Money laundering prevention
moves into the insurance industry
"Financial institutions" takes on a larger meaning
By Phil Zinkewicz
As if they didn’t already have enough on their plates with the recent spate of federal and state transparency laws, property/casualty insurers, life insurers and their agents will now have to put on their thinking caps once more and learn about the Bank Secrecy Act (BSA) of 1970, otherwise known as the Currency and Foreign Transaction Reporting Act.
Simply stated, the BSA requires “financial institutions” to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000, and to report suspicious activity that might signify money laundering, tax evasion or other criminal activities.
The BSA has been amended several times since 1970, most recently in Title III of the USA Patriot Act. It is in its current incarnation, however, where troubles might lie for the insurance industry.
As originally intended, the act, which is sometimes referred to as the “anti-money laundering” (AML) law, affected primarily banking institutions, thrifts and securities dealers. But now the phrase “financial institutions” has been broadened considerably to include just about anyone who deals with large sums of money—jewelry dealers, real estate people, telephone companies, gambling casinos and, yes, insurance companies and reinsurance companies and their representatives.
“Many insurance companies that now fall under BSA requirements are not fully aware of the risks they face or how best to mitigate them,” says Robert Goecks, a principal in the Litigation Consulting & Forensic Accounting Group of Eisner LLP, a leading accounting and advisory firm that has announced a new practice for insurers to deal with the BSA.
“The current global credit crisis is driving demand for greater transparency in financial transactions and reporting consistency,” Goecks notes. “An unintended consequence of this demand for heightened transparency will likely be an increase in BSA expectations relating to insurance companies’ risk assessments, transaction monitoring and sustaining compliant AML programs in a complex and evolving regulatory environment.”
A close look at Goecks’ expertise demonstrates why Eisner LLP chose him to head up its new BSA practice area. Goecks completed a career as a special agent with the Internal Revenue Service (IRS) Criminal Investigations, where he conducted and supervised money laundering investigations. He spent a year as a special investigator of sales practice violations for the National Association of Securities Dealers (NASD), where he introduced AML training to NASD’s District 10 in Manhattan.
Goecks also served as the executive director for AML compliance for the U.S. subsidiary of a Canadian bank for approximately three years, which included the September 11 attack and the subsequent challenges. Immediately before joining Eisner LLP, Goecks served as the designated AML compliance officer for an established bank/wealth management firm in Manhattan, where he helped the bank lift a cease and desist order involving weaknesses in its AML program. He is a member of the board of directors of the New York State Society of CPAs and founding chair of its anti-money laundering and counter terrorist financing committee. He is also on the board of trustees for the John Jay College Foundation, Inc., where he is chair of the audit committee.
“The BSA regulator for the insurance industry is the IRS,” says Goecks. “Their first year of examining for the insurance industry was 2007. The most consistent problem they identified from that round of examinations was inadequate BSA training in general. In particular, the IRS noted inadequate training of insurance company agents. That will no doubt be a focus of the second round of the IRS examinations underway at this time.
“The protocol between FinCEN (the Financial Crime Enforcement Network), which administers the BSA, and the IRS as the federal BSA regulator is that any serious failings identified by the IRS will be referred to FinCEN, who will then issue the appropriate civil fines, penalties and remedial actions to be taken,” continues Goecks.
While Goecks noted that as of last August the IRS had not identified any failings of insurance company AML programs, “whenever that does occur, FinCEN has traditionally looked at such things as the dollar amount of any monies alleged to have been laundered, the number of the suspected money laundering transactions, the length of time the activity has occurred, how many clients were involved, whether employees of the firm were accomplices, the extent of management’s knowledge or involvement and the firm’s history of regulatory non-compliance in this and other related areas.”
In other words, according to Goecks, fines can be steep and cut deeply into an insurance company’s bottom line. Asked whether FinCEN, a federal agency, would work with state regulators when imposing fines and penalties, Goecks said that jurisdictional problems might arise. However, in imposing fines and penalties, the government would stop short of causing an insurer to go under.
But, he added: “If it can be proved that an entity knowingly engaged in money laundering and is subjected to a money laundering charge, that entity could have its licenses pulled. This is called the ‘death penalty.’”
Goecks says he intends to meet with insurance industry leaders and speak frequently at insurance industry events about the BSA. In the meantime, Goecks and his practice group have a variety of recommendations and strategies to help insurance companies comply with the BSA and implement “sound practices.”
These include:
• Focused BSA/AML training for boards of directors and senior management.
• Observe the BSA/AML lessons learned from the depository and securities industries.
• Invest in integrated solutions that can deliver effective and efficient BSA compliance.
• Commit to annual testing of AML compliance programs by independent firms with demonstrated BSA expertise.