IRDA's Money Laundering Notification

In 2002 the Indian parliament passed the Prevention of Money Laundering Act 2002. The Act is applicable to every banking company, financial institution and intermediary. It extends to the insurance industry as well.

The implementation of the Act was deferred until 1st July 2005 while issues raised by various parts of the financial services industry were addressed. Those issues primarily concerned practical problems in implementing the provisions of the Act. The issues raised by the insurance industry took longer to resolve, but on 31st March 2006 the Indian insurance industry regulator, the IRDA, notified its Anti Money Laundering (AML) Guidelines effective from 1st August 2006.

The thrust of the guidelines is essentially as follows:

The IRDA has made life Insurers responsible for spotting any suspicious or dubious financial transactions, and notifying these to the Office of the Director - Financial Intelligence Unit, Government of India.

A suspicious transaction is a transaction (whether or not effected in cash) which gives rise to a reasonable ground for suspicion that it may involve the proceeds of any crime. The Guidelines provide an illustrative list of suspicious transactions, including those where the prospect insists on anonymity or frequently requests a change in his address details.

Insurers must have in place internal policies, procedures and controls to ascertain the true identities of its customers. These include:

Appointing a compliance officer.

Training existing and new employees and agents.

Conducting internal audits and checks.

Having a policy for dealing with customer acceptance, customer identification and transaction monitoring. This policy must be filed with the IRDA and be reviewed annually.

Insurers may not accept premium of more than Rs.50,000 (c $1,222) in cash.

The Know Your Customer (KYC) provisions have been the subject of particularly heated debate. One of the requirements is obtaining a recent photograph of the policyholder on all new Insurance contracts. Certain Insurers questioned the need for this in cases where policy payments were made via banks, as banks were also subject to the KYC rules and would have taken photographs of account holders. The question was why Insurers need to duplicate the process already undertaken by the banks, when it was just as effective to rely on the bank's procedures.

Insurers made a number of representations to the IRDA on this and other issues. On 27th July 2006, the IRDA...