Under the Patriot Act, passed following the Sept. 11 terrorism attacks, the Treasury Department is mandated to develop regulations aimed at detecting money-laundering schemes to finance terrorists. The problem, producer association executives say, is that the insurance transaction is not an effective tool for money laundering because money passes through the agent to the company, and not back to the client.

One circumstance where an individual would get money back from an insurance company would be through a claim, said Justin Roth, director of federal government affairs for IIABA in Alexandria, Va. The problem here, for a money launderer, is that it takes time to get the laundered money back. If the claim is a fake, there are already laws and procedures to detect and prosecute frauds, complicating and slowing down the process.

“[Insurance] has very detailed and defined procedures,” noted Patricia A. Borowski, senior vice president for PIA, also based in Alexandria. “We do a lot already [to detect fraud]. We believe the occasion for concern that money laundering takes place does not exist.”

However, Ms. Borowski advocated that producer associations should wait until the Treasury Department produces its draft regulations before jumping to any conclusions. “This is a big learning process,” she observed.

Because of the nature of insurance transactions, Mr. Roth said intermediaries should be exempt from the Patriot Act, although he believes agents will eventually see some form of regulation. His fear is that the regulations will be so broad that they would become burdensome. He advocates that the rules should be made “as minimal as possible.”

Taking a different view over the need for compliance, Joel Wood, senior vice president of government affairs for CIAB in Washington, said that because of the global nature of the insurance brokers his association represents, it is clear they fall under the law.

“At the outset we did not join the other agent associations [in the talks], but we found we are all on the same wavelength,” as to the difficulties involved in setting regulations, said Mr. Wood. “Our members told us, when we asked them if we should intervene, that we should work with the [Treasury] department. They were emphatic that they did not want to be exempted in this.”

“I think it is pretty straightforward,” he observed. “Absolutely, agents are covered by the act and we do not want to exempt ourselves from it. However, compliance is a problem without some guidance from Treasury. The difficulty is rooted in how the property-casualty transaction can be used for international money laundering. I think Treasury is struggling with this issue just as we are.”

Part of the problem for the Treasury department, producer representatives say, is developing regulations for the unforeseen scheme. “Their concern is five years down the road, what if we find something is happening?” said Ms. Borowski, noting that Treasury is trying to create regulations for any possibility.

She noted that the industry already has established communications with the FBI's insurance bureau, to which agents can report suspicious activity. “You would be an idiot to launder money in this business,” added Ms. Borowski.

“I think we made very effective arguments to the Treasury Department and they see we are unique,” said Mr. Roth. “Our rules are different from banks and securities firms.”

Mr. Roth and Mr. Wood agree that any transaction involving cash or cash equivalents is suspicious, and that is where Treasury should begin developing regulations. “If an agency takes cash, then there should be a procedure and policy set,” said Mr. Wood.

Prior to Treasurys announcement on April 23 that it would extend the study of the question for six months, producer representatives expected the department to issue the regulations for agents by mid-summer. They said they plan to put the extra time to good use by continuing talks with the department to develop workable regulations.

Both producer associations and the Treasury Department “want compliance to be proportionate to risk,” said Mr. Wood. “Compliance is not a problem when we are given more information as to what we must be suspicious of.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, June 3, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.