Is Structured Settlement Secondary Market Ripe For Money Laundering?

by John Darer      

Generally, money laundering involves disguising assets/money obtained through illegal means by moving them through legitimate channels such as banks, broker/dealers and insurance companies in an effort to clean (launder) the assets/money.

Generally, money laundering is a three step process:

•Placement – the initial introduction of criminal proceeds into the stream of commerce (deposit into a bank account) 

•Layering – efforts to disperse the funds and give them an air of legitimacy. Can involve moving funds into different accounts in different locations (illegal proceeds are wired out to fund an annuity contract)

•Integration – occurs when laundered proceeds are no longer distinguishable from legitimate funds in the stream of commerce. At this point, laundered proceeds are distributed back to the criminal.

Money laundering facilitates a broad range of serious underlying criminal offenses and ultimately threatens the integrity of the financial system, not to mention potentially,  the structured settlement industry's secondary and tertiary markets.

The other day I completed a mandatory Anti-Money Laundering course through LIMRA. Such courses are required to obtain and/or maintain appointments with life insurers and annuity issuers these days. Similar AML training programs are required by FINRA Rule 3310. As I was completing the LIMRA AML course i got to thinking,  is it possible that structured settlement secondary market, due to a lack of formal market controls could create opportunities for those with a will to launder money?

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I spoke to a well placed source within the factoring industry today and surprisingly the issue does not appear to have been on the radar screen of members or non-members of the National Association of Settlement Purchasers. Perhaps it should be!

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"The United States Department of the Treasury is fully dedicated to combating all aspects of money laundering at home and abroad, through the mission of the Office of Terrorism and Financial Intelligence (TFI). TFI utilizes the Department's many assets - including a diverse range of legal authorities, core financial expertise, operational resources, and expansive relationships with the private sector, interagency and international communities - to identify and attack money laundering vulnerabilities and networks across the domestic and international financial systems."  (US Treasury website)

Key concept  "Willfully Blind" a/k/a "Turning the Other Cheek Doesn't Fly

Acting “knowingly” includes being “willfully blind” to facts indicating a possible illegal source, such as deliberately ignoring such facts or consciously avoiding learning such facts. Being willfully blind could get you a major kick in the behind, including fines, forfeitures and jail-time.

One life insurer  listed the following as examples of Suspicious Activity Indicators

 in its AML training course

• Customer exhibits unusual concern for secrecy particularly with regard to his/her identity, type of business, assets or dealings with other firms
• Customer refuses to identify source of funds
• Customer exhibits lack of concern regarding risks, commissions or other transaction costs
• Customer appears to act/operate as an agent of an undisclosed principal
• Customer has difficulty describing the nature of his/her business
• Customer lacks general knowledge of the industry he/she has associated themselves with
• Customer is from, or has accounts in, a country known for money laundering
• Customer is represented by an intermediary and does not want to meet the broker in person
• Customer is not available to answer questions but the intermediary or power of attorney always is
• Customer requests codes or passwords to facilitate transactions
• Request to only contact by cell phone
• Corporate account title that sounds very close to the name of a legitimate organization/institution

Key Concept  "Knowing Your Customer"

Knowing the identity of the customers, and further, understanding the kinds of transactions in which the customer is likely to engage. By knowing one's customers, financial institutions will often be able to identify unusual or suspicious behavior, termed anomalies, which may be an indication of money laundering.

Bank employees, such as tellers and customer account representatives, are trained in anti-money laundering and are instructed to report activities that they deem suspicious. Additionally, anti-money laundering software filters customer data, classifies it according to level of suspicion, and inspects it for anomalies. Such anomalies would include any sudden and substantial increase in funds, a large withdrawal, or moving money to a bank secrecy jurisdiction. Smaller transactions that meet certain criteria may also be flagged as suspicious. For example, structuring can lead to flagged transactions. The software will also flag names that have been placed on government "blacklists" and transactions involving countries that are thought to be hostile to the host nation. Once the software has mined data and flagged suspect transactions, it alerts bank management, who must then determine whether to file a report with the government.

Questions

1. What are individuals and entities that accept money from investors in structured settlement payment rights doing to guard against laundered money being used to fund "cash now" deals on a secondary or tertiary level?
2. What sort of anti money laundering training do these indviduals or entities provide to their employees?
3. What controls can the structured settlement secondary market put in place to guard against money laundering?