Anti-money laundering rules disconnected from MGAs’ reality

By Kate McCaffery | May 22 2012 05:14PM

Regulation developed to address money laundering is so disconnected from the reality of a Managing General Agency’s (MGA’s) actual function, it will subject Canadian Association of Independent Life Brokerage Agencies (CAILBA) members to severe legal and regulatory consequences if changes are approved by the Senate.This is the position put forth by CAILBA in December when it responded to proposed changes to Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act. More recently, in March this year, Allan Bulloch, president of IPG Insurance and director of CAILBA’s legislative affairs, addressed the Senate Committee on Banking Trade and Commerce, to respond to questions about the association’s position.

In short, he says the rules would create compliance requirements that MGAs would simply be unable to surmount.

Deep concern

“We expressed deep concern over the current disconnect between how MGAs are regulated and the actual functions they perform,” writes CAILBA president, Paul Brown, in an open letter to members in March. Even more troubling, he says the recommendations would have the effect of creating a business relationship between MGAs and the end client in law, where no such relationship exists in reality.

In another meeting with members of the Department of Finance, Mr. Brown says “we discovered that there is very little understanding about the role MGAs play.”

Anti Money Laundering (AML) rules require that organizations do extensive checks to verify customer identities, their business relationships, and to scrutinize transactions, particularly when monies being exchanged exceed $10,000. Proposed changes would reduce this threshold to zero.

In the course of their discussions with the Senate committee and with the Department of Finance, CAILBA has pointed out that MGAs do not handle cash. The same assertion was put forth to the Senate committee by Frank Swedlove of the Canadian Life and Health Insurance Association (CLHIA).

CAILBA also echoed the CLHIA’s position that life insurance is a low-risk business as far as money laundering is concerned: Not only are companies in the industry not involved in the “placement stage” of money laundering – the companies do not accept cash – insurance products, in general, are simply not a suitable vehicle for laundering money. “For products like these, one really questions the need for any AML review,” says Mr. Swedlove.

In his submission to the Senate, Mr. Bulloch told those gathered that industry stakeholders are united on the need to find cost-effective ways of dealing with money laundering risks, but are adverse to more regulation when there are likely other options.

“CAILBA membership is particulary concerned about the manner in which even current regulation is applied to MGAs,” he says. “It’s the advisor who meets with clients face to face, verifies or ascertains identification and performs other mandated functions. The advisor is in the best position to assess the behavior, other circumstances and the reasonableness of the client’s request and transaction, given that they meet face to face.”

Contractual obligations

He also points out that MGAs are responsible, by contractual obligation, “first and foremost” to insurance companies. “Insurers do not delegate AML responsibilities to MGAs,” he says.

Moreover, in describing the myriad of ways FINTRAC currently requires institutions to monitor transactions over $10,000 – the advisor has checks to make, as does the MGA. When insurance companies receive a cheque for $10,000, their own compliance mechanisms go to work, as do those at banks when the money is withdrawn or deposited – Mr. Bulloch points out, that it is unlikely that anyone genuinely interested in laundering money through an insurance contract will fail because of the paperwork required.

“If I was a crook, or if I was a drug dealer, my goal would be to make sure the paperwork is complete, right? We’re not accomplishing anything.”

That paperwork burden is expected to become even more onerous if proposed changes result in the transaction value threshold being dropped. Presently, Mr. Bulloch says those deals which exceed the $10,000 threshold need to go to a compliance officer who, in turn, needs dig further to determine where clients and advisors met, and to determine if the policy sale makes sense, given the circumstances.

Overall though, he says CAILBA’s biggest concern about the money laundering act is the assumption that MGAs are themselves brokers who deal with end clients.

“MGAs simply do not have this relationship with customers. People do business with advisors and insurers. To create regulation as if the relationship exists is also to create unachievable compliance responsibilities with MGAs,” Mr. Bulloch says.

“We sincerely hope the current disconnect between how we are regulated and the actual functions we perform will not be magnified by proposed changes. Whatever is adopted should take into account the low-risk nature of the business we do, our need for far more specific information about how money can be laundered in our business (a CAILBA investigation found only one person in all of Canada has been charged for money laundering in the 10 years since AML rules have been in place), and in cost effective solutions that include industry collaboration on best practices, rather than punitive regulation.”