Money launderers use many types of businesses to ‘clean’ their dirty money, and insurance companies are particularly vulnerable because their business typically is conducted by agents unaffiliated with the company that writes the policies. Agents and brokers do not always understand when due diligence is required to unearth suspicious transactions. In worst-case scenarios, they willingly participate in criminal schemes.

Three Stages of Money Laundering

Here’s how money laundering works. Typically, money laundering or “cleaning” money occurs in three stages. Each step in the process is essential to ensuring the legitimacy of these kinds of transactions is never in question. The three stages are as follows:

• The Placement Stage —  illegitimate money is paid into legitimate financial accounts
• The Layering Stage — money is disguised by being moved in numerous transactions
• The Integration Stage — now-clean money is put back into circulation to fund other activities

How Do Criminals Launder Money Using Insurance Companies?

Criminals use insurance companies for money laundering primarily by buying insurance and then submitting claims to retrieve their funds. Sometimes, they take advantage of insurance products structured as investments, such as variable annuities and certain life insurance policies. By overfunding and moving money in and out of policies, the launderers can establish a stream of ‘innocent’ wire transfers or checks — all for the relatively low cost of early-withdrawal penalties.

Money Laundering Prevention

Know your customer

To protect against these and other sophisticated forms of money laundering, insurers must, first and foremost, implement and enforce know-your-customer procedures. This means not only obtaining identification for all new accounts and monitoring those accounts for suspicious activity, but also revisiting the transaction records of existing customers periodically.

Warning signs of money laundering include customers who frequently change beneficiaries, use policies as bearer assets or as collateral for wider schemes, or opt to cash in investment-type policies early — even when there is no financial advantage to doing so. Finally, insurers should check whether customers are included on any watch lists maintained by U.S. and other law enforcement authorities.

Prevention is more important than ever

Increasingly, money is being laundered to fund terrorist activities. That is why insurance companies need to adhere to U.S. Patriot Act rules and investigate customers and the source of their money. Having this knowledge is the best defense against infiltration by criminals. KPM provides audit & assurance services that can help protect you from these kinds of vulnerabilities. Contact us today to see how we can help you.