Overview
The application of the USA PATRIOT ACT of 2001 (the "Patriot Act") to the insurance industry became clear on October 28, 2005, when the Treasury Department's Financial Crimes Enforcement Network ("FinCEN") issued final rules essentially requiring life insurance companies to establish formal Anti- Money Laundering Programs and file Suspicious Activity Reports. The final rules were published in the Federal Register on November 3, 2005 and become effective December 5, 2005, with an effective compliance date of May 2, 2006. Specifically, insurance companies subject to these rules must establish an Anti-Money Laundering Program by May 2, 2006. Suspicious Activity Reports must be filed for transactions occurring after May 2, 2006.
Patriot Act Basics and the Insurance Industry
Generally speaking, the Patriot Act requires certain financial institutions to develop formal Anti-Money Laundering Programs, which must include, at a minimum, reasonable detection and reporting procedures, the designation of a compliance officer, ongoing employee training programs, and independent auditing and testing of the program (the "AMLP requirement"). In addition, the Patriot Act requires covered financial institutions and other persons to comply with various currency and suspicious activity reporting requirements and "customer identification" rules.
Insurance companies – along with other designated financial services institutions – were originally required to develop their formal Anti-Money Laundering Programs by April 24, 2002. However, the Treasury Department – pursuant to authority granted to it under the Patriot Act – deferred indefinitely application of the AMLP requirement to the insurance industry. The purpose of the deferral was to provide the Treasury Department time to study the insurance industry and to consider how anti-money laundering controls could best be applied. Accordingly, the Treasury Department issued proposed rules to extend the requirements to establish Anti-Money Laundering Programs and report suspicious transactions to insurance companies.
Anti-Money Laundering Program and Suspicious Activity Reporting Final Rules
The Treasury Department has finished its review of the proposed rules and has concluded that the final rules should only apply to insurance products that possess features that make them susceptible to being used for money laundering, the financing of terrorism, or other illicit activity. The rules do this by defining an "insurance company" as any person engaged within the U.S. as a business issuing or underwriting of any "covered product." For purposes of the final rules, the term "covered product," is defined to mean:
- a permanent life insurance policy, other than a group life insurance policy;
- an annuity contract, other than a group annuity contract; and
- any other insurance product with cash value or investment features.
The final rules effectively require life insurers issuing such products to develop formal Anti-Money Laundering Programs and file Suspicious Activity Reports. However, comments to the final rules exempt P&C and health insurers from such obligations because the insurance products of most P&C and health insurers do not possess features that make them susceptible to being used for money laundering. Comments to the final rules also indicate that the final rules do not apply to reinsurance or retrocession contracts or treaties. In addition, term life (which includes credit life) insurance policies are excluded from the scope of the final rules.
The final rules also expressly exclude insurance agents and brokers from the definition of an "insurance company," even if they engage in the sale or distribution of covered insurance products. Agents and brokers therefore will not be required to independently establish Anti-Money Laundering Programs for their respective businesses or file Suspicious Activity Reports. This reflects the Treasury Department’s conclusion that insurers are in the best position to: (i) design effective Anti-Money Laundering Programs for their products; and (ii) guard against their products being used to launder illegally derived funds or to finance terrorist acts. However, an insurance company subject to the final rules is required to integrate its insurance agents and brokers into its Anti-Money Laundering Program and to monitor their compliance with its program. In addition, insurance companies are required to obtain customer information from all relevant sources, including its agents and brokers, and to report suspicious activity based on such information.
With respect to the AMLP requirements, insurance companies that offer a wide variety of products do not need to develop a company-wide Anti-Money Laundering Program. The AMLP requirements only apply to covered products, as defined above. Under the Suspicious Activity Reports final rule, insurance companies are encouraged to report any transaction that appears relevant to a violation of law or regulation. However, an insurance company is obligated to report any transaction involving $5,000 or more in funds or other assets, if the insurance company knows, suspects, or has reason to suspect that the transaction:
- involves funds derived from illegal activity or is intended or conducted in order to hide or disguise funds or assets derived from illegal activity; or
- is designed, whether through structuring or other means, to evade the requirements of the Bank Secrecy Act; or
- has no business or apparent lawful purpose, and the insurance company knows of no reasonable explanation for the transaction after examining the available facts; or
- involves the use of the insurance company to facilitate criminal activity.
The threshold amount obligating an insurance company to report suspicious transactions "is not limited to insurance policies whose premiums meet or exceed $5,000; but rather, includes a policy in which either the premium or maximum potential payout meets the threshold."
Existing Anti-Terrorism Obligations
In addition to the Treasury Department’s final rules on Anti-Money Laundering Programs and Suspicious Activity Reports, all insurance companies, agents and brokers continue to be required to comply with existing currency reporting requirements stemming from the Patriot Act. Moreover, all insurance companies, agents and brokers are subject to reporting requirements concerning the transportation of currency across U.S. borders, as well as various federal trade restrictions – enforced by the Treasury Department’s Office of Foreign Assets Control ("OFAC") – preventing U.S. persons from doing business in certain countries and with certain "blacklisted" individuals and entities. These obligations existed prior to the passage of the Patriot Act and are unaffected by the Treasury Department’s recently released final rules.
The Anti-Money Laundering Program and Suspicious Activity Report final rules and accompanying Frequently Asked Questions can be found on FinCEN’s website at http://www.fincen.gov/newsrelease10312005.pdf.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
