FEDERAL REGULATION · 6 MIN READ
Federal Crimes, Fraud, and Sanctions Compliance
A cluster of federal criminal statutes reaches insurance even though the states regulate the business. Under 18 USC 1033, it is a federal crime to willfully permit a person convicted of any felony involving dishonesty or breach of trust to work in the business of insurance affecting interstate commerce. The bar has no time limit - a 12-year-old embezzlement conviction still disqualifies - and the only exception is written waiver consent from the state insurance regulator under 1033(e)(2). Mail fraud (18 USC 1341) and wire fraud (18 USC 1343) are the workhorse fraud statutes: a scheme to defraud plus even one mailing or transmission in furtherance of it supplies federal jurisdiction, with no minimum loss and no requirement that the mailing cross state lines. Health care fraud under 18 USC 1347 reaches schemes against any health care benefit program, public or private - unlike the False Claims Act (31 USC 3729), which requires a claim against a federal program and features qui tam whistleblower suits. RICO adds civil and criminal exposure for patterns of racketeering activity. Sanctions compliance is a parallel obligation. OFAC, within Treasury, administers sanctions programs under IEEPA. An insurer that discovers an applicant or claimant on the Specially Designated Nationals (SDN) list must block the property interest, refuse the prohibited transaction, and file a report of blocked property within 10 business days, plus an annual report of blocked property held as of June 30, due by September 30. Civil penalties are strict liability - knowledge is not required - while willful violations carry criminal fines and imprisonment. OFAC may issue general licenses that authorize categories of insurance transactions (such as certain claim payments) without case-by-case approval. Anti-money laundering rules under the Bank Secrecy Act apply to insurers selectively: covered products are those with investment features - permanent life insurance with cash surrender value and annuities - because those can launder funds. Standard P&C products like homeowners and CGL are generally not covered. The USA PATRIOT Act adds customer identification (section 326) and information-sharing (section 314(a)) machinery.
Key rules
A felony involving dishonesty permanently bars insurance work absent a 1033(e)(2) waiver.
18 USC 1033 makes it a crime to willfully permit such a felon to engage in the business of insurance; only written consent from the state insurance regulator lifts the bar, which has no time limit.
Why the exam cares: Hiring scenarios test both the perpetual nature of the bar and the identity of the waiver authority - the state commissioner, not a federal agency.
Mail and wire fraud need only a scheme to defraud plus one qualifying use of mails or wires.
Under 18 USC 1341 the mailing may be routine and need not cross state lines; private interstate carriers like FedEx count. Schmuck v. United States held incidental mailings in furtherance of the scheme suffice.
Why the exam cares: Questions test that a single mailed proof of loss federalizes an insurance fraud scheme with no minimum-loss threshold.
18 USC 1347 reaches fraud on private health plans; the False Claims Act does not.
Health care fraud covers any health care benefit program, defined to include private plans; the FCA requires claims against federal programs and allows qui tam relators to sue.
Why the exam cares: The exam contrasts the two by making the victim a private insurer - only 1347 fits.
SDN hits require blocking, rejection, and reporting — on a strict-liability basis.
Insurers must freeze the property interest, decline coverage or payment, and report to OFAC within 10 business days; civil penalties apply regardless of knowledge or intent.
Why the exam cares: Scenarios test the block-and-report sequence and the strict-liability nature of civil OFAC penalties.
AML program rules cover cash-value life and annuities, not standard P&C products.
FinCEN's covered products are permanent life insurance with cash surrender value, annuities, and other products with investment features; homeowners, CGL, and workers compensation are excluded.
Why the exam cares: The exam asks which product triggers AML program requirements - pick the one a criminal could fund and surrender for clean money.
Numbers to memorize
- 5 years — maximum imprisonment for violations of 18 USC 1033(e)
- 10 business days — OFAC deadline to file a report of blocked property (and rejected transactions)
- September 30 — due date of the OFAC annual report of blocked property held as of June 30
- $377,700 or twice the transaction value — annually adjusted civil penalty ceiling per OFAC/IEEPA violation
- $1 million and 20 years — maximum criminal fine and imprisonment for willful IEEPA violations
Common traps
- Assuming an old felony conviction ages out of the 1033 bar — remember the disqualification is permanent until the state regulator grants a written waiver.
- Requiring an interstate mailing for mail fraud — remember any use of the U.S. mails or a private commercial carrier in furtherance of the scheme suffices, even wholly intrastate.
- Confusing the False Claims Act with 18 USC 1347 — remember the FCA needs a federal-program victim, while 1347 reaches private health plans too.
- Thinking OFAC penalties require knowledge — remember civil liability is strict; screening failures are punishable even if the insurer did not know the party was sanctioned.
Sort the fraud statutes by their jurisdictional hook - mails for 1341, wires for 1343, health benefit programs for 1347, federal claims for the FCA - and match the hook in the fact pattern.
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