokers
The Final Rules apply only to the insurance company
and not to its agents or brokers. Nevertheless,
because insurance agents and brokers are in direct
contact with customers, the Final Rules require each
insurance company’s AML Program to “integrat[e]
the company’s insurance agents and insurance brokers into its [AML Program].” In addition, the Final
Rules require independent testing that “include[s]
testing to determine compliance of the company’s
insurance agents and insurance brokers with their
obligations under the [AML Program].”
Implicit in the Final Rules, as described in the
FinCEN adopting release, is that an insurance company obtain all relevant customer-related information
either from its agents and brokers or from other relevant sources. More importantly, the Final Rules
require procedures for obtaining customer-related
information from an insurance company’s agents and
brokers in connection with suspicious transaction
reporting, discussed below.
Moreover, the adopting release states that “some elements of the compliance program will be best performed by these agents, in which case it is permissible for an insurance company to make appropriate
arrangements with an agent to perform those aspects
of its [AML Program].” FinCen further states in the
adopting release that any insurance company that
does so, however, remains responsible for the effectiveness of the program, as well as for ensuring that
the appropriate examiners have access to information
Under the Proposed Rules, “the issuing, underwriting, or reinsuring of a life insurance policy, an annuity contract, or any product
with investment or cash value features would have caused an insurance company to fall within the scope of the rule.” FinCEN indicated it did not include in the Final Rules reinsurance or retrocession contracts or treaties, group life insurance, group annuities, or
term life insurance policies, because these pose little or no risk of being used for money laundering.
Kirkpatrick & Lockhart Nicholson Graham
LLP
and records relating to the AML Program and are
able to inspect the agent or the third party for purposes of the program.
AML Program Requirements
In many but not all respects, the insurance company
AML Program requirements are consistent with
existing AML Program requirements for other financial institutions, under the Bank Secrecy Act of 1970,
as amended (the “BSA”). Insurance company AML
Programs must be reasonably designed to prevent the
insurance company from being used to facilitate
money laundering or the financing of terrorist activities. The AML Program must be in writing and must be
approved by senior management of the insurance company.
The AML Program must incorporate policies, procedures, and internal controls based on the insurance
company’s assessment of the money laundering and
terrorist financing risks associated with its “covered
products.” When assessing risks associated with particular distribution channels for its “covered products,” an insurance company should consider, among
other things, whether its agents or brokers are
required to have their own AML Program.2
The AML Program’s policies, procedures, and internal controls must be reasonably designed to ensure
compliance with applicable BSA regulations. In the
adopting release, FinCEN represented that the only
BSA regulatory requirement currently applicable to
insurance companies is the obligation to report on
IRS/FinCEN Form 8300 the receipt of cash and certain non-cash instruments totaling more than $10,000
in one transaction or in two or more related transactions. If and when insurance companies become subject to additional BSA requirements (e.g., the suspicious transaction reporting requirement), their AML
Programs will need to be updated accordingly.
An insurance company must designate a compliance
officer (which could also be a committee) to be
responsible for administering the AML Program. The
role of the compliance officer is to ensure that the
AML Program is effectively implemented and updated as necessary, and that “appropriate persons” are
trained concerning their responsibilities under the
AML Program. Such training can be conducted
through external or in-house seminars, and could
include computer-based training. As discussed above,
an insurance company also must provide for the
training of its insurance agents and brokers concerning their responsibilities under the company’s AML
Program. Finally, an insurance company must provide for independent testing of its AML Program on
a periodic basis to ensure it complies with the
requirements of the Final Rules and that the AML
Program functions as designed. The scope and frequency of the testing must be commensurate with the risks
posed by the insurance company’s “covered products.”
Insurance Companies Registered with
the Securities and Exchange Commission as
Broker-Dealers
An insurance company that is registered or required
to be registered with the Securities and Exchange
Commission as a broker-dealer shall be deemed to
have satisfied the requirements of the Final Rules to
the extent that the company has already established
an AML Program including the activities covered by
the Final Rules.
SUSPICIOUS TRANSACTION REPORTING
Under the Final Rules, an insurance company offering “covered products” is required to report3 certain
suspicious transactions, where “either the premium or
maximum potential payout” meets a threshold
amount of $5,000.4 A transaction (or pattern of transactions) “conducted or attempted by, at, or through
an insurance company” and meeting this threshold
amount would need to be reported if the company
“knows, suspects, or has reason to suspect” the transaction either: (i) involves funds derived from illegal
activity or is intended or conducted to hide or disguise funds or assets derived from illegal activity; (ii)
is designed, whether through structuring or other
means, to evade the requirements of the BSA; (iii)
has no business or apparent lawful purpose, and the
insurance company knows of no reasonable explanation for the transaction after examining the available
facts; or (iv) involves the use of the insurance company to facilitate criminal activity.
Agents and Brokers
Insurance companies are also responsible for reporting
suspicious transactions conducted through their agents
and brokers. The insurance company must have proce-
2
For example, to the extent an agent or broker is also a registered representative of a broker-dealer, the broker-dealer is required under
pre-existing rules to have its own AML Program. See 31 CFR 103.120. See also NASD Rule 3011.
3
The form of report to be used is the proposed Form SAR-IC, discussed below.
4
The obligation to identify or report suspicious transactions under the Final Rules applies only to an insurance company and not its
agents or brokers, although they may separately be obligated under the broker-dealer rules.
2 NOVEMBER 2005
KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP
dures in place reasonably designed to obtain customerrelated information from its agents and brokers necessary to detect suspicious transactions, and is responsible for reporting suspicious transactions based on such
information.5 Where an insurance agent or broker has
its own, separate obligation to report suspicious transactions under another BSA regulation, the filing of a
joint SAR-IC is permissible.
Red Flags
Determinations as to whether a report should be filed
must be based on all the facts and circumstances
relating to the transaction and the customer. Different
fact patterns will require different judgments.
According to the adopting release, “red flags” in this
context include, but are not limited to, the following:
■
the purchase of an insurance product that appears
to be inconsistent with a customer’s needs;
■
any unusual method of payment, particularly by
cash or cash equivalents (when such method is,
in fact, unusual);
■
the purchase of an insurance product with monetary instruments in structured amounts;
■
the early termination of an insurance product,
especially at a cost to the customer, or where
cash was tendered and/or the refund check is
directed to an apparently unrelated third party;
■
the transfer of the benefit of an insurance product to an apparently unrelated third party;
■
little or no concern by a customer for the investment performance of an insurance product, but
much concern about the early termination features of the product;
■
■
the reluctance by a customer to provide identifying information when purchasing an insurance
product, or the provision of minimal or seemingly fictitious information;6 and
the borrowing of the maximum amount available
soon after purchasing the product.
The Final Rules have clarified that an insurance company is not required to report instances of suspected insurance fraud unless the company has reason to believe that
the false or fraudulent submission of information relates
to money laundering or terrorist financing.
SAR-IC Filing Procedures
Within 30 days after an insurance company becomes
aware of a reportable suspicious transaction, the company must report the transaction by completing a
SAR-IC and filing it with FinCEN. Supporting documentation relating to each SAR-IC is to be collected
and maintained separately by the insurance company
and made available to appropriate law enforcement
and supervisory agencies upon request. It should be
noted that insurance companies filing SAR-ICs are
prohibited from making any disclosures of SAR-ICs
or the information therein, except to appropriate law
enforcement and supervisory agencies.
Insurance companies must maintain copies of SARICs and the original or business record equivalent of
any supporting documentation for a period of five
years from the date of filing.
Compliance Dates and Examination
for Compliance
The compliance date for the Final Rules is May 2,
2006. FinCEN or its delegee will examine insurance
companies for compliance with these regulations.
Failure to comply with these regulations may violate
the BSA and the Final Rules. The SAR-IC requirements apply to transactions entered into after May 2,
2006. Pending final adoption of the SAR-IC, insurance companies may use the existing SAR-SF.
Diane E. Ambler
dambler@klng.com
202.778.9886
András P. Teleki
ateleki@klng.com
202.778.9477
Michell G. Fishman
mfishman@klng.com
202.778.9215
5
The adopting release indicated that the insurance company “may need to amend existing agreements with its agents and brokers to
insure that the company receives necessary customer information.”
6
The Final Rules do not include reference to Customer Identification Programs for insurance companies, which are required to be
included in AML Programs for broker-dealers and certain other financial institutions.
3 NOVEMBER 2005
KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP
If you have questions or would like more information about K&LNG’s Anti-Money Laundering Practice, please contact one of our lawyers listed below:
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617.261.3133 mcaccese@klng.com
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Stanley V. Ragalevsky 617.261.9203 sragalevsky@klng.com
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Raymond P. Pepe
412.355.8333 mrush@klng.com
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Jonathan D. Jaffe
David Mishel
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Richard A. Hardwick +44.20.7360.8125 rhardwich@klng.com
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William J. Bernfeld
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William P. Wade
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Richard D. Marshall
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415.249.1023 jjaffe@klng.com
415.249.1015 dmishel@klng.com
WASHINGTON, DC
Diane E. Ambler
202.778.9886
Melanie Brody
202.778.9203
Michell G. Fishman
202.778.9215
Kathy Kresch Ingber 202.778.9015
Henry L. Judy
202.778.9032
Rebecca H. Laird
202.778.9038
Charles R. Mills
202.778.9096
Michael J. Missal
202.778.9302
Laurence E. Platt
202.778.9034
Jeffrey B. Ritter
202.778.9396
Francine J. Rosenberger 202.778.9187
Robert H. Rosenblum 202.778.9464
Ira L. Tannenbaum
202.778.9350
András P. Teleki
202.778.9477
Richard L. Thornburgh 202.778.9080
Robert A. Wittie
202.778.9066
dambler@klng.com
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