Over the past months, the world has witnessed the spectacle of so-called “mega-yachts” being impounded by government authorities around the world. These are some of the most ostentatious vehicles ever to put to sea – so why is it so hard to figure out who owns them?
Ultra-luxe property – such as villas, yachts, and private jets – is often surrounded by secrecy. The most public-facing “owner” of these assets is often a numbered corporation registered in a tax haven such as the Cayman Islands. This corporation is owned by another one, which is owned by yet another, and so on, obfuscating the true owner of these assets.
For insurers, this obscurity represents a puzzle. Like everyone, the ultra-rich deserve privacy, but the owners of these assets are sometimes sanctioned individuals or entities. How do insurers know whether they’re safeguarding someone’s ill-gotten gains?
Risks related to KYC continue to increase
Recently, high-profile world events have placed more of the world’s ultra-rich on international sanctions lists. This creates a potentially difficult situation for insurers.
- Existing KYC regulations on insurers are likely to increase, creating more workloads for investigators who need to vet policies before they’re approved.
- Public opinion is against many high-profile sanctioned individuals, and companies found to be sheltering them – even inadvertently – may suffer reputational damage.
- The tools available to high-net worth individuals (HNIs) make it easy for them to conceal themselves from many due diligence efforts.
Finally, insurers face a dilemma. Not every luxury asset belongs to a sanctioned individual, but due diligence may require insurers to treat every luxury asset as though it does. If this prevents HNIs from obtaining insurance in a reasonable timeframe, they may take their business elsewhere – depriving the insurer of lucrative premiums.
Insurers need to know more about their customers
Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations have been growing in scope over the last two decades. In the United States, these laws initially came about during the 1970s with the advent of the Bank Secrecy Act. They were designed to force entities such as banks to keep records about their account holders and force them to report clear examples of criminal activity.
While the initial wave of AML/KYC regulations mostly affected banks, legislation such as the USA PATRIOT Act began to affect insurers as well. On the AML side, insurers needed to prevent bad actors from using instruments such as transferrable life insurance policies, single-premium policies, and other tactics (mostly focused around the life insurance vertical) to untraceably transfer money or launder funds obtained through criminal activities.
In the meantime, Know Your Customer enforcement began to step up as well. The Office of Foreign Assets Control (OFAC) began asking insurers to comply with sanctions lists. Although the mandate of this office was enforced via presidential directives (as opposed to legislative actions), they still prevented insurers from issuing policies or paying claims to “Specially Designated Nationals” or anyone else falling on one of their sanctions lists.
Using AI to untangle KYC
This brings us back to the central question: Let’s say that an insurer is approached by a person who wants to insure a yacht. This person doesn’t own the yacht – instead, they’re a legal representative of a company that owns the yacht on behalf of an HNI. Is this company legitimate, or is it a shell that masks a sanctioned individual? How do you perform due diligence?
Corporate ownership of private property can stymie manual investigations, but artificial intelligence is another matter. For AI, unmasking the owners of luxury assets can rely on a few simple methods:
Nested shell corporations can make manual investigations difficult. Each successive corporation may be in a different jurisdiction or listed in a different database. By having access to multiple external data sources, AI can make it easier to trace ownership.
It is common (although not universal) for the legal representative of a shell corporation to be personally or professionally connected to the ultimate owner of a luxury asset. They might work for a law firm that represents the owner, they might be a relative, or they might be a friend of a friend. In any event, these connections are often more readily apparent to AI solutions than they are to investigators.
Social media mapping
One of the best ways to determine the legitimacy of a shell company is to see who does – or doesn’t – work for it. Specifically, some bad actors will set their companies up with fake employees, complete with fake social media profiles, to provide an aura of legitimacy. These profiles might fool a cursory glance, but AI solutions can see that these employees never change jobs, post on a suspiciously regular schedule, and use photos with doctored metadata.
AI helps insurers perform due diligence
AI solutions help insurers perform due diligence quickly, accurately, and discreetly. Entity resolution tools help insurers uncover policyholders who may be politically exposed, in sensitive positions, or on government sanctions lists – even if they use false information or hide behind shell corporations.
Performing due diligence with AI solutions helps insurers avoid fines, regulatory action, and reputational damage – but it also puts insurers in a position where they can do more to work with legitimate HNIs and their assets. By mitigating legal risks related to these individuals, insurers can be more sanguine about adding them to their book of business, allowing them to generate ROI and improve their loss ratio.
For more information about Shift Technology and Shift Financial Crime Detection, request a demo today.