The Tribune

BY DEREK SMITH

During a recent conversation concerning the growing complexity of the financial services regulatory environment, one position held firm – that legal and compliance professionals should be seen as partners in sustainability. And, in particular, insurers have been required to respond to new risks, make more substantial commitments and innovate to maintain their market share.

Authorities worldwide have been deploying appropriate safeguards through legislation to ensure the long-term viability of the sector. In the Bahamas, industry regulators have issued new client on-boarding requirements for general insurance. This notice essentially requires a risked-based approach to taking on all insured clients irrespective of the type of insurance being procured, or the associated risk rating attached to the policyholder in terms of potential money laundering/terrorism financing risk. This amounts to an increased due diligence requirement for insurance companies.

This new environment has also exposed the enhanced roles of the legal and compliance departments, or a combination of the two. There have been many arguments over whether legal and compliance functions should be combined or separate. I acknowledge the combination of skills and requirements are different, which may infer that I agree the two roles should be separate. However, these skills can be held by a single practitioner, and this is evident in the financial services industry today.

Based on the above, I wish to highlight three observations when assessing the changing environment and how to assist an insurance company in navigating the same.

Financial crime possibilities in the insurance sector

A pre-COVID insurance industry survey noted that criminals, such as money launderers and terrorist financiers, can abuse the sector. Fraud and financial crime in the insurance industry has been growing rapidly in recent years. Statistics released by PricewaterhouseCoopers (PwC’s) 2018 Global Economic Crime Survey indicated that 62 percent of global insurance professionals have been exposed to financial fraud. Scammers are finding ways to inflate medical and accident bills to defraud the insurer. In the case of money laundering, it may be possible to request refundable premiums or to intentionally overpay premiums to trigger a refund, which essentially makes potential dirty money clean. Establishing robust client on-boarding and maintenance procedures that meet regulatory requirements, while assisting with financial profitability through managed risk, is essential.

Understanding each customer is different

Despite the guidance provided by regulatory bodies, based on my research there is not a “standard” method worldwide for correlating the source of wealth and source of funds belonging to high and medium-risk clients. As long as products or services are being offered, there should be no expectation that fact patterns are constant. To facilitate corroboration, compliance professionals should confirm their policies and procedures regarding customer identification, specify if there exists any inherent risks, such as if the individual or entity being a politically exposed person (PEP) or subject to sanctions, and other risk factors.

Art of Tracking

Both legal and compliance functions track these requirements. However, they may differ. An anti-money laundering compliance professional would consider tracking cross-border data statistics, ethical issues and regulatory requirements such as filings – both risk and financial. Conversely, the legal professional may track outstanding contracts and court proceedings. Notwithstanding the above, the role of legal and compliance may also jointly track regulatory changes.

Conclusion

In short, whether a decision is made to separate or join the legal and compliance roles, what is fundamentally important is that the engaged party is fit and proper to adequately address current industry nuances. Additionally, they must be equally aware of international trends to assist with positioning a company for success.

NB: Derek Smith Jr is a compliance officer at a leading law firm in The Bahamas, and a former assistant vice-president, compliance and money laundering reporting officer (MLRO), at a local private bank. His professional career started at a ‘Big Four’ accounting firm and has spanned more than 15 years, including business risk management, compliance, internal audit, external audit and other accounting services. He is also a CAMS member of the Association of Certified Anti-Money Laundering Specialists (ACAMS).