Anti-Money Laundering (AML)

Definition Money Laundering is the process of bringing illegal money into an economy by hiding its illegal origin so that it appears to be legally acquired. The Government of India launched the PMLA 2002 to rein in money-laundering activities. PMLA means bringing illegal money into the financial system by hiding its illegal origin so that it appears to be legally acquired. It is a process of turning black money into white money. Illegal or dirty money is put through a cycle of transactions so that it comes out washed at the other end as legal or clean money. The Prevention of Money Laundering Act (PMLA), 2002 came into effect from 2005 to control money laundering activities and to provide for confiscation of property derived from money-laundering. It mentions money laundering is an offence punishable by rigorous imprisonment from three to seven years and fine up to Rs 5 lakhs. The objective of this module is to ensure you Identify & Comply with AML, KYC and Market Conduct Guidelines. Prevention of Money Laundering Act (PMLA) 2002 and Prevention of Money Laundering Rules 2005 which provides for
- Prevention and control of money laundering
- Confiscation and seizure of property obtained from the laundered money;
- Dealing with any other issue connected with money laundering in India.
- IRDAI guidelines
- Financial Intelligence Unit in India which monitors the financial institutions AML Policy of the Company IRDAI has issued Master Guidelines on Anti-Money Laundering/Counter Financing of Terrorism (AML/CFT) [AML Guidelines] dated August 1, 2022.
Money Laundering – meaning
As per IRDAI: “Money Laundering is moving illegally acquired cash through financial systems so that it appears to be legally acquired.”
As per Prevention of Money Laundering Act: “Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of money laundering.”
Some of these activities include:
✔ Engaging in transactions involving property derived from Criminal Activities
✔ Helping to conceal the origin or ownership of the proceeds from illegal/criminal activities
✔ Funds used to finance terrorism or generated from the activities related to terrorism
✔ Structuring the financial transactions to avoid the reporting requirements
✔ Illegally acquired money plays a significant role in the terrorist activities
✔ Black or laundered money is often generated through smuggling, financial crimes, human trafficking, extortions, blackmail and other illegal activities
✔ Money laundering increases the demand for cash, makes interest and exchange rates more volatile, and causes high inflation
Stages of Money Laundering
1. Collection of Dirty Money: Movement of cash from its source. The source can be easily disguised or misrepresented.
2. Placement: Dirty Money integrates into the Financial System. This is followed by placing it into circulation through financial institutions, casinos, shops, money changers and other businesses, both local and abroad
3. Layering: Transfer funds between various offshore/onshore Banks. The purpose of this stage is to make it more difficult to detect and uncover a laundering activity. It is meant to make the trailing of illegal proceeds difficult for the law enforcement agencies.
4. Integration: Purchase of Luxury Assets, Financial Investments, Commercial /Industrial investments. This is the movement of previously laundered money into the economy mainly through the banking system and thus such monies appear to be normal business earnings.
Why You Need to be Careful? Due to event based pay out, health Insurance is considered to be less vulnerable to risk of being used as a vehicle for money laundering. However, it is not completely immune to the same. 1. Due to dealing in public money, any financial institute may become a target for the money laundering activities.
2. Launderers look for the financial Institutions which have weak governance process so as to exploit the process gaps to launder their proceeds acquired from illegal activities.
What should you do? No Insurance contracts to be entered into with a customer whose identity matches with any person with criminal background. A list of such cases has been sent by IRDA to all insurers as per UNSC sanctions list. We should be aware about the source of funds of the prospects, enhanced due diligence needs to be done for “Politically Exposed Persons” (PEP).
Politically Exposed Person (PEP) "individuals who are or have been entrusted with prominent public functions by a foreign country, including the heads of states/governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations and important political party officials".
KYC to be done In case of every new customer, necessary client due diligence with valid KYC documents of the customer / client shall be done before issuance of any policy / commencement of account based relationship or while carrying out occasional transaction of an amount equal to or exceeding rupees fifty thousand, whether conducted as a single transaction or several transactions that appear to be connected, or any international money transfer operations.
Modes of KYC
a) Aadhaar based KYC through Online Authentication subject to notification by the Government under section 11A of PMLA Or
b) Aadhaar based KYC through offline verification Or
c) Digital KYC as per PML Rules Or
d) Video Based Identification Process (VBIP) as consent based alternate method of establishing the customer’s identity, for customer. The process of VBIP has been specified Or
e) By using “KYC identifier”’ allotted to the clientscertaining Beneficial Owner(s) by the CKYCR Or
f) By using Officially Valid documents AND
g) PAN/Form 60 (wherever applicable) and any other documents as may be required by the insurer
Client Due Diligence
Simplified Due Diligence
Simplified measures are to be applied by the insurer in case of individual policies, where the aggregate insurance premium is not more than Rs 10000/ - per annum.
Enhanced Due Diligence
Enhanced Due Diligence shall be conducted for high risk categories of clients and detailed questionnaire should be filled-in for such customers.
Due Diligence on juridical persons While implementing the KYC norms on juridical persons, insurers will have to identify and verify their legal status through various documents, to be collected in support of ◦ The name, legal form, proof of existence,
◦ Powers that regulate and bind the juridical persons,
◦ Address of the registered office/ main place of business,
◦ Authorized individual person(s), who is/ are purporting to act on behalf of such client, and
◦ Ascertaining Beneficial Owner(s)
Due Diligence for Group Insurance Under all kinds of Group Insurance, KYC of Master Policyholders / Juridical Person / Legal Entity and the respective Beneficial Owners (BO) shall be collected. • Necessary due diligence should be carried out of the policyholders / beneficiaries/ legal heirs/ assignees before making the pay-outs
Reporting of Transactions
Any cash transaction & integrally connected cash transactions >Rs. 10 lacs per month by 15th of next month
Suspicious Transactions, in cash or otherwise of any value to be reported
Receipt of forged / counterfeit currency notes irrespective of its value to be reported within 7 days of identification
KNOW YOUR CUSTOMER (KYC) Criminals attempt to use financial services with dubious identity and vanish once their purpose is served in converting the dirty money into white money. IRDA has strictly advised the insurers to follow KYC norms. An agent has to collect a form confirming compliance of KYC norms along with the proposal. The objective of KYC guidelines is to prevent financial institutions from being used by criminal elements for money laundering activities Agents should ensure that proposers submit the proposal form along with the following as part of the KYC procedure:
✔ Photographs
✔ Age proof
✔ Proof of address – driving license, passport, telephone bill, electricity bill, bank passbook etc.
✔ Proof of identity – Aadhaar, driving license, passport, voter ID card, PAN card, etc.
✔ Income proof documents in case of high-value transactions
In terms of Section 269ST of the Income Tax Act, a premium of Rs. 2,00,000 or more shall not be collected in cash –
◦ in aggregate from a person in a day (Advance / consolidated payments);
◦ in respect of a single transaction; or
◦ in respect of transactions relating to one event or occasion from a person.
Record Keeping
• Record keeping has to be sufficient to permit reconstruction of individual transactions swiftly in case of an investigation
• Insurers have to retain records of following transactions not less than a period of five years from the date of transactions:
- Reporting made to FIU and the back-up working papers
- Documents relating to the verification of the identity of clients
- Records pertaining to accounts settled by claim/maturity/ surrender or cancellation
Penalty for non-adherence • Any agent or intermediary of HDFC ERGO who fails to comply with these Guidelines or in implementing the AML Policy will be subject to dismissal. Services of defaulting agents who expose the Company to AML related risks on multiple occasions will be terminated and the details of such agents will be reported to IRDAI.
• As per the PML Act, the maximum penalty for non-compliance of AML would be:
- Rigorous imprisonment for a term of min. 3 years which may extend to seven years; and
- Fine which may extend to five Lakh rupees
• The Company shall monitor the selection process of agents / corporate agents carefully. While monitoring the performance of the agents, the Company shall also monitor sales practices followed by agents and ensure that if any unfair practice is being reported then appropriate action is taken after due investigation, including reporting to IRDAI.
Monitor Suspicious Activities
We need to monitor closely suspicious transactions closely which include: 1. Customer (including assignees, where applicable)/ beneficiaries / legal heirs/ nominee / Insured / Beneficial Owner (wherever applicable) whose identity matches with any person whose name figures in the list of designated individuals banned persons and entities
2. Customer insisting on anonymity, reluctance to provide identifying information, or providing minimal, seemingly fictitious information;
3. Cash transactions or demand drafts under Rs. 50,000/- towards premium, top- ups, etc.
4. Frequent free look cancellation by customers;
5. Assignments to unrelated parties without valid consideration;
6. Policy from a place where he does not reside or is employed;
7. Frequent request for change in addresses;
8. Inflated or totally fraudulent claims e.g. by arson or other means causing a fraudulent claim to be made to recover part of the invested illegitimate funds; 9. An established trend or pattern or frequent overpayment of premium with a request for a refund of the amount overpaid; and
10. Frequent cancellation of policies for the return of premium by an insurer’s cheque.
11. Unusual termination of policies and refunds
12. Customer Fraud (other than Claims)
13. Media reports about a Customer
14. Information sought by enforcement agencies
15. Insurance of Marine Export Policies in cases of export on cost plus freight basis
16. Re-assignment of marine transit insurance in favour of an Indian exporter
17. Claim settlement exceeding Rs 10 lakhs on total loss basis for non-hypothecated assets
18. Claim settlement exceeding Rs 1 crore for non-hypothecated assets
19. Suspicious profile of the customer is observed
20. Premium payment or attempts for payment made by unrelated third party (irrespective of the mode) with no economic rationale or any justified reasons
21. List of Policies issued to entities/persons of entities who are barred/disqualified by Financial Sector Regulators/MCA
What should you do?
In case of any suspicion of money laundering/ terrorist financing, it is your duty to report immediately to the Chief Compliance officer at reportsuspicioustransaction@hdfcergo.com

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