For a state regulator, the New York Department of Financial Services (“DFS” or the “Department”) has demonstrated an unusual interest in enforcing the United States Government’s Iran sanctions regime. In less than a year’s time, DFS has entered into settlements with Standard Chartered Bank ($340 million), Bank of Tokyo Mitsubishi-UFJ ($250 million) and Deloitte Financial Advisory Services ($10 million) based on violations of New York Banking law that were related to Iran sanctions compliance issues.
Now DFS and Superintendent Ben Lawsky appear to be turning their attention to non-US reinsurers and their compliance with the Iran Freedom and Counter-Proliferation Act of 2012 (“IFCPA”), a new set of Iran sanctions that went into effect on July 1. On Monday it was reported that DFS has sent letters to about 20 non-US reinsurers requesting information about their compliance with the IFCPA
The IFCPA (Section 1246) significantly broadens prior US extraterritorial sanctions targeting the insurance and reinsurance industries. It provides for the imposition of sanctions against any person who knowingly provides insurance or reinsurance (1) covering Iran-related activity for which sanctions have already been imposed under the IFCPA or other prior US sanctions laws targeting Iran; (2) covering Iran-related activity in any targeted sector such as energy, shipping or ship-building, or involving targeted materials such as graphite, raw or semi-finished metals, or coal, or involving any persons designated for sanctions in connection with Iran’s efforts to acquire weapons of mass destruction or its support of terrorism; or (3) issued to or for any Iranian person listed as a specially designated national or blocked person by the Office of Foreign Assets Control (OFAC) in the US Treasury Department (except for certain financial institutions). The requirement for the President to impose sanctions can be waived in some circumstances if the insurer or reinsurer is determined to have exercised appropriate due diligence in establishing and enforcing controls designed to avoid engaging in sanctionable activity.
According to a sample inquiry letter obtained by the press, DFS is asserting jurisdiction over the non-US reinsurers because each of them has applied for and received DFS designation as a well-capitalized “Certified Reinsurer” subject to lower collateral requirements under New York Regulation 20 (11 NYCRR 125.4(h)). As part of the certification process non-US reinsurers are required to provide “such other information that the superintendent may reasonably require” which the Department believes includes sanctions compliance information. 11 NYCRR 125.4(h)(7)(vii)(g). The Department’s stated concern is that sanctions issued against a “Certified Reinsurer” might render that reinsurer unable to pay claims to ceding insurance companies in New York.
Ironically, the Certified Reinsurer designation was added to Regulation 20 in 2011 as an effort to ease collateral requirements for non-US reinsurers who cover New York domiciled insurers. Now DFS is asserting the designation as a jurisdictional hook to look into the non-US reinsurers’ compliance with US sanctions law.
In the inquiry letter, DFS purports to have “learned that several insurers issued insurance coverage that applied to trades made with Iran.” The insurers are not named, and it is not clear that the “several insurers” referred to are even among the 20 recipients of the DFS inquiry letter. Instead, the Department appears to be seeking survey information from the 20 non-US reinsurers that it happens to have some limited jurisdiction over because they have sought the “Certified Reinsurer” designation.
The information requested includes:
- the lines of business that may be subject to sanctions under the IFCPA;
- policies and procedures in place to ensure compliance with the IFCPA;
- an explanation of how the company ensures that underwriters correctly ascertain whether a policy may cover transactions that are prohibited by the IFCPA;
- information the company requires from maritime policyholders relating to each shipment covered;
- the rights the company has to verify a maritime policyholder’s representations;
- the company’s internal response to press reports that particular commodities trades by Glencore Xstrata and Trafigura potentially violated the US Iran sanctions regime;
- a copy of any policy that may cover the Glencore Xstrata and Trafigura transactions;
- a list of all insureds that the company has identified as potentially engaging in business with Iran or any entity or person affiliated with Iran; and
- specific aspects of the company’s due diligence relating to Iran sanctions compliance.
This request for information is striking in that it asks unusually detailed questions about various aspects of the reinsurers’ efforts to comply with a law that is just now going into effect, and also asks reinsurers to name its insureds who may engage in Iran-related transactions. Also, while the IFCPA is new, other extraterritorial sanctions laws targeting a more narrow range of insurers’ and reinsurers’ Iran-related activity have been in force for some time. Therefore, reinsurers’ responses to the questions in the DFS letter could potentially disclose information about activity of both reinsurers and their insureds that are subject to the previously existing sanctions regimes.
Although DFS has been interested in Iran sanctions compliance in banking for quite some time, it is clear that its look at non-US reinsurers is still in its infancy. DFS does not directly supervise the non-US reinsurers at issue, unlike the banks who have entered into regulatory settlements with DFS related to sanctions compliance issues. There is also no indication that any of the 20 recipients of the DFS letter has acted inconsistently with US sanctions law or the New York Insurance Law. Should DFS uncover what it views to be problematic activity, it could threaten to revoke a reinsurer’s status as a Certified Reinsurer in New York or publicize the activity in a report as it has done recently on issues where it does not have direct regulatory authority.