Introduction

The Iran Threat Reduction and Syria Human Rights Act (the “Act”), the latest in an ever expanding arsenal of US-based long-arm jurisdiction statutory instruments, was passed into law on 10 August 2012, following extensive negotiation in the US legislature.

The Act significantly increases the inherent risks for those companies conducting business in the Middle East, particularly shippers, financial institutions and most notably, insurers.  A key threat to insurers and reinsurers is the ban on the insurance of the transport of oil from Iran if the insurer or reinsurer “should have known” that its cover was deployed for this purpose.  The precise legal test of what an insurer “should have known” has been left deliberately vague, but it seems likely that control failings in management and governance will create liability; a key defence is the exercise of “due diligence”, and insurers will need to check their ability to produce, maintain and retrieve evidence of such due diligence.

It comes at a time when the US has issued a number of new Executive Orders and taken a series of enforcement actions against companies such as HSBC and Standard Chartered in respect of sanctions.  The Act is the third law focusing on Iranian sanctions in the last two years following the Comprehensive Iran Sanctions, Accountability and Divestment Act and the National Defense Authorization Act.  The US now has a triumvirate of regulations designed to stifle Iran’s ability to develop its petroleum and petrochemical industries, its nuclear enrichment program and its financial sector.

The Act is intended to further bolster the existing US sanctions against Iran and it achieves this aim largely by ensuring that companies who, however indirectly, do business with Iran are subjected to intense pressure from competitors, customers, the media, regulators and other interested groups.  There is also now a “whistle-blowing” obligation, which requires companies who engage in certain types of business with Iran to notify the US Securities Exchange Commission.

Summary of Key Provisions

One aspect of the Act is the introduction of a plethora of new and enhanced provisions in relation to dealings with Iran, including:

  1. A bar on significant transactions related to the shipment or sale of Iranian petroleum products and the development of the Iranian petroleum industry.
  2. A provision for sanctions to be placed on any non-US insurers who “underwrite, insure or reinsure” Iranian oil shipments, tankers or similar related to the Iranian petroleum industry.
  3. A prohibition on any non-US companies which are “owned or controlled” by US persons from engaging in transactions that would be illegal if done by their US parents – historically, US companies have been banned from doing almost any business with Iranian entities. In order for a foreign subsidiary to be “owned or controlled” by a US parent, the parent will need to (i) have more than 50% ownership (by value or vote), (ii) a majority on the board of directors or (iii) otherwise be in control of the actions, policies or personnel decisions of the subsidiary. This provision will be in force by no later than 6 October 2012.
  4. Subjecting US parents to civil penalties for the conduct of their foreign subsidiaries.
  5. Expanding the possible sanctions available to the President of the United States and requiring that the President must employ five or more sanctions against any entity found to be in breach of the Act.

Summary of Provisions Relevant to the Insurance and Reinsurance Market

There are a number of provisions which are aimed specifically at insurers and reinsurers, including:

  1. A ban on the insurance of any vessel used to transport crude oil from Iran to another country if the insurer knows or “should have known” that the vessel was to be used for that purpose. What a company “should have known” will depend on all the circumstances of the case and the US legislature (as has been the case in the past) has remained deliberately vague on this point.  What is clear however is that the requisite knowledge is automatically imputed to insurers if the vessel is included on the Specially Designated Nationals List (the “SDN List”), which details proscribed entities.
  2. A ban on the insurance of any vessel used for transportation of goods that could materially contribute to the proliferation of nuclear weapons, weapons of mass destruction or terrorism by the Government of Iran.
  3. A ban on the provision of insurance and reinsurance for the National Iranian Oil Company (“NIOC”) or the National Iranian Tanker Company (“NITC”) (or any successor entity to either) with respect to any goods or transactions.
  4. A ban on the insurance of any barter transactions (in which goods are exchanged for goods) involving Iranian petroleum sales.

The Safe Harbour

The Act contains  limited “safe harbour” provisions, including if:

  1. An insurer has exercised due diligence in establishing and enforcing policies/procedures/controls to prevent the violation of US sanctions.  It should, however, be noted that there is no safe harbour for any violation of the ban on providing insurance services for vessels transporting goods relating to nuclear weapons, weapons of mass destruction or terrorism.
  2. The insurance is provided in respect of the provision of medicine and medical devices, agricultural commodities or food or humanitarian assistance to the people of Iran (although note, you would be advised to secure an OFAC licence in advance).
  3. The company in breach provides assurances that it will terminate the insurance or reinsurance.
  4. Ownership or control of a foreign subsidiary found to be in breach of sanctions is divested within 180 days of the enactment of the Act.

Practical steps

Like previous rounds of US sanctions (and their European counterparts), it may be possible to avoid sanctions liability by ensuring you conduct due diligence appropriate to the situation in which you find yourself. Recommended steps include:

  • Knowing your client: Insurers and Reinsurers must check that the Act will not apply to the vessel or transaction which they are insuring or reinsuring, including checking the SDN List before going on cover.  An up-to-date copy of the SDN List is  available at www.treasury.gov/resource-center/sanctions/SDN-List.
  • A review of existing policies should be carried out, and in particular, prohibited insurances in respect of NIOC and NITC must be terminated by 8 December 2012.
  • Policy and treaty wordings must exclude risks which are in violation of U.S Sanctions.
  • On placement, representations from the insured that the risks covered will not violate US sanctions must be obtained.

Conclusion

It is imperative that insurers and reinsurers turn their attention to compliance with this Act as a matter of urgency. Time is already running in terms of deadlines for conformity with the Act.

The Act represents but one of a raft of US-based, EU and national sanctions regimes. Any compliance provisions which do not consider these regimes should be amended accordingly and must be regularly reviewed to ensure that they keep pace with the ever more onerous and far reaching legislation in this area.