MASTER IN FORENSIC ACCOUNTING

& FINANCIAL CRIMINOLOGY

MAF 721 - RISK MANAGEMENT

Insurance and Risk in Malaysia: A perspective from Money Laundering

activities

For: Dr Sharifah Khadijah Syed Agil

CONTENT
Project synopsis

Introduction

3-4

Types of Insurance

5-6

Risk associated with Insurance Products

6-8

Impact of Non-Compliance

9-10

Summary of Case

10-11

Recommendations

11-12

Conclusion

12

Reference

13

INSURANCE AND RISK IN MALAYSIA:

A PERSPECTIVE FROM MONEY LAUNDERING ACTIVITIES
Synopsis
Insurance in general is an economic device whereby an individual substitutes a small certain
cost (or known as premium) for a large uncertain financial loss (the contingency insured
against), which would exist if it were not for the insurance. Some sees insurance as an
economic device in reducing and eliminating risk through the process of combining a
sufficient number of homogenous exposures to make the losses predictable for the group as
a whole. The insurance industry in general provides risk transfer, savings and investment
products to a variety of consumers, from individuals to multi-national corporations and
governments. FATF through their report on Money Laundering typologies report in 2003
stated that, experts viewed the insurance industry as potentially vulnerable to money
laundering activities because of the size of the industry, the easy availability and diversity of
its products and the structure of its business. This study adopts conceptual approach through
analysis of previous studies on money laundering risk and the impact to the APG (Asian
Pacific Group) assessment, Malaysian economy and enforcement to anti money laundering,
anti-corruption and bribery. This study in particular, is structured in a way, which it will first
discuss on the different types of insurance products, ie from general insurance to investment
link products. It will then discuss on the risk that is associated to the insurance industry,
focusing on money laundering activities in particular and will later look into the consequences
if an organization does not comply with the spelled out regulations. The second part would
discuss on actual case studies and to identify its typologies being adopted. The final part of
this study is a conclusion of what has been presented on the earlier part, which would be the
presenters recommendation in fighting money laundering activities that the insurance
industry should adopt.
Introduction
This research is conducted with the objective of assessing the risk of money laundering that
involves a multi-factor analysis. Factor influencing the level of money-laundering risk associated
with a business relationship include country or geographic risk, distribution risk, customer risk,
product risk and financial sanction risk. Malaysia, even though does not rated as high risk
countries by any international bodies, have been rated medium risk under Basel AML Index and
Corruption Perceptions index.
It is important to understand what money laundering is, both in general terms and it is defined in
the law. The term money laundering is in fact misleading and precise, for a number of reasons.
The term money laundering suggests that criminal property starts out in one form then goes
through some sort of laundering process and comes out in a different form. In other words, the
term implies that it involves some form of relatively complex transformation process. This
encourages the view that the clients who pose a money laundering threat know how to launder
money and set out consciously to cleanse it in some way. This view is encouraged by the
traditional staged interpretation of money laundering. The objective of money laundering is to be
able to benefit from the crime and not get caught. This will require disguising the source of the
property and altering it into something else. It is important to the criminal not to leave a trail
leading back to the crime, or to the property derived from it.
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Due to money laundering, the development is distorted as products are supplied at a

price lower than production cost, making it difficult for others to stay alive in the
competition. The overall productivity of the economy of a country can be decreased.
The demand for money in our country will unpredictably fluctuate and the international
exchange rates and cash flow will also become unstable. Studies from The BASEL AML
Index, Country Risk Ranking shows that Malaysia AML Risk is moderate where Malaysia was
ranked 102 out 162 countries and our risk score is 5.41 which is classified as moderate.
Assessment from BASEL and APG is very important in order to have the confidence level of
foreign investor to invest in Malaysia which would however affect our economy as a whole.
Weak law enforcement to anti-corruption and bribery, heighten the risk of money laundering in
the country. It was mentioned that the amount of worldwide money laundering is problematic,
the International Monetary Fund has estimated that between 2% and 5% of global GDP per year
is generated annually as the proceeds of crime (in US funds that is an amount in the trillions of
dollars), the largest sources of which are illicit drug manufacturing and trafficking, arms and
people smuggling, corruption, fraud, extortion, kidnapping and theft.
Based from the assessment from BASEL and APG, the study shows several areas need to be
improved. The areas are:
1) weak law enforcement to anti-corruption and bribery hamper the effectiveness of
operations of competence authorities to counter crime;
2) weak and immature countrys awareness on Money Laundering offences,
3) present of terrorist groups that support violent extremism exposed the risk of fundraising
from criminal or apparently lawful activities; and
4) Influx of (illegal) foreign workers from neighbouring countries and the Malaysia My
Second Home (MM2H) programme, may carry forged IDs and provide fabricated
documentation to circumvent controls.
The objective of this study is to:
1) To explore the risk of non-compliance of anti-money laundering in the financial institution
focusing in insurance company in Malaysia
2) To explore the risk of money laundering towards the Malaysian economy
3) To identify whether money laundering risk in insurance company (financial institution)
could impact the society as a whole.
In order to assess the risk in the insurance sector in a structured form, discussion will be
based on:
1) The different types of insurance products, ie from general insurance to investment link
products;
2) The risk that is associated to the insurance industry, focusing on money laundering
activities in particular and will later look into the consequences if an organization does
not comply with the spelled out regulations;
3) The second part would discuss on actual case studies and to identify its typologies
being adopted.

Types of Insurance Product

Common modus operandi to launder money using insurance policies premium is paid up front
lump sum rather than in annual installment. Launderers purchase them and then redeem at a
discount (including paying for the fees and penalties). The launderer will receive a clean
cheque from the insurance company.
In the modern insurance industry, competitiveness amongst the insurance companies worldwide
is becoming more vicious. Therefore, attractiveness of the insurance product is one of the
factors that would attract sales towards customer compared to the olden insurance product that
only offers solely in life insurance. Below are the list groups of type of insurance products:
1) Investment linked product
a) Product features allow for high liquidity which could be relied upon to draw
out deposited funds with relatively ease (at minimal cost)
b) Characteristics include larger cash and premium payments, surrender value,
accumulation of funds with top-up/ withdrawal facility
c) Free-look provision allowing for immediate policy cancellation (with full
premium refund)
2) General Insurance
a) Non-life insurance, including automobile and homeowners policies, provide
the payments depending on the loss from a particular financial event
b) Low exposure to money laundering
3) Life Insurance
a) Pays out a certain amount of money to the insured or their specified
beneficiaries upon a certain event such as death of the individual who is
insured.
b) The coverage period for life insurance is usually more than a year. So this
requires periodic premium payments, either monthly, quarterly or annually.
High Risk Products
a) Single premium linked policy and high value policy
b) Regular premium plans with annual premium on per policy more than RM 5,000
Low Risk Products
a) Group insurance
b) General insurance
c) Telemarketing insurance products
Investment linked product, one of the most active selling insurance product in the insurance
industry, features high liquidity which could be relied upon to draw out deposited funds with
relative ease, and thus significantly increase its risk exposure toward money laundering.
According to 2013 statistics, about 76% of the policies were investment-linked plan.
However, majority of the plan was medically related and 20 odd percent were still having unit
linked features. Product characteristics such as large premium payment, cashing in of the
policy through redemption (surrender value) and free-look period provision allowing for
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immediate premium cancellation with full refund are considered high risk. Only 2% of the
total business was single premium, which met all the high risk characteristics and the
remaining 98% of the business are regular premium basis.
Most significant laundering and terrorist financing risks in the insurance industry are found in life
insurance and annuities products. While many life insurance policies are generally structured to
pay a certain sum upon the death of the insured, others have an investment value which can
create a cash value if the policyholder wishes to cancel the policy. Life insurance policies that
have an investment feature, which can increase the death benefit as well as the cash value of
the policy, are often referred to as whole life or permanent life. Vulnerabilities in the insurance
sector include:
1) Lack of oversight/controls over intermediaries
Insurance brokers have a great deal of control and freedom regarding policies.
2) Decentralized oversight over aspects of the sales force
Insurance companies may have employees (captive agents) who are subject to the full
control of the insurance company. Non-captive agents, those who offer an insurance
companys products, but are not employed by an insurance company (i.e., the noncaptive agent will often work with several insurance companies to find the best mix of
products for their clients) may fall between the cracks of multiple insurance companies
or may work to find the company with the weakest AML oversight if they are complicit
with the money launderer.
3) Sales-driven objectives
The focus of brokers is on selling the insurance products and, thus, they often overlook
signs of money laundering, such as a lack of explanation for wealth or unusual methods
for paying insurance premiums.
Risk associated with the Insurance Products
Reputational risk is described as the potential that adverse publicity regarding an organizations
business practices and associations, whether accurate or not, will cause a loss of public
confidence in the integrity of the organization.
Legal risk is the potential for lawsuits, adverse judgments, unenforceable contracts, fines and
penalties generating losses, increased expenses for an organization, or even the closure of the
organization. For instance, legitimate customers may become victims of a financial crime, lose
money and sue the organization for reimbursement. There may be investigations conducted by
regulators and/or law enforcement authorities, resulting in increased costs, as well as fines and
other penalties. Also, certain contracts may be unenforceable due to fraud on the part of the
criminal customer.
Concentration risk is the potential for loss resulting from too much credit or loan exposure to
one borrower or group of borrowers. This is particularly a concern where there are related
counter-parties, connected borrowers, and a common source of income or assets for
repayment. Loan losses can also result, of course, from unenforceable contracts and contracts
made with fictitious persons.
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Understanding of money laundering and terrorist financing risks in a bigger scope can be seen
three levels which are:
1) Countrys level
a. Results of NRA
b. Reports by reputable sources
c. FIs own analysis on the countrys ML/TF risks
2) Financial Institutions Inherent Vulnerabilities (Factors influencing FIs vulnerabilities)
a. FIs size, structure and geographical locations of branches/operations
b. Variety of channels of deliveries available for products and services
c. Extent of exposures to cash-based transactions or cash-intensive customers
d. Level of skills and experience of resources in AML/CFT including front liners
3) Customers Level (Factors influencing ML/TF risks of the customers)
a. Type of customers
b. Type of transactions
There are three types of risks involved in mapping out anti-money laundering procedures
depending on the capacity of a company to map its risks. The risk types are:
a) Risk linked to the product itself;
b) Risk inherent in client relationship; and
c) Risk linked to distribution networks
Therefore, based on FATF recommendations that recommends to the Risk-Based Approach as
the central for AML/CFT measures. The purpose of Risk-Based Approach is life insurance
companies and intermediaries are able to ensure that measures to prevent or mitigate money
laundering (ML) and terrorist financing (TF) are commensurate to the risks identified. This will
allow resources to be allocated in the most efficient ways. The principle is that resources should
be directed in accordance with priorities so that the greatest risks receive the highest attention.
The alternative approaches are that resources are either applied evenly, so that all life
insurance companies and intermediaries, customers, products could receive equal attention, or
that resources are targeted, but on the basis of factors other than the risk assessed.
FATFs new assessment methodology focuses on:
RISK

MATERIALITY

CONSEQUENCES
S

D BY INFLUENCE

Country situation
(economic and financial)
THREATS
Structural elements
(geographical location)
VULNERABILITIES
Other contextual factors
(maturity of financial sectors

This would also closely relate to the Malaysias National Risk Assessment. National Risk
Assessment is an assessment of the countrys exposure to prevail crimes (domestic and
foreign) and vulnerabilities of various sectors to ML / TF risk. This is an initiative by National
Coordination Committee to Counter ML (NCC). National Coordination Committee is a
combination several law enforcement which are Malaysian Anti-Corruption Commission,
Attorney-Generals Chamber, Companies Commission of Malaysia, Inland Revenue Board,
Labuan Offshore Financial Services Authority, Ministry of Domestic Trade and Consumer Affairs,
Ministry of Finance, Ministry of Foreign Affairs, Ministry of Internal Security, Royal Malaysian
Customs, Royal Malaysia Police, Securities Commission and Bank Negara Malaysia.
The risk-based approach places the responsibility to identify and assess the money laundering
and terrorist financing risks and to take appropriate measures to identify, manage and monitor
those risks.
Risk-based approach to money laundering covers:
1) Risk identification and assessment identifying the money laundering risks facing a firm
(including related legal, regulatory and reputational risks) given its customers, product
and services profile and having regard to available information including published
typologies and assessing the potential scale and impact of the risks if they were to
crystallize.
2) Risk mitigation identifying and applying measures effectively to mitigate the material
risks emerging from the assessment.
3) Risk monitoring putting in place management information systems and keeping up to
date with changes to the risk profile through changes to the business or to the threats.
4) Documentation having policies and procedures that cover the above and deliver
effective accountability from the board and senior management down. Documenting the
risk assessments undertaken to provide the rationale for decisions made.
Financial institutions that rely on the proceeds of crime have additional challenges in adequately
managing their assets, liabilities and operations. The adverse consequences of money
laundering are generally described as reputational, operational, legal and concentration risks.
They are interrelated, and each has financial consequences, such as:
1.
2.
3.
4.
5.
6.
7.

Loss of profitable business

Liquidity problems through withdrawal of funds
Termination of correspondent banking facilities
Investigation costs and fines
Asset seizures
Loan losses
Reduced stock value of financial institutions

Impact of Non-Compliance
8

Loss of control of, or mistakes in, decisions regarding economic policy

Due to the large amounts of money involved in the money laundering process, in some
emerging market countries these illicit proceeds may dwarf government budgets, resulting in a
loss of control of economic policy by governments or policy mistakes due to measurement
errors in macroeconomic statistics arising from money laundering. Money laundering can
adversely affect currencies and interest rates as launderers reinvest funds where their schemes
are less likely to be detected, rather than where rates of return are higher. Volatility in exchange
and interest rates due to unanticipated cross-border transfers of funds can also be seen. To the
extent that money demand appears to shift from one country to another because of money
laundering resulting in misleading monetary data it will have adverse consequences for interest
and exchange rate volatility, particularly in economies based, as the tracking of monetary
aggregates becomes more uncertain. Last, money laundering can increase the threat of
monetary instability due to the misallocation of resources from artificial distortions in asset and
commodity prices.
Economic Distortion and Instability
Money launderers are not primarily interested in profit generation from their investments, but,
rather, in protecting their proceeds and hiding the illegal origin of the funds. Thus, they invest
their money in activities that are not necessarily economically beneficial to the country where
the funds are located. Furthermore, to the extent that money laundering and financial crime
redirect funds from sound investments to low-quality investments that hide their origin,
economic growth can suffer. In some countries, entire industries, such as construction and
hotels, have been financed not because of actual demand, but because of the short-term
interests of money launderers. When these industries no longer suit the needs of the money
launderers, they abandon them, causing a collapse of these sectors and immense damage to
economies that could ill-afford these losses.
Loss of Tax Revenue
Of the underlying forms of illegal activity, tax evasion is, perhaps, the one with the most obvious
macroeconomic impact. Money laundering diminishes government tax revenue and, therefore,
indirectly harms honest taxpayers. It also makes government tax collection more difficult. This
loss of revenue generally means higher tax rates than would normally be the case. A
government revenue deficit is at the center of economic difficulties in many countries, and
correcting it is the primary focus of most economic stabilization programs.
Risks to Privatization Efforts
Money laundering threatens the efforts of many states trying to introduce reforms into their
economies through privatization. Criminal organizations can outbid legitimate purchasers for
formerly state-owned enterprises. Furthermore, while privatization initiatives are often
economically beneficial, they can also serve as a vehicle to launder funds. In the past, criminals
have been able to purchase marinas, resorts, casinos and other businesses to hide their illicit
proceeds and to further their criminal activities.
Reputation Risk for the Country
A reputation as a money laundering or terrorist financing haven could cause negative effects for
development and economic growth in a country. It diminishes legitimate global opportunities
because foreign financial institutions may decide to limit their transactions with institutions
9

located in money laundering havens because the necessary extra scrutiny will make them more
expensive. Legitimate businesses located in money laundering havens may suffer from reduced
access to world markets (or may have to pay more to have access) due to extra scrutiny of
ownership and control systems. Once a countrys financial reputation is damaged, reviving it is
very difficult and requires significant resources to rectify a problem that could have been
prevented with proper anti-money laundering controls. Other effects include specific countermeasures that can be taken by international organizations and other countries, and reduced
eligibility for governmental assistance.
Social Costs
Significant social costs and risks are associated with money laundering. Money laundering is
integral to maintaining the profitability of crime. It also enables drug traffickers, smugglers and
other criminals to expand their operations. This drives up the cost of government expenses and
budgets due to the need for increased law enforcement and other expenditures (for example,
increased health care costs for treating drug addicts) to combat the serious consequences that
result.
Summary of Case
MALAYSIA
Offence : S.4(1)(a) AMLATFA 2001& S. 25(1) of BAFIA
Accused
: Datuk Adzhar Sulaiman, Noradzma Adzhar and Noradzrin Adzhar Director
Noradz Travel
Fact of the case :
They were alleged to have used the money to buy several properties in Perak and Pahang,
buy insurance and investment products and also transfer part of the money into a
subsidiary of the company.
Actions :
1) Two (2) years imprisonment against Noradzma bt. Dato Adzhar
2) Three (3) years imprisonment against Dato Adzhar b. Sulaiman
3) One (1) year imprisonment against Noradzrin bt. Dato Adzhar
4) Travel & Services Sdn Bhd was fined RM5 million;
5) Noradzma bt. Dato Adzhar (1st accused) was sentenced to one (1) year imprisonment
and fined RM 500,000.00 (in default - 6 months imprisonment); and
6) Dato Adzhar b. Sulaiman (2nd accused) was sentenced to two (2) years imprisonment
and fined RM 1 million (in default - 10 months imprisonment).
Offence : S.4(1)(a) AMLATFA 2001
Accused
: T. Gauthaman
Fact of the case :
He was also convicted on charges of engaging in money laundering and using money from
illegal activities to pay deposit to buy a car and bought life insurance policy.
Actions :
1) T.Gauthaman was sentenced to nine (9) year imprisonment and fined RM 1,800,000.00
OVERSEA
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Accused
: Gao Ailing Wife of Linkwell owner
Fact of the case :
Evidence showed she had spent some of the money on insurance and investment
funds. She also transferred HK$3 million to her personal account in Singapore.
FRAUD OPENING ACCOUNT
Accused : Randall Petersen Insurance Agent of Equity Leadership Insurance Agency Inc.
Fact of the case :
Florida - Petersen advertised job opportunities on the internet for College Consultants of
the Gulf Coast, and induced hundreds of applicants to provide information for life
insurance that he and his associates described as free job benefits. College
Consultants was not a real company and Petersen merely used the information from
the job applicants to complete life insurance applications that he submitted to the
insurance companies (American National Insurance Company and Liberty National
Insurance Company).
Actions :
1) Petersen faces a maximum of 60 years state prison.
Recommendations
The Money Laundering Compliance Officer (MLCO) who is appointed by BNM are authorized
and have access to FINS to report STR and CTR. The STR will be submitted by the MLCO via
FINS to report directly to BNM. However the information were escalated only one way direction
where only RI such as insurance company report to BNM but the information collected didnt
available for review. Therefore it will be useful if BNM can perform live update such as summary
of the STR reported. BNM should communicate the latest modus operandi and current status
money laundering activities to the insurance company and communicated to the other Reporting
Institutions for risk assessment and mitigation action purposes. This information will assist who
deal with heavy daily cash transactions to identify the indicator and trends of any suspicious
transaction which relevant to current trends of money laundering activities.
Looking at the perspective of financial institutions that are involved in dealing with the antimoney laundering, they need to provide continuous education for their members of staff at all
levels. For example at an entry level, every new member of staff joining in, has to undergo a
compulsory course on money laundering, to start with and perhaps later on, they need to keep a
record on how many hours they have spent on attending the update courses on the subject.
Everything is aimed so that their level of knowledge is keep up to date with the current
environment.
On the other hand, the STRs and CTRs will be more effective if proper legal frameworks are
included and introduced to all members of staff. Be it for people working in financial institutions
or elsewhere, they need to be able to understand a comprehensive explanation of suspicious
transactions, and need well organized supervision and aware of the penalties in the cases of
failure to comply with regulations. Then again, the financial institutions and Financial Intelligence
and Enforcement Department (FIED) have to ensure that Anti Money Laundering policies are
11

respected and followed by all employees, so that it can deter and prevent the money laundering
activities from occurring in their organizations.
Government with the co-operation of the financial institutions and FIED should advise the
private sectors on the importance of their role in combating money laundering activities.
Wolfberg principles mentioned that the responsibility to combat money laundering is not only
borne by the government but also with the help of the private sectors, by giving the information
on suspicious transaction activities. Through decentralization of the law in Malaysia, the laws
should be strengthen at all levels of the Government as because money launders in this era are
always eager and could still find ways or loopholes that will give them those illegal benefits.
In addition, FINS system introduced by BNM can be updated such as automatically block funds
movement of the suspected account which STR reported by the MLCO and able directly
generates significant amount to be frozen for further investigation. Nevertheless, law
requirement might need to review in order to add and implement as we recommend. In addition,
law enforcement agencies and regulators should maintain an exchange of ideas medium to
develop the use of harmonized data recording practices for the key variables of policy
importance.
Conclusion
Money laundering activities consist of 3 main activities such as placing, integration and layering.
The ultimate goals for money launder was not motivated to gain profit, however their focus is to
covert illicit proceed to legitimate fund and use as clean money in daily economy business
cycle. Nevertheless, as a result of containing high effort in combating criminal such as
corruption, transnational crime and terrorism financing by international and local community,
reporting institutions such as commercial bank are mandatory to practice anti money laundering
activities with serious approach. Therefore there are law as a regulation and guidelines for the
reporting institutions such as insurance company to follow and obliged and responsible to
monitor on their customer accounts activities and reported promptly to the authorities.
Other than, the laws had set a guideline for the insurance sector to have a good practice how to
monitor and techniques in order to face the AMLA related issue. Adequate and continuous
training needs to provide to the compliance officer in order to increase awareness to identify any
suspicious transactions and report it to relevant authorised appointed MLCO. Supports from top
management are crucial in order to implement the guidelines set up by BNM in order to fight
and detect money laundering activities.
The top management need to identify the risk involved and implement relevant and necessary
control to minimize and mitigate money laundering transaction performed and able to detect if
any. In addition, continuous monitoring such as annual review by Internal Audit are important in
order to ensure appropriate controls had implemented in order to fight against money
laundering activities.

Reference
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1) http://www.themalaysianinsider.com/malaysia/article/money-laundering-man-and-two-

daughters-ordered-to-enter-defence#sthash.WQlHOs9K.dpbs
2) http://www.bnm.gov.my/microsites/fraudalert/0301_status.htm
3) http://www.thesundaily.my/news/1082834
4) http://www.sprm.gov.my/name-and-shame.html
5) http://www.scmp.com/news/hong-kong/article/1679702/mainland-chinese-housewife-

jailed-hk240m-hong-kong-laundering-case
6) http://www.insurancejournal.com/news/southeast/2015/04/14/364171.htm
7) AML/CFT Compliance Conference 2014 FIED, Bank Negara Malaysia

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