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9/10 W01/March 2017 Award in General Insurance

Using 1998 statistics, these percentages indicate that money laundering ranged between US$590 billion
and US$1.5 trillion. However, it must be said that overall it is absolutely impossible to produce a reliable
estimate of the amount of money laundered.
The integrity of the banking and financial services marketplace depends heavily on the perception that it
functions within a framework of high legal, professional and ethical standards. A reputation for integrity
is the one of the most valuable assets of a financial institution.
If funds from criminal activity can be easily processed through a particular institution – either because
its employees or directors have been bribed or because the institution turns a blind eye to the criminal
nature of such funds – the institution could be drawn into active complicity with criminals and become
part of the criminal network itself. Evidence of such complicity will have a damaging effect on the
attitudes of other financial institutions and of regulatory authorities, as well as customers.
On the same note, a financial institution that carries out a transaction, knowing that the funds or
property involved are owned or controlled by terrorist organisations, or that the transaction is linked to
terrorist activity, may be committing a criminal offence under the laws of many jurisdictions. Such an
offence may exist regardless of whether the assets involved in the transaction were the proceeds of
criminal activity or were derived from lawful activity but intended for use in support of terrorism.
Regardless of whether the funds in a transaction are related to terrorists for the purposes of national
criminal legislation, business relationships with such individuals could expose a financial institution to
significant reputational, operational, and legal risk. This risk is even more serious if the person or entity
involved is later shown to have benefited from the lack of effective monitoring or wilful blindness of a
particular institution and was to carry out terrorist acts.

As for the potential negative economic consequences of unchecked money laundering, this can include
changes in money demand, prudential risks to bank soundness, contamination effects on legal financial
transactions, and increased volatility of international capital flows and exchange rates due to
unanticipated cross-border asset transfers. Also, as it rewards corruption and crime, successful money
laundering damages the integrity of the entire society and undermines democracy and the rule of
the law.
The possible social and political costs of money laundering, if left unchecked or dealt with ineffectively, Reference copy for CII Face to Face Training
are serious. Organised crime can infiltrate financial institutions, acquire control of large sectors of the
economy through investment, or offer bribes to public officials and indeed governments.

The economic and political influence of criminal organisations can weaken the social fabric, collective
ethical standards and ultimately the democratic institutions of society. In countries transitioning to
democratic systems, this criminal influence can undermine the transition. Most fundamentally, money
laundering is inextricably linked to the underlying criminal activity that generated it. Laundering enables
criminal activity to continue.
Question 9.3

Briefly outline the three stages of money laundering.

D1A Vulnerabilities in insurance

Life assurance and general insurance can be used in different ways by money launderers and terrorist
financiers. The vulnerability depends on factors such as the complexity and terms of the contract,
distribution, method of payment (cash or bank transfer) and contract law. Insurers should take these
9 factors into account when preparing a risk profile of the type of business in general and of each business
Chapter relationship.

Examples of the type of life insurance contracts that are vulnerable are products such as:
• unit-linked or with profit single premium contracts;
• single premium life insurance policies that have cash value;
• fixed and variable annuities; and
• (second hand) endowment policies.
When a life insurance policy matures or is surrendered, funds become available to the policyholder or
Funds become
available to the other beneficiaries. The beneficiary to the contract may be changed before maturity or surrender, so that
policyholder or other payments are made by the insurance company to a new beneficiary. A policy might be used as collateral
beneficiaries
to purchase other financial instruments. These investments may be one part of a sophisticated web of
complex transactions with their origins elsewhere in the financial system.