How PEPs are Exploiting Life Insurance Policies

Why have they become a target and what can you do?

With large funds, flexible and easily accessible policies and comparatively relaxed customer due diligence (CDD) processes, the life insurance sector has become a hot target for money laundering.

Although any customer could potentially be involved in fraud or money laundering, politically exposed persons (PEPs) present a higher risk, highlighting the need for life insurance providers to take extra care.

Here’s what you need to know.

PEPs – the basics

A PEP is someone who holds a prominent or influential position (for example, a politician or someone in a trusted public role). The assumption is that being in a position of power makes a PEP more susceptible to bribery or corruption, and close business associates and family members also present a risk.

Why life insurance has become a target for financial fraud

Life insurance policies can be used to filter large amounts of money through an eventual withdrawal of funds.

Policy elements that are attractive to fraudsters include:

• The ability to transfer ownership of the policy: some life insurance policies can be transferred from one customer to another. This allows the initial customer to pass a policy on to a PEP, who cashes it in later.
• Policies that allow top-ups: policies with small premiums don’t typically trigger a red flag. Money launderers will start with a smaller policy, then top it up with illegal funds, which are eventually withdrawn.
• The ability to withdraw funds: it’s possible to draw down on some life insurance policies, and these sums don’t have to be repaid. Policy loans aren’t typically subject to AML measures either.
• Selling on secondary markets: it’s entirely legal to sell life insurance policies on a secondary market to receive a cash pay-out. These policies can be purchased by a PEP through a broker, avoiding any upfront CDD checks.

Protect your life insurance business from financial fraud

Understanding the risks involved with PEPs and life insurance is a positive step for providers, but there’s more to do. To protect your business against financial fraud – including money laundering through life insurance – it’s essential to put a robust AML/CFT program in place. This helps you verify new customers, identify risk levels and monitor transactions in the long term.

If you’re a life insurance provider, PEPs and their relatives and close associates should be subject to enhanced CDD screening through your AML program, to minimise the risk as much as possible. Managing a complex program with continuous monitoring can be time-consuming – so it’s worth seeking professional help. First AML has specialists, automated, customised AML/CFT software and years of experience in the financial fraud sector.