On September 26, 2002, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a proposed rule that would apply the anti-money laundering provisions of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act) to insurance companies (67 Fed. Reg. 60625). The USA PATRIOT Act amended the U.S. Bank Secrecy Act to "provide additional tools to prevent, detect and prosecute international money laundering and the financing of terrorism."
Since the USA PATRIOT Act entered into force on October 26, 2001, an ever-increasing arsenal of regulations has been promulgated to apply its provisions to "covered financial institutions," which include insurance companies. Regulations will continue to be promulgated until all covered financial institutions are required to implement anti-money laundering compliance programs.
Summary of the Proposed Rule
The proposed rule would require insurance companies to comply with the anti-money laundering provisions of the USA PATRIOT Act. These provisions include the development of internal policies, procedures and controls; the designation of a compliance officer; the implementation of an ongoing employee training program; and the creation of an independent audit function to test the programs.
FinCEN’s proposed rule would apply to those insurance companies that offer life insurance, annuities and other insurance products that have features of stored value and transferability. Law enforcement authorities believe that these products pose the most significant money laundering and terrorist financing risks because such products "allow a customer to place large amounts of funds into the financial system and seamlessly transfer such funds to disguise their true origin."
Under the proposed rule, insurance companies will be required to establish and maintain an anti-money laundering compliance program that is "reasonably designed to prevent the insurance company from being used to facilitate money laundering or the financing of terrorist activities." The program will also need to be one that "incorporates policies, procedures, and internal controls based upon the insurance company’s assessment of the money laundering and terrorist financing risks associated with its products, customers, distribution channels, and geographic locations." Insurance companies will be required to obtain "all the information necessary to make its anti-money laundering program effective. Such information includes, but is not limited to, relevant customer information collected and maintained by the insurance company’s agents and brokers."
In addition, the compliance program must be in writing, be approved by senior management, designate a compliance officer or committee, provide for education and training of appropriate personnel, be available for review by the U.S. Department of the Treasury upon request and be subject to independent testing.
The proposed rule would only apply 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 proposed rule states, "FinCEN believes that it is appropriate to place on the insurance company (which develops the products and bears their risk), the responsibility for obtaining all relevant information necessary to establish and maintain an effective anti-money laundering program."
The proposed rule recognizes that insurance agents may be in the best position to observe and identify patterns of suspicious money laundering or terrorist financing behavior, such as the purchase of life insurance policies or annuity contracts with multiple money orders or by customers who express little or no interest in the details of such products, including surrender charges. The proposed rule also requires an insurance company to assess the money laundering and terrorist financing risks posed by its distribution channels and to incorporate policies, procedures and internal controls integrating its agents and brokers into its anti-money laundering program.
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 Open for Public Comment
The proposed rule is open for public comment until November 25, 2002. Since insurance companies have not before been subject to these types of regulations, this comment period provides insurance companies with an opportunity to work with the U.S. government to ensure that the objectives of the USA PATRIOT Act and the proposed rule are achieved while, at the same time, minimizing additional burdens on life insurance companies. The Federal Register Notice publishing this proposed rule also specifically invited comments on the following four questions:
- Whether the scope of the definition of an insurance company is appropriate in light of money laundering risks in the industry.
- Whether the final rule also should require insurance agents (captive, independent or both) or any subset of agents to establish and maintain an anti-money laundering program.
- Whether the final rule also should require insurance brokers, or any subset of insurance brokers, to establish and maintain an anti-money laundering program.
- Whether the factors that should be considered as part of an insurance company’s risk assessment are appropriate.