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Master Guidelines for Anti Money Laundering/ Counter Financing of Terrorism: IRDAI

Raghvendra Sonker

| Updated: Aug 04, 2022 | Category: Compliances

Guidelines for Anti Money Laundering

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.

Major Highlights under the IRDAI Master Guidelines

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:

Internal policies, procedures, controls and compliance arrangement

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:

  • Develop an Anti Money Laundering/ Counter Financing of Terrorism procedures and policies with adherence to the current legal and regulatory regime;
  • Adequate staff training on the AML/CFT policy and procedure;
  • The Insurer’s Board must approve the anti-Money Laundering/ Counter Financing of Terrorism programme;
  • Customer Due Diligence (CDD) measures shall be undertaken to avoid the risk;
  • A system of identifying, monitoring, and reporting shall in place to detect suspected transactions and further reports shall made available to the Finance Intelligence Unit-IND and other law enforcement agencies.

The established policies and procedures must be AML/CFT complaints and shall cover the following:

  • Policies and Procedures related to combating Money laundering and terror financing shall be circulated among all the staff and management of the organisation, especially the department holding and handling the details of the policyholder;
  • The process of Customer Due Diligence (CDD) must be performed to manage and mitigate the risks associated with money laundering and terror financing;
  • Maintenance and management of client’s record;
  • Statutory and regulatory compliance;
  • Timely disclosure of information and complete cooperation with law enforcement agencies; 
  • The internal audit shall be conducted. The periodic internal review process ensures compliance with policies and procedures with respect to the prevention of money laundering and terror financing. 

Responsibility of Insurers/ Insurance Companies

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:

  1. A specific or specialised document must be included in the insurance contract, and a clause that mandates the KYC norms must be added.
  2. Stringent action against the representative of Insurers who exposes the Insurers to money laundering and terror financing activities.
  3. The AML/CFT compliant selection mechanism for the intermediaries/representatives has to be implemented.
  4. An insurer/ Insurance company shall submit an annual certificate for compliance within 45 days of the end of the fiscal year.

Appointment of Designated Director and Principal Officer

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.

Know Your Customer (KYC) Norms 

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.

  • An effective mechanism shall be implemented to obtain the proper identification of the new/ existing customers to avoid dubious and fraudulent customers.
  • When a customer is a juridical person, the Insurer shall follow the procedure for determination of beneficial ownership provided under Rule 9(3) of PML Rules to ascertain and verify the identity of the customer and its beneficial owner to their satisfaction.
  • Insurers/ Insurance companies may perform the KYC process by any method. The following methods are :
    • Aadhaar based KYC online authentication;
    • Aadhaar based KYC offline authentication;
    • Digital KYC;
    • Video-Based Identification Process (VBIP) is a consent-based alternate method for ascertaining  the client’s identity;
    • KYC identifier allotted to the customer by CKYCR;
    • Officially valid Documents for KYC; or
    • PAN/ Form 60
  • The Master policyholder shall maintain the details and information of the individual members of the group insurance.
  • A suspicious Transaction Report shall be filed with FIU-IND where an insurer is not satisfied with the true identity of the client.

Risk Assessment

The huge base of insurance clients and the significant differences in the extent of their risk calls for a systematic risk assessment[1] 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.

Risk Categorisation

Different parameters/ factors are considered for the purpose of risk categorisation. The following parameters are:

  • Identity of the client;
  • Financial/Social Status;
  • Nature of the business activity;
  • Details of the customer’s business and their office’s location.

Client Due Diligence (CDD)

Insurers shall undertake the process of client due diligence (Rule 9 of PML rules). The Client Due Diligence shall be carried out as follows:

  • Knowing New Client/Customer
  • Knowing Existing Client/ Customer
  • Ongoing Due Diligence
  • Verification at the claim stage/maturity/partial withdrawal/ refunds etc.

Simplified Due Diligence (SDD)

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.

Enhanced Due Diligence (EDD)

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.

Contracts with Politically Exposed Persons

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.  

Implementation of Section 51 A of UAPA, 1967

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.

Countries with AML/CFT Deficient Regime

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.

Monitoring and Reporting of Transactions

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.

Conclusion 

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

Raghvendra Sonker

Raghvendra Sonker has completed his Graduation from Gujarat National Law University. He has a keen interest in legal drafting, writing articles, and research papers. His core interest areas are Banking and Financial Issues.

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