8.2 Anti-Money Laundering (AML) & Counter-Terrorist Financing

The Anti-Money Laundering and Counter-Terrorist Financing Framework

Money laundering is the process by which criminals disguise the original ownership and illicit origin of proceeds derived from criminal conduct, converting those funds into assets that appear legitimate. Counter-terrorist financing (CTF) shares many operational characteristics with anti-money laundering (AML), but with a critical distinction: while money laundering deals exclusively with funds generated by prior crimes, terrorist financing may involve funds derived from entirely legitimate sources (such as business earnings, personal savings, or charitable donations) that are intentionally channeled to support terrorist operations or organizations.

Legal Scope: General Insurance vs. Regulated Sector Scope

A critical distinction in UK financial regulation concerns the scope of anti-money laundering legislation across different financial sectors:

• Scope of the Money Laundering Regulations (MLRs): The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) and the FCA's specific AML rules apply to designated "relevant persons" and credit/financial institutions—such as retail banks, building societies, wealth managers, and firms carrying on relevant long-term insurance activities, not only investment or cash-surrender products.
• The General Insurance Position: The Financial Conduct Authority (FCA) explicitly confirms that mortgage brokers, general insurers, and general insurance intermediaries are NOT directly bound by the Money Laundering Regulations 2017 or the FCA's specific AML rules. Pure general insurance contracts (such as marine hull, property, liability, or aviation) do not offer cash-surrender values or investment returns, making them less suited for straightforward financial deposit placement.
• Universal Application of POCA and the Terrorism Act: Although exempt from direct MLR 2017 administrative mandates, general insurers and brokers are strictly subject to the primary criminal law:
  1. Proceeds of Crime Act 2002 (POCA): Sections 327, 328, and 329 apply universally to all individuals and corporations in the UK. Handling, converting, or entering into arrangements involving criminal property carries severe criminal penalties of up to 14 years' imprisonment and unlimited fines.
  2. Terrorism Act 2000: Specifically penalises fundraising, using, possessing, or entering into funding arrangements where money or property is intended to be used for terrorist purposes.
• FCA Systems and Controls (SYSC): Under the FCA Senior Management Arrangements, Systems and Controls sourcebook (SYSC 3.2.6R and SYSC 6.1.1R), all authorised firms, including general insurers and insurance intermediaries, are legally required to establish and maintain effective systems and controls to counter the risk that the firm might be used to further financial crime.
• JMLSG Guidance and London Market Practice: General insurance firms need proportionate financial-crime controls, but the MLR-specific CDD and MLRO duties do not automatically apply to their general insurance business. Many firms adopt comparable controls voluntarily, including customer checks, a nominated officer, internal reporting and SARs to the NCA. JMLSG guidance can inform that approach; it does not expand the statutory regulated sector.

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The Three Stages of Money Laundering in General Insurance

While retail banking and life insurance with investment surrender values are historically viewed as higher-risk sectors for physical cash laundering, the London Market is vulnerable to sophisticated money laundering operations. The London Market handles multi-million-pound premium transfers, complex global cross-border payments, international broking accounts, and massive claims settlements. Criminals exploit these mechanisms to disguise illicit wealth through three classic stages:

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• 1. Placement: The initial entry of illicitly acquired funds into the financial system. In the London Market, underwriters and brokers do not accept physical currency. However, placement can occur when illicit proceeds are introduced through structured bank wires, premium funding loans, or premium payments paid by unverified third parties situated in opaque offshore jurisdictions.
• 2. Layering: Creating a complex web of financial transactions designed to obscure the audit trail, sever the connection between the funds and the underlying crime, and hide the true beneficial ownership. In London Market general insurance, layering frequently takes the form of:
  • Early Cancellation & Refund Diversion: Purchasing high-premium marine cargo, property, or liability coverage, followed by an immediate mid-term cancellation. The client requests that the unearned return premium be wired to an unrelated corporate entity or a third-party bank account in a different country.
  • Premium Overpayment Schemes: Deliberately overpaying an annual premium (e.g., wiring £500,000 for a £50,000 premium) and urgently requesting that the insurer or broker refund the excess balance to a separate overseas account.
  • Fictitious or Collusive Claims: Orchestrating staged, fraudulent, or collusive losses where an insurer pays legitimate settlement funds directly into a corporate bank account, transforming criminal proceeds into legitimate insurance compensation.
• 3. Integration: The final stage where laundered funds re-enter the mainstream economy, fully legitimized and indistinguishable from clean commercial wealth. Because the funds originate from a reputable London Market broker or insurer as an official return premium or claims settlement cheque, the criminal can present them to banks and tax authorities with a clean commercial audit trail.

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Risk-Based Customer Due Diligence (CDD) and JMLSG Standards

General insurance firms should know their customers and assess financial-crime risk through proportionate controls. Many use the simplified, standard and enhanced due-diligence techniques described below, drawing on JMLSG guidance. These are possible risk-based controls, rather than a universal statutory three-tier CDD mandate for general insurance. The firm sets its procedures and timing according to the risks and applicable obligations.

1. Simplified Due Diligence (SDD)

Simplified Due Diligence is applied where the customer or transaction presents an intrinsically low risk of money laundering or terrorist financing. Examples include UK or EEA regulated financial institutions, public bodies, and UK publicly listed companies trading on a recognized exchange (subject to rigorous statutory disclosure and transparency rules). While verification requirements are streamlined, firms must maintain ongoing monitoring to ensure transactions remain consistent with the known business profile.

2. Standard Customer Due Diligence (CDD)

Standard CDD applies to standard commercial insurance risks. It comprises four core components:

• Customer Identification & Verification: Identifying the policyholder (individual or corporate legal entity) and verifying their identity using reliable, independent source documents, official registry data, or electronic verification services.
• Beneficial Ownership Verification: Understand and verify who ultimately owns or controls a corporate customer. Under the MLR corporate test, a beneficial owner includes someone with more than 25% of shares or voting rights, or control through other means. A general insurance firm may use that test in its own controls. Under MLR regulation 28, treating a senior manager as the beneficial owner is a fallback after exhausting possible means of identifying the owner; it is not automatic whenever no shareholder exceeds 25%. Escalate unexplained ownership structures.
• Purpose and Nature of the Relationship: Understanding and documenting the intended commercial purpose, operational profile, and geographic scope of the insurance contract.
• Ongoing Monitoring: Scrutinizing transactions, premium payments, and claims throughout the lifecycle of the policy to ensure activities align with the firm's knowledge of the client and risk profile.

3. Enhanced Due Diligence (EDD)

Enhanced Due Diligence is applied in heightened-risk scenarios, including:

• High-Risk Jurisdictions: Transactions, policyholders, or trade routes connected to countries identified by the FATF or UK authorities as having strategic AML/CTF deficiencies.
• Unusual, Complex, or High-Value Transactions: Transactions that exhibit unusually complex corporate structures, lack obvious commercial logic, or involve unexplained third-party payors.
• Politically Exposed Persons (PEPs): A PEP is an individual entrusted with prominent public functions (e.g., senior government ministers, members of parliament, judicial figures, high-ranking military commanders, or executives of state-owned enterprises). Because their public position creates exposure to bribery and corruption, PEPs present heightened financial crime risks. Under standard practice, EDD extends to PEPs, their immediate family members (spouses, partners, children, parents), and their known close associates.

Key EDD Measures:

• Securing Senior Management Approval before binding cover or formalizing the commercial relationship.
• Establishing the client's Source of Wealth (the overall origins of their commercial net worth) and Source of Funds (the specific origin of the monies utilized to pay insurance premiums).
• Applying enhanced, continuous monitoring to transactions, premium receipts, and claims adjustments.

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The Nominated Officer (MLRO) and Suspicious Activity Reports (SARs)

General insurance firms need clear arrangements for escalating financial-crime concerns. Many designate a nominated officer, often called an MLRO, with sufficient seniority, independence and resources. The FCA-specific AML rule requiring an MLRO does not apply automatically to pure general insurance business. If a nominated officer is appointed outside the regulated sector, POCA section 332 can nevertheless require onward disclosure of suspicions received through that role.

The reporting framework follows a structured, two-tier escalation:

1. Internal Disclosure: Staff follow the firm's reporting procedures and promptly refer knowledge or suspicion to the nominated officer. An internal report does not itself give blanket immunity for proceeding with a transaction involving criminal property. The conditions for an authorised disclosure and, where needed, appropriate consent must be met.
2. External SAR to the National Crime Agency (NCA): The nominated officer evaluates the information and makes any required external report. Section 330 applies to staff in the statutory regulated sector; section 331 covers its nominated officers, while section 332 addresses other nominated officers. Pure general insurance is not brought into the regulated sector merely by FCA authorisation.

Defence Against Money Laundering (DAML)

When a firm is asked to execute a transaction involving funds suspected of being criminal property (such as paying a contested claim or refunding a large overpaid premium), processing the payment would expose the firm and its employees to committing a primary money laundering offence under Sections 327–329 of POCA. To handle this dilemma safely, the MLRO submits a SAR requesting a Defence Against Money Laundering (DAML) (formerly known as statutory consent) from the NCA:

• Notice Period (7 Working Days): The firm must suspend processing the transaction for a statutory notice period of 7 working days, starting the day after the SAR is submitted. If the NCA grants consent, or if the 7 working days elapse without an objection from the NCA, the specified act may have a defence to the principal POCA money-laundering offences. This is not approval of the transaction or immunity from other offences.
• Moratorium Period (31 Calendar Days): If the NCA formally refuses consent within the 7 working days, a 31-calendar-day moratorium period begins on receipt of refusal and may be extended by the court. During this period, the firm must continue to freeze the transaction, granting law enforcement agencies time to investigate and obtain a formal court restraint or freezing order under POCA.

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Criminal Offences and Legal Liabilities Under POCA

The Proceeds of Crime Act 2002 creates severe criminal offences to deter financial crime:

1. Primary Money Laundering Offences (Sections 327–329)

The primary offences apply universally to all individuals and corporate entities across the UK economy, including all general insurers, Lloyd's syndicates, and broking personnel:

• Section 327: Concealing, disguising, converting, transferring, or removing criminal property from the UK.
• Section 328: Entering into or becoming concerned in an arrangement which the person knows or suspects facilitates the acquisition, retention, use, or control of criminal property by or on behalf of another. (In insurance, arranging cover or handling premium refunds for known or suspected illicit funds constitutes an arrangement under Section 328).
• Section 329: Acquiring, using, or having possession of criminal property.
• Penalties: Primary POCA offences carry maximum penalties of up to 14 years' imprisonment and unlimited fines.

2. Failure to Disclose (Sections 330 & 331)

• Under Section 330, an offence is committed if a person working in the statutory "regulated sector" (credit and financial institutions, investment business, life insurance) fails to disclose knowledge or suspicion of money laundering to their MLRO as soon as practicable. Section 330 imposes an objective test (negligence standard: having reasonable grounds to suspect).
• Pure general insurance business falls outside the statutory regulated sector, so section 330 does not automatically apply to its staff. That does not remove the principal offences in sections 327–329. Staff must follow the firm's reporting controls, and an appointed nominated officer outside the regulated sector may commit a section 332 offence by failing to make a required onward disclosure.

3. Tipping Off (Section 333A)

Section 333A applies where the relevant information came through business in the regulated sector. It criminalises specified disclosures about a SAR or a contemplated or ongoing money-laundering investigation when likely to prejudice an investigation. The maximum penalty on indictment is two years' imprisonment, a fine, or both. Pure general insurance business is outside that statutory sector; FCA authorisation alone does not make this offence applicable. Staff must still avoid disclosures that prejudice an investigation.

4. Prejudicing an Investigation (Section 342)

Section 342 can apply outside the regulated sector. A person who knows or suspects that an appropriate officer is acting or proposing to act in a relevant investigation may commit an offence by making a disclosure likely to prejudice it, or by falsifying, concealing, destroying or disposing of relevant documents, subject to the statutory defences. For a disclosure, the person must know or suspect its prejudicial effect. The maximum penalty on indictment is five years' imprisonment, a fine, or both.