Ask MAT – What is the need for MLRO & CO to have Directors and Officers (D&O) liability insurance?

Ask MAT – What is the need for MLRO & CO to have Directors and Officers (D&O) liability insurance?

MAT SAYS:

• Directors and Officers (D&O) liability insurance is designed to protect individuals in leadership or managerial positions, such as directors, officers, and key compliance roles, including MLRO, from personal financial losses arising from claims related to their professional duties.
• As a Money Laundering Reporting & Compliance Officer (MLRO &CO), you're responsible for:-
• Ansuring that internal policies and procedures are followed.
• Overseeing your organisation's compliance with laws and regulations, including but not limited to anti-money laundering (AML) regulations.
• Identifying suspicious activities, filing reports with authorities such as
• The National Crime Agency (NCA) in the UK or
• JFIU in Jersey or
• Equivalent bodies in other jurisdictions, and
• This role can expose you to personal liability risks, such as
• Regulatory investigations, civil lawsuits, or even criminal charges if decisions or oversights are alleged to have contributed to compliance failures, money laundering incidents, or related harms.

Here's how it can protect you:

Key Protections Provided by D&O Insurance

• Coverage for Legal Defence Costs: If you're sued or investigated for alleged wrongful acts (e.g., failing to report suspicious transactions adequately, or decisions that led to regulatory penalties on the firm), D&O typically covers attorney fees, court costs, and expert witness expenses. This is crucial for MLROs, as AML-related probes can be lengthy and expensive.
• Settlements and Judgments: The policy can pay for settlements or court-awarded damages against you personally, shielding your assets from claims by shareholders, regulators, employees, or third parties who allege harm from your AML oversight.
• Indemnification Support: Many D&O policies work alongside company indemnities (where your employer agrees to cover your legal costs). If the company can't or won't indemnify you (e.g., due to insolvency), D&O can step in directly. For MLROs, requesting a formal indemnity from your employer is recommended as a complementary layer.
• Broad Scope for Compliance Roles: While D&O traditionally covers board-level directors and officers, many policies extend to senior managers and compliance officers like MLROs. If you're not a statutory director, confirm with your insurer or employer that the policy explicitly includes your role to avoid gaps.

Limitations to Be Aware Of

• D&O does not cover intentional criminal acts, fraud, or fines/penalties from criminal convictions (though it may cover defence costs until guilt is proven).
• It focuses on third-party claims related to your official duties, not general personal liabilities outside work.
• Policy quality varies: Premiums depend on factors like your firm's size, industry, claims history, and AML systems. Broader policies might include extensions for regulatory investigations or crisis management.

JFSC Rules on Ensuring Regulatory Fines:

• If your operations fall under Jersey jurisdiction, the Jersey Financial Services Commission (JFSC) imposes civil financial penalties under the Financial Services (Jersey) Law 1998 and related legislation for breaches of regulatory requirements, such as AML failures.
• These penalties are designed to be punitive and deterrent, and as such, the JFSC explicitly prohibits insuring them to ensure they are borne personally or by the entity at fault. Specifically, amendments to the JFSC's Codes of Practice (which apply to regulated entities like trust companies, investment businesses, and fund services providers) state that registered persons are prohibited from securing insurance cover to pay any civil financial penalty imposed by the JFSC.
• This rule was introduced to prevent insurance from undermining the effectiveness of penalties. For example, in the Trust Company Business Code of Practice, Investment Business Code of Practice, and similar sector-specific codes, this prohibition is embedded as a compliance requirement for all registered persons.
• The rule clarifies that while defence costs, investigation expenses, or other "surrounding risks" (e.g., legal fees before a penalty determination) can still be insured, the penalty itself cannot be covered by any insurance policy, indemnity arrangement, or third-party payment.
• This aligns with broader Jersey policy, which requires civil penalties to be paid directly by the sanctioned party to maintain accountability and transparency. If you're in a specific sector (e.g., trust services as an MLRO), review the applicable Code of Practice on the JFSC website for the exact wording, as it's standardised across them. Note that criminal fines (e.g., under the Proceeds of Crime (Jersey) Law 1999) are similarly uninsurable under general legal principles.

Steps to Maximise Protection

• Review your employer's D&O policy to ensure it covers MLRO-specific risks, such as AML enforcement actions.
• If coverage is inadequate, discuss enhancements or consider personal D&O insurance (sometimes called individual director liability coverage) for added peace of mind.
• Document your decisions thoroughly and follow best practices to reduce liability exposure in the first place.

Close

• D&O insurance acts as a safety net, allowing you to perform your MLRO duties without constant fear of personal financial ruin from lawsuits or investigations.
• You can consult an insurance specialist or a legal advisor familiar with AML for tailored advice specific to your jurisdiction and firm.