By Derek Smith Jr
During a recent conversation concerning the complexity of the growing regulatory environment, one position held firm — that legal and compliance professionals should be seen as partners in sustainability. Additionally, in the current economically complicated environment, insurers have been required to respond to new risks more successfully, make more substantial commitments and innovate to maintain their market share.
Authorities across the globe have been deploying appropriate safeguards through legislation to ensure the long-term viability of the sector. In The Bahamas, this is particularly true where the Bahamas Insurance Association (BIA) issued new onboarding requirements for general insurance. This notice essentially required a risked-based approach of all insured individuals irrespective of the type of insurance being procured and required accompanying documents aligned with the associated risk rating assigned to the policyholder. This amounted to an increased due diligence requirement for insurance companies.
This new environment also brought to light the discussion of the enhanced roles of legal, compliance or the combination of legal/compliance. Where some argue whether legal and compliance should be combined or separate, I prefer to present the combination of skills and requirements are different that may infer that I agree with the separation of the roles. However, these skills can be held by a single practitioner and this is evident through many local and international industry executives today.
Based on the quick snapshot above, I wish to highlight three observations when assessing the changing environment and stakeholders engaged to assist an insurance company’s navigation of the same.
Finance 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 insurance industry. Fraud and financial crime in the insurance industry have been growing rapidly in recent years. Statistics released by 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 and dynamic onboarding 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 and independent intergovernmental bodies, based on my research in this field, there isn’t a “standard” method worldwide for correlating source of wealth (SoW) for high-risk clients and source of funds (SoF) for 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, specifying if there exists any inherent risks, such as if the individual or entity is a politically exposed person or sanctioned, and other risk factors.
Art of tracking
Both the legal and compliance track requirements. However, they may differ. An AML 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 jointly track regulatory changes with a view to confirming applicability to the entity (legal) and the obligation once being deemed applicable (compliance).
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 are equally aware of international trends and predictions to assist with positioning a company for success.
Derek Smith Jr is a Top 40 Under 40 leader; the compliance officer at Higgs & Johnson, a leading law firm in The Bahamas; and the former assistant vice president, Compliance & Money Laundering Reporting Officer (MLRO), at an international private bank. He is also a CAMS member of the Association of Certified Anti-Money Laundering Specialists (ACAMS) and an executive member of the Bahamas Association of Compliance Officers.