Rules of dirty money

Be careful here, as there are pitfalls with serious consequences for the unwary broker. While the Financial Services Authority did not apply its own money-laundering rules to intermediaries in respect of general business, all firms are subject to the provisions of the Proceeds of Crime Act 2002. Consequently, firms should ensure that staff are alerted to the provisions of that act, and to understand what action they must take, should they suspect that a transaction could involve money laundering.

A standard definition of money laundering is "the process whereby criminals attempt to hide and disguise the true origin and ownership of the proceeds of their criminal activities, thereby avoiding confiscation of the criminal funds".

Most brokers are aware of the more obvious possible scenarios, such as early cancellation of a motor policy, where the premium may have been paid in cash and the refund is by means of a 'clean' cheque from the broker, or the effecting of property insurance on a non-existent risk and again, subsequent early cancellation.

However, the broker's potential exposure extends much further. If an intermediary arranges cover in respect of a property or legitimate business that was funded by the proceeds of crime, the broker could find themselves in the dock alongside the money launderer, unless he can demonstrate that there were no reasonable grounds or suspicion concerning the transaction.

Alternatively, by reporting any suspect transaction, whatever action the authorities may subsequently take, the mere act of reporting is likely to put the broker in the clear.

Some firms have historically dealt with 'colourful' characters. The message now must be to look very closely at any client where there is the slightest doubt about what is funding that flamboyant lifestyle.

One could envisage a scenario in which a money launderer uses the services of two brokers. Once discovered, one broker could end up facing charges through not being able to demonstrate that the business had recognised the potential for financial crime, and the other in the clear, because it could demonstrate that it followed its money-laundering procedures.

This is just the tip of the iceberg. I hope it is sufficient to encourage you to revisit the senior management attitude of your firm to this potential threat, and to ensure that you have adequate procedures and staff training in place.