AML/CFT Transaction Monitoring –

Principle and Practice

Dickson Chui

Senior Manager (Enforcement) –

Anti-Money Laundering

1 December 2016

Office of the Commissioner of Insurance

The Government of the Hong Kong Special Administrative Region

Disclaimer

• This part of presentation aims to enhance the audience’s understanding of transaction monitoring. It is not intended to cover all the statutory requirements applicable to insurance institutions. Insurance institution should seek its own professional legal advice in ensuring its compliance with the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance and Guideline on Anti-Money Laundering and Counter-Terrorist Financing.

• The PowerPoint materials of this presentation may be used for personal viewing purposes or for use within an insurance institution. These materials may not be reproduced for or distributed to third parties, or used for commercial purposes without the OCI’s prior written consent.

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Ongoing Monitoring

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Customer Due

Diligence

Ongoing

Monitoring

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Ongoing Monitoring

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Customer’s

Identities –

up-to-date and

relevant

Customer’s

Transactions –

Transaction

Monitoring

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What is Transaction Monitoring?

Usual - Unusual

Financial - Non-Financial

Insurer - Intermediary

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What is Unusual/Suspicious?

• External reference – Guideline on Anti-Money Laundering and Counter-

Terrorist Financing (GN3)

– Feedback reports by JFIU

– FATF/APGML/IAIS papers

• Internal reference – Discrepancy between a transaction and the

customer’s risk profile, e.g. withdrawal amount

exceeds certain percentage when compared with

the policyholder’s withdrawal history

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Non-financial Transactions

Policyholder A Policyholder B Policyholder C Policyholder D

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Frequent change of policy ownership

Policyholder A Policyholder B Policyholder A Policyholder B

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Non-financial Transactions

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Frequent change of policy ownership

Policyholder A

Policyholder B

Policyholder C

Policyholder D

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Non-financial Transactions

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Frequent change of policy ownership

Policyholder

A

Policyholder B

Policyholder C

Policyholder D

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Non-financial Transactions

Policy level – Policyholder level

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Non-financial Transactions

Frequent change of beneficiary

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Frequent change of address

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Financial Transactions

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Money In – Money Out

Financial Transactions

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Inflow – premium / loan repayment / future premium deposit

- Large

- Accumulated

- Policy level/policyholder level

Financial Transactions

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Outflow – surrender payment / withdrawal / policy loan / policy refund

- Large

- Accumulated

- Policy level/policyholder level

Financial Transactions

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Large accumulated fund inflow at policy

level/policyholder level

Large accumulated fund outflow at policy

level/policyholder level

IN + OUT

Fund Inflow - Cash

Large accumulated cash deposit on policyholder level

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• Structuring/Smurfing - practice of conducting

financial transactions in a specific pattern

calculated to avoid the creation of certain

records and reports required

• Cashier/bank/convenience store

• Internal control and transaction monitoring

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Fund Inflow – Premium Payment

Dump in premium amount does not match with

the modal premium or its multiples for a

regular premium insurance policy

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Fund Outflow

• Timing as a criteria

• Time between policy

issued/certain event

and payout

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Fund Outflow

Frequent cooling off/policy cancellation

on policyholder level

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Fund Outflow

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Withdrawal/surrender soon after

change of policy ownership

Fund Outflow

Frequent surrender

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Surrender loss over certain percentage

and a defined threshold

Withdrawal over certain percentage

when compared with the policyholder’s

withdrawal history

A Few More…

Taking out similar insurance policies from

various insurers without valid reasons

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Product-specific criteria, e.g. single premium

insurance policies

Channel level review

How to Monitor?

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• Scale

• Demonstrate effectiveness

• Adequate with respect to the

company’s size / activities / risk

• Electronic system a must ?

How to Monitor?

Dedicated automatic transaction monitoring system / System generated exception reports

Manual incident report/log

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How to Monitor?

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On screen alerts • Real-time monitoring transactions of high

risk customers

Event-driven reviews • Ad hoc basis

Transaction Monitoring -

Implementation

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Appropriate MIS/policy

administration system with good

data quality

Understand the operating

rules/rationale

Justified and reasonable

parameters/ thresholds

Understand system limitation

Transaction Monitoring -

Maintenance

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Changes in risk profiles of insurance institutions

Changes in identified ML/TF

typologies

Effectiveness and

efficiency of prior results

Periodic review on

extent/depth of monitoring

Insufficient manpower

Transaction Monitoring -

Alerts Handling

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Written guidance and procedures on handling

alerts

Documentation of assessment conclusions with

rationale

Adequate resources allocated – demonstrate

commitment of senior management

Outsource arrangement and quality control

Transaction Monitoring

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Transaction Monitoring

Customer Due

Diligence

Risk profile Internal control

Suspicious Transaction Reporting

Office of the Commissioner of Insurance

The Government of the Hong Kong Special Administrative Region