The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) administers complex and comprehensive trade and financial sanctions against the Government of Iran. The Iran sanctions prohibit virtually all direct and indirect transactions involving Iran, the Government of Iran, persons who ordinarily reside in Iran, and entities either located in Iran or formed under Iranian law.
The Iran sanctions also prohibit the exportation, re-exportation, sale, or supply of goods to a person in a third country undertaken with knowledge or reason to know that the goods are intended specifically for supply, transshipment, or re-exportation — directly or indirectly — to Iran or the Government of Iran.
Although the Iran sanctions are broad, there are several well-developed exemptions, general licenses, and statements of licensing policy that permit U.S. businesses and persons to undertake transactions that would otherwise be prohibited. The sanctions targeting Iran are also unique because the secretary of the treasury and the president are authorized to target foreign persons and foreign financial institutions that do business with Iran by imposing secondary sanctions against them.
The historic Iranian nuclear agreement memorialized in the July 2015 Joint Comprehensive Plan of Action is a landmark step towards reopening the Iranian market for Western businesses. While it provides limited exceptions to the prohibition on certain insurance and reinsurance contracts, widespread relief for the U.S. insurance and reinsurance industry remains unlikely in the near future. Re/insurers should therefore continue to screen new contracts and reexamine their compliance programs to avoid unintended violations of the Iran Sanctions Program going forward.
What are the U.S. sanctions?
U.S. sanctions cover a variety of purposes related to the country's internal and external affairs, ranging from weapons proliferation to human rights abuses within Iran to state sponsorship of terrorism and fomenting instability abroad. They target broad sectors as well as specific individuals and entities, both Iranian nationals and non-nationals who have dealings with sanctioned Iranians.
Financial/Banking: U.S. sanctions administered by the Treasury Department have sought to isolate Iran from the international financial system. Beyond a prohibition on U.S.-based institutions having financial dealings with Iran, Treasury enforces extraterritorial, or secondary, sanctions: Under the 2011 Comprehensive Iran Sanctions, Accountability and Divestment Act (CISADA), foreign-based financial institutions or subsidiaries that deal with sanctioned banks are barred from conducting deals in the United States or with the U.S. dollar. At the end of 2011, the United States prohibited importers of Iranian oil from making payments through Iran's central bank, though it exempted a handful of countries that had made a "significant reduction" in their purchases. Other measures restrict Iran's access to foreign currencies so that funds from oil importers can only be used for bilateral trade with the purchasing country or to access humanitarian goods.
Oil Exports: Along with pressure on Iran's access to international financial systems, curtailing oil revenue has been the principal focus of the Obama administration as it stepped up pressure on nuclear nonproliferation. Prior to 2012, oil exports provided half the Iranian government's revenue and made up one-fifth of the country's GDP; its exports have been more than halved since. Extraterritorial sanctions target foreign firms that would provide services and investment related to the energy sector, including investment in oil and gas fields, sales of equipment used in refining oil, and participation in activities related to oil export, such as shipbuilding, ports operations, and insurance on transport. CISADA and related executive orders expanded restrictions that predated nuclear concerns.
Asset freezes and travel bans: Following the September 11, 2001, terrorist attacks, the United States froze the assets of entities determined to be supporting international terrorism. This list includes dozens of Iranian individuals and institutions, including banks, defense contractors, and the Revolutionary Guard Corps (IRGC). The IRGC's elite paramilitary Quds Force has been sanctioned for destabilizing Iraq and abetting human rights abuses in Syria for Iran’s support of the government of Bashar al-Assad, and Syria’s crackdown on that country’s peaceful protest movement.
Additional Trade Sanctions. In addition to the trade and financial sanctions highlighted above, the United States and the European Union (EU) maintain sanctions that prohibit trade with Iran, including trade involving oil and other petroleum products and components that would assist Iran in the acquisition of chemical, biological, nuclear and other types of conventional weapons.
Congress provides the statutory basis for most U.S. sanctions, but it is up to the executive branch to interpret and implement them. While congressional legislation would be required to repeal these measures, the president, by citing "the national interest," has the authority to waive nearly all of them, in whole or in part. Lifting terrorism-related sanctions would require the president to delist Iran as a state sponsor. The president is also able to hollow them out by removing individuals and entities from sanctions lists.
On July 14, 2015, Iran, the EU and the P5+1 (the United States, United Kingdom, France, China, Russia and Germany) reached a historic deal for Iran to wind down its nuclear program in exchange for sanctions relief. This agreement has been memorialized in the Joint Comprehensive Plan of Action (the JCPOA ). The JCPOA does not provide any immediate sanctions relief to Iran; instead, U.S. and EU sanctions will be withdrawn in a phased manner, based on Iran achieving certain nuclear milestones. The first phase of sanctions relief will take place when the International Atomic Energy Agency (the IAEA) verifies that Iran has completed certain decommissioning steps relating to its nuclear weapons program. Further sanctions relief will follow based on the IAEA providing confirmation that Iran is complying with the JCPOA. Sanction relief will not be immediate and it will be a number of months before the first stage of U.S. and EU sanctions relief is implemented; however, the JCPOA is a landmark step towards reopening the Iranian market for Western businesses.
How does the JCPOA impact financial institutions such as insurers and reinsurers?
The Iranian Financial Sanctions Regulations define “U.S. financial institutions” to include: depository institutions, banks, savings banks, money service businesses, trust companies, insurance companies, securities brokers and dealers, commodities exchanges, clearing corporations, investment companies, employee benefit plans, and U.S. holding companies, U.S. affiliates, or U.S. subsidiaries of any of these entities. Covered institutions include those branches, offices, and agencies of foreign financial institutions that are located in the United States.
The sanctions prohibit the issuance of insurance policies and reinsurance contracts involving insurable risks subject to the sanctions program. This prohibits the collections of premiums from entities and potential individual insureds subject to the sanctions and claims cannot be adjusted or paid to the entities or individuals subject to the sanctions. Insurers and reinsurers must review policies and contracts as sanctioned individuals may be a party to the insurance transaction in a number of ways including: insureds and additional insureds; payers of the premium; beneficiaries; intermediaries and administrators; third party liability claimants; loss payees and banks or other financial institutions as lien holders or parties to the routing of payments or the place of deposit for the beneficiary. In short, every step of the policy and reinsurance contract must be reviewed to ensure that the Iran sanctions are not inadvertently violated.
The JCPOA has brought certain limited exceptions to the prohibition on insurance and reinsurance contracts. However, the exceptions are limited. The JCPOA will allow the U.S. and the EU to suspend sanctions on associated insurance and transportation services related to Iran’s crude oil and petrochemical sales. To date, OFAC has issued limited waivers to non-U.S. persons and has not issued guidance clarifying the procedures for U.S. persons to obtain OFAC approval to provide insurance-related services.
Violations can be costly
Even unintentional violations may result in civil and criminal penalties. Any U.S. person who violates the sanctions may be subject to civil penalties of up to the greater of $250,000 or twice the transaction value, and criminal penalties for willful violations of up to $1 million and 20 years in prison. The value of the insurance transaction is typically measured by the premium or the claim amount. A single policy issued to an OFAC target could result in multiple violations due to the issuance of the policy, each subsequent receipt of the premium or the payment of the loss.
Every insurer and reinsurer should consider putting in place a set of internal controls and developing a written compliance program to avoid OFAC violations. The programs must contain a thorough and continuous risk assessment of the insurers’ business and take into account the geographic region and activities. The insurer should appoint an OFAC Compliance person to run OFAC screens and handle OFAC issues for the company. Regular training of employees, agents, reinsurance intermediaries and independent adjusters on updates to U.S. Sanctions and OFAC regulations must be mandatory. New policies must be screened against the OFAC sanctions and Specially Designated Nationals list to ensure that the potential insured is not a sanctioned entity. All policies currently in effect must be screened on a regular basis to screen current insureds who may become a sanctioned party. Finally, insurers and reinsurers must use policy exclusions to limit exposure in the event a policy provision would cover a prohibited transaction. By following these steps, insurers and reinsurers can avoid unintended and costly violations.