It has been almost ten years since the terrorist attacks of 9/11. Since then, over 30 planned attacks against the U.S. have been thwarted or failed, two through sheer luck. Other countries have not been so fortunate. There have been horrific attacks in London, Madrid, Mumbai and elsewhere. More broadly, several nations in the Middle East and North Africa are in transition, and some are in turmoil. Rogue nations are trying to acquire weapons of mass destruction, disrupt our economy, and gain geopolitical advantage. New threats continually arise.
The good people of the insurance industry are in this struggle. Terrorists use life insurance and annuity products to launder money and finance their activities. They need auto insurance to drive car bombs to their intended targets. Malevolent nations and their parastatals transport lethal materials in international commerce, build facilities to develop weapons of mass destruction and seek commercial insurance to protect their projects.
One way insurers and reinsurers can help is by carefully observing the restrictions created by the economic sanction programs administered and enforced by the Office of Foreign Asset Control (OFAC) of the U.S. Department of Treasury. As the Treasury Department has stated, “these programs are a frontline defense against foreign threats to our national safety, economy and security.”
OFAC actively enforces its restrictions and imposes penalties, which for the most part are based on strict liability. That is, even unintentional violations may result in penalties. Penalties can be imposed not only on companies, but also on individuals involved in underwriting, administration and claims, even if they work for non-U.S. companies. Penalties can be civil or criminal, with fines as high as $10 million for each violation, and prison terms of up to 30 years. There have been approximately 50 enforcement matters involving insurance transactions. One company paid a $2.4 million penalty for issuing life reinsurance covering Cuban nationals.
OFAC has publicly expressed a growing interest in the insurance industry, especially with respect to the facilitation of insurance placements, and has stepped up its enforcement in the industry. Sanctions were recently imposed on three insurance entities in just a few weeks, and others are anticipated. For example, a Texas-based reinsurance broker was fined for allegedly facilitating the placement of a facultative retrocession reinsurance agreement covering the construction risks of a petroleum project on Kharg Island in Iran. The retrocedent and retrocessionaires were European.
OFAC currently administers 21 separate programs, and the specific restrictions and penalties vary for each of the programs. But broadly, OFAC prohibits the issuance of insurance and reinsurance involving nations, companies, organizations, individuals or vessels that are subject to a sanctions program (OFAC Targets). Under some programs, OFAC also prohibits actions approving, guaranteeing, financing or facilitating these transactions. OFAC also requires that any funds in which an OFAC Target has a direct or indirect interest must be “blocked,” i.e., premiums must be deposited into a U.S. bank in a separate interest bearing account. Claims cannot be adjusted or paid. Exemptions or exceptions can be made only by obtaining a license from OFAC.
The complete list of OFAC Targets includes about 6,000 companies, organizations, individuals and vessels on a “Specially Designated Nationals and Blocked Persons List” (the SDN List), which is continually updated.
The obvious cases are straightforward. Clearly, a company should not issue a life insurance or auto insurance policy involving an SDN. It should not provide liability insurance for a construction project in a sanctioned nation. Challenges arise, however, because OFAC Targets can appear in transactions in many ways, such as insureds and additional insureds, policyholders, payers of premium, beneficiaries, loss payees, intermediaries and administrators of all variety, banks as lien holders, and banks to which premiums and claims payments are deposited or routed.
Issues also arise whenever a claim involves an OFAC Target in any way. For example, a properly insured vessel may collide with a vessel listed, owned or controlled by an OFAC Target. This means that potential payees, including third-party liability claimants, should be checked against the SDN List. An insurer may not pay amounts related to damage mitigation or prevention, or amounts to evaluate and adjust claims, defend an insured, or reimburse an insured party or a third-party liability claimant. Any claim payments due or to be deposited to or transferred through a bank that is an OFAC Target must be stopped.
Most OFAC restrictions apply to “U.S. persons.” These include insurers, reinsurers, agents, brokers, reinsurance intermediaries and third-party adminis¬trators. They also include the overseas branches of U.S. companies, but not overseas subsidiaries (except that the Cuba and North Korea programs do include overseas subsidiaries). They include individuals who are U.S. citizens or permanent residents, wherever they are located, and whoever they work for. Also, non¬U.S. persons outside the US may be prosecuted for conspiracy with a U.S. person.
One program of great current interest to insurers is the Comprehensive Iran Sanctions, Accountability and Divestment Act (CISADA) enacted in 2010. The CISADA program extends sanctions to the non-U.S. insurers and non-U.S. ship owners who provide insurance or transportation services for certain trade with Iran, notably in the petroleum industry. Its sanctions, however, require knowing violations, and it provides a safe harbor for companies that establish compliance policies and procedures.
For all OFAC programs, the most basic ways to avoid violations are declinations and exclusions. In OFAC’s view, a company cannot issue a global insurance policy without an OFAC exclusion. For large commercial insurers, bespoke exclusions should be considered.
OFAC has stated that a facultative reinsurance placement should receive the full scrutiny of a direct insurance policy. Facultative reinsurance certificates should also have an OFAC exclusion. Reinsurance treaties should contain a variety of geographical and substantive exclusions.
But insurers and reinsurers cannot rely solely on declinations and exclusions. Although there is no requirement that companies establish a compliance program, in practice, every company should establish some OFAC Policies and Procedures, with variations based on the specific nature and scope of its business. This will both prevent violations and mitigate penalties.
An insurer may seek exemptions by applying to OFAC for a general or specific license. A company may have a compelling reason to issue coverage that might involve an OFAC Target, such as insuring humanitarian relief or missionary expeditions. Or there may be other reasons why the transaction would promote security. It bears mention that the European Union has its own economic sanctions regime, frequently consisting of legislation implementing resolutions of the U.N. Security Council. These apply to all persons and companies doing business in the E.U., and E.U. nationals and entities doing business outside the E.U. Unfortunately, E.U. restrictions are not always consistent with other sanction regimes. In fact, one of the special challenges is the existence of an E.U .Council Regulation “blocking statute,” which makes it illegal for any E.U. company to comply with certain specified U.S. sanctions.
OFAC restrictions also present coverage issues in claims by insureds. Some violations are unintentional. Unfortunately, others are not. For example, in the last few years, there have been several high profile enforcement actions involving non-U.S. banks, which allegedly designed processes to deliberately disguise transactions to avoid OFAC restrictions. These transactions have had aggregate values as high as $800 million, and the banks have paid penalties as high as $500 million. It appears that eight banks are still under current investigation.
Insureds have also been fined and prosecuted for payments made in other contexts. Some companies made payments, which they assert were in the nature of required extortion payments, to the left-wing Revolutionary Armed Forces of Columbia and the right-wing United Self-Defense Forces of Columbia, both of which were SDNs.
When claims against insureds arise from scenarios including intentional violations of OFAC restrictions, there may be grounds to resist coverage, warranting careful consideration by insurers and reinsurers.