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Anti Money Laundering Guidelines

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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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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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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

Stages of Money Laundering

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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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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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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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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

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:

Internal policies, procedures and controls

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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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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

Know Your Customer Policy- Requirements

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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.

Know Your Customer- Requirements

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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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• 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

Identity proof for Individuals

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• 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.

Residence proof for Individuals

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Identity Proof for Others

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Identity Proof for Others

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• 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)

Proof of PAN

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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 YearNon-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.

Proof of Income

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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.

2. When should KYC be done ?

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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.

3. Risk Profiling of Customers

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• 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

Risk Profiling of Customers - Examples

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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)

4. Scope of Products Covered

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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.

5. Defining Suspicious Transactions (including Suspicious Cash transactions)

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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 customers4. Assignments to unrelated parties without valid consideration5. 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 employed7. Unusual terminating of policies and refunds8. Frequent request for change in addresses9. Borrowing the maximum amount against a policy soon after buying it10. 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 funds11. Overpayment of premiums with a request for a refund of the amount overpaid.

Defining Suspicious Transactions (including Suspicious Cash transactions)

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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

6. Reporting of Suspicious Transactions

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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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i. .

7. Monitoring and Reporting of Cash Transactions

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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)

8. Verification at the Time of Redemption/Surrender

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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.

Responsibility of Agents

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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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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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