Insurance Industry Suspicious Activity Reporting: An Assessment of Suspicious Activity Report Filings

FinCEN is committed to providing quality written feedback to industries affected by new or amended regulations. The option for certain insurance companies to file SARs regarding certain covered products became mandatory in May 2006. FinCEN previously issued reports concerning SARs filed by the insurance industry in February 2003 and again in May 2007. FinCEN issued its latest report on April 2, 2008, which provides a more in-depth review of insurance company SAR filings from May 2006 to May 2007 and will serve to provide a baseline for future comparisons. See the full report at www.fincen.gov/Insurance_Industry_SAR.pdf.

Overall, the quality of SAR reporting has been quite good, indicating that insurance companies are well positioned to report suspected illicit activities relating to money laundering. In addition, their SARs provide information that may benefit the mission of state regulatory agencies.

FinCEN analysts reviewed each of the 641 SARs filed by insurance companies between May 2, 2006 and May 1, 2007. The majority of SARs filed by unique corporate entities were from Massachusetts, New York, and Ohio. The residences of the majority of the individuals who were the subjects of these SARs were located in New York, California, Florida, and New Jersey.

Filers categorized over half of the subjects as the insured, the beneficiary, the payer, or the applicant. The next largest category of subjects was the applicant or owner of an annuity.

Consistent with data from all other financial services industries, insurance company filers most commonly cited ?BSA/Money Laundering/Structuring? as the characterization of suspicious activity. Structuring, where larger transactions are broken into smaller exchanges, is consistent with an attempt to avoid currency reporting requirements.

The data revealed some potential trends in illicit activity. Some of the typologies evidenced in the narratives appeared very similar to >2 For example, subjects sometimes used multiple cash equivalents (e.g., cashier?s checks and money orders) from different banks and money services businesses to make policy or annuity payments, and then cashed out the insurance products to potentially disguise the original source of the funds. Also, some customers seemed unusually willing to incur significant penalties for surrendering their annuities before full term.

FinCEN agrees that both the insurance regulators and industry will benefit from a more industry-specific format for reporting suspicious activity. Currently, insurance industry SARs are being filed on the SAR-SF, which was designed for the Securities and Futures industry.3

FinCEN has instructed insurance filers to add ?SAR-IC? after the name of the institution (Part IV, Field 36) and begin the narrative with the term, ?Insurance SAR? (Part VI).4 This study found that some filers did not follow these instructions, thus hindering the identification of those filings as insurance SARs. Additionally, some filers include disclaimers in narratives. Disclaimers add no value to the SAR narrative and should be omitted.

2 Money laundering is the disguising of funds derived from illicit activity so that the funds may be used without detection of the illegal activity that produced them. It is typically accomplished in three stages:

Placement: Requires physically moving and placing the funds into financial institutions or the retail economy. Depositing structured amounts of cash into the banking sector and smuggling currency across international borders for further deposit, are common methods for placement. Layering: Once the illicit funds have entered the financial system, multiple and sometimes complex financial transactions are conducted to further conceal their illegal nature, and to make it difficult to identify the source of the funds or eliminate an audit trail. Purchasing monetary instruments (traveler?s checks, banks drafts, money orders, letters of credit, securities, bonds, etc.) with other monetary instruments, transferring funds between accounts, and using wire transfers facilitate layering.

Integration: The illicit funds re-enter the economy disguised as legitimate business earnings (securities, businesses, real estate). Unnecessary loans may be obtained to disguise illicit funds as the proceeds of business loans.

3 See Notice and Request for Comments, Suspicious Activity Report by Insurance Companies, 70 FR 66895 (November 3, 2005). See also Release of Revised Suspicious Activity Reports, 72 FR 23891 (May 1, 2007), indicating a delay to implement the effective date of the form due to the recently implemented data quality initiatives.

4 See Frequently Asked Questions, Anti-Money Laundering Program and Suspicious Activity Reporting Requirements for Insurance Companies at http://www.fincen.gov/insurance_companies_faq.html.

Excerpted from SAR Activity Review Issue 13, page 7