Corporate Accountability in Insurance Fraud: India Laws

ABSTRACT:

Insurance fraud has become a serious concern in India today. It not only damages the economy but also weakens public trust in insurance companies. When people begin to doubt the reliability of insurers, it affects everyone from honest policyholders to the companies themselves. Moreover, these frauds often serve as a channel for hiding or moving illegal money, making them even more dangerous for the financial system. Most insurance frauds occur through collaboration between insiders and outsiders. For example, an employee within an insurance company may work hand in hand with an agent or customer outside to exploit loopholes and manipulate claims. This inside outside connection makes detection and prevention a real challenge. This paper examines how India is addressing these crimes and how its approach aligns with the international standards set by the Financial Action Task Force. It focuses on three key frameworks the Prevention of Money Laundering Act; the Bharatiya Nyaya Sanhita ; and the Insurance Fraud Monitoring Guidelines. Each of these plays an important role in tightening the country’s financial integrity system. The IRDAI, for instance, now holds insurance companies accountable for the actions of their agents, while the BNS treats large-scale financial fraud as a form of organised crime. However, strong laws alone cannot solve the problem. The real test lies in how effectively these rules are implemented. India must ensure that punishments are proportionate, that illegally earned money is recovered, and that audits and compliance checks are carried out regularly. If enforcement improves and these measures are taken seriously, India can move toward a more transparent and trustworthy insurance sector in the years to come.

Introduction

The shadow economy is concerned about the matter of financial activities which are functioning outside of formal regulation and the taxation and general government oversight. It is a true fact that this space incorporates unreported transactions and documentation which is false and also hidden financial networks which move money without true accountability. Inside this type of space, there is systemic insurance fraud which has grown to be a significant challenge. This practice goes beyond claims which are false and isolated. Instead, it involves manipulation of insurance processes that is repeated and very much organized.

The research problem for this paper lies in understanding whether India’s legal and regulatory framework maintains strength enough to address systemic insurance fraud and prevent its usage in the shadow economy. The objectives are to examine the role of corporate accountability and vicarious liability in controlling fraud and to evaluate how Indian laws are responding to organized financial crime and to compare these responses with global expectations about the matter.

The scope of this research is focusing on the Prevention of Money Laundering Act 2002 and the Bharatiya Nyaya Sanhita 2023 and the IRDAI Insurance Fraud Monitoring Guidelines 2025. The methodology relies on doctrinal legal research and policy analysis and regulatory comparisons and review of secondary literature. The Financial Action Task Force stands as the setter of international standards for the prevention of money laundering and terrorist financing. Its recommendations are important because financial systems are interconnected across borders. This is an important consideration for many countries.

Literature Review

It is concerning insurance fraud has exhibited an expansion across the last twenty year period because researchers have comprehension of its economic and social consequences about the matter. Scholarship viewed the fraud as an individual level moral difficulty, concentrating mostly on false claim submission or misrepresentation. More recent work takes a structural approach that is broader and describes insurance fraud as a financial crime which has the ability to distort markets and also weaken institutional trust and drain national resources.

Scholars are arguing that this fraud becomes systemic when there is a network formation of claimants and surveyors and medical personnel and intermediaries and company employees who all participate in the schemes that are coordinated. This specific literature shows that the insurance sector is increasingly attractive to people doing crime because it offers legitimate financial channel access and a large volume of transactions and complex documentation which has capability to disguise proceeds that are illegal.

Research concerning corporate accountability and the vicarious liability in insurance is putting an emphasis on the idea that fraud cannot be addressed only through criminal law imposition. Scholars are highlighting how the insurers, as entities of the corporate nature, must accept responsibility for actions of their employees and agents and representatives of third parties. Legal writing notes that traditional principles of vicarious liability experienced an evolution in the manufacturing and employment contexts, but these principles now maintain a relevance to financial services where decisions are often decentralised and intermediaries play a very central role.

Scholars describe FATF as a soft law institution which influences legislation that is domestic through the processes of mutual evaluation and peer pressure and reputational incentive. Studies compare how various jurisdictions incorporate FATF standards into anti money laundering rules and reporting obligation and risk based supervision and enforcement practice. Research also shows that alignment to FATF norms encourages transparency and cross border cooperation, while weak compliance can affect international credibility and access to finance.

Standing apart, this growing body of literature which is the research on India’s insurance governance framework remains restricted. Much of the writing that exists studies banking compliance under the Prevention of Money Laundering Act, while insurance receives very less attention. There is limited academic examination concerning agent based fraud structure and insider collusion or the role of corporate responsibility in prevention. Study between Indian regulations and the expectations of financial action task force are also scarce, specifically after the introduction of the Bharatiya Nyaya Sanhita and the Insurance Fraud Monitoring Guidelines. This gap shows the need for a deeper legal analysis regarding regulatory convergence and the enforcement challenges and the systemic accountability within India’s insurance sector structure.

Conceptual Framework

The conceptual framework for analysis about corporate accountability in matters of systemic insurance fraud starts by understanding fraud not only as isolated dishonesty but also as organized economic activity. Systemic insurance fraud involves schemes repeated and coordinated that exploit the weaknesses of institutions, gaps in regulation and asymmetries in information. It operates similarly to a parallel market inside the formal economy, utilizing insurance policies and claims and settlement processes to generate and circulate income which is illicit. This activity has resemblance to organized crime because it often includes structured networks of insiders and intermediaries and service providers and external criminal actors. Their objective is not just the obtaining of payouts but also the conversion of illegal money into financial assets that seem legitimate, which gives contribution to the growth of the shadow economy.

Corporate accountability maintains a central position because financial institutions are controlling the systems that allow fraud to occur.

In insurance distribution, intermediaries often interact with customers more than the institution itself. This creates opportunity for mis-selling and fabricated claims and document manipulation.

A legal regime of vicarious liability encourages insurers to make monitoring and training and auditing and discipline of their networks. It shifts the burden of oversight to those who are profiting from the market and prevents companies from distancing themselves from wrongdoing carried out on their behalf. The Financial Action Task Force provides international structure for the evaluation of these responsibilities. FATF also promotes a risk based regulation in which institutions must assess their exposure to financial crime and adopt proportionate safeguards while also maintaining monitoring simultaneously, FATF has always stressed the need for accountability by keeping records and accounts under a supervision. These principles push jurisdictions ensuring private institutions act as crucial partners in prevention of financial crime.

Indian Insurance Fraud Landscape

The sector of Indian insurance has demonstrated rapid growth across the last two decades and together with this expansion, the scale and complexity concerning fraud have also grown. It is a true fact that fraud is not only limited to singular false declarations but appears in recurring forms of different types.

Claim fraud is the most common kind and includes exaggerated losses and fabricated accidents and staged deaths and manipulated medical bills and repeated claims across many insurers. Intermediary fraud occurs when the agents or brokers provide misleading information to customers or forge signatures or divert premium money or cooperate with claimants to make false policy histories. Underwriting fraud takes place at time of policy creation when documents and income records and risk details are intentionally changed to secure high commissions or lower premium rates. These practices collectively lead to the weakening of integrity in the insurance market and they create possibilities for financial crime.

Insider networks play a central role in sustaining such fraud. Employees responsible for processing claims and evaluating medical necessity and entering data or giving policy approval may collaborate with external agents or surveyors or service providers. Their good knowledge concerning internal procedures makes it easier for them to bypass verification systems or suppress the reports of suspicious activity or fast track settlements that are fraudulent. When these networks are handling large sums of unverified money, insurance stands as a convenient vehicle for the laundering of illegal proceeds.

The problem is intensified by India’s model of distribution which is agent driven, where personal relationships often substitute formal compliance with rules. Digital payments have achieved improvement in access and efficiency, but also they create new vulnerabilities about the matter. Instant transfers and remote documentation and online onboarding and automated claim approvals reduce the scrutiny by human employees. Weak reporting systems in smaller insurers and lack of integrated databases for fraud mean that repeated frauds often go without notice. Many companies are still treating fraud as a dispute of customer service rather than a crime of finance, which discourages the timely reporting to enforcement authorities.

The social and economic consequences of systemic fraud are very significant. Policyholders who are honest must bear higher premiums because insurers attempt to recover losses. Genuine claimants face delays and additional paperwork and also suspicion from the employees.

Core Legal and Regulatory Framework in India

A. Prevention of Money Laundering Act 2002

The Prevention of Money Laundering Act is primary legislation of India concerning the detection and punishment for the and also use of money which is obtained illegally. It recognizes many ranges of economic and financial crimes as predicate offenses. This means that if proceeds are generated from an unlawful source such as insurance fraud then the act becomes applicable about the matter. This law places reporting duties upon financial institutions, and this includes insurers. They are required to verify the identity of customers, maintain records of all transactions, and file suspicious transaction reports to the Financial Intelligence Unit. When the authorities identify illicit proceeds, they have the power to provisionally attach the assets, prevent the transfer of these assets, and finally confiscate them after the process of trial is completed. These powers enable the state for recovery of criminal profits instead of only prosecuting the individuals. By classifying insurers as institutions for reporting, PMLA shifts some part of policing responsibility to the private sector and expects companies to detect risk and monitor transactions and to ensure cooperation with enforcement agencies.

B. Bharatiya Nyaya Sanhita 2023

The BNS has introduced the strengthened criminal framework and relevant provisions which are concerned with financial wrongdoing. It provides recognition for financial fraud that is coordinated and large scale as organized crime. This places the crime closer to offenses which are traditionally associated with criminal syndicates. This classification allows for investigation of patterns of collusion standing apart from isolated acts.

C. IRDAI Insurance Fraud Monitoring Guidelines 2025

The Insurance Regulatory and Development Authority of India has introduced detailed standards for compliance aiming to improve the prevention of fraud. Insurers must establish trained personnel units tasked with controlling fraud control. They must conduct internal audits and document risk management procedures and report activity which is significant and suspicious to both the regulator and the law enforcement.

FATF Standards & Global Practise

The Financial Action Task Force established global standards regarding prevention of money laundering and also concerning the misuse of the financial system. Although the majority of the attention usually goes to banks, the FATF regulation focus also includes the insurance sector on this matter. Several recommendations are very direct and relevant. These include verification of customer identity and monitoring of transactions that are ongoing and keeping of record and detection of suspicious behaviour and reporting in a timely manner to the national financial intelligence units.

Another point is concerning that FATF also requires robust internal controls and independent audits and staff training and information systems that are reliable. Life insurance products and investment linked policies and high value settlements are generally treated as having higher risk. It is a true fact that these instruments possess the ability to be utilized for storing or layering or integration of funds that are illegal.

FATF maintains the expectation that countries will construct regulatory systems. These systems must supervise insurance companies in the same method as supervision of banks and firms dealing with securities. This means the implementation of licensing requirements and compliance reviews and risk based inspections. Insurers and intermediaries are expected to check the identity of the customers, understand the purpose of a policy, verify the funds source and reject transactions that look unusual. When suspicious activity occurs, companies must make a report about it without delay, even if full proof of criminal behaviour is not possible to achieve.

Regulators are expected to impose sanctions on companies that demonstrate failure to comply. The imposition of sanctions may involve monetary penalties or removal of management or cancellation of operating licence. Standing apart from this, FATF also emphasizes international cooperation for the exchange of information across borders during the investigation processes.

Global practice shows how different jurisdictions apply the necessary standards. In the European Union, anti money laundering directives require insurers to conduct due diligence and maintain central beneficiary registers and share financial intelligence. Supervisors regularly conduct review of insurance companies and impose corrective actions when it is needed.

The United States utilizes the Bank Secrecy Act and also Patriot Act framework. This framework requires insurers that offer covered products to file reports about suspicious activity and establish programs for compliance and provide customer information when authorities make requests. The enforcement agencies within the United States also pursue penalties in criminal and civil area for large scale schemes of insurance laundering.

Singapore is following a risk based supervision model that is administered by its Monetary Authority. Insurance companies must make assessment of exposure to money laundering and maintain strong reporting systems and file structured statements of compliance. Singapore also publishes the outcomes of enforcement for encouragement of transparency and deterrence.

Across these regions and jurisdictions, the common theme is that insurers stand as gatekeepers of financial integrity. FATF thus promotes a culture where insurance companies maintain a role not only as commercial actors but also as essential partners in safeguarding the global economy from criminal misuse and exploitation.

Regulatory Convergence & Gaps

India’s regulatory approach to insurance fraud shows a growing alignment with global expectations for the prevention of financial crime. The Prevention of Money Laundering Act and the BNS, IRDAI Insurance Fraud Monitoring Guidelines ensures that the numerous principles that are promoted by the Financial Action Task Force.

PMLA recognises insurance as a reporting sector, and it requires verification of customers and mandates record keeping and enforces reporting of suspicious transactions. This action matches the emphasis of FATF on transparency and risk awareness and cooperation with the financial intelligence units. The Bharatiya Nyaya Sanhita provides the strengthening of criminal accountability by treating large financial fraud as a crime that is organised, and this corresponds to the FATF focus on prosecuting coordinated economic offences.

The IRDAI guidelines promote internal controls for fraud and structured reporting and continuous monitoring and independent audit and responsibility for intermediaries. Together, these measures show good progress toward a regulatory culture based on risk. Compliance capacity also has improved after the oversight reforms in 2025. Insurers now maintain units for fraud control and use automated tools for claim scrutiny and participate in data exchange of regulatory nature.

It is a true fact that there is greater awareness of the money laundering vulnerabilities in the life and health insurance sectors. IRDAI has initiated the issuing of compliance direction and reviewing governance framework. The institutions appear more willing to self report fraud and they cooperate with the enforcement agencies. These developments indicate a shift from a reactive resolution toward a supervision that is preventive.

Standing apart from this convergence, many gaps remain. Enforcement of the regulation is still uneven and numerous cases do not progress beyond the internal disciplinary action. Prosecution of money laundering that is related to insurance is limited, and confiscation of assets is rare. Reports from financial intelligence often fail to translate into criminal trials.

Proving of organised fraud requires linking multiple actors across several transactions which demands expert testimony and digital tracing and coordinated investigation. Courts may lack specialised knowledge about the insurance processes, making the conviction uncertain. These obstacles in the practical domain weaken the effect of strong legislation. Therefore, while India’s legal and regulatory framework reflects the FATF standards, effective implementation remains the central challenge to overcome. Continued coordination and technological integration and institutional accountability are essential for achieving a true regulatory convergence.

Corporate Liability & Vicarious Liability

Corporate accountability about the matter in the insurance sector finds its beginning at the highest level of decision making. Boards maintain responsibility for setting of the organisational culture and approving compliance budgets and monitoring risk exposure and ensuring that prevention of fraud is not regarded as a technical formality. For many companies, the control of fraud is delegated to management at the middle level with very limited authority, while the focus of boards is mainly on business expansion and profitability. Stronger responsibility standing at the board level signifies regular review of reports regarding fraud and independent audits and protections for whistleblowers and clear consequences for governance failures. When the directors recognise fraud as a strategic threat rather than an inconvenience of operation, the prevention becomes more effective. Ethical governance supports this approach very strongly.

Insurance companies are managing confidential data and customer savings and public trust, so integrity must guide the daily decision making. Ethical governance necessitates transparent documentation and internal communication channels for reporting suspicious activity and a function for compliance that operates independently. It is important that employees feel safety in reporting wrongdoing without the fear of retaliation. Data systems must record transactions with accuracy and must flag patterns that are abnormal. These internal ecosystems provide a reduction in reliance on external enforcement and encourage detection at an early stage. Companies must have an understanding that profitability in the long term depends on credibility, not volume in the short term.

The debate becomes more complex concerning the matter of vicarious liability. Many frauds involve agents who are independent rather than employees who are direct. Some argue about the fact that insurers should not be held responsible for actions that are beyond their control or supervision. Others respond that agents act as the face of the insurers for the public, and they collect premiums and advise customers and influence claims. Because insurers benefit from these relationships, they must also provide monitoring of them.

Policy & Enforcement Recommendations

It is concerning the regulation of intermediaries, which needs improvement of its current state. Mandatory background screening processes and correct licensing and periodic certification for agents and brokers would assist in the reduction of entry of persons with histories that are criminal or records that are unethical. Publicly accessible registries about disciplinary actions would allow customers and insurance providers to check the credibility of these intermediaries before engaging in business.

The recovery of assets stands as one of the weakest aspects of enforcement activities. Faster attachment of monies which are suspected proceeds of crime under PMLA, supported by specialist financial courts and modern digital tracing tools, will prevent fraudsters from moving or hiding money in secret places. The successful recovery of assets sends a stronger message of deterrence than prosecution action alone can provide.

Whistleblower protections must be strengthened and reinforced, employees should be given the ability to report such suspicious behaviour anonymously and without the fear of retaliation. IRDAI should engage in thematic inspections and the publishing of compliance outcomes and require insurers to disclose statistics related to fraud and status of investigation and corrective actions which are taken. This transparency encourages good accountability and establishes trust with the public.

Finally, the capacity for enforcement must grow. Investigators and forensic accountants and prosecutors and insurance ombudsmen require specialized training about fraud typologies and digital evidence and policy structures and methods for financial tracing.

Conclusion

It is concerning Bharatiya Nyaya Sanhita, which recognises large and coordinated fraud as a form of organised crime. Furthermore, the IRDAI Insurance Fraud Monitoring Guidelines introduce structured monitoring and also institutional responsibility. The combining of these developments moves India closer to the accountability framework which is promoted by the Financial Action Task Force, where private institutions become important partners in safeguarding the financial integrity.

However, legislative alignment by itself alone cannot prevent fraud. The effectiveness of any legal system depends on enforcement and cooperation and consistent application. Many cases remain still unreported or are unresolved because of limited data sharing and investigative delays and capacity constraints. Without timely prosecution and recovery of assets and follow up from regulators, the fraud continues to function as low risk activity.

The future of the insurance sector which is fair and trusted therefore requires transparent governance and proactive supervision and responsibility shared across regulators and insurers and enforcement agencies. If India strengthens the oversight and encourages ethical corporate culture and prioritises prevention, the insurance market has the ability to grow in a manner that supports public confidence and economic stability and long term financial inclusion. Students of this country understand the importance of this development.

References

Treaties & Intl. Organizations:-

FATF “Report on Money Laundering and Terrorist Financing Risks in the Insurance Sector”
Financial Action Task Force “Recommendations on the Risk-Based Approach to Money Laundering and Terrorist Financing in the Insurance Sector” (Available at: http://www.fatf-gafi.org/recommendations/insurance-sector-risk-based-approach (Visited on 19 November 2025)
World Bank “The Impact of Financial Crime on Economic Stability” (Available at: http://www.worldbank.org/reports/financial-crime-economy)
World Economic Forum “Building Trust in the Insurance Sector: A Call for Transparent Governance” (Available at: available at: http://www.weforum.org/reports/trust-insurance-sector)

Legislations:-

Prevention of Money Laundering Act, 2002
Bharatiya Nyaya Sanhita, 2023

Guidelines and Reports:-

Insurance Regulatory and Development Authority of India (IRDAI) “Insurance Fraud Monitoring Guidelines, 2025”
Insurance Regulatory and Development Authority of India “Framework for Coordinated Response to Insurance Fraud” (Available at: available at: http://www.irdai.gov.in/fraud-response-framework)
Corporate Governance Institute “Enhancing Corporate Accountability in the Insurance Sector” (Available at : http://www.cg-institute.org/reports/accountability-insurance-sector)
Ministry of Finance “Report on Strengthening Financial Regulations in India” (Available at: http://www.finmin.nic.in/reports/strengthening-financial-regulations )

Websites:-

Insurance Information Institute “Understanding Insurance Fraud: Types and Consequences
Indian Financial Stability Report “Combating Systemic Insurance Fraud: A National Imperative”

NAVNEET KHURANA

Corporate Accountability in the Shadow Economy