What makes it difficult to detect and prevent fraud within an insurance firm is also what might make fraud attractive to criminals: The low number of transactions in insurance provide few tracks for tracing financial crimes. Outside of premium payments and claim submissions, insurance customers engage in relatively few transactions (compared with banking customers) from which companies can build and test anti-money laundering models on their own. And, while insurance is a heavily regulated industry, it has been relatively ignored when it comes to its anti-money laundering practices in comparison with the attention regulators give to financial institutions. For these reasons, some fear that an annuity account, for example, might be just the place a nefarious character would park funds as part of a larger money laundering scheme.
The Next Focus for Regulators
Immediately following the financial crisis of 2008, regulators were laser-focused on big banks’ policies and procedures for deterring financial crimes. Those that didn’t comply with the U.S. Patriot Act and Bank Secrecy Act were hit with hefty fines. No wonder: It is estimated that almost 70% of illicit finance flows through legitimate financial institutions, while less than 1% of global trade is seized and frozen. Regulators are now turning their attention to non-traditional banks like Western Union (which expects to pay compliance-related charges of up to 4% of its revenue in 2017) and PayPal (which in 2015 agreed to pay $7.7 million to the Treasury Department’s Office of Foreign Assets Control for sanctions violations). Insurance companies feel they are the next industry to receive the attention of examiners and are acting to comply with know your customer (KYC) and anti-money laundering (AML) rules.
At stake for insurers is not just large penalties if a regulatory agency feels that anti-money laundering policies don’t meet expectations. Risk to reputation is of top concern to insurers, which understand that it takes only nanoseconds for customers to find an alternative carrier or for investors to learn on social media that their institution was used in organized crime or, worse yet, funding for terrorist activities. A regulator’s ability to directly affect an insurer’s bottom line is also a major threat. A regulator could, for example, hamper the insurer’s expansion efforts, preventing it from entering a market or from acquiring a business because it lacks the right safety controls.
See also: Cognitive Computing: Taming Big Data
How Insurers Can Mitigate Money-Laundering Activities
To avoid this, I recommend to my clients that they focus on evaluating the entire AML and KYC function across the enterprise, cleaning and enriching the data that firms already have and bolstering AML efforts with outside expertise.
Clean and Enrich Your Data
The availability of high-quality data that is meaningful and predictive lays the foundation for an effective financial crimes prevention strategy. This critical first step is often overlooked and no easy feat for the typical insurance carrier that operates in silos and segregates information within different systems and lines of business.
Before investing in new tools and technology, partner with data remediation experts to assess the quality, completeness and predictive power of the customer profile data and fill in missing data to ensure that KYC and AML systems work effectively.
Establish a Consistent, Enterprise-Level Customer Onboarding, KYC and AML Process
Regardless of the many products and channels your insurance company offers, you need to establish a single, consistent process for monitoring, evaluating and onboarding customers.
Many insurance companies bring in an IT partner to assess their AML and KYC policies and procedures, as well as how technology can be leveraged to improve effectiveness. The right partner will help you define an onboarding strategy with a strong customer experience component and establish the roles and responsibilities for different lines of defense. This includes the agents who capture the customer information and onboarding; the financial crimes unit that monitors transactions and customer behavior; and the internal audit group, which ensures all policies and procedures are followed and measures their effectiveness at preventing financial crimes.
In addition, with clean data and an enterprise-level AML process, you’re ready to customize off-the-shelf generic AML models with observed client performance, data from public sources and third-party data feeds for the industry.
Look Outside Your Industry for AML Expertise
Insurers can learn a lot from compliance experts in other industries, such as banking, law enforcement and the public sector. Your recruitment efforts should focus on building financial crime teams with people from these sectors.
Find opportunities to share stories and best practices with compliance professionals outside your industry. Attend conferences focused on financial crime and regulation where the attendee list includes both banks and insurance firms.
See also: Big Data? How About Quality Data?
Insurers whose AML strategy is built on meaningful and predictive customer data and that create a culture of compliance that permeates all areas of the company, will succeed at strengthening their mandated AML/KYC functions. While these changes can’t happen overnight, by pulling in expertise from outside the industry insurance companies can make great strides toward protecting their assets from fraudulent activities.