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Money laundering and the insurance industry

Money laundering and the resultant financial undermining of economies is having an increasingly devastating effect on businesses and individual taxpayers worldwide. 'Dirty money', derived through criminal activities ranging from extortion and drugs/arms trafficking to large-scale tax evasion, has resulted in large amounts of cash being laundered through so-called 'legitimate' means in an effort to conceal their illicit origins.

Laundering methods include the use of shell corporations, offshore financial havens, cash only businesses, financial service institution abuse and the use of formal securities, insurance and money changing sectors, often making illegal practices difficult to detect or prove.

"Organised crime syndicates generate large amounts of cash and their sole objective is the conversion of the illegally obtained profits into legitimate assets. Money laundering, generally, takes place in three phases, namely placement (disposal of ill-begotten gains), layering (financial transactions aimed at distancing illicit proceeds from their origins) and integration (money being absorbed into the financial system). Unsuspecting and/or uninformed industries, if not aware of the above-mentioned distribution mechanisms, could unwittingly fall victim to one of these scams," says Zibeth Beytell, Consultant, Alexander Forbes Risk Engineering.

"The insurance industry is left vulnerable as money launderers often seek to purchase life and other insurance cover in an effort to 'integrate' illegitimate money into the legitimate financial system. Insurance companies are also, therefore, at risk of violating the Financial Intelligence Bill (promulgated in August 2000) as short and long-term insurance businesses, as well as brokers, are deemed Accountable Institutions," adds Beytell.

An Accountable Institution is required to, according to the Financial Intelligence Bill, formulate and implement internal rules in respect of identity verification of individuals with whom they do business, adequate record keeping and the training of staff in money laundering recognition and handling.

"The prevalence of crime syndicates, as well as revised legislation relating to these activities, has necessitated that the insurance industry in South Africa implement control measures aimed at mitigating money laundering-related risks," concludes Beytell.

For further details contact Alexander Forbes Risk Services, tel: (011) 378 3503, fax: (011) 378 4294, e-mail: [email protected]

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