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Gareth Evans is Head of Customer Success UK, Ireland & Nordics at Shift Technology

Cleaning dirty money is the stuff of pop culture legend and features prominently in numerous crime novels, movies, and television dramas. At the most fundamental level, money laundering is simply the act of concealing the origin of funds obtained through illegal activities by converting it into a legitimate source. For years the banking industry was the primary target for bad actors looking to legitimise their ill-gotten gains. And for this reason, greater scrutiny was placed on the banks and stricter regulations were put in place to curb money laundering activities.

Naturally, when one avenue for criminal behaviour is shut down participants will seek another. With the banking industry being increasingly hardened against money laundering, criminals turned toward the insurance industry, with life insurance providers being the primary target. Whole life policies that could be borrowed against, annuities, and other financial instruments offered new opportunities for cleaning dirty money. And the industry quickly responded with new strategies and initiatives designed to help them know who exactly they were doing business with and better spot potential illegal activities related to their book of business. These anti-money laundering (AML) and Know Your Customer (KYC) programs added a layer of security that helped protect insurers and their policyholders from not only the bad actors looking to take advantage of the system, but also supported compliance efforts.

It is easy to see why AML and KYC initiatives are crucial to life insurers. Their products are often viewed as an “easy way” to funnel money through the system. For example, buy a whole life policy using illicit funds and then borrow against it, rinse and repeat. But what about P&C insurers? Are motor or property policies viable options for money laundering? Unfortunately, the answer is a resounding yes. P&C insurers must take the same kind of precautions their life insurance colleagues are taking to mitigate the risk of their products being used to facilitate financial crime and/or running afoul of regulators. 

How P&C Policies can be used to Facilitate Money Laundering
While money laundering related to life insurance policies and other insurance-related financial instruments may appear to be straightforward, it can be a whole different world in the realm of P&C insurance. This is partly due to the variety of coverages offered by P&C insurance and how those policies can be manipulated.

A home insurance policy, for example, could be used to cover goods purchased using illicit funds. Report a loss of those goods, tack on a bit of exaggeration for good measure, and now you have clean cash in your pocket. Bad actors have been known to purchase cars for cash (ill-gotten of course) and then stage total loss incidents as another means of creating clean funds from dirty. And these are just two examples. Unfortunately, the list goes on and on.

How can Insurers Protect Themselves and Their Policyholders
Fortunately, insurers have a variety of options when it comes to AML and KYC, and one of the most powerful weapons in the fight against financial crime is artificial intelligence (AI). The benefits of using AI as the foundation for insurer AML and KYC initiatives are numerous. Chief among them is the ability to analyse vast amounts of data and make the connections that might not otherwise be apparent. This is incredibly useful for helping know exactly who you are doing business with. AI can be used to quickly perform entity resolution. Is the person applying for a policy already doing business with you under a slightly different name — J.H. Smith vs. John Smith — and have any of those entities been suspected of using their policy to commit fraud or other financial crimes. The resolved “John Smith” entity can also be matched against external databases to help determine if the individual appears on industry held databases, financial sanctions or Politically Exposed Persons (PEP) lists. Having a holistic view of who your policyholder really is makes it that much harder for them to use a policy for nefarious purposes and may even be the difference between writing them a policy or not in the first place.

If a policy is already in place AI can also be used to more effectively detect behaviours that may indicate the policy is being used for illegal purposes. Analysing a claim for suspicious behaviour or potential fraud (exaggerated loss value, faked injuries, etc.) and being able to make a connection to an individual that is shown to be part of a fraud network or other criminal enterprise is one of the best ways to determine if a potentially fraudulent claim is simply opportunistic or something more. 

No insurer is immune from the threat of policyholders using their coverage for illicit purposes. With the right AML and KYC strategies in place and backed by AI they stand a much better chance of identifying potentially dangerous policies and/or policyholders before the damage is done.

For more information about how Shift can help you adopt AI to meet the challenges facing the insurance industry – contact us today