Lawyer Article

Published in the November 8, 2005 issue of Southeast Tech Wire.

As part of the nation’s ongoing effort to implement the USA Patriot Act and confront the threat of money laundering, on November 3, 2005, the U.S. Department of the Treasury (“Treasury”) published final rules requiring insurance companies that issue or underwrite permanent life insurance, or other policies with investment features, to (1) establish their own internal anti-money laundering and customer identification programs, and (2) begin filing Suspicious Activity Reports (SARs). Companies will have until May 2, 2006 to create compliance and customer identification programs, just as banks and other financial institutions have been required to do since early 2002. Insurance companies will now be required, under the threat of civil and criminal penalties, to develop their own written policies to ensure that their financial products are not being used to facilitate money laundering or the financing of terrorist activities. In addition, companies will be required to designate a compliance officer, implement employee training, record-keeping, and audit procedures, and file SARs when employees detect suspicious transactions.

Originally passed in the wake of the September 11, 2001, attacks, the USA Patriot Act seeks to combat terrorism by strengthening the government’s ability to track the funds of terrorist organizations. Enlisting the private sector in these efforts, Section 352 of the Patriot Act amended the Bank Secrecy Act by requiring financial institutions to establish anti-money laundering programs that permit more rigorous scrutiny of customers and transactions. While insurance companies were included in the Patriot Act’s definition of “financial institutions,” Treasury deferred applying the rules to them until now so it could determine how best to apply its requirements to the insurance industry.

As a result of numerous comments, Treasury limited the Act’s application to insurance companies or insurers in the United States that issue or underwrite the following products: (1) permanent life insurance policies, other than group life insurance policies; (2) annuity contracts, other than group annuity contracts; and (3) any insurance product with an investment portion or cash value. Importantly, companies that issue only property, casualty, health, and mortgage insurance are exempt. Companies that offer both covered and exempt products will be required to implement a program only with respect to the covered products.

Additionally, the Rule specifically excludes insurance agents and insurance brokers, and instead imposes the obligation for compliance and training upon the insurance company itself. Independent agents and brokers will not be required to implement their own compliance program. However, the comments to the Rule make it clear that companies will be held responsible for ensuring that their agents and brokers comply with the company’s anti-money laundering program.

The rules permit an insurance company to create its own written anti-money laundering program based upon a risk assessment that takes into account such factors as its customer base, geographic location, type of product, and distribution channels. However, each anti-money laundering program must include at a minimum:

(1) the development of internal policies, procedures, and controls to prevent the use of a company’s products to engage in money laundering;

(2) the appointment of a compliance officer responsible to management for implementing and supervising the program;

(3) a training program for employees to detect suspicious activity; and

(4) an independent audit function to ensure adequate development and execution of the anti-money laundering program.

To create an appropriate program, companies should begin by reviewing their customer identification and record-keeping procedures to ensure that they obtain adequate information at the sales level. Make sure that you know your client and that you have the tools you need to identify suspicious transactions. Management should conduct a risk analysis to determine, based upon the company’s products and the size of the market, how extensive a program it needs. Finally, you should begin preparing training programs for all employees to help them understand how to identify and report suspicious activity.

The law requires that insurance companies be vigilant in preventing the use of their products to conceal the proceeds of illegal activity. Insurers must now establish reliable procedures to ensure that all personnel are able to identify risks. Senior management will be responsible for ensuring that the policies are implemented, at the risk of possible civil and even criminal penalties. Womble Carlyle has extensive experience advising clients on anti-money laundering issues, including the design and implementation of compliance procedures. Because of our longstanding experience in banking and insurance, we can provide cost-effective solutions for insurance companies faced with these new regulations.

If you would like to receive more information about this subject, or if we can be of assistance, please contact any of the following attorneys at Womble Carlyle.

The purpose of this executive summary is to provide a general summary of significant legal developments to our clients and friends.

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