IRA flags money laundering risks in life insurance, launches sector review after FATF grey listing

The Insurance Regulatory Authority (IRA) has launched a comprehensive review of the life insurance sector, citing growing risks of money laundering and terrorism financing associated with long-term insurance products.

The move follows Kenya’s grey-listing by the Financial Action Task Force (FATF) earlier this year over regulatory weaknesses in financial oversight systems.

The regulator says the design and packaging of life insurance policies, also referred to as long-term business, make them attractive for abuse by criminals, prompting the need for tighter supervision.

Treasury Cabinet Secretary John Mbadi told Members of Parliament that the IRA is currently examining the operations of long-term insurers to identify weaknesses that could inform future oversight reforms.

“The Authority is also conducting a comprehensive money laundering and terrorist financing risk assessment on the vulnerability of the insurance industry. This will aid in the identification of areas of improvement so as to strengthen the supervisory framework,” Mbadi said.

Global standards

The probe is part of wider Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) initiatives that seek to align Kenya’s insurance industry with global standards and support the country’s efforts to exit the FATF grey list.

During a recent media briefing, the IRA confirmed the review is a key step toward addressing FATF concerns.

IRA’s senior manager for prudential supervision, Mary Nkoimu, said life insurance products are particularly prone to abuse due to their structural features.

“Globally, long-term insurance products are more prone to be abused for money laundering and terrorism financing, especially because of the cooling off period of 14 days between filling the proposal forms, making the payment and accepting the product,” Nkoimu said.

Illicit funds

She explained that the 14-day window allows someone to purchase a policy, make a payment, then cancel the agreement and seek a refund, enabling them to launder illicit funds under the guise of insurance proceeds.

Nkoimu noted that some life insurance plans allow top-ups, which criminals can exploit by making small initial contributions and gradually increasing them, a method used to avoid triggering transaction reporting thresholds at the Financial Reporting Centre.

“Premiums can also be paid at regular intervals, and this makes it palatable for criminals. Some of the long-term products also allow for surrenders, and so one can pack money in an insurance policy and pull out three years later and declare the surrender as the source of cash,” she said.

The IRA’s mandate to enforce AML/CFT compliance was strengthened in 2023, giving the regulator powers to supervise insurers and report suspicious activities.

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• IRA flags money laundering risks in life insurance
• launches sector review after FATF grey listing

Under the revised framework, insurance firms must now reveal their beneficial owners, a shift that aims to address the use of layered ownership structures to obscure the identity of true investors.

“We’ve noticed a growing trend of layering of ownership to hide the beneficial owners,” Ms Nkoimu revealed.

According to IRA data, the life insurance sector recorded a 12.5 per cent growth in gross written premiums last year, rising to Sh191.2 billion. Claims and policyholder benefits also surged from Sh94 billion to Sh105.74 billion during the same period.

The ongoing review is expected to inform new regulatory measures to seal loopholes and bolster oversight in the long-term insurance segment.