August 20, 2024

Producer Disclosures, Prohibited Actions, and Financial Crime Programs

Protect yourself by properly disclosing replacements

Athene and regulators are concerned about the failure of some producers to properly disclose replacements. It’s important that you become familiar with your state’s definition of a replacement and follow related requirements. Below are some reminders regarding replacement activity:

Please keep in mind that in most states, a financed purchase is considered a replacement. A “financed purchase” is the purchase of a new annuity contract or life insurance policy involving actual, or intended use of, funds obtained by a withdrawal, full or partial surrender of, or loan from, an existing contract/policy to pay all or part of any premium due on the new contract/policy.

A common misconception is that a replacement occurs solely on direct company-to-company transfers from one annuity to another. However, placing surrendered funds from an annuity into a checking or other short-term account, and then using those funds to purchase a new annuity, typically meets the definition of a replacement in most states and considered a “financed purchase.”

Tax implications

The tax implications of annuity transfers vary depending on the type of annuity, the nature of the transfer and/or your customer’s individual circumstances. Some tax considerations to keep in mind when transferring an annuity include:

Nonqualified Annuities: A 1035 exchange refers to a tax-free exchange of one nonqualified annuity for another nonqualified annuity. If properly conducted, a 1035 exchange preserves the cost basis of the old annuity contract, and taxes are deferred until your client withdraws earnings or gains from the new annuity.
One important requirement of the IRS 1035 rule is that the premium must move directly from the old annuity to the new annuity without your customer taking possession of the funds. Failing to comply with IRS rules could leave your customer with a tax bill and possible tax penalties if they are under age 59 ½.
Qualified Annuities: Qualified annuities are purchased with pre-tax dollars. For an exchange of qualified annuities, the funds may be transferred as follows:
- Directly from the old annuity to the new annuity without your customer taking possession of the money (a trustee-to-trustee transfer) or,
- Through an indirect 60-day roll-over if your customer takes possession of the funds (Customers must deposit all or a portion of the funds in a qualified annuity or account within 60 days).

When properly transferred, the new qualified annuity maintains the tax deferred status of the old qualified annuity until your customer takes a withdrawal from the new annuity contract.

Protect your reputation with your clients, Athene, and state regulators. Failing to disclose replacements can lead to disciplinary action by Athene, up to and including termination, as well administrative licensure actions by state regulators.

Thank you for your business. At Athene, we aim to do more by providing the information you need to stay compliant with the rules and regulations of Athene, the federal government and the state(s) where you do business.

Any information regarding taxation contained herein is based on our understanding of current tax law, which is subject to change and differing interpretations. This information should not be relied on as tax, legal or financial advice and cannot be used by any taxpayer for the purposes of avoiding penalties under the Internal Revenue Code. We recommend that taxpayers consult with their tax or legal professionals for applicability to their personal circumstances.

Prohibited use of producer’s address on client contracts

We’ve recently received applications where the client’s address of record matches the producer’s business or personal address. We’ve also noted requests to send a client’s withdrawal or surrender checks to a producer’s address, instead of the client’s address. We want to take this opportunity to remind producers of the following Athene guidelines:

A producer must not list their personal or business address as the address of record on any Athene application, except for those owned by the producer or a producer’s close family member (one residing with the producer).
Athene will not approve a change of a customer’s address to the personal or business address of the producer unless it is a close family member. All customer address changes are monitored to identify any suspicious activity and/or violations of Athene guidelines.

In cases where an application or request to change an address is submitted for a family member living with a producer, we strongly recommend that the producer provide a brief explanation along with the application or address change request. This explanation should outline the relationship between the producer and the client and confirm that they reside at the same address.

It’s important to note that Athene’s guidelines strictly prohibit sending any annuity proceed checks to the producer’s address unless the contract is owned by a close family member who resides at the same address as the producer. We appreciate your cooperation and assistance in adhering to these guidelines as they protect all of us.

Stay alert with Athene’s Financial Crime Programs

Our goal is to provide valuable information on an ongoing basis that can help in your efforts to prevent, detect and combat financial crime. These resources can help you understand your obligations.

Anti-Fraud:

A Ponzi scheme is a type of investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest a client’s money and generate high returns with little or no risk. In many Ponzi schemes, fraudsters do not invest the money. Instead, they use it to pay those who invested earlier while usually keeping some for themselves. Ponzi schemes require a constant flow of new money to sustain themselves.

Athene is aware of recent cases in which producers have been convicted of fraudulent investment schemes funded with clients’ insurance funds. Often these producers used their position of trust, as a licensed insurance producer, to convince clients to withdraw or surrender penalized insurance proceeds.

Prohibited transactions

Athene’s Doing Business Producer Guidelines states that producers must avoid both apparent and potential conflicts of interest. While we encourage strong relationships with customers; the following transactions are prohibited:

Lending money or borrowing money from a customer.
Comingling your funds with funds belonging to a customer.
Making any unauthorized transactions, including the submission of applications against the customer’s wishes.

Seniors are often the target of Ponzi and producer-related investment schemes. At Athene, we are committed to safeguarding our contract owners from unwittingly financing these schemes with their insurance contract funds.

Potential red flags

Our producers play a vital role as frontline defense and in reporting fraud. To aid in this effort, we’re highlighting several red flags that signal a potential Ponzi or producer-related investment scheme:

Unrealistic returns: Investments promising high returns with low risk should be viewed with suspicion, as risk typically aligns with potential returns.
Unlicensed sellers: Federal and state securities laws mandate sellers of an investment to be licensed or registered. Ponzi schemes often involve unlicensed individuals.
Unregistered financial products: Ponzi schemes typically involve unregistered investments with limited access to information about the product purchased.
Surrender fees: Clients may be encouraged to surrender annuity contracts early to obtain funds to invest, often incurring high surrender fees.
Lack of documentation: Clients may have limited or unprofessional documentation outlining the purchase.
Seller as sole administrator: Administration of the product is conducted solely through the selling agent rather than a financial services company.
Difficulty in obtaining payouts: Clients may be incentivized to hold funds within the purchased product by offering higher rates.

Real-life examples

Several insurance producers involved in Ponzi or producer-related investment schemes have faced legal action, including jail time. Even insurance producers who were recruited to sell the investment, without knowledge of the fraud can, and do, face consequences for selling, including monetary penalties and loss of licenses. Here are some examples:

A producer in Pennsylvania received a 17-year prison sentence for committing securities fraud, which involved encouraging clients to withdraw from their life insurance policies or retirement accounts to fund an investment.
A producer in Iowa was sentenced to 18 years in prison after pleading guilty to wire fraud. The producer inserted himself into the lives of his victims by building personal relationships to facilitate his scheme of defrauding elderly clients out of their retirement savings.

Anti-Money Laundering (AML):

As a producer, you’re required to keep and maintain the following information for at least five years:

All records following the termination, cancellation or surrender of an annuity.
All documentation, reporting, or case file information associated with financial crime activity following the date the customer relationship has ended.

Documentation should include …

A copy of the identification used by the customer, the customer’s name, date of birth, address and tax identification number.
A description of any document used to verify the customer’s identity, noting the type of document, a document identification number, the place of issuance, the date of issuance and the document expiration date.
A description of the methods and results of non-documentary measures used to verify their identity (e.g. viewing of non-expired government issued identification).
A description of any substantive discrepancy between the identifying information provided by the customer and that found in identifying methods, noting how the discrepancy was resolved.