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9/10 W01/March 2018 Award in General Insurance

A United Nations Office on Drugs and Crime (UNODC) report in 2009 estimated that the aggregate size of
money laundering in the world was equivalent to 2.7% of global GDP, or US$1.6 trillion. This tallied with
the International Monetary Fund’s 1998 estimate of between 2% and 5% of global GDP. Using 1998
statistics, these percentages indicate that money laundering ranged between US$590 billion and US$1.5
trillion. However, 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 has chosen to ignore the criminal
nature of such funds – the institution could become actively complicit in financial crime. 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.
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 financial transfers.

The possible social and political costs of money laundering, if left unchecked or dealt with ineffectively,
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 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
inseparable from the underlying criminal activity that generated it. Laundering enables criminal activity
to continue.

Question 9.3
Briefly outline the three stages of money laundering.

9 D1A Vulnerabilities in insurance
Chapter Life insurance 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
factors into account when preparing a risk profile of the type of business in general and of each business
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.