2. Money Laundering
• Money Laundering is defined as :
– Concealing the existence, illegal source or application of
income, derived from criminal activity
– Then subsequent disguising of the source of that income to
make it appear legitimate.
• Money Laundering is not limited to drug money or banking
transactions.
• It can also involve sophisticated schemes in every sector
of financial services industries – from commercial banking
investment to insurance.
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3. Stages of Money Laundering
– Placement : Introduction of illegal funds into financial system
through placement of funds into circulation through financial
institutions, casinos, shops, bureau de change etc.
– Layering : Conversion of the proceeds of crime into another form
and creating complex layers of financial transactions to disguise the
audit trail, source and ownership of funds.
– Integration: Placement of the laundered money back into the
economy to create the perception of legitimacy. By this stage, it is
extremely difficult to distinguish the legal and illegal wealth.
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4. Stages of Money Laundering
Black money is
introduced in the
financial system
Conversion of the illegal money by
moving it through a series of financial
transactions to disguise the sources
and ownership of these funds.
Placing the laundered
“Clean” money back
into the economy to
give it the perception of
legitimacy.
This process makes it difficult to distinguish Legal from illegal
wealth
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5. Requirements of Prevention of Money
Laundering Act , 2002
• The Prevention of Money Laundering Act, 2002 casts
certain responsibilities on banks, financial institutions and
intermediaries in terms of:
– Verification and maintenance of records of identify of its
clients.
– Maintenance of records of transactions of a specified nature
in hard and soft form for 10 years.
– Furnishing information to authorities as specified.
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6. Response of the Insurance Industry
• Worldwide Regulators in financial sector have issued guidelines to
combat money laundering.
• Insurance Regulatory & Development Authority (IRDA) has, by virtue
of the powers conferred under section 34 of the Insurance Act, 1938,
issued “Guidelines on Anti Money Laundering programme for
Insurers” .
• The company will be guided by these guidelines in framing its policies
and procedures to combat the threat of money laundering
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7. IRDA Guidelines
The IRDA guidelines require every insurer to have an AML
program which should at a minimum, include:
• Internal policies, procedures and controls;
• Designating a compliance officer
• Recruitment and Training of employees and agents
• Internal control / audit.
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8. Internal policies, procedures and controls
Each insurance company has to establish and implement policies,
procedures, and internal controls which would also integrate its agents in its
anti-money laundering program as detailed below:
1. Know Your Customer (KYC)
2. When should KYC be done?
3. KYC and Risk Profile of the Customer
4. Products to be covered
5. Defining Suspicious Transactions (including
Suspicious Cash transactions)
6. Reporting of Suspicious Transactions
7. Monitoring and Reporting of Cash Transactions
8. Verification at the time of redemption/surrender
9. Record Keeping
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9. 1. Know Your Customer Policy
• Ensures that the company does not become involved unwittingly
with money launderers and other criminals
• Helps the company reinforce the existing checks and controls to
ensure due diligence while starting/extending relationship with a
new/existing customer.
• Scope of KYC
– the time of accepting new business
– accepting additional / top up premium
– customer profile changes
– claims pay out stage / issuing refunds.
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10. Know Your Customer Policy- Requirements
i. It is mandatory to obtain documents to clearly establish the
Customer Identity consistent with Risk Profile in respect of all new
Insurance Contracts
ii. The degree of due diligence to establish KYC would depend on the
Premium size. Premium of Rs. 1 lakh per annum in case of
Individual policies should be considered as a threshold for
exercising detailed due diligence, what ever be the payment mode
iii. Remittance of Premium is an important stage of entering into
Contract, hence, cash transactions need more diligence and care
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11. Know Your Customer- Requirements
iv. Customer information should be collected from all relevant sources,
including from Agents.
v. Insurance Premium paid by persons other than the person insured
should be looked into to establish Insurable Interest.
vi. The Insurer should not enter into a Contract with a Customer whose
identity matches with any person with known Criminal background or
with banned entities and those reported to have links with Terrorists
or Terrorist Organizations
vii. Besides verification of Identity of the Customer at the time of initial
issuance of contract, KYC should also be carried out at the Claim
payout stage and at times when additional top up remittances are
inconsistent the Customers known profile.
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12. Know Your Customer : Documentation Requirements
1. Proof of Identity compulsory for all applications
2. Proof of PAN required if Annual Premium is >= Rs.50,000/-
3. Proof of Source of Income & Proof of Residence required if Annual
Premium is >= Rs.1,00,000/-
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13. Identity proof for Individuals
• Valid Passport
• PAN Card
• Voter’s Identity Card
• Valid Driving License
• Written confirmation from the banks where the prospect is a customer,
regarding identification and proof of residence.
• Personal identification and certification of the employees of the insurer
for identity of the prospective policyholder.
• Letter (on letterhead with name and address, stamped and signed)
verifying the photo identity and residence of the customer from a
recognized public authority* or public servant* such as
• *
Microsoft Word
Document
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14. Residence proof for Individuals
• Telephone bill (mobile, landline, wireless etc) provided it is not older than
six months from the date of insurance contract
• Bank account statement for any bank account opened by the customer
wherein his permanent/present residence address is available. However,
the statement should not be older than six months as on the date of
acceptance.
• Electricity bill provided it is not older than six months from the date of
insurance contract
• Ration card
• Valid lease agreement along with rent receipt, which is not more than 3
months old as a residence proof.
• Employer’s certificate as a proof of residence. (Certificates of employers
who have in place systematic procedures for recruitment along with
maintenance of mandatory records of its employees are generally
reliable).
• Letter from any recognized public authority*
If the document of identity also gives the proof of residence, no further
documentation would be necessary in cases where proof of residence
needs to be obtained.
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17. Proof of PAN
• Copy of PAN Card
• Copy of acknowledged IT return
• Copy of IT Assessment Order
• Copy of Form – 16
• Copy of acknowledged Form 49A in case of PAN is applied for
provided the date of application form should not be more than 3
months
• Copy of Form 60 (Declaration of Income below taxable limit)
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18. Proof of Income
Standard Income proofs:
• Income tax Asst. orders/IT Returns- Last financial year IT return
• Employer’s Certificate
– Last financial year Form 16
– Salary slip for past 3 months with Employer stamp and sign
– Latest Employment Contract Letter (From reputed companies)
• Audited Company accounts- Last financial Year
• Audited firm accounts and Partnership Deed- Last financial Year
Non-standard Income Proofs:
• Chartered Accountant’s Certificate- Certification confirming source of income and the
amounts earned during the previous financial year. Issued within preceding 3 months
of date of policy application.
• Agricultural Income Certificate- Certification confirming source of income and the
amounts earned during the previous financial year. Issued within preceding 3 months
of date of policy application.
• Agricultural-land details & Income assessments
• Bank Cash-flows statements, Pass-book-last 1 months running statement
Other documents may be asked as per individual assessment of the
case for Financial Underwriting and for compliance with AML
Guidelines.
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19. 2. When should KYC be done ?
Knowing New Customers
In case of new contracts, KYC should be done before the issue of
every new contract.
Knowing Existing Customers
The process of AML should be applied for all policies coming into
force on or after 1st January 2006 and those covered under detailed
due diligence procedures i.e. policies with annual premium of Rs.1
lakh and above.
KYC in case of existing customers will be carried out based on the
limits fixed for new policies on all contracts/relevant transactions in
case of the existing polices.
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20. 3. Risk Profiling of Customers
Based on the Individual’s profile and Product profile ,Customer to
be classified into high risk and low risk
• Low Risk Profile : Individuals (other than High Net Worth) and entities
whose identities and sources of wealth can be easily identified and
transactions in whose accounts by and large conform to the known
profile may be categorized as low risk.
• High Risk Profile : Customers who are Customers who are in
Business, KYC and underwriting procedures should ensure higher
verification and counter checks.
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21. Risk Profiling of Customers - Examples
• Low Risk Profile : E.g. Salaries employees, Govt. employees etc. In such
cases, the policy may require that only basic requirements of verifying the identity
and location of the customer are to be met.
• High Risk Profile : Builder, Hoteliers – Owners of Restaurants & Bars, Real
Estate Agents, Dealers in precious metals, Dealers in precious Stones, Film
Producers & Financers, Import & Export Business, Lawyers, Notaries, other
independent legal professional & Accountants this refers to sole practitioners,
Owner of Casino, Bar, Disc, Lounge & Night Club, Owner of Amusement Park,
Tax Consultant, Owner of Shipping Company, Travel Agencies & related
occupation. Dealers & Manufacturers (Arms, Ammunition, Explosives etc.,), non-
residents, high net worth individuals, trusts, charities, NGO’s and organizations
receiving donations, companies having close family shareholding or beneficial
ownership, firms with sleeping partners, politically exposed persons (PEPs), and
those with dubious reputation as per available public information who need higher
due diligence
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22. 4. Scope of Products Covered
Based on the vulnerability criterion and after examining the product and
business coverage, the following categories of products/business lines
may be exempted form the purview of AML requirements:
i. Standalone Medical/Health Insurance Products
ii. Reinsurance and Retrocession Contracts where the treaties are
between insurance companies for reallocation of risks within the
insurance industry and do not involve transactions with customers.
iii. Group Insurance Businesses which are typically issued to a
company, financial institution, or association and generally restrict the
ability of an individual insured or participant to manipulate its
investment.
iv. Term Life Insurance Contracts, in view of the absence of cash
surrender value and stricter underwriting norms for term policies
(especially those with large face amounts)
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23. 5. Defining Suspicious Transactions
(including Suspicious Cash transactions)
The AML program envisages submission of Suspicious
Transaction Reports (STR)/Cash Transactions Reports (CTR) to
a Financial Intelligence Unit-India (FIU-IND) set up by the
Government of India to track possible money laundering
attempts and for further investigation and action.
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24. Defining Suspicious Transactions
(including Suspicious Cash transactions)
illustrative list of Suspicious Transactions:
1. Customer insisting on anonymity, reluctance to provide identifying information, or
providing minimal, seemingly fictitious information
2. Cash based suspicious transactions for payment of premium and top ups over and
above Rs. 5 lakhs per person per month. It should also consider multiple DDs each
denominated for less than Rs. 50,000/-
3. Frequent free look surrenders by customers
4. Assignments to unrelated parties without valid consideration
5. Request for a purchase of policy in amount considered beyond his apparent need;
6. Policy from a place where he does not reside or is employed
7. Unusual terminating of policies and refunds
8. Frequent request for change in addresses
9. Borrowing the maximum amount against a policy soon after buying it
10. Inflated or totally fraudulent claims e.g. by arson or other means causing a fraudulent
claim to be made to recover part of the invested illegitimate funds
11. Overpayment of premiums with a request for a refund of the amount overpaid.
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25. 6. Reporting of Suspicious Transactions
Insurance companies have to report the
suspicious transactions immediately on
identification. When such transactions
are identified post facto the contract, a
statement may be submitted to FIU-IND
within 3 working days of identification in
the prescribed formats
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26. 7. Monitoring and Reporting of Cash Transactions
To ensure that premiums are paid out of clearly identifiable
sources of funds
1. Remittances of premium by cash should not exceed Rs.49,999/-
2. Premium/proposal deposits >= Rs. 50,000 should be remitted only
through cheques, D/D, credit card or any other banking channels
3. For integrally related transactions, premium amount > Rs. 50,000 in a
calendar month should be examined more closely for possible angles of
money laundering. This limit will apply at an aggregate level considering
all the roles of a single person-as a proposer or life assured or assignee
4. Insurance companies have to report integrally connected cash
transactions above Rs. 10 lakhs per month to FIU-IND by 15th of next
succeeding month
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27. 8. Verification at the Time of Redemption/Surrender
i. No payments should be allowed to 3rd parties except in cases
like superannuation/ gratuity accumulations and payments to
legal heirs in case of death benefits
ii. Free look cancellations needs particular attention of insurer
especially in client/agents indulging in free look surrender on
more than one occasion.
iii. AML checks become more important in case the policy has been
assigned by the policyholder to a third party not related to him
(except where the assignment is to Banks/FIs/Capital Market
intermediaries regulated by IRDA/RBI/SEBI)
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28. Responsibility of Agents
a. All agents need to comply with the AML policy of
the company strictly.
b. All the agents/SPs need to undergo training on
Anti Money Laundering conducted by company
c. Services of defaulting agents who expose the
insurers to AML related risks on multiple
occasions will be liable to be terminated and the
details reported to IRDA for further action
d. Insurance Company when faced with a non-
compliant agent or corporate agent will take
necessary action to secure compliance, including
when appropriate, terminating its business
relationship with such an agent.
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29. Offences under Money Laundering
• Section 3 of the PMLA, 2002 describes the offence of ML as
under:
“Whosoever directly or indirectly attempts to indulge or knowingly
assists or knowingly is a party or is Actually involved in any
process or Activity connected with the proceeds of crime and
projecting it as untainted property shall be guilty of offence of
Money-Laundering”.
• Under the law, it is a crime to engage knowingly in a financial
transaction of any amount with the proceeds of drug trafficking,
organized crime or other criminal activity.
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30. Punishments - Money Laundering
• As per section 4 of PMLA, 2002, the punishment for money
laundering is as follows:
“Whoever commits the offence of Money-Laundering shall
be punishable with rigorous imprisonment for a term which
shall not be less than three years but which may extend to
seven years and shall also be liable to fine which may
extend to five lakh rupees.
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