Last year, former Chancellor Ken Clark shocked the City of London by revealing that money laundering is now the world's third-largest industry.
Lloyd's concedes it is vulnerable to the practice, dubbed "financial rape", because of its status as the best known insurance market in the world.
John Baker, head of the new unit, will work with underwriting agents to hunt suspicious transactions. Officials believe billions of pounds in illegal funds are laundered through the UK each year. London's speed in financial transactions has made it a top target for international criminals trying to legitimise proceeds from drug-dealing, financial fraud, illegal gambling, prostitution and extortion.
Last week, a businessman was fined pounds 1m and jailed for 14 years at Knightsbridge crown court, in London, for using a bureau de change as a front for Europe's largest money-laundering operation.
Ussama el-Kurd was the first person in England to be prosecuted and convicted solely as a money-launderer. The Government had introduced legislation in 1993 compelling financial institutions to combat money laundering.
Irregularities are now reported to the National Criminal Intelligence Service (NCIS). In 1996, NCIS dealt with 16,125 disclosures, an increase of 17.7 per cent on the previous year's 13,170. Reports came from banks, building societies, accountants, solicitors, bureaux de change and insurance companies.
Lloyd's has been rebuilding its reputation after the debacle of the early 1990s when hundreds of investors or "names" lost everything they had after a series of huge payouts on insurance claims.
And Lloyd's does not want to lose business to rival insurance institutions in Frankfurt, which is competing with London to be Europe's leading financial market.
One way criminals are trying to launder money through Lloyd's insurance policies uses the rule that payments do not have to be made to the person who has suffered the loss. A payment for a disaster in the UK could be made to a criminal in the US.
Lloyd's is also monitoring abnormal transactions where money may pass through a number of sources and through different people.
Mr Baker says laundering is financial rape because the criminals are abusing Lloyd's good name.
"The Government has said to people that it wants them to be more alert to suspicious transactions because it does not want it to become a haven for criminals," he added. "London is a also a target because it is ideally situated on timezones."Reuse content