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FATF typologies.

THE FIGHT against international money laundering may need resources and determination, but what it most needs is intelligence. The Financial Action Task Force (FATF) knows this well, spreading the word about new threats. Keith Nuthall reports.

LIKE every international organisation, it seems, FATF is fond of acronyms and jargon. For instance, the task force, the world's global anti-money laundering body, and part of the OECD, the Organisation for Economic Cooperation and Development, calls its intelligence reports 'typologies' papers.

This is a rather bloodless term for studies, published every year, that are both important and fascinating, and that show how money launderers are prepared to exploit any vulnerability to clean their ill-gotten gains. They are aimed at anti-money laundering specialists, both in the business world and governments, arming them with knowledge about their foes.

For 2005, FATF has been especially keen to get the insurance industry up to speed. Its specialists see it as a weak point in the global financial sector, for it is not only growing in size, and offering increasingly complex products, it is spreading its tentacles into further flung reaches of developing and emerging markets. Furthermore, the insurance sector, unlike the banking world, has suffered from a degree of denial about its vulnerability to money launderers. For this study, FATF analysed 94 reported cases of money laundering involving the insurance industry between 1999 and 2003, and found they involved large sums of money--totalling US$525 million, with an average of US$2.1 million for those within developed countries. The overwhelming majority of this money was laundered through life insurance--65% of cases and US$520 million of the money; with 30% of cases involving general non-life insurance (just US$1 million) and 5% of cases involving reinsurance (US$4 million).

And this is just the reported cases, there may well be many more millions dirty dollars swilling around the industry. Indeed, FATF's paper warned that the "expansion and increasing sophistication" of the international insurance industry "has not been accompanied by a corresponding widespread awareness that insurance products at the same time have become increasingly more attractive to criminals". Not only has the sector's self-awareness of criminal infiltration "historically been low", an FATF questionnaire "generally indicated that no noticeable change has taken place in this respect", said the report.

To help pull the sector's head out of the sand, FATF lists seven key methods used by money launderers to abuse the insurance industry:

* Buying a policy. Pretty simple. The money launderer simply takes out a single or annual premium life insurance policy and deposits plenty of money into it. At some point, the policy is surrendered, and the cleansed money is recovered. This might be very soon, losing the launderer say 40% of their premium. But in money laundering 40% in usable money is a lot better than 100% that could lead to jail.

* Fraudulent claims. Here, criminal proceeds are used to buy expensive goods, such as jewellery or a boat, which are then insured with as high-end policy as can be bought. This property is then 'stolen', and a claim is made. The insurance payout is clean and the property is somewhere safe: a nice little earner.

* Exploiting cooling-off periods. Here, money launderers buy a life product that gives a customer the right to cancel within 10 days, with a full refund. Naturally, they cancel, and get 100% of their crime proceeds linked to a reputable insurer.

* Dodgy brokers. That not all insurance intermediaries are honest is no great surprise, but some really push the envelope by colluding with criminals, accepting their illicit funds and transferring them to policies in exchange for high commissions.

* Using friends. Here the launderer exploits an existing policy, coming to an informal arrangement with the holder, where they fund premiums and then take the payouts. This kind of laundering is very difficult to detect.

* International transactions. Paying premiums for a policy in one country from a foreign bank account makes the origins of money harder to check. Another method is for launderers to use legally designated representatives to buy policies offering payouts overseas.

* Criminal takeovers. Crime groups sometimes purchase or establish complex corporate structures, which then legitimately enter into business relationships with insurers or reinsurers. Of course the money used is entirely illegitimate, having already been laundered once by feeding it into a formal company.

To fight these problems, FATF wants better cooperation with the International Association of Insurance Supervisors, swapping material on methods used by launderers to help develop more detailed and updated guidance. It wants state Financial Investigation Units, in place in every developed country, to have insurance expertise. FATF also suggests that brokers could be required to report suspicious about a client direct to law enforcement authorities rather than their insurers. And it wants effective risk assessment procedures to be introduced within insurance companies, so that they better screen potential clients, with special attention being paid to international transactions.

Maybe, the insurance industry will tighten up its procedures following this report. Furthemore, FATF has two other topics of concern this year, of less importance to global commerce, but key problems nonetheless. One is the abuse of alternative remittance systems to mask audit trails that can highlight money laundering. FATF warned that the growth in alternative remittance systems, which enable international payments to be made outside established banking services, and which are especially used by developing country citizens working abroad, can help criminals "obscure the audit trail for criminal money". Such systems are often complex and informal, "due to the intricate settlement systems used and the number of jurisdictions through which a transfer could pass", making it difficult to trace payments. Even where an alternative remittance system is registered, the mixing of funds in a particular transaction can also "break the audit trail", warns FATF. Another problem cited is that of 'cuckoo smurfing' involving dirty money being moved through the accounts of unknowing innocent parties who are expecting payments abroad. Criminal money is paid into legitimate accounts in exchange for informal credit notes that can be redeemed later. Also, alternative remittance system providers helping money launderers also keep two sets of books, warns FATF, one hiding any criminal links. This year's report also examines the trafficking of human beings, noting that criminals in this trade often use professional money launderers to hide their illicit incomes. Sometimes fake travel agencies are used to hide proceeds from this increasingly lucrative branch of organised crime, it warns. * Full report--see
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Author:Nuthall, Keith
Publication:International News
Date:Sep 1, 2005
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