Based on Reply to Show Cause Notice dated 31^st October, 2013 and Submissions made during Personal Hearing on 2^nd January, 2014 at 4:30 PM

Chaired by Sri Sudhin Roy Chowdhury, Member (Life), IRDA

At the office of Insurance Regulatory and Development Authority, 3^rd Floor, Parishrama Bhavanam, Basheer Bagh, Hyderabad

The Insurance Regulatory and Development Authority (hereinafter referred to as “the Authority”) carried out an onsite inspection of two of the braches of HDFC Standard Life Insurance Company Limited (hereinafter referred to as “the Life Insurer”) during           3^rd April, 2013 to 9^th April, 2013 to examine the procedures in place to comply with the Anti Money Laundering guidelines issued by the Authority. The Authority forwarded the copy of the Inspection Report to the Insurer vide letter dated 4^thSeptember, 2013 seeking comments. On examining the submissions made by the Life Insurer vide letter dated 19^th September, 2013, the Authority has issued a Show Cause Notice on          10^th October, 2013 which was responded to by the Life Insurer vide letter dated          31^st October, 2013.  As requested therein, a personal hearing was given to the Insurer on 2^nd January, 2014.

Mr Amitabh Chaudhry, Managing Director & CEO, Ms Vibha Padalkar, Chief Financial Officer and Mr Manish Ghiya, Compliance Officer were present in the hearing on behalf of the Life Insurer.  On behalf of the Authority, Dr Mamta Suri, JD (Sectoral Development Department), Mr V. Jayanth Kumar, JD (Life), Mr DVS Ramesh, DD (Life-Coordination), Ms.B.Padmaja, Sr.AD (SDD - AML&RI) and Mr K Sridhar Rao,              AD (Life-Regulatory Actions) were present in the personal hearing. 

The submissions made by the Insurer in their written reply to Show Cause Notice as also those made during the course of the personal hearing were taken into account.

The findings on the explanations offered by the Life Insurer to the issues raised in the Show Cause Notice dated 10^th October, 2013and the decisions are as follows.

Charge 1: From the compliance submitted it is noticed that refresher training on AML matters was not imparted periodically to all the Specified Persons of the Corporate Agent, HDFC Bank. This is in Violation of Chapter III (v) (e) of AML Circular IRDA/F&I/CIR/AML/158/09/2010 dated 24/09/2010

In response the Life Insurer has submitted that their Corporate Agent, HDFC Bank’s AML training framework ensures training requirements for all its employees (including specified persons) as per the role and responsibilities undertaken by them.  The Life Insurer further confirmed that all the specified persons have completed their induction AML training requirements and that 87% of the Specified Persons also completed AML refresher training.

Decision: Considering the submissions that the Life Insurer is in the process of completing the refresher training to all the specified persons no charges are pressed. However, the Life Insurer is hereby advised to put in place the systems to comply with the training requirements envisaged in the AML guidelines issued by the Authority.

Charge 2: In some of the instances KYC certification by the Bank was accepted even though the proposers were not the customers of the Bank and the AML Manual of the Company allows the KYC Certification by the Employee of the HDFC Bank Branches even if the customers are not holding any account with them. This is in Violation of Clause 3.1 of AML Circular IRDA/F&I/CIR/AML/158/09/2010 dated 24/09/2010 (read with Annexure 1 Row 3 of AML Circular, 2010)

In response the Life Insurer has informed that the policies in question were sourced through HDFC Bank, their Corporate Agent hence KYC were verified by the Bank itself and that as a corrective measure HDFC Bank has stopped sourcing business from non-HDFC Bank customers. The Life Insurer further submitted that KYC documentation had been obtained from the customers and the same had been appropriately validated establishing the genuineness of the identity of the policy holder.

Decision: While considering the submissions of the life insurer, it is to state that AML Guidelines envisage acceptance of written confirmation towards proofs of both identity and residence from the Banks where the prospect is a customer of the Bank. Therefore, the submission of the Life Insurer that since the HDFC Bank has sourced these customers; they can undertake such verification/attestation is not accepted. However, taking into account the submissions that KYC documentation had been obtained from the customers in the referred cases and the same had been appropriately validated establishing the genuineness of the identity of the policy holder, the Life Insurer is hereby cautioned to comply with the provisions of the AML guidelines issued from time to time.

Charge 3: Instances are noticed where multiple DDs received towards premiums were not reviewed from the perspective of reporting STRs. Further, it is also noticed that ‘Demand Drafts’ collected were accounted as ‘Cheques’ which may potentially lead to the problem of escaping the attention while reviewing the transactions in violation of Clause 3.2 and Clause 3(IV) of AML Circular IRDA/F&I/CIR/AML/158/09/2010 dated 24/09/2010 (for not having adequate internal controls to monitor the compliance of AML).

In response the Life Insurer has submitted that as part of AML Compliance augmentation they have put in place processes for collecting multiple Demand Drafts’ declaration from customers and archiving the image of financial instruments through which premiums are accepted.  With regard to the instances referred, the Life Insurer submitted that the requisite AML/KYC documentations were collected and that PAN details furnished have been duly verified. And that a copy of Income Tax Return was also collected. .The Life Insurer submitted that basing on the documents furnished they were of the view that even if the transactions would have been picked up as an alert under STR monitoring and reviewed, it would not have been a reportable suspicious transaction hence there is no case of a transaction escaping the reporting to FIU. It was further submitted that the enhanced measures to monitor these types of transactions, from the perspective of STRs were put in place subsequently. With regard to accounting of Demand Drafts as cheques, the Life Insurer has submitted that it was an inadvertent clerical error without any malafide intention.

Decision: The submissions with regard to accounting Demand Drafts as cheques are considered hence no charges are pressed.

With regard to monitoring the STRs, it is noticed that the   premiums were paid through multiple Demand Drafts drawn from a Co-operative Bank inconsistent with the profile of the customer.  Hence, the Authority considers that the transactions deserve an immediate review from the perspective of monitoring for STRs as and when the same was noticed as per the AML norms in vogue.    The Life Insurer’s subsequent submissions that had the transaction been picked up as an alert under STR monitoring and reviewed, it would not have been a reportable suspicious transaction are not acceptable. From these submissions it is noticed that the procedures that were in place for monitoring these types of transactions (multiple DDs) are not satisfactory and may potentially compromise with the compliance norms of AML Guidelines while reviewing and reporting the STRs. It is noticed that the enhanced measures were put in place subsequent to the onsite inspection of the Authority. In light of these gaps noticed, the Authority hereby warns the Life Insurer for the lapse referred in the Charge and directs the Life Insurer to ensure compliance with the AML Guidelines issued from time to time. The Life Insurer is also hereby directed to reopen and review all such similar transactions (acceptance of multiple D Ds), missed if any from the preceding financial year 2012-13 to until now, from the perspective of STRs and report the Suspicious Transactions, fit to be reported if any, to FIU IND within 30 days from the date of this order.

Charge 4:Instances are noticed where proposals for insurance were underwritten with questionable documentation sourced by the Corporate Agent (HDFC Bank) and basis the signatures on the ACRs it is found that policies are not sourced by Licensed Specified Persons of the Corporate Agent.  This is in violation of provisions of Section 42(7) of Insurance Act, 1938 and Circular No.  IRDA/CIR/010/2003 dated 27.03.2003.

In response the Life Insurer has confirmed that all the policies referred by the Authority were sourced by the corporate agent (HDFC Bank) through licensed specified persons only and confirmed that all related AML/KYC papers and documents were also duly obtained under all the said proposals.

With regard to signatures on the ACRs in the said policies, the Life Insurer has submitted that they have placed necessary oversight and mandated declarations in ACRs with proper and full signatures of specified persons. The Life Insurer has also submitted that they have rolled out enhanced process of attestation of all supporting documents.

Decision: While considering the confirmation of the life insurer that the business is sourced by the licensed specified persons of the Corporate Agent, it is observed that the manner in which the proposals were accepted with unidentifiable signatures of the S Ps is not acceptable. It is also noticed that the proposals were routinely processed without ensuring and verifying the signatures of specified persons which is a matter of serious concern. In view of the serious nature of the procedural gap, the Authority warns the life insurer for not putting in place the effective procedures so as to ensure that the business is sourced only through the licensed specified persons. The Life Insurer is also directed to be vigilant hereafter.

Charge 5: In a number of cases annual premium is not consistent with the annual income of the proposer / policyholder and financial viability was not assessed before issuing policies.  This is in violation of Clause 3.1.5 of AML Master Circular IRDA/F&I/CIR/AML/158/09/2010 dated 24/09/2010

The Life Insurer submitted that the premiums referred relate to the consolidated premium pertaining to multiple policies held by the respective policy holders. Further submitted that as per their internal AML rules, the practice was to undertake AML checks at the policy level rather than client level at the time of underwriting hence the deviations. The Life Insurer further submitted that they have ensured financial viability of the policy holder at the time of issuance of each of the policy by exercising due compliance and obtaining necessary income proof documents keeping in view the profile of the customers as per the AML policy.

Decision: The submissions of the Life Insurer that the premium details relate to multiple policies are taken into consideration. On examining the submissions it is noticed that the Life Insurer did not comply with Clause 3.1.5 of AML Guidelines. It may be noted that the compliance to clause 3.1.5 of AML Guidelines would be complete and effective only on considering the entire portfolio of the life policies of the customer than reviewing the viability for each and individual policy by piecemeal. Otherwise ensuring that the insurance purchased is reasonable as prescribed in the within referred Clause 3.1.5 of AML Guidelines may be compromised. On considering the submissions, the Life Insurer is warned for failing to comply with the provisions of Clause 3.1.5 of the AML Guidelines in some of the instances and the Life Insurer is directed to effectively comply with AML norms without fail.

The Life Insurer is hereby directed to confirm the compliance in respect of the directions referred in this order within 15 days from the date of issuance of this order. 

Place: Hyderabad                                                                     Sudhin Roy Chowdhury  

Date: 11/02/2014                                                                                Member (Life)