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You must have heard the phrase "Life Is Short Do Not Waste It". This short life is even shorter due to the uncertainties of life .Do you know what would happen to you tomorrow? Certainly Not. In order to safeguard your family's financial health you must take life insurance. Fortunately this need has been recognized by the Government Of India. The Government has given us tax deductions on our premium and death benefits in a life insurance policy are tax free. Unfortunately these benefits are exploited by certain greedy Politicians and Businessmen for money laundering. The government is taking strict action against these unscrupulous Politicians and Insurance agents in order to prevent these unsavory practices from corrupting the insurance sector as a whole .Don't you think it is our moral obligation to prevent such practices from occurring in our society?
It would be wise to remember the saying ".Don't Kill The Goose That Lays The Golden Egg".
Tax Benefits For Life Insurance Policies In India:
· Under Section 80 C of the Income Tax Act the premium for a Whole Life Insurance and a Term Life Insurance policy is tax deductible up to an amount of 1 Lakh.
· Under Section 10(10d) maturity benefits are tax free in the hands of the policyholder only if the premium amount does not exceed 10% of the basic sum assured.
· Death Benefits of Term Life and Whole Life Insurance are tax free .in the hands of the nominee or receiver under Section 10(10d)
· Under Section 80 C premium for ULIP's will be tax deductible provided the premium should not exceed 1 Lakh.
· Under Section 10(10d) the death benefits on ULIP's will be tax free in the hands of the nominee and any proceeds received from ULIP's on its maturity will be tax free in the hands of the receiver.
· Let us consider if we pay the premium of 10% or less of the assured amount of the ULIP then the maturity benefit is tax free under Section 10(10d).
· Let us consider that the ULIP Policyholder dies, then the death benefits depend upon the type of plan he had taken. Under some plans the policy gives us the sum assured or fund value whichever is higher. In other plans the policy holder gets both the sum assured and the fund value. In first case the mortality charges are lesser as the fund value goes up because it focuses on the returns of the fund and lesser importance is focused on mortality. But in the second case even though we get both the fund value and sum assured the mortality charges are higher.
· Let us consider that you have commenced a ULIP Policy on January 2007 but due to certain unavoidable circumstances you discontinue this policy before paying the premium for 5 years. Then you will not get any tax benefits for the previous year in which you terminate your ULIP policy.
· You must be wondering why the Government has reduced the premium limits on the sum assured from 20% to 10% from April 1st 2012 onwards. The reason for this is to prevent money laundering done by politicians and businessmen.
· Insurance Companies are trying to come up with innovative methods to bypass Government rules by addition of bonus to the basic cover in order to raise the premium limits. But the Government states that the rule of 10% premium on sum assured considers only basic cover and not the bonus. If the insurance plan reduces the basic cover from the next year of your policy or for any of the subsequent years then your premium rate exceeds 10% of the basic cover and you will not be eligible for tax deductions under Section 10(10d).
How Is Money Laundering Done In Life Insurance?
· Mr. Sahil a cricket bookie wants to launder the funds that he obtains from gambling. He wants to launder a sum of INR 10 Lakhs .He wants to purchase an insurance policy that has a maturity and death benefit sum of 1 Crore on which the premium is 10 Lakhs .He knows that insurance policies have a free 15 day grace period. He approaches an insurance Manager of a highly reputed Private Life Insurance Company for the same. He convinces him that he will pay 4 Lakhs by cash and 6 Lakhs by Cheque. The insurance Manager knows that there is a rule that one cannot pay more than INR 50000 in cash for premiums without a PAN card . But he agrees on Mr Sahil's conditions in order not to lose a high value customer. After 10 days Mr Sahil says that I want to discontinue my policy so that he gets back 9.6 Lakhs by cheque from the insurance company. He is deducted INR 40000 as administrative charges. So he manages to convert 3.6 Lakhs of black money into white money. Similarly he opens multiple policies in different life insurance companies and manages to convert huge sums of black money into white money. Here he uses the free look in period as a tool for money laundering. This is a common tactic used by money launders to throw regulators off track.
· Mr Vijay a businessman is having cash in hand of 15 Lakhs and he wants to buy a single premium ULIP plan that gives maturity and death benefits worth 2 Crores. This sum of 15 Lakhs are his business profits on which he doesn't pay tax.He approaches an insurance agent of a reputed company with a preposition that he will give the agent a cut of INR 1 Lakh if the agent makes a high value demand draft of 15 Lakhs from his own bank account. The insurance agent agrees for this preposition because he gets a cut of INR 1 Lakh as well as commissions from his insurance company. Mr Vijay hands him a briefcase of 16 Lakhs in order to purchase the policy.. In this way Mr Vijay manages to buy a ULIP policy through his black money. This is a win win situation for insurance companies, agents and the money launderers.
The Art Of Money Laundering:
· You must have read recently in the newspapers or seen on television the sting operation conducted by the magazine "Cobrapost" under the codename "Operation Red Spider 1" and "Operation Red Spider 2".The Cobrapost associate editor posed as a relative of a fictitious politician. He made a series of cold calls to a number of different branches of banks and insurance companies in different cities in India with a preposition that a reputed politician wants to convert his black money into white money. Could these bank executives help him out ?. The bank executives readily agreed to help out using Benami accounts, bypassing KYC norms and so on and in many cases recommended highly reputed Insurance Companies and insurance divisions of their own banks for the purpose.
So How Was This Done?
· The cobrapost sting operator approaches the assistant manager of a reputed Life Insurance Company with a preposition that we wants to convert black money into white money for a sum of 25 Lakhs .He asks the manager if he can take a policy of 25 Lakh premium and can pay in cash. As per Government rules any cash payments above INR 50000 need documentation such as a Pan Card. The Assistant manager readily accepts the cash of 25 Lakhs and tells him not to worry about this above mentioned rule and any other KYC rules and says that he will bypass these rules .He also states that he would send agents to collect the money from his home. The assistant manager tells him that there are different types of life insurances to launder these kinds of funds.The manager says that there is no limit on cash acceptance. There are people who have used this kind of modus operandi to deposit Crores of Rupees. He also tells him that no regulator looks into this issue. The assistant manager asks him to take policies in the name of his family members for small amounts such as 12 Lakhs. The maturity benefits will be given by cheque from the Insurance Company thereby converting his black money to white money. These maturity benefits will be tax free in the hands of the receiver under Section 10(10d).This is a general modus operandi used by insurance agents and managers. The assistant manager also told the sting operator that they can take loans against the cash value of these kinds of life insurance policies. In this way the funds you obtain from loans is white money.
· Conclusion: We come to know through this sting operation that Banks and Insurance agencies indulge in unethical money laundering practices .Evidence shows that just not lower down agents but also their assistant branch managers, Development officers and other higher up's are involved in this process..Since Bank officials colluded with Insurance agencies to launder funds enquiries of senior heads of Insurance and Banks took place by RBI and IRDA. Both RBI and IRDA visited the headquarters of major Banks and Insurance agencies to audit their systems and to detect flaws in Management Control Systems to weed out rogue elements from the system.
Steps Taken By IRDA To Prevent Money Laundering:
· Know Your Customer: All the insurance companies should have Know Your Customer processes in place for all insurance policies. This means they should have a copy of identity proof, address proof and a recent photograph of the insured for all policies above INR 10000.
· Cash Limits: Even though the premium cash limits have been raised above INR 50000 documentation such as a PAN card needs to be provided. Any cash transaction above 10 Lakhs taken through a single or a multiple policy needs to be reported by the insurance company with the Financial Intelligent Unit of India.
· Auditing The Money Trail: In case of suspicious transactions like frequent surrender of policies within the free look in period, unusual termination of policies, regular change in address and so on need to be reported by the insurance agencies. In case of large premium policies and single premium polices mainly in Annuity, Whole Life and ULIP's insurance companies must ask the policyholder for an Income proof. Insurers are expected to maintain these kinds of records for at least 10 years.
· Monitoring of High Risk Individuals: IRDA Guidelines focuses more on politically well connected people, senior public figures and people capable of breaking FEMA and IRDA rules.
· Verification At The Time Of Redemption: No payments should be allowed to a third party for life insurance except in case of death.
We notice from this article that "End Justifies The Means" .Cobrapost may have done all the hard work in detecting flaws and loopholes in the system. It is now up to the regulatory agencies to find out what is going on and implement corrective measures in the banking and insurance sectors.
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