In October and November of 1992, an insurance company called AXA Equitable Life Insurance Company issued a health insurance policy that provided coverage for certain individuals. The U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”), later in 2009, added parties to the list of Specially Designated Nationals and Blocked Persons (the “SDN List”).

Because the insurance company and its third party administrator (“TPA”) failed to screen the names of existing policy holders, the insurance company failed to identify and block the policies and premium payments made by these “Blocked Persons.” As a consequence, OFAC issued a Finding of Violation for violating the Foreign Narcotics Kingpin Sanctions Regulations 31 CFR Part 598.

OFAC is a Federal Agency that administers and enforces economic sanctions programs primarily against countries, entities and groups of individuals such as terrorists and narcotics traffickers. The sanctions for violating OFAC regulations can be comprehensive including the blocking of assets and trade restrictions to accomplish foreign policy and national security goals. OFAC is the successor to the Office of Foreign Funds Control (“FFC”) which was established at the start of World War II.

An insurance company is prevented from entering into prohibitive transactions with Blocked Persons unless authorized by OFAC. The federal government takes the position that state insurance laws are preempted by the OFAC Regulations since these regulations are promulgated under the President’s exercise of foreign affairs and national emergency powers. Consequently, the lesson to be learned from the enforcement against AXA Equitable Life Insurance Company, and the companion enforcement against Humana, Inc. as the parent company of Kanawha Insurance Company which was acting as a TPA for policy issued by AXA,[1] is that health insurers should run the names of persons who apply for insurance through the “SDN List” and other OFAC lists to confirm that the person is not a Blocked Person.[2] If the person is a Blocked Person the insurance company should not issue a policy nor should the insurance company collect any premiums or make any payments under the insurance policy to the Blocked Person to avoid sanctions under the above regulations.

Insurers need to make a risk based determination on how often the insurer needs to screen insurance policies. Best practices dictate that depending on the risk analysis, it should be done at least prior to policy issuance and before billing or collection of premium or payment of benefit. These OFAC lists are not static. The federal government updates some of their lists monthly if not more frequently. As a practical matter for a low risk insurer, (U.S. citizens U.S. address) this search should at least be done prior to the issuance of the policy and prior to any renewal at a minimum. One only needs to go to the OFAC website to see that the penalties for violating OFAC Regulations and engaging in commerce with a Blocked Person are significant and range in the hundreds of thousands to millions of dollars. Once again, the issuance of a simple insurance policy becomes more complex given the concerns the US has in dealing with certain groups of people.