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When people hear the term “money laundering,” many know that it is illegal, but few people know what it means or what it generally entails.
Financial professionals who sell life insurance and annuities need to understand the meaning and overview of the term.
This is because life insurance and annuities can potentially be used as money laundering tools.
This time, we have summarized money laundering and life insurance.
- What is Money Laundering?
- Money Laundering Structure
- Placement
- Layering
- Integration
- Money Laundering and Life Insurance
- The process of money loaning with life insurance
- Examples of life insurance being used for money loaning
- Other possibilities
- Money Laundering Regulation
- Bank Secrecy Act of 1970
- The USA PATRIOT Act of 2001
- FinCEN Final Rules
- Anti-Money Laundering Act of 2020
- summary
What is Money Laundering?
“Money laundering” is “the process of incorporating illegally obtained money into the legal monetary system while concealing its origin.”
Money laundering is a necessary process from a criminal’s point of view, because money of unknown origin (unlaundered, “dirty” money) can easily be traced and therefore cannot be freely spent.
In Japanese, this is called “money laundering.”
Once the money has gone through this process, it appears legitimate and can be used or invested however you like.
Money Laundering Structure
There are countless ways to launder money, but it basically consists of three steps:
- Placement: The stage where criminal proceeds are incorporated into the financial system.
- Layering: The stage where the source of funds is obscured
- Integration: The stage where funds are injected into legitimate economic activities.
Placement
Placement is the step that brings illicit cash into the legitimate financial system.
The purpose of this step is to physically separate the money from the criminals, making their origins more difficult to discern if they are traced.
This means avoiding financial accounts or products that record ownership.
This is usually done by converting cash into cash equivalents such as checks, money orders, bank drafts, traveller’s checks and wire transfers.
When moving large amounts at once, you may need to split them into multiple smaller transactions due to reporting and record-keeping requirements. This is characteristic of what happens during the Placement phase.
Layering
This is a process to further conceal its origin.
Simply exchanging cash for money orders and depositing those orders into personal bank accounts does little to hide a criminal’s connection to the crimes.
This process involves repeated transfers and the purchase of various financial products to obscure the source of the money.
Cash Value Life Insurance and Deferred Annuity Contracts are used for this purpose.
The insurance policies purchased may be cancelled immediately or held for an extended period of time.
Anything that is held for a long time changes ownership frequently.
For example, ownership of a life insurance policy may be transferred to a third party as a charitable donation.
By obscuring the source of premiums paid, the transferred owner is more free to exercise contract privileges with withdrawals.
Integration
This is the final process.
Here, the purified money makes its way into criminal hands and eventually into the financial system.
Once the money has been laundered it can be used immediately.
This money can be invested or used publicly, and questions as to its origin can be legitimately answered.
Money Laundering and Life Insurance
Money Laundering usually comes at a price, and by the time the entire process is complete, it may be worth much less than its original value.
This is because those who provide money laundering are aware of the risks and importance of the service, so they charge a fee when laundering money or the money becomes worth less than its original value in the process.
For this reason, life insurance and annuities are sometimes used for money laundering.
There are cases where insurance companies sell life insurance without conducting detailed checks.
The process of money loaning with life insurance
Cash Value Life Insurance and Deferred Annuity Contracts allow owners to access funds through policy loans, partial withdrawals or complete surrender.
In particular, free-look surrenders are more attractive to criminals because they allow them to avoid surrender charges.
It will be considered a reasonable Business Expense for the privilege of accessing the contracted Value as needed.
Regardless of the form of distribution, a check issued by the insurance company gives legitimacy to the payment.
Funds obtained in this manner appear to be completely legitimate and can be sent or wired anywhere.
Examples of life insurance being used for money loaning
In the past, it has been revealed that drug trafficking organizations outside the United States have purchased large amounts of cash value life insurance in the United States, the United Kingdom, and other locations through a small number of insurance brokers.
The policies were purchased with tens of millions of dollars worth of drug sales that were sent to the insurance companies by third parties around the world via check and wire transfer.
Policyholders who were associated with drug trafficking organizations received checks or wire transfers from the insurance companies for what appeared to be legitimate insurance payments.
Other possibilities
- You can buy a life insurance policy and then cancel the policy during the free-look period to receive a refund of your premiums. The returned premium can then be used to purchase other assets or investments, adding a layer to the process and allowing the money to work its way into the financial system.
- You can purchase a life insurance policy and use the value of the policy as collateral for a loan to purchase real estate. The loan is repaid by surrendering the policy, and you now own an asset that you can keep or sell at a later date.
- Using the illegal funds, they may purchase life insurance policies from terminally ill insureds, designating an offshore company or a group of foreign investors as the beneficiary of the policy. When the insured dies, the proceeds are paid to the company or investors as a legitimate death benefit.
Money Laundering Regulation
Federal anti-money laundering laws have evolved over the past several decades.
The history of AML regulations began in 1970 with the Bank Secrecy Act.
The law that has the greatest impact on insurance companies is the USA PATRIOT Act, which is a direct successor to the Bank Secrecy Act.
The USA PATRIOT Act created Financial Crimes Enforcement Network (FinCEN) regulations that govern AML requirements and responsibilities for insurance companies.
Source: History of Anti-Money Laundering Laws (Financial Crimes Enforcement Network)
https://www.fincen.gov/history-anti-money-laundering-laws
Bank Secrecy Act of 1970
The first significant federal AML law in the United States.
Established a requirement for financial institutions to report large cash deposits.
Initially targeted only at banks, it now requires financial institutions to keep records and report cash (or cash equivalent) transactions in excess of $10,000.
The information provided will be used by domestic and international law enforcement agencies to identify and prosecute money laundering.
What’s included:
- Cash payments over $10,000 received in a trade or business from a single buyer must be reported to the IRS on Form 8300.
- Companies and individuals with foreign bank accounts, brokerage accounts, mutual funds, unit trusts, or holdings totaling more than $10,000 must report their accounts annually to the IRS.
- Banks are required to file Suspicious Activity Reports (SARs) about “suspicious activities related to possible violations of law or regulation.”
The USA PATRIOT Act of 2001
The Uniting and Strengthening America Act (The USA PATRIOT Act) is a law passed after the September 11, 2001 terrorist attacks.
It was created to strengthen weaknesses in the U.S. economic system that may have contributed to this terrorist attack.
Among its provisions, the USA PATRIOT Act amended certain parts of the Bank Secrecy Act to extend its application to non-bank financial institutions, including insurance companies and securities firms.
Additionally, the act increased law enforcement’s ability to search electronic communications and medical, financial and other records.
Importantly for the insurance industry, it expands the Treasury Department’s authority to regulate financial transactions, particularly those involving foreign individuals and entities.
FinCEN Final Rules
Due to the nature and complexity of insurance products, additional guidelines are needed to define how insurers should comply with AML requirements.
- Developing and implementing anti-money laundering programs for insurance companies
- Insurance companies report suspicious transactions
Anti-Money Laundering Act of 2020
The Anti-Money Laundering Act of 2020 (AMLA) further expands the Bank Secrecy Act and requires the adoption of additional priorities for anti-money laundering activities.
One of the priorities, and one being addressed by FinCEN, is efforts to detect and eliminate cybercrime, including procedures related to cybersecurity and virtual currency considerations.
The AMLA also includes the Corporate Transparency Act (CTA), which adds beneficial ownership reporting requirements.
summary
If a client purchases a product for the purpose of money laundering and you do not respond appropriately, you may be held legally responsible.
If you work in the business of dealing with life insurance or annuities, you will not only need to obtain a license, but you will also need to have knowledge about money landering and be able to handle it appropriately.