Money laundering: A growing threat to Bangladesh’s insurance sector

Money laundering is a significant risk in various sectors globally and the insurance sector is no exception. In Bangladesh, the insurance industry is growing, which brings both opportunities and vulnerabilities. Here’s an overview of the emerging money laundering risks and vulnerabilities in the insurance sector of Bangladesh:

Emerging Risks: Emerging risks in money laundering within the insurance sector stem from complexities in products, global operations, the anonymity of transactions and regulatory variations. These factors enable criminals to exploit insurance policies for laundering illicit funds through cash payments, shell companies and complex transaction layers. Technological advancements and new insurance products further complicate detection and prevention efforts. Addressing these risks requires robust AML compliance, enhanced due diligence and collaboration across stakeholders to strengthen defences against financial crime. In life insurance companies, major concerning areas are as follows:

• Life Insurance Products: Life insurance policies, especially those with high premiums (single premium with high value) and the ability to cash out by policy surrendering, are attractive to money launderers. They can pay premiums with illicit funds and later withdraw them as clean money.
• Investment-linked insurance products: These products allow for the investment of funds in various financial instruments, which can be used to launder money by cycling it through the financial system.
• Annuities: Annuity contracts, which are often large and can be purchased with lump sums, are potential vehicles for laundering large amounts of money over time.

Vulnerabilities: Money laundering vulnerabilities in the insurance sector are the result from the complication of insurance products and transactions, high premium payments often accepted in cash, cross-border transactions, the use of shell companies to obscure ownership, fraudulent underwriting and claims processes, reliance on third-party distribution channels, inadequate customer due diligence, management of investment products and regulatory gaps. Addressing these vulnerabilities requires robust anti-money laundering frameworks, enhanced due diligence and effective collaboration between insurers, regulators and law enforcement agencies to prevent the exploitation of the sector for illicit financial activities. We can identify the following reasons for these vulnerabilities in Bangladesh,

• Lack of awareness and training: Many insurance companies and their employees may lack sufficient awareness and training regarding money laundering risks and the necessary compliance measures.
• Regulatory gaps: Inadequate regulatory frameworks and enforcement mechanisms can leave loopholes that money launderers exploit.
• Customer due diligence (CDD) and know your customer (KYC): Inconsistent or weak KYC and CDD processes make it easier for money launderers to use insurance products without detection.
• Complexity of products: The complex nature of some insurance products can make it difficult to monitor and track financial transactions effectively.
• Use of intermediaries: Insurance brokers and agents can sometimes be used to circumvent anti-money laundering (AML) controls, either knowingly or unknowingly.

Recommendations to mitigate risks: We may take some mitigation initiatives as recommendations against the probable money laundering risks and vulnerabilities in the insurance sector of Bangladesh. These are,

• Enhanced regulatory oversight: Strengthen the regulatory framework and ensure rigorous enforcement of AML laws and regulations within the insurance sector.
• Improved KYC and CDD processes: Implement robust KYC and CDD processes to verify the identity of customers and understand the nature of their transactions.
• Regular training and awareness programmes: Conduct regular training sessions for employees and intermediaries to enhance their understanding of AML risks and compliance requirements.
• Transaction monitoring systems: Deploy advanced transaction monitoring systems to detect suspicious activities and transactions promptly.
• Collaboration and information sharing: Promote collaboration among insurance companies, regulatory bodies, and law enforcement agencies to share information and best practices in combating money laundering.
• Risk-based approach: Adopt a risk-based approach to AML compliance, focusing on higher-risk products, services and customers to allocate resources more effectively.

The insurance sector in Bangladesh is susceptible to money laundering risks despite regulatory frameworks being in place. Challenges include the potential misuse of insurance policies for illicit funds, gaps in transaction monitoring and customer due diligence and the evolving nature of technological threats. Effective enforcement of regulations, enhanced monitoring capabilities and international collaboration are essential to mitigate these vulnerabilities and safeguard the integrity of the sector.

Addressing the emerging money laundering risks in the insurance sector of Bangladesh requires a coordinated effort between the government, regulatory bodies and the insurance industry. By enhancing regulatory frameworks, improving due diligence processes and fostering a culture of compliance, the sector can better safeguard against money laundering activities.

SM Ziaul Hoque, FLMI is the CEO of Chartered Life Insurance Company Ltd.