Some Insurance Companies Now Subject to Anti-Money-Laundering Program Requirements

Certain insurance companies will soon be obliged to establish anti-money-laundering programs and file required Suspicious Activity Reports (SARs) as a result of two rules made final by the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) on October 31, 2005. While only life insurance companies are required to establish anti-money-laundering programs and submit SARs, the new final rules indicate that all insurance companies, because of the perceived high-risk nature of their products, should conduct periodic assessments of their exposure to abuse by money launderers or terrorist financiers. The rules will go into effect on December 5, 2005. Insurers offering "covered products" must have compliance programs in place by May 5, 2006.

When the USA PATRIOT Act was signed into law on October 26, 2001, the government formally established its intent to maintain a heightened and permanent vigilance to ensure that the U.S. economic system is not available for exploitation by terrorists and their support networks. Section 352 of the PATRIOT Act amended a provision of the Bank Secrecy Act requiring that anti-money-laundering programs be established by all financial institutions. "Financial Institutions" were broadly defined to include "insurance companies." Because of the complexity and diversity of products provided by insurance companies, FinCEN, in April 2002, deferred the requirement in 31 U.S.C. 5318(h) that insurance companies maintain anti-money-laundering programs. These regulations represent the first time FinCEN has defined "insurance companies" or issued regulations regarding insurance companies.

However, "insurance companies," for the purposes of the requirement that all financial institutions establish anti-money-laundering programs, are now defined by the nature of the product that the companies offer. In keeping with the intent of the PATRIOT Act, the final rule focuses on "those covered insurance products possessing features that make them susceptible to being used for money laundering or the financing of terrorism." "Covered Products" include (1) a permanent life insurance policy, other than a group life insurance policy; (2) any annuity contract, other than a group annuity contract; and (3) any other insurance product with features of cash value or investment. To the extent that the risk for abuse is lower, term life insurance, group life, group annuities, and insurance products offered by property-casualty insurers or by title or health insurers are not, at this time, included in the definition of "covered products." 31 C.F.R. 103.137(a)

FinCEN has also determined that insurance agents and brokers are not themselves required, to establish anti-money-laundering programs or file SARs under these two final rules. Instead, FinCEN has placed the responsibility directly with the insurance companies to incorporate brokers or agents into the companies' anti-money-laundering programs. FinCEN notes that if the effectiveness of the rule appears to be undermined by the failure of agents and brokers to cooperate with insurers, it reserves the right to amend the rule.

Insurers offering "covered products," typically life insurers, must have developed and implemented an anti-money-laundering program as of May 2, 2006 that meets the following criteria:

1. The program must be in writing.
2. The program must be approved by senior management.
3. The program must be made available to FinCEN upon request.

In addition, the program must:

1. Be tailored to meet each company's assessment of the money laundering and terrorist financing risks of its products.
2. Designate a compliance officer responsible for ensuring that the program is implemented effectively and is updated as necessary.
3. Provide for on going training of appropriate personnel.
4. Provide for independent testing to ensure adequacy.

Throughout the newly published Final Rules, FinCEN emphasizes that its determination to limit the definition of "insurance companies" based on their specific products is the result of detailed and extensive research into the insurance industry and an assessment of the degree of risk that each insurance product poses to potential abuse by money launderers and/or terrorist financiers. This focus on "risk-based" analysis, prevalent in other current Treasury enforcement entities, also opens the door to the understanding that FinCEN will now approach enforcement of breaches of these rules from the same perspective. The reminder that companies not covered under the rule still "may voluntarily report suspicious activity under the protection of safe harbor from liability contained in 31 U.S.C. 5318(g)(3)" suggests that while not all insurance companies must maintain the full-blown anti-money-laundering programs described above, insurers of all sorts should, at a minimum, conduct a periodic comprehensive assessment of their risks. It would not be surprising if state insurance regulators begin inquiring about companies' anti-money-laundering programs, even if the companies are not within the specific requirements of the current rule.

For more information, please contact John B. Reynolds, III at 202.719.7342 or jreynolds@wileyrein.com and Cari N. Stinebower at 202.719.7456 or cstinebower@wileyrein.com.

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