Examination of Witnesses (Questions 506
- 519)
WEDNESDAY 13 MAY 2009
Mr Sean McGovern, Ms Louise Shield and Mr Andy Wragg
Q506 Chairman: Good
morning and welcome. Perhaps, Mr McGovern, you would like to introduce
yourself and your two colleagues.
Mr McGovern: Thank you. I am Sean McGovern,
I am General Counsel at Lloyd's. This is Louise Shield, who is
Head of Communications at Lloyd's, and Andy Wragg, who is Senior
Manager at Lloyd's who deals with money laundering and financial
crimes issues for us. I would like, if I may, to begin with a
brief opening statement to set the context for the comments I
wish to make but also for answering the questions the Committee
may have for me.
Q507 Chairman:
That would be most helpful.
Mr McGovern: Lloyd's is the world's leading
specialist insurance market-place covering some of the largest,
most individual and complex risks around the world, and we can
trace our history back some 300 years to Edward Lloyd's coffee
house. It is important to understand, however, what the structure
of the Lloyd's market is. Lloyd's is not an insurance company
but an insurance market where 86 syndicates compete to provide
insurance and reinsurance solutions to clients from all over the
world. Together the syndicates underwriting at Lloyd constitute
one of the largest insurance and reinsurance markets in the world.
Each syndicate is made up of one or more members of Lloyd's. Historically,
members of Lloyd's were individuals, but today there are less
than 800 individual members of Lloyd's who are actively participating,
providing less than five per cent of Lloyd's capacity. The remainder
of Lloyd's capacity is provided by members who are backed by private
and public shareholders, investment funds and specialist insurance
investors. Each syndicate is managed by a managing agent. It is
the responsibility of the managing agent to employ underwriting
staff and manage the syndicate on the members' behalf. All managing
agents are regulated by the Financial Services Authority. The
Corporation of Lloyd's oversee the activities of the market, admitting
new members and new managing agents, approving business plans
and ensuring solvency. The corporation does not carry on insurance
business itself but supervises the market's activities. We, the
Corporation of Lloyd's, are also regulated by the FSA. I am the
General Counsel of the Corporation of Lloyd's and I am responsible
for its legal and regulatory affairs. With that as background
to the structure of the market, I would like briefly to comment
on the areas I believe the Committee would like me to address
this morning and then, of course, I will be very happy to take
any questions that you may have. First, money laundering. The
general insurance sector is regarded as being subject to a low
risk of money laundering. To reflect this, general insurance activities
fall outside of the money laundering regulations. We are, however,
covered by the Proceeds of Crime Act 2002. My views and comments
today will be limited to the general insurance sector as, other
than a relatively small amount of term life assurance, the Lloyd's
market does not write much life business. Notwithstanding the
relatively low risk of money laundering, Lloyd's takes the management
of the risk very seriously. Each managing agent has its own money
laundering reporting officer, and the Corporation issues guidance
to the market regularly on legal issues and best practice. With
regard to suspicious transactions, as a practical matter it is
the managing agents in the market who would usually be the first
to identify suspicious transactions. However, once identified,
the most common method for reporting that suspicion is for them
to pass the report to Lloyd's, who will then pass it on to the
Serious Organised Crime Agency. Receiving this data centrally
allows us to monitor the risk more broadly within the market and
to spot emerging trends. The Corporation will also handle any
consent requests on behalf of the market, although, for reasons
I can explain, those are a relatively rare occurrence. Second,
the payment of ransoms. I understand you would like me to address
the question of the role of insurers when ships are seized and
ransoms are demanded. It is obviously topical with the escalation
of incidents in the Gulf of Aden. There are two points I would
like to make at the outset. First, at the risk of stating the
obvious, the issue needs to be approached with some care. It is
a very complicated situation that has its roots onshore. Piracy
is a symptom of a much broader problem in Somalia, and, ultimately,
there are lives at stake. Whilst the payment of ransoms is unpalatable,
to date the human cost has been relatively small. Second, in light
of some of the evidence that I have read that has been given to
the Committee, I would like to clarify the role of insurers in
the payment of any ransom in these circumstances. As a general
principle, whether insurance is provided through hull coverage,
hull war-risk cover, cargo cover or, in relatively rare cases,
stand-alone kidnap and ransom cover, insurers do not get involved
in negotiating with pirates and do not get involved in making
payment. Insurers stand behind the insured and provide, after
the event, indemnification for the insured's loss. That concludes,
My Lord Chairman, my introductory comments and I am very happy
to take questions.
Q508 Chairman:
Thank you. That is most helpful. Before I ask the first question,
perhaps I could say, for the record, that many years ago I was
a name at Lloyd's but have not been for a long time. The annual
SAR (suspicious activity report) for 2008 states that in the year
2007-08 the insurance industry made 1,434 suspicious activity
reports. I wonder if you could give us examples of the sorts of
matters on which the insurance industry makes reports. In what
circumstances does the industry have to seek consent for transactions?
Mr McGovern: It is likely that the majority
of the SARs filed by the insurance industry relate to whole life
assurance, and, as I said, that is not necessarily an area that
the Lloyd's market write. The risk of money laundering around
the sale of general insurance is, as I said in my opening remarks,
considered a low-risk. That is principally because, once a criminal
has successfully disguised the proceeds of crime, they will want
to reintroduce those funds back into the legitimate economy, and
in general insurance, which does not have the investment aspects
that you often find with life insurance products, that is quite
a difficult thing to do. The way in which you could introduce
those funds back into the real economy, the legitimate economy
in general insurance, tends to be either through making a claim
or through requesting a return of premium. That added dimension,
particularly given the additional scrutiny that the insurance
industry would place around the validity of a claim, generally,
in our assessment, means that a criminal's flexibility to use
general insurance as a means to launder money is quite restricted
and they often look for easier routes to bring money back into
the economy. Having said all of that, in 2008 Lloyd's filed 70
suspicious activity reports. The majority of those reports were
where managing agents had suspicions around the reasons as to
why an individual or a company was seeking insurance cover, and
in all cases the cover was declined. A large proportion of those
related to international fine art, jewellery, gemstones, cash
in transit and those kinds of things, and underwriters are generally
suspicious about the criminal either seeking to use the existence
of a Lloyd's policy to gain legitimacy with third parties or to
inflate asset values within the company by claiming they had assets
that they do not have. To give you an example: we often find that
we will have approaches from individuals to insure a gemstone,
and trying to get clarity over the existence or otherwise of this
gemstone is often difficult. That is a fairly regular attempt
that is made by criminal entities. The other aspect that we see
is trying to buy a Lloyd's policy to cover an asset and either
inflate its value or the asset does not belong to the company
or individual who is seeking the insurance, and then they will
try to use the existence of a Lloyd's policy to go to a financial
institution to raise finance off the back of a fictitious or inflated
asset. In our experience, seeking consent is relatively rare in
general insurance, but we have sought consent from SOCA on a couple
of occasions in relation to paying a claim or paying a return
premium. To give you an example of one of those: we had a claim
for a stolen car, a very expensive car, a Ferrari, and the investigations
around that claim led to concerns as to how that individual had
come to be able to afford such an expensive car, and also it was
clear that the individual had made various misstatements at the
point at which the policy was purchased. The insurers wanted to
avoid the policy because of those non-disclosures and misrepresentations
at the point at which the policy was taken out. In the case of
avoidance you would pay the premium back to the policyholder,
and so we sought SOCA's consent to return the premium to the individual
concerned. Those are examples of where we have seen it. It is
pretty rare. I hope that is helpful.
Q509 Lord Hodgson of Astley Abbotts:
When you say Lloyd's get the SARs from the managing agents, does
that mean managing agents are relieved of a duty to make a report
to SOCA?
Mr McGovern: This is something we have talked
to SOCA about. They can, if they wish, make a report directly
to SOCA. If they choose to make a report through Lloyd's, theoretically
there is an issue. If Lloyd's did not pass that referral on to
SOCA, then it does not necessarily satisfy their obligation to
make a suspicious activity report. As a practical matter, SOCA
quite like the consolidated role they play because it helps to
funnel suspicious activity retorts through to them. But we do
not do any filtering, we pass them straight on to SOCA, so the
risk to managing agents concerned is very low.
Q510 Lord Hodgson of Astley Abbotts:
What is the position where the underwriting is technically done
offshore? It might be done in the Channel Islands. Where they
have a money laundering agency. Do you liaise with that? Or it
might be done, perhaps, in areas which have less heavily policed
arrangements.
Mr McGovern: All of Lloyd's underwriting is
either done in London or where it is done offshore it is done
on an agency basis. A responsibility that we expect managing agents
in London to discharge is that all of their activities, wherever
it happens, complies with any relevant legislation, whether that
is in the UK or any local legislation, and we take steps to give
them guidance on that.
Q511 Lord Hodgson of Astley Abbotts:
Do you have any evidence of insurance brokers and clients using
the system in any way to avoid/evade/minimise their tax?
Mr McGovern: I cannot speak on the part of insurance
brokers. Obviously the relationship that should exist between
a client and their insurance broker means that brokers should
be in a far better system than the insurers to come to a determination
about the whys and the wherefores of a request for insurance and
any suspicions that may be aroused in that context. However, we
have very little experience of notifying to SOCA in relation to
potential tax evasion, but we would expect that both the insurance
brokers and the managing agents, if they had a suspicion that
the purpose of the insurance policy was to evade tax, would file
a suspicious activity report, but we do not have much direct experience
of that.
Q512 Baroness Garden of Frognal:
We have heard from the Law Society, the British Bankers' Association
and the Institute of Chartered Accountants in England and Wales
that they would like more feedback from SOCA to persuade them
of the value of the effort they put into making the SARs, which
take quite a lot of work and effort together. What is the position
of Lloyd's? How do you rate the feedback that you get from SOCA?
Mr McGovern: I think it is fair to say that
we would share those comments. We do not get feedback from SOCA.
We are not sure why that is. It may be that because the international
dimension of a lot of Lloyd's business means that SOCA is passing
that information on to other financial investigation units, but
we have no transparency around what they do with the information
once they receive it. Feedback would be quite helpful because
it would justify the effort that has gone into it, but also may
help in preventing further cases in future.
Q513 Baroness Garden of Frognal:
Does that cause you any difficulty with the managing agents in
circumstances where you are being the transit, as it were?
Mr McGovern: No. As I said, because the managing
agents are expected to do this as a matter of best practice, they
all have money laundering reporting officers. It is something
to which we attach a great deal of significance from a reputational
perspective, albeit we would agree that general insurance is a
low-risk environment for money laundering. We have not had any
feedback from our managing agents that would suggest that they
are in any way irritated by the lack of feedback from SOCA, but
I think it would be helpful to know whether the information we
are providing and the effort we are putting in to file those suspicious
activity reports is useful in the fight against financial crime.
Q514 Lord Marlesford:
I think I should also declare that I was a victim of Lloyd's,
until rescued by Equitas in 1993, since when I have taken no part.
I understand, thanks to Mr Buffet, I have no further liabilities.
I would like to ask about the consent regime, and whether or not
you feel that the Home Office's refusal to change the consent
regime was acceptable to you or whether you share the disappointment
of the British bankers and others at the failure to do so. In
particular, one has had the impression that you have been given
a sort of nod and a wink that you do not have to comply. Would
you prefer to have the consent regime that other people do? Would
you prefer that the regime was changed so that it was clear what
your position was?
Mr McGovern: As I have said, we do not find
ourselves in a situation where we have to apply for consent that
often. That is because, rather than us having a nod and a wink
around compliances, the nature of the environment means that we
are at low risk for this kind of activity. The concerns that have
been expressed by the Institute and by the BBA, I suspect are
particularly linked to the automation and expectation around speed
of payments within the banking sector. Without being pejorative
about my own industry, insurance does not have the automation
that banks do around payments, and so, in particular, where we
have sought consent, it is part of the claims process, and generally
the claims process requires a period of adjustment, analysis and
settlement. In our experience there is plenty of opportunity to
build in time to request consent if that is necessary as part
of that claims process, so the fact that the consent regime has
not been changed is not a particular problem from our perspective.
I can understand that when you get into the banking sector, trying
to stop automated payments or, at least, an expectation around
the speed at which payments will be made, will cause different
issues. Our experience, where we have consent with SOCA, has been
reasonably good. We have had no consent that has taken any longer
than four days to be approved. I understand their concerns but
we do not share them.
Q515 Lord Faulkner of Worcester:
How burdensome is all this for the private regulated sector? We
are getting different views. The Law Society says it is a disproportionate
burden, but the British Bankers Association and the Institute
of Chartered Accountants, whilst admitting it is quite large,
say that it is necessary in order to preserve the reputation of
the City. What view do you take about it?
Mr McGovern: We would agree that a robust system
of anti money laundering is necessary to protect the reputation
of the City. At Lloyd's, although not subject to money laundering
regulations, we have said to our market that, as a matter of best
practice, we expect them to comply. There are obligations within
the FSA handbook around systems and controls for money laundering
which do not apply to the general insurance sector, but, again,
we have said to managing agents, "We want you to be able
to satisfy those requirements, as a matter of best practice".
I think that is a measure of how important we take the issue as
a matter for Lloyd's reputation but also for the reputation more
broadly. The regime is, in our view, proportionate. I think it
is proportionate in the way in which the money laundering regulations
do not apply to insurance, so there has been an element of a risk-based
approach in defining the scope of the regulations, but, notwithstanding
that, I do think that having a robust system of anti financial
crime in the City is very important.
Q516 Lord Faulkner of Worcester:
You think the Law Society is wrong, therefore?
Mr McGovern: I cannot speak for the Law Society.
I would agree that I do not have any issues at all in terms of
the corporation compliance activity around money laundering or
the managing agents' activity around money laundering, and, as
I have said, we have had no complaints from our market-place at
all around the proportionality of the regime as it stands but,
also, the extension of that regime that Lloyd's has applied to
the market as an issue of best practice.
Q517 Lord Harrison:
Mr McGovern, the payment of ransom is not currently a criminal
offence in the United Kingdom law and no-one has suggested to
us that it should be. However, the ransom, once paid, becomes
the proceeds of crime and may well be used to finance terrorism.
Do you believe it is right that shipowners and others collecting
ransom money should be obliged to seek consent from SOCA for this?
In your answers heretofore you have made mention about seeking
consent and you have offered a couple of occasions, but do you
think the shipowners and the others ought to have a responsibility
there to SOCA?
Mr McGovern: I have been interested to read
and listen to the evidence that has already been put before the
Committee around the application of the regime to this situation,
and it is obviously a bit of a vexed areas. There does not seem
to be any dispute around the fact that the collection and preparation
of money for the onward transmission to meet a ransom demand is
not a criminal offence. The question is whether or not in doing
so they should seek consent. I note that the Government's position
is that it is possible that the shipowners may be under an obligation
to seek consent under the terms of the Act but that a prosecution
in that context would not be in the public interest. I think that
is probably the right outcome. I think we would have to think
very carefully about the imposition of a consent regime and the
extent to which that might hinder the ability of a shipowner to
secure, in particular, the safety of crew in what can be quite
delicate and time-sensitive negotiations. My assumption is that
shipowners, if faced with this situation, whilst they may not
be formally seeking consent from SOCA, would be in contact with
the police and other relevant authorities to inform them that
the situation is arising, but that is just an assumption that
I have. There is a very clear distinction between criminal acts
such as piracy and where there is evidence of terrorism or terrorist
involvement. In that context, I imagine the shipowners would be
looking to the Government to give them a very clear steer as to
whether or not there is a risk that the activities are funding
terrorists. We are, as I said, slightly removed from the situation
because any payment we make indemnifying a shipowner is an after-the-event
payment to a legitimate party, so from our perspective the issue
of consent would not arise.
Q518 Lord Harrison:
Do you think it is too mechanistic to have a regime where there
would be an obligation, as such, to report to SOCA, given that
you have given a very good example of why there ought to be some
subtlety in terms of this.
Mr McGovern: I think that would be something
that would have to be looked at. Clearly it would be unfortunate
if shipowners felt constrained by a timetable that was too rigid.
My perspective would be that one would not want to see the shipowners'
hands tied in any way in trying to extract themselves from a situation
that nobody wishes to be in.
Chairman: That is the sort of issue on
which, if you have reflections over the next few days, you might
like to come back to us.
Q519 Lord Faulkner of Worcester:
Have you ever had any suspicion that a shipowner who is insured
with Lloyd's has colluded with a pirate and has effectively organised
his own act of piracy so that he can then claim on the insurance?
Mr McGovern: That would be a suspicion that
would arise in the payment of the indemnification. Absolutely,
if during the course of dealing with that claimant there was a
suspicion that there had somehow been some collusion.
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