On October 17, 2002, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued another proposed rule that applies provisions of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act) to insurance companies. The most recent proposed rule supplements a rule proposed on September 26, 2002, which applied the USA PATRIOT Act to insurance companies and required those companies to enact anti-money laundering procedures and mechanisms.
This latest proposed rule is in addition to the proposed requirement for insurance companies to establish anti-money laundering programs and requires those companies to report suspicious transactions to the U.S. Department of the Treasury. In the USA PATRIOT Act, Congress amended the Bank Secrecy Act to authorize the Treasury to "require any financial institution, and any director, officer, employee, or agent of any financial institution to report any suspicious transaction relevant to a possible violation of law or regulation."
The current proposed rule only applies to insurance companies, essentially defined as businesses that issue, underwrite or reinsure life insurance policies, annuity contracts or insurance products with similar investment features that can be used to store value and transfer that value to another person. The current proposed rule does not require direct reporting by individuals, captive or independent agents or brokers, although the Treasury is considering whether to apply these reporting requirements to agents and/or brokers.
Summary of the Proposed Rule
Under the proposed rule "[e]very insurance company shall file with FinCEN, to the extent and in the manner required by this section, a report of any suspicious transaction relevant to a possible violation of law or regulation." Transactions that would be required to be reported under the proposed rule include those transactions that are conducted or attempted by, at or through an insurance company and involves or aggregates at least $5,000 in funds or other assets, and the insurance company knows, suspects, or has reason to suspect that the transaction:
- involves funds derived from illegal activity or is meant to hide or disguise funds derived from illegal activity as a part of a plan to violate or evade U.S. federal laws or reporting requirements;
- is designed or structured to evade the requirements of the Bank Secrecy Act;
- has no apparent business or lawful purpose that could normally be attributed to the customer after examining the available facts, including the background and purpose of the transaction; or
- involves using the insurance company for a criminal purpose.
Notwithstanding the fact that insurance companies already report cash transactions involving $10,000 to FinCEN, the proposed rule would apply to all suspicious transactions involving at least $5,000.
The proposed rule places the burden of reporting suspicious transactions solely on the insurance company involved in the transaction and not on agents or brokers. The proposed rule expects that "to the extent that a transaction involving an insurance company is conducted through an insurance agent or broker, the insurance company shall obtain all the information necessary to ensure its compliance with the requirements of this section."
In most cases under the proposed rule, an insurance company will be required to complete and submit a Suspicious Activity Report by Insurance Companies (SAR-IC) and collect and maintain the required data. The company must maintain the SAR-IC and supporting documents for five years from the date of filing the SAR-IC.
Examples of transactions that would likely trigger the requirement for filing an SAR-IC include the following:
- The purchase of an insurance product that appears to be beyond a customer’s normal pattern of business.
- Any unusual method of payment, particularly by cash or cash equivalents.
The purchase of an insurance product with monetary instruments in structured amounts.
- The early termination of an insurance product, especially at a loss or where cash was tendered and/or the refund check is directed to a third party.
The transfer of the benefit of an insurance product to an apparently unrelated third party.
- Little or no concern by a customer for the performance of an insurance product, but much concern about the early termination of the product.
The reluctance by a customer to provide identifying information when purchasing an insurance product or who provides minimal or fictitious information.
- The borrowing of the maximum cash surrender value of an insurance policy soon after paying for the policy.
Insurance companies will also be required to maintain the report of any suspicious activity in strict confidentiality. The company may not "notify any person involved in the transaction that the transaction has been reported." This confidentiality must be maintained even when documents are requested for legal proceedings. "[A]ny person subpoenaed or otherwise requested to disclose a SAR-IC or the information contained in the SAR-IC, except where such disclosure is requested by FinCEN or another appropriate law enforcement agency, shall decline to produce the SAR-IC…and shall notify FinCEN of any such request and its response thereto."
Insurance companies and their officers, directors, employees and agents are protected from liability under the proposed rule for any disclosures contained in an SAR-IC.
Violations of the Bank Secrecy Act, as amended by the USA PATRIOT Act can result in civil fines of up to $25,000 and criminal penalties of up to $250,000, five years imprisonment or both. Repeated or patterns of violations can result in even higher fines and penalties.
If an insurance company is registered or required to register with the U.S. Securities and Exchange Commission (SEC) as a result of the issuance of such insurance products, it will be deemed to have satisfied the proposed rule to the extent that it complies with the anti-money laundering program requirements applicable to such activities, as required by the SEC or by a self-regulatory organization registered with the SEC.
Proposed Rule Is Open for Public Comment
The proposed rule is open for public comment until December 16, 2002. FinCEN specifically seeks input on the following questions:
- Is the scope of the definition of an insurance company appropriate in light of money laundering risks in the industry?
- Should the rule also require insurance agents (captive, independent or both), or any subset of agents, to report suspicious transactions to FinCEN?
Should the rule also require insurance brokers, to report suspicious transactions to FinCEN?
- Is any reporting dollar threshold, including the $5,000 threshold in the proposed rule, appropriate?
- Is the exception from reporting for routine insurance fraud unrelated to money laundering or terrorist financing appropriate, and should any other exceptions should be included in the rule?
At present, it is anticipated that any final rule on this subject will not enter into force until 180 days following its publication in the Federal Register.