A Case Study on Money Laundering in Insurance Business

A CASE STUDY ON
MONEY LAUNDERING IN INSURANCE BUSINESS*
B. Padmaja
IRDA, Hyderabad

Facts of the Case

During first week of August 2006, branch manager Mr. Sukdeep Singh of M/s Beassure
Insurance Co. Ltd, New Delhi branch was very excited to know that Mr. Sunder Lal, a
business man with an annual turnover of Rs. 2 crores, wanted to buy an Insurance Policy
Long Life- a Unit Linked Single premium product which had no cap on maximum premium
payable. The point of excitement was that he called to take a cover for 10 crores with a
single premium remittance of Rs. 10 lakhs. He, however, expressed his reservations regarding
remittance of premium wherein he desired to make the payment partly through bank account
which at the moment had a balance of Rs. 6 lakhs. He informed that balance of the premium
he would remit in cash. Mr. Singh was left in a fix. He was not in favour of losing his
valuable customer. At the same time, he had to comply with the IRDA guidelines on Anti-
Money Laundering (AML) wherein he was not supposed to allow remittance of premium in
cash beyond Rs. 50,000/-. He succumbed to the pressure to fulfill his annual targets and
used all his mind and influence to ensure that Mr. Lal was issued the policy. Mr. Singh, could
accomplish this task with all ease, as it was the time when software on AML was getting
implemented in phases across all the branches of the company and was facing certain teething
problems.

In the free-look period Mr. Lal came back to cancel his policy as he was not happy with the
terms and he wished to take another policy with better terms to suit his requirement. As a
valuable customer Mr. Lal was given back Rs. 9.5 lakhs based on the NAV as on that date
and after deducting administrative charges. With a promise to take another policy after a
weeks’ time, Mr. Lal vanished from the scene.

After 10 days, Mr. Singh happened to read the local newspaper wherein he came to know
that Mr. Lal was arrested on a non- bailable warrant and is a prime suspect in the smuggling
racket of cocaine that came to light a week ago. He was happy that he had no more dealings
with the accused. He also recollected his agent’s informal remarks that the so called

*
Award winning case study of NIA - C. D. Deshmukh Case Study Competition - 2006 and awarded at the
hands of Hon’ble President Dr. A. P. J. Abdul Kalam.

Bimaquest - Vol. VII Issue II, July 2007 q 67

A Case Study on Money Laundering in Insurance Business

businessman had changed his residential address twice during the previous year and was
likely to shift to his own house some time during the last quarter of the calendar year and as
such provided his friend’s address for communication.

Out of curiosity, he reviewed the documents attached along with the proposal form. He
found that Mr. Lal had submitted:

l A written confirmation from his banker as Identity proof

l Income tax return for the previous year ended 2005 as income proof

l Photostat copy of his SSC certificate as age proof

Mr. Lal had furnished all the minimum documents required for financial underwriting.

Mr. Singh sighed with relief and thanked God, because the policy was cancelled as the terms
and conditions of Long life did not please Mr. Lal. Now that there is no insurance contract,
there is hardly any possibility of him being caught for having dealings with Mr. Lal.

Case Problem

Mr. Singh has no more dealings with Mr. Lal as there is no insurance contract. However,
after reading the news item, and having realized that Mr. Lal was a prime suspect in a
smuggling case and to whom he ensured issuance of an insurance policy violating vital
requirements of the AML guidelines issued by IRDA, what is the course of action left to Mr.
Singh?

Mr. Singh is hardly in possession of any documents which could be used for an audit trail to
trace out that money laundering was involved. Has he got to report the transaction to Financial
Intelligence Unit FIU-IND?

What is the position of Mr. Singh who did not report the transaction as required by the
guidelines?

What is the course of action towards the insurance company which might have become a
part of the money laundering process though unknowingly?

What steps should the insurance company take in order to avoid occurrence of such violations
in the implementation of AML guidelines?

68 q Bimaquest - Vol. VII Issue II, July 2007

 A Case Study on Money Laundering in Insurance Business

Case Analysis

Background for analysis:

Money Laundering (ML) is a process of cleansing dirty money, derived out of organised
criminal activities, in order to make it look like having legal origin. It involves three stages,
namely placement, layering and integration in which criminal proceeds pass through a series
of intricate transactions among various financial institutions. Thus, illegal money is distanced
from its source and used at the destination. Recent past has witnessed the ML process being
used basically to fund terrorist activities. As such there is a growing concern across the
world to curb the progression. A step towards this direction in our country is the enactment
of The Prevention of Money Laundering Act, 2002 which criminalizes the ML process.

As per section 3 of the Prevention of Money Laundering Act, 2002 a person who is involved
directly or indirectly or indulges or assists or is a party in any process or activity connected
with the proceeds of crime and projecting it as untainted property would be guilty of offence
of money-laundering. He/she would be liable for a punishment, not less than 3 years and
which may extend upto 7 or 10 years, based on the crime involved and would also be liable to
a fine which may extend to Rs. 5 lakhs.

Vulnerability of insurance sector to ML processes is far less in comparison with that of other
financial institutions.However, there are certain highly prone areas in this sector. Eg., single
premium products. Buying single premium products with huge premium remittance and
cancellation of the same especially during the free-look period is one of the various ways in
which ML can happen in life insurance industry. In general insurance, it takes the form of
fraudulent claims or refunds following cancellations.

The triumvirate regulators of the financial institutions (FIs) namely RBI, SEBI and IRDA
have issued guidelines to comply with the PML Act to their respective regulated entities. FIs
should submit reports of certain specified transactions to Financial Intelligence Unit (FIU-
IND), which is the central, national agency responsible for receiving, processing, analyzing
and disseminating information relating to suspect financial transactions to enforcement
agencies.

Guidelines on Anti-Money Laundering Programme for Insurers were issued in March 2006.
It requires every insurance company to have in place their Anti-Money Laundering Policy
and emphasizes “Know Your Customer (KYC)” norms.

Accordingly, insurance companies are required to collect recent photograph of individual

clients; document identity of the customer; his/her residential address (both permanent and

Bimaquest - Vol. VII Issue II, July 2007 q 69

A Case Study on Money Laundering in Insurance Business

temporary); and sources of funds based on the risk profile of the customer besides the
documents required by underwriting norms. Premium remittance cannot be in cash beyond
Rs. 50000/-. Cash transactions above Rs. 10 lakhs in a month and series of all cash transactions
integrally connected to each other which have been valued below Rs. 10 lakhs where such
series of transactions have taken place within a month and those that are suspicious in nature
(whether in cash or not) should be reported to FIU-IND.

Analysis of case under review

AML guidelines are in the nascent stage of implementation in the insurance industry in our
country. There is a general lack of awareness in the industry as a whole that insurance
products are attractive to money launderers. Like Mr. Singh, many employees of the insurance
companies are not aware of the fact that their priorities in carrying out their responsibilities
can facilitate insurance companies being utilized as a conduit in the layering process of ML.
They are concerned more about their routine annual targets and bypass major issues which
are likely to arouse regulatory concerns as seen in the present case. Mr. Singh, if he were
compliant, should have insisted upon proper proof of residence and photograph which needs
to be collected mandatorily under AML guidelines apart from whatever documents were
submitted by Mr. Lal. Had he insisted upon proper documentation, he might have got a clue
about the intentions of his client wherein he ensured to receive a cheque from the insurance
company in the pretext of cancellation. Client’s reactions could have roused suspicion which
in turn warrants reporting requirements.

Mr. Singh disregarded AML guidelines. He would have sensed the possibility of ML when
he had read the news item on the arrest of Mr. Lal in the smuggling racket. However, he
tried to pretend ignorance under the cover that he no longer had any contract with Mr. Lal.
Suspicious transactions are required to be reported within 3 days of identification. Mr. Singh
suspected only after the publication of the news item about Mr. Lal. He is very well bound to
report at that stage in spite of lack of any valid contract. But, as this would have brought out
his non-compliance with the AML requirements as regards documentation mandated in the
AML guidelines, Mr. Singh would not venture such an attempt.

Interrogation of the case can bring out the fact that proceeds, out of cancelled insurance
contracts, was being used in financing the smuggling process. It would ultimately crystal
down to reveal the fact that AML guidelines were not complied with. It certainly attracts
penal action against Mr. Singh, both for non-compliance with the guidelines and also with the
PML Act. Insurance company’s reputation is at stake as this case would highlight the fact
that it has failed in training and motivating their employees to comply with the guidelines. It
also shows the ineffective implementation of regulatory directions.

70 q Bimaquest - Vol. VII Issue II, July 2007

 A Case Study on Money Laundering in Insurance Business

Insurance companies are responsible for the compliance and implementation of AML guidelines.
Insurance companies are expected to impart ample training on the subject to all their employees/
agents, both the front and back office staff, for effective implementation of their AML policy.
Any violation of Act or non-compliance of guidelines indicates improper communication of
the impact of ML at various levels of the organisation. In view of the responsibility fixed upon
the insurance company, M/s Beassure Assurance Co. Ltd should review the training
requirements of the staff and make it more effective to educate their employees on the
implications of non-compliance and the penalties that follow non-compliance. In the instant
case, delay in the installation of software on AML which have in-built mechanisms to check
the violation of threshold limits of acceptance of cash has contributed towards violation.
Internal audit department of the Company should carry out extensive check on all the
exceptional transactions that took place during the installation phase of the software to bring
out more violations if any. Once the issue surfaces out, insurance company should take
disciplinary action against Mr. Singh which would prove a lesson to other employees. Unless
strenuous action is initiated against such violations, implementation of the guidelines cannot
be effective and successful. The company will have to intensify their training campaigns to
make sure that the communications on AML reaches all the levels of the organisation. They
may quote the specific incidence of non-compliance and the action taken against such deviation
to highlight the necessity and importance of AML measures adopted by the company. The
Company should also carry out quick and thorough check of the software to ensure that it is
fool-proof.

People like Mr. Singh will never be able to guess or understand, how they are aiding terrorist
attacks like ‘9/11’ by giving weightage to measly areas like fulfillment of their annual targets
by sacrificing the larger interest of the society.

Achievement of pre-set targets lead to accomplishment of organizational objectives, which

however should not be at the cost of interest of the society at large. In a dynamic competitive
world, organisations are keen on attaining their goals. In the process, however, they should
not be indifferent towards their social responsibility. Organisations have a duty to ensure that
they educate their employees to give equal importance to the accomplishment of individual
annual targets and also comply with law and regulatory concerns. Individual and organizational
goals should not prove hazardous to the welfare of the society.

qqq

Bimaquest - Vol. VII Issue II, July 2007 q 71