Monitoring Suspicious Activity and Reporting Requirements

Suspicious Activities

It is important to know your clients and recognize when their activities fall outside of the normal or expected range. Consider suspicious any transaction that appears to lack a reasonable economic basis or recognizable strategy. Be aware of activities that raise a red-flag and could indicate money laundering; some examples include, but are not limited to the following:

• Applicant who purchases policies in amounts considered beyond the applicant’s apparent means;
• Any unusual method of payment, particularly by cash or cash equivalents (when such method is, in fact, unusual);
• The early termination of a policy, especially at a cost to the customer or where cash was used or the refund check is directed to an apparently unrelated third party;
• The transfer of ownership or benefit of the product to an apparently unrelated third party;
• Applicant shows little concern for the investment performance of a product but more concern about the early termination features;
• Applicant is unwilling to provide information for identity verification;
• Applicant is reluctant to provide normal information, provides minimal or fictitious information, or provides information that is difficult or expensive to verify;
• Applicant requests to make a lump sum payment by wire transfer or with foreign currency;
• Applicant applies for a large insurance policy and within a short period of time cancels the policy and requests the cash value returned to a third party;
• Applicant wants to borrow the maximum cash value of a single premium policy soon after paying for the policy;
• Change of address to or change of ownership involving foreign countries;
• Applicant who purchases policies from several institutions in a short period of time;
• Large overpayment of premiums; and
• Unusually great concern with your or the insurer’s compliance with reporting requirements.

Suspicious Activity Report

If you suspect or know that a transaction involves funds related to an illegal activity or is designed to avoid regulations you must report the transaction to the Senior Life Market Compliance Department. A determination as to whether a report should be filed must be based on all the facts and circumstances relating to the transaction and customer. Different fact patterns will require different judgments.

You must not notify the client. The BSA prohibits employees and agents from informing clients that their activities have been or may be reported as suspicious, that a Suspicious Activity Report (SAR) is filed, or that an ongoing investigation regarding activities in his or her account is being conducted.

"Know Your Customer" Procedure and Due Diligence Activities

"Know Your Customer" is a fundamental principle used in complying with the obligations of due diligence to decrease the possibility of you or Senior Life being used to facilitate money-laundering activities. The following information should be collected concerning the client:

• Name
• Date of Birth
• Physical address (in addition to post office box)
• Social Security Number

The majority of clients are not involved in money laundering so it is important to be able to identify routine transactions versus suspicious transactions. A client profile provides:

• The ability to identify appropriate transactions and transactions requiring more security
• To detect a pattern of activity that is inconsistent with the client’s stated goals
• To detect inconsistent patterns or transactions
• To anticipate activities that may or may not be related to money laundering and may require further investigation

Federal rules require all records maintained under AML regulations be kept five (5) years and be reasonably accessible. If a state's regulations require the records be maintained for a longer period then they must be maintained for the longer time period. As an agent, be sure to keep all customer identification you obtain in the client’s file along with any information you provided to Senior Life. By documenting your actions, you protect yourself from possible penalties.

As an agent your responsibility does not end after the initial sale. If any of your future interactions with the client seem suspicious, notify Senior Life's Market Compliance Department. Learn enough about the client’s financial goals and situation to identify if a particular transaction makes sense for the client.

Background

Recognizing the need for a more comprehensive anti-money laundering regime to fight drug trafficking, organized crime, and international terrorism, the U.S. Congress passed and President George W. Bush signed into law the USA PATRIOT ACT (Patriot Act), which, among other things, amended the Bank Secrecy Act (BSA) to require all businesses defined in the BSA as financial institutions to implement an Anti-Money Laundering (AML) program and report suspicious transactions to the Financial Crimes Enforcement Network (FinCEN). An insurance company is defined as a "financial institution." The characteristics of financial products, including certain life insurance products, make them potentially vulnerable to those seeking to launder money. FinCEN relies upon a network of state, federal and international law enforcement agencies to collect, analyze and disseminate information about money laundering. FinCEN is also the repository for all Suspicious Activity Reports (SAR).

Bank Secrecy Act (1970)

The BSA grants the Treasury Department the authority to require firms under its jurisdiction to develop written policies and employee training programs for compliance with the provisions of the BSA. Additionally, the reporting and recordkeeping rules within the BSA require a financial institution to:

• Maintain certain records in order to allow investigators to trace transactions.
• Maintain certain records in order to allow investigators to trace transactions.
• This includes information such as the identity and address of the participants in a transaction.
• The legal capacity in which a participant in a transaction is acting.
• The identity of the beneficial owner of the funds involved in any transaction.
• A description of the transaction.
• File a Currency Transaction Report (CTR) with the Internal Revenue Service (IRS) for each transaction in currency of more than $10,000. The types of transactions include: deposits, withdrawals, or currency exchanges in an amount exceeding $10,000.
• For purposes of the CTR, multiple transactions taking place on the same day, for the same person, and the at the same financial institution count as a single transaction; this is known as the Aggregation Rule.
• File a Report of International Transportation of Currency or Monetary Instruments (CMIR) when the amount of currency or monetary instruments transported into or outside of the U.S. exceed $10,000. Monetary instruments include any traveler’s checks or other checks, securities, or stocks that have been signed over or are otherwise in such a form that ownership goes to the bearer.
• Maintain information concerning sales of monetary instruments purchased with cash in amounts from $3,000 to $10,000 to prevent structuring transactions.
• Keep records for any transmittal of funds over $3,000 (the "Travel Rule").
• Certain financial institutions must file a Suspicious Activity Report (SAR) for any suspicious transaction or activity.

USA Patriot Act (2001)

On the heels of the terrorist attacks on September 11, 2001, the Patriot Act was signed into law to combat terrorism. The Patriot Act gives law enforcement agencies broader powers in dealing with money laundering and terrorism, and makes it more difficult for money launders to use their traditional financial channels to launder money. The Patriot Act created new anti-money laundering responsibilities for insurance companies.

Money Laundering

Money laundering is the illegal practice of placing money gained from criminal activity, "dirty money," through a series of apparently legitimate transactions in order to hide the criminal origin of the money. The goal is to make money from criminal activity appear to be from legitimate sources. Money is usually associated with cash though non-cash transactions can play a role. Any financial transaction can be a part of the process to hide the origin of the money

Mechanics

Although money laundering is a diverse and often complex process, it basically involves three independent steps that can occur simultaneously, separately or overlap.

1. Placement. This is the first step in the washing cycle. Money laundering is a cash intensive business, generating vast amount of cash from illegal activities. The monies are placed into the financial system or retail economy or are smuggled out of the country. The aims of the launderer are to remove the cash from the location of acquisition so as to avoid detection from the authorities and to then transform it into other asset forms. A common method is “structuring” which breaks up the currency transactions into portions that fall below the reporting threshold. Examples for disposal of bulk cash include:
• Payment of premiums on life insurance policies or annuity contracts;
• Large number of transactions;
• Using cash;
• Using cash equivalents;
• Not using normal banking channels.
2. Layering. In the course of layering, there is the attempt at concealment or disguise of the source of ownership of the funds by creating complex layers of financial transactions designed to disguise the audit trail and provide anonymity. The purpose of layering is to disassociate the illegal monies from the source of the crime by purposely creating a complex web of financial transactions aimed at concealing any audit trail as well as the source and ownership of funds. Examples of layering include:
• Multiple transactions
• Purchasing financial products such as life insurance and annuities
• Cash transfers
• Currency exchanges
3. Integration. Integration is the final step in the process. It is this stage at which money is integrated into the legitimate economic and financial system and is assimilated with all other assets in the system. Integration of the "cleaned" money into the economy is accomplished by the launderer making it appear to have been legally earned. By this stage, it is very difficult to distinguish legal and illegal wealth. Methods popular to money launderers at this stage are:
• Purchasing legitimate businesses
• Borrowing against insurance policies
• Termination of insurance policies
• Early termination of annuities

Ramifications

Penalties for money laundering can be severe. Fines could be twice the amount of the transaction up to 1 million dollars. Any property involved in the transaction or traceable to the proceeds of the criminal activity may be subject to forfeiture. Individuals are subject to prison terms for being willfully blind to the fact that the transaction involved illegal funds. In addition, insurance companies risk losing their charter, and agents risk being removed and barred from insurance. Insurance companies have their own disciplinary policies and procedures.

Agents not complying could be subject to disciplinary action up to and including termination and will be reported to the proper legal authorities. To protect yourself from a willful blindness charge:

• Report suspicious behavior to the Senior Life Market Compliance Department and keep documentation of communication;
• Know your clients; and
• Stay alert for any suspicious behaviors.

Reputational Risks

One of the most harmful outcomes from involvement in a money laundering investigation is damage to the agent and insurance company's reputation. Being aware of and following money laundering requirements helps protect our most valuable sales tool, your reputation.