Insurance companies have been facing additional pressure from regulatory bodies to take imperative steps and revert money laundering. While they offer huge reimbursements for accidents, property damages, and other issues, criminals see them as an easy target to hide illicit funds. Fraudulent insurance claims rose to 20% in 2022, which is another increasing concern for indemnity firms. Considering their inefficiency, regulatory bodies are toughening Anti-Money Laundering (AML) requirements for these companies.
Insurance firms should improve their AML verification mechanisms to keep up with evolving regulatory frameworks. One of the major reasons behind compliance risks is the perception that companies selling policies will attract fewer money launderers. The case is completely the opposite because for fraudsters it is an easy way to escape AML compliance.
Crack Down of AML Regulatory Watchdogs on Insurance Companies
Dealing with a huge flow of transactions like financial institutions may not be a trait of insurance companies, but they do handle high-value contracts. Therefore, criminals see indemnity firms as an easy way to launder money. By transferring insurance policy ownerships, selling their life endorsements in illegal third-party markets, and taking out loans, they hide the proceeds of crimes. Similarly, creating camouflaged accidents and creating fake death scenarios are other ways to reap illicit insurance coverage.
Keeping the rising threats in insurance companies under consideration, anti-money laundering regulatory bodies are clamping down on their operations. They are toughening the existing crime prevention requirements while increasing penalties for firms with inadequate fraud controls. The next section entails changing AML security standards put forth so far by regulatory watchdogs:
Guidelines by the Financial Action Task Force (FATF)
FATF put forth Risk-Based Approaches (RBA) requirements for insurance companies in 2018. Since then, it has been toughening requirements to deter money laundering, terrorist financing, and illicit claims. Soon after making Customer Due Diligence (CDD) another obligation, FATF also mandated intermediaries to perform the same strict anti-money laundering checks. This way, insurance firms can rely on third parties’ risk-scoring, saving them additional processing time.
Insurance companies should strengthen their AML compliance mechanisms to monitor coverage transfers, claims, and authenticity of incidents for saving their reputation. Else, they can face heavy regulatory scrutiny and hefty non-compliance penalties.
United Kingdom (UK)’s Regulations
Within the UK, insurance firms are dual-regulated by both AML screening legal bodies involving Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA). The former describes the functioning and conduct perspective of indemnity companies while the latter outlines policies and standards liable to abide by. Insurance firms are regulated under the anti-money laundering framework of the Financial Services and Markets Act 2000 (FSMA)
Insurers are subject to regulations enforced within the PRA Rulebook and FCA Handbook. These legal AML verification requirements are in accordance with the European Union (EU)’s insurance directives. Furthermore, as per the standards set out by the Proceeds of Crime Act, insurance firms need to track suspicious customer behaviour and report it to regulatory bodies.
AML Security Solutions – Detering Financial Crimes Surfacing Insurance Firms
Insurance companies are equally on the firing line of fraudsters to launder money along with other financial institutions. Somewhat around two-thirds of firms encountered a flow of illicit funds in 2022. Furthermore, due to insufficient AML compliance controls, this number is projected to increase in the upcoming years. Concerning this increase in nefarious financial activities, regulatory watchdogs are diverting their focus to insurers. Legal bodies are handing out penalties and imposing sanctions on insurance companies failing to meet AML monitoring requirements.
Money laundering, illegal transfers, and false insurance claims are some of the major threats attracting regulatory scrutiny for indemnity companies. With advanced document forgery, spoofing, and identity theft techniques at their disposal, potential criminal risks are sure to result in the downfall of the insurance sector.
Role of Online AML Tools
Insurance companies should integrate efficient AML solutions to overcome increasing criminal threats. With a dramatic increase in fraud over the years, strengthening digital onboarding with enough money laundering prevention controls has become crucial. AI-powered AML tools work on mathematical algorithms that are hard to breach and identify criminals in real time. Furthermore, automated ongoing activity monitoring, risk assessment, and due diligence further leave less room for illicit claims.
In a Nutshell
The absence of adequate AML systems drives insurance companies to regulatory scrutiny, sanctions, and complete closure. Insufficient fraud prevention controls hinder the growth of these firms. They further create space for criminals to claim fraudulent coverage and flee with illicit financial benefits. As a result, staying put with changing anti-money laundering frameworks becomes challenging, leaving insurance firms with huge fines. Hence, they need to integrate robust AML compliance solutions for identifying risky customers, performing due diligence, and mitigating other risks involved.