IRDA strengthens the AML Guidelines

IRDA vide its circular dated June 16, 2010, has issued clarifications and amendments to the guidelines on Anti Money Laundering Programs for Insurers (“AML Guidelines”).[1] The AML Guidelines were notified by IRDA vide its circular dated March 31, 2006.[2] The AML Guidelines primarily lay down the standards for conducting Know Your Customer (“KYC”) due diligence on the prospective customers of the insurance companies.

The salient features of the circular have been summarized below:

1. IRDA has clarified that any person including proposer/policy holder, beneficiary, assignee etc., who funds/pays for the insurance contract, either as a beneficial owner or otherwise, is to be considered as a customer, for the purposes of AML Guidelines. The KYC requirements under AML Guidelines will apply to such a person.

Further, the circular reaffirms the obligation of the insurer to file a Suspicious Transaction Report (“STR”) with Financial Intelligence Unit-India (“FIU-IND) at any stage of contract period, if the insurer is not sure about the true identity of the customer.

IRDA has also clarified that the due diligence requirements apply to individual policies procured by entities other than individuals. In this connection, reference to word ‘individual’ under clause 3.1.1(ii) of AML Guidelines has been clarified to mean stand-alone individual policies, weather purchased by a private individual or any other individual corporate entity. IRDA considers individual insurance policies procured by an individual or an entity as different from group insurance policies, to which the AML Guidelines does not apply.

2. AML Guidelines mandates the insurer to undertake a detailed due diligence of the customer where the insurance premium exceeds Rs. 1, 00,000/-. IRDA has explained the scope of the detailed due diligence in such cases, by prescribing a more robust and rigorous procedure than a normal KYC. Without limiting the scope and the extent of the due diligence, the circular prescribes the following measures to be taken in such cases:

a) More frequent reviews of the customer’s activities, profiles and transactions;

b) Collection of information from publicly available sources or otherwise; and

c) Review of the proposal/contract by a senior official of the insurance company.

3. IRDA has reiterated that a detailed due diligence should be conducted in all such cases, where the insurer has suspicions of money laundering/terrorist financing or where there are factors indicating higher risk.

4. It has been clarified that in order to ensure compliance of clause 3.1.5 of the AML Guidelines that pertains to verification of source of funds of the customer, mere collection of income proof of will not suffice. Insurer shall take appropriate measures commensurate with the risk profile of the customer and the product profile. In this connection, insurer’s due diligence may include conducting independent enquiries on the details of customer and consulting credible databases. Further, all such records that establish ‘source of funds’ of a customer, shall be preserved to enable future verification.

5. IRDA has clarified that even in cases where policies are assigned to entities regulated by the Securities and Exchange Board of India (“SEBI”), Reserve Bank of India (“RBI”) or the IRDA, if there is a suspicion of money laundering / terrorist financing or where there are factors indicating higher risk, AML verification shall be carried out in respect of such assignee and if necessary, a STR shall be filed with FIU-IND. It may be noted that under clause 3.1.9(iii) of the AML Guidelines, a lesser degree of verification is prescribed in cases where the insurance policies are assigned to entities regulated by IRDA, RBI, or SEBI.

6. IRDA, while referring to its circular dated January 13, 2009 pertaining to recommendations made by Financial Action Task Force’s (FATF), has also advised the insurers that special attention shall be paid on any business relationship and transaction involving individuals/entities connected with the countries that do not sufficiently comply with FATF’s recommendations. In all such cases, the background and purpose of underline transaction shall be examined and recorded for any future verification by a competent authority.

Rule 3(1)(c) of the PML Rules, 2005[3] provides for reporting of all cash transactions, where forged or counterfeit currency notes or bank notes have been used or where the forgery of a valuable security or a document has taken place. IRDA, while reaffirming such obligation imposed on the insurers, has specified that such reporting to FIU-IND shall be done within 7 days of identification of transaction of such nature.

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[1] The circular may be accessed at http://www.irdaindia.org/circulartoall/aml_guidline_160610.pdf.

[2]The AML Guidelines may be accessed at http://www.irdaindia.org/cirnonlife/guidelinesonaml31march06.htm.

[3] Prevention of Money-laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005 dated July 1, 2005. The PML Rules may be accessed at http://rbidocs.rbi.org.in/rdocs/content/pdfs/68781.pdf.