On August 6 2015 the US Department of the Treasury's Office of Foreign Assets Control (OFAC) announced a $271,815 settlement with a US-based company that specialises in marine and related lines of insurance, professional liability insurance, commercial umbrella and primary and excess insurance. This enforcement action highlights the need for insurers and reinsurers to integrate economic sanctions into their compliance procedures.
The insurer agreed to settle potential civil liability for 48 alleged violations of various OFAC sanctions programmes, including:
- the Foreign Assets Control Regulations;
- Executive Order 13466/2008 Continuing Certain Restrictions With Respect to North Korea and North Korean Nationals and OFAC's North Korea Sanctions Regulations;
- the Iranian Transactions and Sanctions Regulations;
- the Sudanese Sanctions Regulations; and
- the Cuban Assets Control Regulations.
OFAC determined that these alleged violations were, at least in part, caused by the insurer's lack of an OFAC compliance programme and misinterpretation of the applicability of OFAC sanctions regulations by personnel in its UK branch.
Between May 2008 and April 2011 the insurer issued global protection and indemnity (P&I) insurance policies that provided coverage to North Korean-flagged vessels or covered incidents occurring in or involving Iran, Sudan or Cuba, which led to the payment of some claims. Specifically, the insurer:
- provided insurance coverage to North Korean-vessels under 24 P&I insurance policies, collected $1,142,237 in premium payments and paid seven claims totalling $12,236 in relation to these policies;
- provided insurance coverage and processed 11 claims payments totalling $72,962 that involved Iran;
- provided insurance coverage and processed five claims payments totalling $260,912 that involved Sudan; and
- made a claim payment of $21,736 in which a Cuban national had an interest.
OFAC determined that the total base penalty amount for these violations was $755,042.
According to OFAC, the case was aggravated by the fact that:
- managers and supervisors knew or had reason to know that the majority of the insurance policies and payments involved sanctioned countries;
- the insurer was a commercially sophisticated financial institution; and
- the insurer did not have a formal OFAC compliance programme in place at the time that the alleged violations occurred.
However, OFAC considered that the case was mitigated by the insurer's cooperation with the investigation, its clean record with OFAC for the five years preceding the first alleged violation and the remedial actions taken in response to the alleged violations, including the implementation of a comprehensive compliance programme.
The settlement with OFAC has broad applicability for the insurance industry, as it is indicative of sanctions issues and penalties that any insurance operation – whether inside or outside the P&I realm – could potentially face. All global insurance operations must ensure that they are not extending any prohibited services to sanctioned countries, entities or individuals by taking appropriate compliance-related steps, including:
- incorporating comprehensive screening procedures in their business practices;
- adding exclusion clauses to global policies prohibiting violations of US economic sanctions programmes; and
- applying for a specific licence from OFAC when the inclusion of exclusion clauses is not possible or feasible.
OFAC has provided compliance guidance for the insurance industry.(1)
For further information on this topic please contact Andrew Shoyer or Lana Muranovic at Sidley Austin LLP by telephone (+1 202 736 8000), fax (+1 202 736 8711) or email (firstname.lastname@example.org or email@example.com). The Sidley Austin LLP website can be accessed at www.sidley.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.