BaFin calls on in­sur­ers to im­ple­ment more con­trol mea­sures

Erscheinung:17.07.2024 | Topic Anti-money launderingBaFin calls on insurers to implement more control measures

(BaFinJournal) How does the Federal Financial Supervisory Authority (BaFin) monitor insurance undertakings' efforts to prevent money laundering and terrorist financing? Carsten Sperl is responsible for this task at BaFin. In this interview, he provides insight into the work of BaFin's anti-money laundering supervision units and current challenges in this field.

Mr Sperl, what are BaFin's current priorities when reviewing money-laundering prevention measures at insurance undertakings?

One of the areas we are focussing on right now is foreign insurance undertakings with branches in Germany. They are not required to file any reports with us regarding their measures for the prevention of money laundering and terrorist financing. They are mainly supervised by the supervisory authorities in their respective home countries. However, BaFin still needs to be aware of their business activities and prevention measures as the host supervisor.
We're conducting more frequent on-site interviews at these obliged entities, for instance. The goal is to get to know each other and foster personal exchange. We want to speak with the branch managers and the employees working in money laundering prevention.

We've also launched a questionnaire initiative aimed at branches of foreign insurers. This is another way for us to gain more in-depth knowledge about these undertakings. For example, we ask the branches what business activities they are conducting in Germany.

Which new challenges are insurers facing when it comes to money laundering prevention?

One crucial topic is the shift from traditional life insurance policies with guarantees towards more flexible insurance products. We've observed more and more life insurers switching to flexible insurance products. With these relatively new products, the funds invested are readily available. Unlike traditional life insurance with regular premiums that don't fluctuate, flexible deposits and withdrawals make it possible to conduct many transactions on a policy within a relatively short period. The additional irregular payments make it more complicated to monitor the inflow and outflow of funds.

The large amount of banking-related services offered by insurance undertakings, such as overnight money accounts and lending, brings additional challenges for money laundering prevention. In this case, there is a similarly high risk of illicit funds being concealed through transactions and integrated into the legal economic system as with banks. Unfortunately, the money laundering prevention units are not always consulted early enough during the product development process to ensure that anti-money laundering measures are always sufficient.

What measures can insurers take to mitigate these risks?

The German Money Laundering Act does not require companies in the insurance sector to implement IT-supported monitoring. That's not a problem for conventional insurance business with regular, non-fluctuating premiums. The transaction risks are relatively easy to manage.

It is very doubtful, however, whether insurers can appropriately monitor the irregular transactions associated with flexible insurance products and banking-related business without IT support. We therefore urgently recommend that undertakings with these kinds of product portfolios introduce extensive IT monitoring.

Where do you see the greatest terrorist financing risks for insurers?

In the past, terrorists have attempted time and again to finance their activities through large death-related payouts from life insurance policies. Term life insurance is especially popular in this context, since it can be used to obtain large payouts within a short period at relatively little expense thanks to low premiums. It is these payouts that terrorists can use to finance their plans.

There is a particularly high risk in the event that a death occurs outside Germany and the death benefit is to be paid out to a beneficiary abroad. It is extremely difficult for insurers to determine the circumstances surrounding the death in such cases. The same applies to the identity and background of the beneficiary. Persons associated with terrorist groups try to exploit these difficulties.

If the policyholders include politically exposed persons (PEPs), there is an increased risk of money laundering and terrorist financing. In such cases, obliged entities are subject to increased due diligence requirements. What is your view of insurance undertakings' current practice in terms of PEP screening? Where do you see room for improvement?

We see a mixed picture when it comes to PEP monitoring at insurance undertakings. Almost all companies rely on lists from external service providers for their PEP screening. But there are huge differences in the way insurers update their portfolio management systems with these PEP lists. Some undertakings conduct daily overnight updates in order to quickly detect potential PEPs in their portfolio and take appropriate measures. We strongly welcome this approach.
Unfortunately, we've also found that some undertakings only update their portfolios at relatively large intervals, such as every six months. There is a great risk here that customers in the portfolio become PEPs in the meantime by being elected or appointed to high political office and will go undetected as such over a longer period. For this reason, we recommend performing PEP screening at the shortest possible interval, ideally daily.

On multiple occasions, we also found that obliged entities failed to include explicit questions regarding a potential PEP status in their contract forms, or simply assumed that the person in question was not a PEP. We recommend crafting the contract forms in such a way that each customer must explicitly declare whether or not they qualify as a PEP. The same also applies to questions regarding the beneficial owner, meaning the person behind a legal entity or other vehicle who actually controls it.

What is BaFin doing to ensure that insurance undertakings improve their preventive measures?

We conduct on-site inspections at insurance undertakings every year. If they offer products that we consider particularly risky, we check whether their preventive measures are sufficient. We take our time and review whether the insurers' measures are effective.

We are also working to raise awareness. In our discussions, we alert undertakings to the issue and make them aware of which measures they need to take to mitigate the risk of terrorist financing. We also regularly hold events, such as our conference on combating money laundering and terrorist financing, to foster exchange with the undertakings.

In individual cases, we must take measures against insurance undertakings found to have weaknesses in their preventive measures, for example if they have underestimated the risks and not taken sufficient precautions. Depending on the nature and gravity of the violation, we can order the undertaking to remedy the shortcomings, impose administrative fines or even take action to restrict its business activities.

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