Hassan Zebdeh, Financial Crime Advisor at Eastnets discusses the latest money laundering challenges facing insurers and how to tackle them.
Fraudsters are experts at finding novel ways to launder money. This is evidenced in the variety of ways that dirty money is cleaned, from crypto assets to online auctions. And the insurance industry isn’t immune from illegal acts taking place under its nose.
In fact, the PwC Global Economic Crime Survey 2022 found that two-thirds of insurers experienced fraud or financial crime in the previous year. And as soon as one door is closed to criminals, they find a new way in. People with malicious intent just need to know where to look to find new mechanisms to enable crime.
How does money laundering happen in insurance?
It’s a complex web of illegal activities mixed with social engineering, identity theft, and other nefarious activities. Examples of the complex nature of financial crimes in the sector are captured by the Coalition Against Insurance Fraud (CAIF).
One recent case involved a money laundering and wire fraud campaign targeting Medicare stakeholders in the USA. The scam involved fraudsters sending fake emails from spoof, but realistic-looking hospitals, to healthcare insurers, requesting reimbursements for faked health provisions.
These payments were sent to scammer bank accounts. The cybercriminals then laundered the money, withdrawing large sums and transferring them into synthetic or stolen identities of shell companies; the funds were then subsequently moved overseas to buy luxury goods.
Health is not the only area of insurance suffering at the hands of fraudsters; the FBI estimates that the total cost of (non-health) insurance fraud is more than $40 billion per year, increasing annual insurance premiums for the average U.S. family by between $400 and $700.
In this context, there are four major trends emerging, which compliance leaders need to be aware of.
- Insurance platforms and automation
The Covid-19 pandemic drove insurance online, along with its financial sector counterparts. The 2022 Interpol Global Crime Trend Report stated, “Money laundering ranked second among the crime trends most frequently indicated by member countries in the region as posing a ‘high’ or ‘very high’ threat”… “The use of online tools by criminals to perpetrate financial fraud schemes has also rapidly expanded, particularly during the pandemic.”
The reference by Interpol to online tools is notable as the insurance sector has embraced online platforms. These are a growing industry trend, with a predicted market value of $169 billion by 2026. Fraudsters abuse online insurance platforms to identify digital methods to propagate money laundering schemes.
A recent survey by Attestiv into insurance claim fraud and AI-enabled media generation found that over 80 per cent of insurers were concerned about tampered digital media being used for insurance transactions. The use of fraudulent synthetic and AI-developed identities will continue to enable money launderers to operate under the radar.
- DLT, blockchain, and insurance
A 2002 IAIS (International Association of Insurance Supervisors) report into fintech developments in insurance identified several pros and cons when applying Distributed Ledger Technology and blockchain to insurtech. The IAIS warns that these technologies could advance money laundering activities, stating, “The use of DLT solutions could also heighten the money laundering/terrorism financing risks that insurance could be exposed to.”
- Insurance product fraud and money laundering
Products make prizes in the world of the money launderer. Fraudsters look for certain types of life insurance and other high value insurance products to move dirty money and clean it up.
For example, fraudsters look for insurance policies that are cash redeemable. They then ‘invest’ in the policy, using illicit funds to pay the insurance policy premiums or make a significant top-up payment. At an appropriate time, the fraudsters surrender the policy for a cash payment given out by a legitimate insurer on a legitimate policy, providing them with clean money.
- Intermediaries and money laundering
While FinCEN regulations place anti-money laundering (AML) requirements and suspicious activity report (SAR) obligations on insurance companies, these regulations apply only to insurance companies, not to intermediaries such as brokers and agents. However, an insurer is responsible for an AML compliance programme’s overall effectiveness, so intermediary activities must be considered.
If an insurance company does not manage its supply chain, this extended business associate network could seriously threaten the industry. As a result, supply chain-enabled money laundering through intermediaries is a likely trend in the sector.
Anti-money laundering technologies for the insurance sector
Insurance fraudsters hide money laundering activities in webs of deceit and complex, multi-part transactions. Teasing apart these unlawful activities requires the right tools for the task. Breaking these advanced solutions down into core areas of focus helps to show how insurance companies can tackle money laundering. Below are some of the compliance monitoring solutions that can be used to protect organisations.
Automated watchlist updates
The use of beneficial owners and other entities to perpetuate money laundering requires a deep interrogation of sanction lists. However, these lists are regularly updated and contain vast amounts of data. Ensuring that these lists are kept up to date can be a stumbling block rendering these watchlist checks ineffective. It’s vital to have a solution that can update any list automatically and in real time.
AML checking is becoming increasingly complex in response to sophisticated money laundering chains. As a result, AML tools must utilise intelligent technologies to handle this complexity. The ability for fraud experts to augment their work with AI-enabled behavioural monitoring provides the means to spot anomalous behaviours that signals fraudulent transactions. For example, spotting that a customer is suddenly making a significant overpayment on a policy can provide an alert that triggers a response by the financial crime team.
Customer due diligence
Insurance fraud is heavily dependent on identity, and verifying an individual’s identity is critical in preventing money laundering. Therefore, customer due diligence must be a fundamental part of an insurance organisation’s anti-financial crime programme.
It seems that fraudsters are always one step ahead, finding new ways to get past regulations. If insurance companies fail to upgrade their security systems, the money laundering threat will continue to grow exponentially.
Time to act
We must not let any more time go by as we watch the fraud rates grow. Companies must prepare for attacks on all fronts and turn the tide of financial crime.
And the only way to do so is to beat criminals at their own game. As lawbreakers innovate and use technology to sidestep rules and checks, insurers must also turn to new tech. It’s an inevitable game of cat and mouse where compliance leaders need to constantly reinforce their defences.
It may feel like a costly investment to make, but the alternative is an even greater loss in terms of fines, lack of trust and reputational damage. Now is the time to act.