“Should car dealers investigate their customers’ military connections?”

The Finnish Government is proposing additional national anti-money laundering provisions that are both unnecessary and ineffective. The proposed obligation of non-life insurers to establish whether a customer is a politically exposed person (or in the immediate circle of one) will not facilitate the prevention of money laundering and terrorist financing.

The EU Fourth Anti-Money Laundering Directive contains an exhaustingly extensive definition of a politically exposed person (PEP). The definition includes, for example, high-ranking officers in the armed forces, as well as the immediate family members and close associates of such persons. “Extending the requirement to assess a customer’s PEP status to non-life insurers would only bring disadvantages to customers and no benefits to the prevention of money laundering”, states Risto Karhunen, Head of Security and Loss Prevention at the Federation of Finnish Financial Services.

What drawbacks could there be in extended PEP assessment, Mr Karhunen?

“It may unnecessarily stall the commencement of the customer relationship. And what if the customer gives no answer? Should the company refuse to serve them at all? People become insurance customers through different channels, for example through car dealerships ‒ how should the assessment be conducted there? The Government’s proposal allows the assessment to be skipped in other statutory insurances, but not with motor liability insurance. The assessment will hinder the insuring of motor vehicles, which is zero-risk activity from the perspective of money laundering prevention.”

How would extending the assessment help prevent money laundering and terrorist financing?

“It wouldn’t. Non-life insurers are not even in the scope of the Fourth Anti-Money Laundering Directive. The EU made a conscious decision to leave the insurance sector outside of the Directive precisely due to its low risk. The Directive has elements that are useful in customer identification, but the PEP assessments are pointless. Why would the non-life insurance sector’s risk of money laundering or terrorist financing be higher in Finland than in other countries? Furthermore, wrongfully claimed compensation is a case of insurance fraud, not money laundering.”

What kind of financial impact would extended PEP assessment have?

“Regulatory amendments almost always require changes in the data systems of insurance companies. That would also be the case here. Collected data must be stored and maintained, which will naturally generate costs. According to the Finnish Council of Regulatory Impact Analysis, small insurance companies would be hit the hardest. The changes to anti-money laundering regulation could financially impact them three times as heavily compared to large companies.”

How should the PEP assessment be solved in non-life insurance?

“The Finnish insurance sector supports the enhanced customer due diligence measures required by the Fourth Anti-Money Laundering Directive. PEP assessment, which is part of the measures, is continued and increased in scope in the banking and life insurance sectors. The obligation should not, however, be extended to non-life insurers and their customers. Non-life products have low risk exposure, so the appropriate solution is to implement the simplified due diligence provisions referred to in the anti-money laundering draft law. Simplified due diligence allows the insurance company to evaluate on a case-by-case basis whether PEP questions are necessary. I’m sure that the actual need for such questioning is relatively small.”