A CASE STUDY ON MONEY LAUNDERING IN INSURANCE BUSINESS*

Transcription

1 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 Dehi branch was very excited to know that Mr. Sunder La, a business man with an annua turnover of Rs. 2 crores, wanted to buy an Insurance Poicy Long Life- a Unit Linked Singe premium product which had no cap on maximum premium payabe. The point of excitement was that he caed to take a cover for 10 crores with a singe premium remittance of Rs. 10 akhs. He, however, expressed his reservations regarding remittance of premium wherein he desired to make the payment party through bank account which at the moment had a baance of Rs. 6 akhs. He informed that baance of the premium he woud remit in cash. Mr. Singh was eft in a fix. He was not in favour of osing his vauabe customer. At the same time, he had to compy with the IRDA guideines on Anti- Money Laundering (AML) wherein he was not supposed to aow remittance of premium in cash beyond Rs. 50,000/-. He succumbed to the pressure to fufi his annua targets and used a his mind and infuence to ensure that Mr. La was issued the poicy. Mr. Singh, coud accompish this task with a ease, as it was the time when software on AML was getting impemented in phases across a the branches of the company and was facing certain teething probems. In the free-ook period Mr. La came back to cance his poicy as he was not happy with the terms and he wished to take another poicy with better terms to suit his requirement. As a vauabe customer Mr. La was given back Rs. 9.5 akhs based on the NAV as on that date and after deducting administrative charges. With a promise to take another poicy after a weeks time, Mr. La vanished from the scene. After 10 days, Mr. Singh happened to read the oca newspaper wherein he came to know that Mr. La was arrested on a non- baiabe warrant and is a prime suspect in the smugging racket of cocaine that came to ight a week ago. He was happy that he had no more deaings with the accused. He aso recoected his agent s informa remarks that the so caed * Award winning case study of NIA - C. D. Deshmukh Case Study Competition and awarded at the hands of Hon be President Dr. A. P. J. Abdu Kaam. Bimaquest - Vo. VII Issue II, Juy 2007 q 67

2 businessman had changed his residentia address twice during the previous year and was ikey to shift to his own house some time during the ast quarter of the caendar year and as such provided his friend s address for communication. Out of curiosity, he reviewed the documents attached aong with the proposa form. He found that Mr. La had submitted: A written confirmation from his banker as Identity proof Income tax return for the previous year ended 2005 as income proof Photostat copy of his SSC certificate as age proof Mr. La had furnished a the minimum documents required for financia underwriting. Mr. Singh sighed with reief and thanked God, because the poicy was canceed as the terms and conditions of Long ife did not pease Mr. La. Now that there is no insurance contract, there is hardy any possibiity of him being caught for having deaings with Mr. La. Case Probem Mr. Singh has no more deaings with Mr. La as there is no insurance contract. However, after reading the news item, and having reaized that Mr. La was a prime suspect in a smugging case and to whom he ensured issuance of an insurance poicy vioating vita requirements of the AML guideines issued by IRDA, what is the course of action eft to Mr. Singh? Mr. Singh is hardy in possession of any documents which coud be used for an audit trai to trace out that money aundering was invoved. Has he got to report the transaction to Financia Inteigence Unit FIU-IND? What is the position of Mr. Singh who did not report the transaction as required by the guideines? What is the course of action towards the insurance company which might have become a part of the money aundering process though unknowingy? What steps shoud the insurance company take in order to avoid occurrence of such vioations in the impementation of AML guideines? 68 q Bimaquest - Vo. VII Issue II, Juy 2007

3 Case Anaysis Background for anaysis: Money Laundering (ML) is a process of ceansing dirty money, derived out of organised crimina activities, in order to make it ook ike having ega origin. It invoves three stages, namey pacement, ayering and integration in which crimina proceeds pass through a series of intricate transactions among various financia institutions. Thus, iega money is distanced from its source and used at the destination. Recent past has witnessed the ML process being used basicay to fund terrorist activities. As such there is a growing concern across the word to curb the progression. A step towards this direction in our country is the enactment of The Prevention of Money Laundering Act, 2002 which criminaizes the ML process. As per section 3 of the Prevention of Money Laundering Act, 2002 a person who is invoved directy or indirecty or induges or assists or is a party in any process or activity connected with the proceeds of crime and projecting it as untainted property woud be guity of offence of money-aundering. He/she woud be iabe for a punishment, not ess than 3 years and which may extend upto 7 or 10 years, based on the crime invoved and woud aso be iabe to a fine which may extend to Rs. 5 akhs. Vunerabiity of insurance sector to ML processes is far ess in comparison with that of other financia institutions.however, there are certain highy prone areas in this sector. Eg., singe premium products. Buying singe premium products with huge premium remittance and canceation of the same especiay during the free-ook period is one of the various ways in which ML can happen in ife insurance industry. In genera insurance, it takes the form of frauduent caims or refunds foowing canceations. The triumvirate reguators of the financia institutions (FIs) namey RBI, SEBI and IRDA have issued guideines to compy with the PML Act to their respective reguated entities. FIs shoud submit reports of certain specified transactions to Financia Inteigence Unit (FIU- IND), which is the centra, nationa agency responsibe for receiving, processing, anayzing and disseminating information reating to suspect financia transactions to enforcement agencies. Guideines on Anti-Money Laundering Programme for Insurers were issued in March It requires every insurance company to have in pace their Anti-Money Laundering Poicy and emphasizes Know Your Customer (KYC) norms. Accordingy, insurance companies are required to coect recent photograph of individua cients; document identity of the customer; his/her residentia address (both permanent and Bimaquest - Vo. VII Issue II, Juy 2007 q 69

4 temporary); and sources of funds based on the risk profie of the customer besides the documents required by underwriting norms. Premium remittance cannot be in cash beyond Rs /-. Cash transactions above Rs. 10 akhs in a month and series of a cash transactions integray connected to each other which have been vaued beow Rs. 10 akhs where such series of transactions have taken pace within a month and those that are suspicious in nature (whether in cash or not) shoud be reported to FIU-IND. Anaysis of case under review AML guideines are in the nascent stage of impementation in the insurance industry in our country. There is a genera ack of awareness in the industry as a whoe that insurance products are attractive to money aunderers. Like Mr. Singh, many empoyees of the insurance companies are not aware of the fact that their priorities in carrying out their responsibiities can faciitate insurance companies being utiized as a conduit in the ayering process of ML. They are concerned more about their routine annua targets and bypass major issues which are ikey to arouse reguatory concerns as seen in the present case. Mr. Singh, if he were compiant, shoud have insisted upon proper proof of residence and photograph which needs to be coected mandatoriy under AML guideines apart from whatever documents were submitted by Mr. La. Had he insisted upon proper documentation, he might have got a cue about the intentions of his cient wherein he ensured to receive a cheque from the insurance company in the pretext of canceation. Cient s reactions coud have roused suspicion which in turn warrants reporting requirements. Mr. Singh disregarded AML guideines. He woud have sensed the possibiity of ML when he had read the news item on the arrest of Mr. La in the smugging racket. However, he tried to pretend ignorance under the cover that he no onger had any contract with Mr. La. Suspicious transactions are required to be reported within 3 days of identification. Mr. Singh suspected ony after the pubication of the news item about Mr. La. He is very we bound to report at that stage in spite of ack of any vaid contract. But, as this woud have brought out his non-compiance with the AML requirements as regards documentation mandated in the AML guideines, Mr. Singh woud not venture such an attempt. Interrogation of the case can bring out the fact that proceeds, out of canceed insurance contracts, was being used in financing the smugging process. It woud utimatey crysta down to revea the fact that AML guideines were not compied with. It certainy attracts pena action against Mr. Singh, both for non-compiance with the guideines and aso with the PML Act. Insurance company s reputation is at stake as this case woud highight the fact that it has faied in training and motivating their empoyees to compy with the guideines. It aso shows the ineffective impementation of reguatory directions. 70 q Bimaquest - Vo. VII Issue II, Juy 2007

5 Insurance companies are responsibe for the compiance and impementation of AML guideines. Insurance companies are expected to impart ampe training on the subject to a their empoyees/ agents, both the front and back office staff, for effective impementation of their AML poicy. Any vioation of Act or non-compiance of guideines indicates improper communication of the impact of ML at various eves of the organisation. In view of the responsibiity fixed upon the insurance company, M/s Beassure Assurance Co. Ltd shoud review the training requirements of the staff and make it more effective to educate their empoyees on the impications of non-compiance and the penaties that foow non-compiance. In the instant case, deay in the instaation of software on AML which have in-buit mechanisms to check the vioation of threshod imits of acceptance of cash has contributed towards vioation. Interna audit department of the Company shoud carry out extensive check on a the exceptiona transactions that took pace during the instaation phase of the software to bring out more vioations if any. Once the issue surfaces out, insurance company shoud take discipinary action against Mr. Singh which woud prove a esson to other empoyees. Uness strenuous action is initiated against such vioations, impementation of the guideines cannot be effective and successfu. The company wi have to intensify their training campaigns to make sure that the communications on AML reaches a the eves of the organisation. They may quote the specific incidence of non-compiance and the action taken against such deviation to highight the necessity and importance of AML measures adopted by the company. The Company shoud aso carry out quick and thorough check of the software to ensure that it is foo-proof. Peope ike Mr. Singh wi never be abe to guess or understand, how they are aiding terrorist attacks ike 9/11 by giving weightage to measy areas ike fufiment of their annua targets by sacrificing the arger interest of the society. Achievement of pre-set targets ead to accompishment of organizationa objectives, which however shoud not be at the cost of interest of the society at arge. In a dynamic competitive word, organisations are keen on attaining their goas. In the process, however, they shoud not be indifferent towards their socia responsibiity. Organisations have a duty to ensure that they educate their empoyees to give equa importance to the accompishment of individua annua targets and aso compy with aw and reguatory concerns. Individua and organizationa goas shoud not prove hazardous to the wefare of the society. qqq Bimaquest - Vo. VII Issue II, Juy 2007 q 71