Changes to money laundering laws increase compliance obligations for life insurance industry

By Alain Thériault | March 17 2014 08:19PM

Changes to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations came into effect recently, bringing increased compliance requirements for insurers. Several will need to increase their vigilance and modify their information forms. Segregated funds held outside of an RRSP are one of the products that will be affected.On Feb. 1, the federal Department of Finance released the amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations. In Article 11.1, the legislation states that the regulations apply to a range of financial institutions including life insurers, as well as life insurance agents and brokers.

At the same time, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) has issued guidelines to clarify how the regulations should be interpreted. FINTRAC is the agency responsible for analyzing the suspicious transaction reports (STRs) that are transmitted by banks, financial cooperatives, insurance companies, money services businesses, and casinos. It takes action when an STR suggests there may be dishonest intentions.

The concept of a business relationship lies at the heart of the new regulatory regime. Lawmakers are emphasizing the importance of keeping up constant monitoring. A consultant who specializes in money laundering compliance and prevention, Jean-François Lefebvre explains that continuous monitoring covers all transactions occurring in a business relationship, on all accounts held by the same customer. “Any transaction, whether it be $5 or $500, is part of that relationship,” explains Lefebvre, who worked for FINTRAC for several years.

The new regulations require financial institutions to pay greater attention to the transactions that they see as part of their daily routine. They need to determine the client’s underlying intentions and whether they increase the risk he poses. FINTRAC’s ultimate goal is to detect dishonest intentions before it is too late. Thus, Article 53.1 calls on institutions to take reasonable measures to verify the identity of any person who performs or attempts to perform a suspicious transaction, and report the information to FINTRAC. Lefebvre points out that the old regulations only stipulated that those who actually conducted a transaction were to be reported.

In addition, insurers are now obliged to obtain information on the client’s identity, while previously they were only required to take reasonable steps to do so. The regulations are also more specific about the information to be obtained on the shareholders of a corporation. Article 11.1 provides that, in the course of verifying information, the insurer must obtain “the names of all its directors as well as the names and addresses of all persons who own or control directly or indirectly, at least twenty-five per cent of its shares.”

In its Guideline 6A on Record Keeping and Client Identification for Life Insurance Companies, Brokers and Agents, FINTRAC explains how insurance companies must tighten their controls. The section on business relationship records (5.1) indicates that the insurer or the advisor must keep a record of the purpose and intended nature of the business relationship, and must periodically review this information and keep it up to date.

“This may lead you to increase the frequency of ongoing monitoring, update their client identification information more frequently, and adopt any other appropriate enhanced measures,” explains FINTRAC in its guidelines.

Casts wide net

“The legislation casts a wide net, allowing for business relationships considered low risk to be re-designated as high risk if new information should warrant,” says Mr. Lefebvre. The FINTRAC guidelines include a partial list of purposes and intended natures of a business relationship, including financial planning and advice, capital preservation, and estate planning and preservation.

FINTRAC has high hopes for these new regulations. “The simple requirement to identify oneself is an important deterrent”, said FINTRAC director Gérald Cossette in a speech at the Association of Certified Anti-Money Laundering Specialists (ACAMS) conference held in Montreal on Feb. 11.

However, the head of FINTRAC wants to step up this deterrent to money laundering with more effective compliance, which is the ultimate goal behind the recent changes. “What is required of you is common sense,” he told an audience composed of one hundred compliance officers, many of whom were from the insurance industry and legal and accounting firms. “You must exercise continuous supervision, recognizing that a customer’s risk profile may change. Continuous verification, we hope, will allow us to detect these changes.”

Chain of events

Through this continuous monitoring, FINTRAC hopes to receive more suspicious transactions reports and be better able to reconstruct the chain of events. “A transaction by itself says nothing. On the other hand, a series of transactions can demonstrate a pattern. A suspicious transaction is not dishonest in itself, but it can later be used to identify an at-risk client,” explains Cossette.

The obligation to report suspicious transactions applies at all times, whether or not it occurs in the context of a business relationship as prescribed by the federal regulations. However, Jean-François Lefebvre points out that the business relationship designation only targets transactions in which the client must be identified. He notes, for example, that segregated funds held in a registered account (RRSP) are exempt but not non-registered segregated funds.

Jean-François Lefebvre is also skeptical about the statement on the Ministry of Finance website about the impact of the proposed changes, which claims they do not impose an additional administrative burden on reporting entities. “I do not agree. Everyone will have more work to do,” he says. “The impact will vary depending on the resources of each organization. Some are better equipped to cope.” He believes that many insurers will need to, among other things, change their software.

As for Jean-François Morin, the chief compliance officer of Desjardins Insurance, he believes that insurers will need to review their forms and add sections which will allow them to document the business relationship. “FINTRAC believes that continuous monitoring of the business relationship will allow us to see something else. For some manufacturers, you will see the introduction of very specific questions, such as ‘describe or specify the reason for acquiring the product’,” he says.

Morin expects most insurers will change their information forms. “Others will rely on the information they have already gathered elsewhere” he comments. Desjardins will take it step by step, he says, changing forms as new products are launched, or in conjunction with other regulatory initiatives.

This is probably what the insurer intends to do when it introduces forms to comply with the U.S. Foreign Accounts Tax Compliance Act (FATCA). This legislation is meant to counter tax evasion among U.S. taxpayers who hold accounts abroad, and will come into force on July 1.

While it waits to revise its forms permanently, Manulife Financial is using a temporary form. This temporary measure will allow the insurer to verify the identity of the insured and how he or she intends to use an individual universal life contract or Performax Gold policy. Advisors will need to complete this form to set up new contracts or make changes to existing ones, for example in the event of a term to permanent conversion or a change of ownership, says the insurer in a notice to its sales force.

The financial advisor must also complete the form when submitting a new application for a non-registered Manulife Investments contract. In July 2014, Manulife Investments plans to update various applications and says it will incorporate new questions so that advisors will not be required to complete a separate form. The products covered by future forms will include the RetirementPlus products, GIF Select, PensionBuilder, as well as guaranteed interest accounts and annuity products.

Jean-François Morin believes that the regulation is causing a commotion because of the low volume of life insurance transactions that could qualify as suspicious activities.

“Of course the regulations that came into force on Feb. 1 will give insurers a better understanding of how a client could conduct a suspicious transaction. But they are targeting activities. For example, RRSPs are exempt but not non-registered products, which have a lower volume,” says Morin.

He expressed some other reservations about the new regulations. “The February 1st regulations ask that insurers document the reason for which the customer is buying a policy. Strictly speaking, some will say it adds a specific duty. In the general sense, I would say it is clarifying the fundamental duty that we have to be alert in order to detect suspicious transactions,” he says.

He argues that the way the regulations require the relationship be documented, trying to predict what will the customer will do, is unclear. “Our role is to check everything beyond the normal relationship. As such, the indicators that FINTRAC provides that suggest things to look for are extremely approximate. They are defined a priori and are ill-suited to our situation, where it is not easy to launder funds with a life insurance product,” adds Morin.

In life insurance, he believes that it is obvious that the customer is buying the product for protection. “If we add a question to the form that asks what the policy is for, that will be the answer in 99.9% of cases,” he comments. “This does not get us very far, and it will not detect more suspicious transactions.”

As for Jean-François Lefebvre, he points to a lack of communication between FINTRAC and the industry. “People in the insurance industry want more answers. The rules are written with deposit-taking institutions in mind, which is not always good.”

Speaking on the sidelines of the event where he was a speaker, the director of FINTRAC told The Insurance and Investment Journal that the organization intends to spend more time looking at the different sectors with which it is less familiar, such as life insurance. “We understand, however, that in this sector, it is possible to deposit a substantial amount in an insurance policy and sell it the next day,” says Gérald Cossette.

Yet Morin believes that this is a rare event. “This is a profitability disaster for the insurer, which pays a large commission to the advisor and ends up with a sudden hole in its long-term investments,” he comments. In his opinion, insurance products are not attractive to money launderers who want to buy and sell everything quickly to cover their tracks. An insurance product that is redeemed within a period of three to five years sets off a red light with an insurer, and triggers an automatic check.

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