The New York Department of Financial Services (“DFS”) has recently begun a string of new investigations into possible violations by non-U.S. reinsurers of U.S. sanctions against Iran, specifically those set forth in the Iran Freedom and Counter-Proliferation Act of 2012 (the “IFCPA”) that became effective on July 1, 2013. These new investigations dovetail with DFS’s recent crackdown on banks, such as Standard Charted PLC ($340 million settlement) and Bank of Tokyo-Mitsubishi UFJ, Ltd. ($250 million settlement), for violations of U.S. trade sanctions.
The IFCPA imposes new U.S. sanctions and expands existing sanctions against Iran and enlarges extraterritorial sanctions on Iran’s energy, shipping, and shipbuilding sectors. As we discussed in our blog article here, with regard to the insurance industry, IFCPA imposes sanctions against the provision of insurance services (i) for any activity with respect to Iran for which sanctions have been imposed by the IFCPA or any other provision of law; (ii) to or for any person engaged in transactions prohibited under the IFCPA; or (iii) to or for any person on the specially designated nationals (“SDN”) list.
One week before the relevant section of the IFCPA became effective, the DFS sent a letter dated June 25, 2013 to several non-U.S. based reinsurers certified under New York Insurance Regulation 20 (Credit for Reinsurance from Unauthorized Insurers) asking each of them to submit to the DFS by July 15, 2013 specific information (detailed below) regarding their business activities that may be sanctionable under the IFCPA (the “Letter”). Certification under Regulation 20 subjects a well-capitalized certified reinsurer to lower collateral requirements when covering insurers domiciled in New York.
While it is clear that the DFS cannot enforce U.S. sanctions per se, as that is the task of the Office of Foreign Asset Control (the sanctions enforcement arm of the United States Department of the Treasury), it appears as though the DFS plans to use alleged violations of the IFCPA in determining whether a certified reinsurer can maintain its certification. According to the Letter, the DFS is presently studying the IFCPA to “assess the nature of the risk [of violating the IFCPA] and the potential that a certified reinsurer may not be able to meet its obligations to cedents.”
In the Letter, the DFS also warned it knows several non-U.S. insurers based in various countries are issuing coverage that applied to trades made with Iran. While such insurance policies—and any claim made under them—may not violate the sanction regimes in some or all of the home countries of these insurers, they are in violation of the IFCPA. The non-U.S. insurers alluded to are not named and it is unclear from the Letter whether these insurers are included in the group of certified reinsurers that received the Letter.
In recent years, the insurance industry has embraced the use of coverage exclusions specific to sanctionable activities as a way to avoid paying claims that may violate U.S. sanctions. The DFS acknowledges this in its Letter, but stated that such sanctions clauses “do not protect against the risk that insuring a sanctionable transaction, whether or not a claim is ever made, may be found to violate the IFCPA.” Therefore, the DFS is taking a proactive approach and requesting the following information, among other items, from certified reinsurers to insure they have an adequate due diligence program in place to prevent the placement of sanctionable coverage:
- Identify all lines of business, or any other insurance service, that you, your parent, affiliates or subsidiaries write or provide, which may be subject to sanctions under the IFCPA.
- Explain all policies and procedures in place to ensure compliance with the IFCPA.
- Provide the Department with representative copies of the relevant compliance policies and procedures.
- Explain how, when underwriting a policy, you ensure that your underwriters correctly ascertain whether the policy may cover transactions that are prohibited by the IFCPA. Include within your answer how, and to what extent, representations made by a potential insured are verified.
- Explain what information you require an insured to provide to you regarding each shipment covered by a maritime policy, including: (1) the port of origin of the shipment; (2) the nature of the goods being shipped; and (3) whether the shipment involves or is the for the benefit of a SDN.
- Explain what rights you have to verify whether an insured’s representation about the nature of cargo insured under a marine policy is accurately represented and state the number of time in the last three years that you have exercised those rights.
- Identify any instance in which you have invoked a sanctions clause to refuse payment of a claim. For each instance, please explain how you became aware of the claim, how the claimant responded, and state whether you currently insure the claimant.
- List all insureds that you have identified as potentially engaging in business with Iran or any entity or person affiliated with Iran.
New York is not the only state insurance regulator attempting to use U.S. sanctions against Iran as a tool for state insurance regulation. Over the past few years, the California Department of Insurance (the “CDI”) has worked hard to force insurers to divest their Iranian assets. While the CDI was ultimately unable to force insurers to divest, the CDI retained the power to publicize the names of insurers with investments in Iran-related businesses and the California state legislature gave the CDI the power to treat such investments as disallowed assets on an insurer’s statutory financial statements.
It is unclear whether the insurance industry will push back on this latest request from the DFS, mount an offensive once the DFS decides to act on the information that it is gathering from the certified reinsurers, or not take any action at all. What is likely is that the DFS inquiry may expand beyond the initial recipients of the Letter. Therefore, insurers and reinsurers doing business in New York should review their internal due diligence procedures with regard to its underwriting and claims paying processes for sanctionable activity. Further, reinsurers should also consider reviewing existing agreements to see if they have a clear understanding of the business ceded to them to make sure it does not run afoul of U.S. trade sanctions.