Insurance companies in Asia are increasingly being used as vehicles to spirit money out of China and circumvent Chinese capital controls, officials said.
While insurance companies have been on high alert for potential money laundering risks in recent years, capital flight is a more recent phenomenon, but one that could have serious implications for the insurance sector, panelists at a conference argued.
In some cases, mainland Chinese insurance companies have tried to circumvent capital controls by obtaining insurance licences outside their domestic market to transfer funds out of the country, said Bill Majcher, president of EMIDR in Hong Kong. Speaking at the InnoXcell Annual Symposium in Hong Kong, Majcher highlighted the use of insurance to engage in private equity or hedge fund-style investments.
"I have routinely been asked by Chinese insurance companies, in some of the investment banking and advisory deals I do, to buy insurance licences in Hong and Taiwan and Greater China," he said. "They are not looking to sell insurance policies, they are looking for vehicles to bring money out [of China]. Until recently, who had heard of Chinese insurance companies doing multi-billion dollar hotel acquisitions?"
"When I see all this money and desire to get insurance vehicles from and outside of China, it tells me it is nothing more than a vehicle for capital flows. When it comes to how the insurance industry can be used to launder funds, there are so many different ways; it is not just a launderer buying a product," he said.
He also likened the fund outflow from China to a "giant Ponzi scheme" which would cause considerable problems in five years' time.
Majcher, a former inspector with the Royal Canadian Mounted Police ("RCMP"), said, historically, insurance had never seriously been regarded as an AML risk. "From a law enforcement perspective, in the past, insurance was never a major issue," he said.
Soeren Seitz, chief compliance officer at Manulife Asia in Hong Kong, and a co-panelist, said many insurance products, such as car insurance, medical plans and term life, were not good money laundering vehicles. "You have got to produce a death certificate, so it is only in pretty rare events that it [life insurance] will get misused," he said.
Insurance can however be an effective way for criminals to launder funds.
"When it comes to insurance companies depositing money into a bank account because it is [ostensibly] from the proceeds of sales of insurance products, there is going to be a lower barrier of scrutiny on that money because it is still considered as coming from a financial institution," Majcher said.
He said if a launderer took out an insurance policy, they could always later claim they did not need it and surrender the policy for its current cash value. "Nowadays, [insurers] are selling any number of financial products and doing financial engineering in ways insurance companies have traditionally not been doing," he said.
Ultimately, would-be launderers merely want to know how much it will cost, what currencies they can use, how long the transaction will take, what volume of funds can be sent and what guarantees they have of performance.
Compliance officers must therefore be aware of their firms' AML risks, to what extent the beneficial ownership information in their files is lacking or dubious, and how easily and quickly value can be transported via insurance products. They should also appreciate how swiftly large amounts of money can be laundered through a firm's insurance offerings, be they traditional insurance policies or those which have an investment element attached, such as annuities.
"A few [insurance] products, however, do pose risk," Seitz said. "In the single premium space, for example, where you can pump in quite a lot of money right away and take it off during the cooling-off period and then reassign it in secondary market. You can even take out a loan against it," he said.
The insurance sector has sometimes been held out as a weak link in terms of money laundering, when compared with banks, investment banks, brokerages and funds. The traditional view has been that AML should not be a great concern for insurance companies, because launderers would be unlikely to want their funds locked up in a policy that made their money less liquid and accessible than it might be in a bank or brokerage account.
Modern launderers plan ahead.
"Particularly when dealing with politically exposed persons in an Asian context, the time horizon is not to get bribery monies out of the country. People take the long-term view and want to provide for multiple generations in advance, and insurance is a good vehicle for that," Seitz said.
He added that policies which were cancelled within the two-week cooling-off period would typically cause some AML concerns, although he said such instances were the exception rather than the rule.
Data Mining Helps with AML
In Hong Kong, insurance companies filed only 1.1 percent of suspicious transaction reports last year, with comparable ratios in other major jurisdictions such as the United States. In some ways, however, insurers may actually find it relatively easy to ratchet up their AML and know your customer) compliance standards because of the information they collect on potential clients before deciding to onboard them.
"Insurance companies have been lucky to get a lot of information on their customers [upfront] to prevent fraud and payout claims," Seitz said.
Furthermore, insurance companies have always undertaken plenty of data mining, as most of them are run by statisticians and actuaries who understand such data, he said.
"We know how to deal with reassignments, topping-up of policies, lapses of policies or giving them back [their money] after the cooling-off period, which are red flags from a money laundering perspective. We have done that as industry much earlier than most banks have," he said.