Over the last 20 years, the federal government has stepped up its efforts to fight money laundering, fraud, and other financial crimes. Since 2006, it has required insurance companies to file Suspicious Activity Reports (or SARs) under certain circumstances.
There is some confusion with these rules, though, specifically who they apply to and in what situations. Below, we’ll detail the cases in which SARs must be filed and whether independent insurance agents must file them.
What Are SARs?
SARs are reports required under the anti-money laundering laws created by the USA PATRIOT Act in 2006. The laws were established under the oversight of the U.S. Treasury Department through FinCEN or the Financial Crimes Enforcement Network. There are also related requirements under a separate law called the Bank Secrecy Act.
These laws dictate that any time a financial institution believes that fraud of any kind has happened at their business, they must file a SARs report. To date, there have been multiple violations of these laws, resulting in massive fines handed down to money service businesses and broker-dealers. The law also applies to insurance companies in certain circumstances, so it’s essential to understand how and in which ways.
What Has to Be Reported?
Insurance companies covered under the laws must file a SAR when a suspicious transaction is “conducted or attempted by, at, or through the institution.” This rule applies to individual transactions and aggregate transactions.
FinCEN set a threshold of $5,000 for reporting requirements. For insurance companies, this amount applies to either the potential payout of the suspicious transaction or the premium payment of it. FinCEN also strongly encourages insurance companies to file SARs voluntarily for lower amounts if they suspect any suspicious transactions.
What Do SARs Cover?
Insurance companies must file SARs under the above rules when they either issue or underwrite products that have been determined by FinCEN to “present a high degree of risk for money laundering or the financing of terrorism or other illicit activity.” The products included under these regulations are:
- Annuity contracts aside from any group annuity contract
- Permanent life insurance products that contain an investment element or a cash value, except for group life policies
- Other insurance policies that have investment features or cash value
Insurance policies, such as home and auto, don’t apply. That’s because FinCEN has determined that these policies don’t present a high likelihood of money laundering or other illicit activities. In fact, insurance companies that only offer casualty or property insurance don’t even have to establish an anti-money laundering program as long as the products they offer don’t have any investment features. Still, if your company provides products with investment features outside of the three products listed above, it’s best to play it safe.
What Must Be Implemented in an AML?
Insurance companies that are required to create an AML policy must do so to prevent it from being utilized to facilitate the financing of illicit activities such as money laundering or terrorism. Guidelines are based on the individual company’s risk profile.
At the very least, these insurance companies must establish an AML program with four money laundering elements. Steps include:
- Hiring a compliance officer responsible for ensuring an effectively implemented program.
- Having a written policy, internal controls, and procedures designed to control all the risks associated with the program
- Establishing training programs that are ongoing for any personnel involved
- Creating and maintaining an adequate monitoring and testing program that is conducted independently
Are Independent Insurance Agents Required to File SARs?
These rules all apply to insurance companies and not to their agents. This means that, in most cases, independent insurance agents are not required to file SARs. The AML programs insurance companies are required to create will encompass all the activities of its brokers or agents who sell the products, which essentially puts the onus on reporting on the insurance company itself.
That being said, in filing SARs, the insurance company would need to obtain all relevant client information from relevant sources, including independent agents and brokers. This means that independent agents could be involved in the process of filing the SARs, though they won’t be the ones responsible for starting the process.
At the same time, independent agents should always be on the lookout for suspicious activities when consumers apply for new policies covered under the FinCEN regulations. If you believe something might be questionable, it’s best to report it to the appropriate insurance company that does the underwriting. This insurance company may decide to move forward with a SAR report or give you the go-ahead to proceed with the application.
Join the Good Life
With the excitement of the new year, are you feeling the urge to make a change? If so, our team at Good Life Insurance Associates welcomes your call. Becoming an independent agent is exciting and liberating, but we know it can be a little scary to step outside your comfort zone; that’s why our team is here to help.