In India, like any other companies which are managed by Indian people and entities, the foreign...
Money laundering is a growing issue in the Insurance sector. The insurance companies, especially those offering life insurance products having flexible and customised policies, are most affected.The large volumes of funds can be claimed with a slight reduction in the deposited amount. Due to huge flow of funds in the Insurance Sector, all insurance companies must adhere to the Guidelines for Anti-Money Laundering/ Counter Financing of Terrorism.Many countries and international organisations like Financial Action Task Force (FATF) have framed guidelines for combating money laundering and terror financing.
On 1st August 2022, Insurance Regulatory and Development Authority of India (IRDAI) released the Master Guidelines for Anti Money Laundering/ Counter Financing of Terrorism which has consolidated and updated previous guidelines; the master guidelines will be effective from 1st November. It applies to almost all Insurers/ insurance companies dealing with products like Life, General or Health Insurances.
The master guidelines for Anti Money Laundering/ Counter Financing of Terrorism (AML/CFT) provide aspects for framing the policies and installing compliance arrangement procedures. Some of the major guidelines are discussed in the blog are:
Every Insurer/ Insurance Company must establish a framework to implement procedures and policies and have a system of internal audit to be in place all the time to prevent and control the activities related to money laundering and terror financing.
To ensure effective compliance and relevant provisions and regulations under the Prevention of Money Laundering Act, are adhered to. An Insurer shall oblige followings:
The established policies and procedures must be AML/CFT complaints and shall cover the following:
The master guidelines provide steps to strengthen and overall control on the action of the intermediary/ representative of the Insurers/ Insurance Companies. The following steps are:
The Insurer shall appoint a Designated Director and Principal Officer to ensure the overall compliance with the Prevention of Money Laundering Act, and PML rules. The contact details of the appointed officials shall be communicated to the Insurance Regulatory and Development Authority of India and Finance Intelligent Unit-IND (FIU-IND) within seven days of the appointment.
Under section 13 of PML Act, the director of the FIU-IND can take appropriate action against the insurers/designated officers/employees if they fail to comply with the guidelines for Anti Money Laundering/ Counter Financing of Terrorism.
An insurer must make sufficient efforts to determine the true identity of a customer availing the insurance services to avoid the risk of exposure to money laundering and terror financing. The master guidelines for Anti Money Laundering/ Counter Financing of Terrorism also explain KYC Norms.
The huge base of insurance clients and the significant differences in the extent of their risk calls for a systematic risk assessment process. The risk assessment reposts shall be updated regularly to minimise the risk and classifies the customer into low risk and high risk based on their insurance profiles. The Insurer carries out the internal risk assessment according to the size, geographical presence, the complexity of activities etc.
Different parameters/ factors are considered for the purpose of risk categorisation. The following parameters are:
Insurers shall undertake the process of client due diligence (Rule 9 of PML rules). The Client Due Diligence shall be carried out as follows:
The Insurer applies the process of simplified due diligence in cases where the aggregate insurance premium of individual policies is less than 10000/- per annum. A Simplified Client Due Diligence is not considered up to mark whenever there is suspicion of money laundering and terror financial or high-risk scenarios.
Section 12AA of the PMLA, provides for due diligence of high-risk categories of customers. Under Enhanced Due Diligence, insurers shall examine complex, unusual patterns of transactions. EDD is carried out where an apparent risk of money laundering and financing of terror has been identified.
A special examination by senior management is required for screening Politically Exposed Persons (PEPs). Ongoing risk management procedures and enhanced due diligence measures are applied to customers who are found to be the close relatives of PEPs or where the PEP is itself the ultimate beneficial owner.
The Unlawful Activities (Prevention) Act prevents terrorist activities on Indian soil. According to Section 51A of the UAP Act, an insurer must not enter into any contract whose identity matches the person listed in the UN sanction list or banned organisations.
The financial Action Task Force (FATF) is an intergovernmental body established in 1989 to carry out two mandates:to prevent money laundering and counter-terror financing. FATF designates countries under Grey List and Black List for not taking enough measures to build AML/ CFT laws and regulations in the respective countries. The Guidelines for Anti Money Laundering/ Counter Financing of Terrorism provide for emanating contacts with the regime/ country that doesn’t have stringent AML compliance.
An effective monitoring and reporting ensure the detection of fraud at early stages. AML/CFT guidelines can help identify and analyse the slightest deviation in transactions that do not conform to the laws, and reporting such suspicious funds is achieved. Suspicious Transaction reports have been filed with IRDAI and FIU-IND.
IRDAI’s master guidelines were much-needed reform to prevent money laundering and terror financing activities in the Insurance industry. These guidelines for Anti Money Laundering/ Counter Financing of Terrorism will create a stringent environment for better adoption and implementation of PMLA and PML Rules. These consolidated guidelines will help create a robust insurtech infrastructure and facilitate smooth client onboarding.
Read our Article: Knowing the Legalities of Anti Money Laundering Compliance in India