U.S. Economic Sanctions Laws and How They Affect Insurance Brokers

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1 U.S. Economic Sanctions Laws and How They Affect Insurance Brokers The United States Government imposes economic sanctions against several countries and a large number of individuals and entities, in response to specific national security objectives such as isolating pariah governments or officials, countering terrorism, preventing weapons proliferation, and combating narcotics trafficking. The U.S. sanctions laws and regulations apply independent of other laws with similar objectives (such as anti-money laundering and export controls laws). They restrict a wide variety of services, financial transactions, and business dealings that directly and indirectly can touch on these restricted countries, entities, and persons. The U.S. economic sanctions programs are administered by the Department of the Treasury s Office of Foreign Assets Control ( OFAC ) under a variety of laws, executive orders, and federal regulations. The OFAC website, includes copies of the controlling legal documents and useful guidance on the various sanctions programs and their application in specific contexts (including the insurance industry). Which countries and entities are subject to U.S. economic sanctions? OFAC currently enforces comprehensive economic embargoes against three countries Cuba, Iran, and Sudan. All three embargo programs, though not identical to one another, restrict or require an OFAC license for virtually any dealings with the governments of those countries, persons acting on their behalf, private persons or entities located in those countries, and in some cases citizens of those countries located abroad. While OFAC also has more targeted sanctions against several other countries, the programs most relevant to insurance brokers are those covering Burma, North Korea, and Syria. OFAC also administers comprehensive restrictions against certain non-governmental entities and individuals, collectively known as specially designated nationals (SDNs). These include members of certain current/former governmental regimes that have been identified as sanctions targets, designated terrorists and terrorist organizations, narcotics traffickers, weapons proliferators, and persons involved in the black-market rough diamond trade. It also includes a large number of vessels. OFAC publishes an updated list of SDNs on its website at This list is quite voluminous, having thousands of entries, and it is augmented frequently. To whom do U.S. economic sanctions laws apply? Most U.S. sanctions apply to U.S. persons, a term that includes any U.S. citizen or permanent resident, wherever located in the world; any U.S. company (including branch offices of U.S. companies located abroad); and foreign persons located in the United States. In addition, the Cuba embargo (and certain North Korea sanctions) cover foreign entities that are owned or controlled by U.S. companies. What activities do U.S. economic sanctions laws prohibit? Cuba, Iran, and Sudan The U.S. sanctions programs generally restrict the provision of goods or services to targeted countries and individuals/entities. OFAC has stated clearly in public guidance that restricted services can include providing or brokering insurance or reinsurance policies. The restrictions on services are very broad and could implicate many routine activities connected with insurance or reinsurance, including processing premiums or claims (including standard insurance and facultative or treaty-based reinsurance coverages), and other ancillary services. Moreover, an insurance policy is considered property under the OFAC regulations, such that an owner, policy holder, or beneficiary s interest in the policy is considered an interest in property. For most transactions involving Cuba and some involving Iran and Sudan, the regulations require the freezing of any assets that U.S. persons come into possession of in which persons/entities in these countries have an economic interest. These asset-freezing requirements would come into play if the owner/holder/beneficiary of an insurance policy is a sanctioned person or entity, or is a national or resident of certain sanctioned countries.

2 Insurance brokers are also subject to two broad, but vague, sanctions provisions. The first prohibits transactions related to or dealing in goods or services (1) originating in or under the control of restricted countries or persons, or (2) for export, sale, or supply to restricted countries or persons. Under the second provision, a U.S. person, wherever located, may not facilitate any transaction by a foreign person where the foreign person s transaction would be prohibited by the sanctions regulations if performed by a U.S. person or within the United States. The policy behind the transaction or dealing and facilitation provisions is to prevent U.S. companies from supporting offshore transactions with embargoed countries. The broad reach of these restrictions allows OFAC to restrict brokering of non-u.s. insurance services, where the insureds, insurers, or beneficiaries are in restricted countries, or are persons or entities on the SDN list. Notably, OFAC sanctions issues could arise even where the broker s direct customer is not a restricted party or based in a restricted country. For example, if a U.S. insurer or broker learns that a beneficiary under a group insurance policy is an SDN, a claim cannot be paid to that person. Similarly, under global risk policies, syndicate or pooling arrangements, and treaty-based reinsurance agreements, there could be significant risks that the ultimate scope of coverage includes restricted countries or entities. Burma (Myanmar) Under the Burma sanctions program, there are three provisions most likely to affect insurance brokers. First, the regulations include a blocking provision for property and property interests of certain designated officials of the Government of Burma. If any of these officials is the owner/holder/beneficiary of an insurance policy, the blocking provision prohibits any U.S. broker from being involved in providing the insurance product coverage, again even if the insurance originated from a non-u.s. carrier. Second, the exportation of financial services (defined to include insurance services) to Burma is prohibited. Third, the regulations prohibit the facilitation of a foreign person s transactions regarding Burma, if the foreign person s actions would be prohibited if engaged in by a U.S. person. Such facilitation would include a U.S. person or entity issuing or brokering an insurance policy related to Burma, where the insurance coverage is provided by a non-u.s. person or from a non- U.S. location. There are also SDNs of Burma (persons and entities), who could not be beneficiaries/ holders/owners of insurance products brokered by U.S. persons. North Korea Under the North Korea sanctions program, the provision most likely to impact insurance brokers concerns transactions involving North Korean vessels. The regulations prohibit U.S. persons from insuring any North Korea flagged vessel, registering vessels in North Korea, or otherwise obtaining authorization for a vessel to fly the North Korean flag. However, the North Korea sanctions do not contain a facilitation provision that would prevent brokering of such transactions by foreign persons. There are also North Korean SDNs (persons and entities), who could not be beneficiaries/holders/owners of insurance products brokered by U.S. persons. Also, like the Cuba embargo, the prohibitions apply to non-u.s. brokers who are owned or controlled by U.S. persons. Syria The Syrian sanctions are more narrow in scope and do not prohibit the export of services. However, there is a blocking provision in effect for property and interests in property of certain persons involved in terrorist acts in Lebanon, those obstructing the work of a United Nations committee investigating the acts, and persons connected to public corruption by senior Syrian officials. There are also Syrian SDNs (persons and entities), who could not be beneficiaries/ holders/owners of insurance products brokered by U.S. persons. * * * A license from OFAC is required to engage in any transaction restricted by U.S. economic sanctions programs. OFAC routinely denies license requests for activity with embargoed countries, except for certain agricultural and medical exports and travel-related transactions. However, OFAC will consider license requests for certain insurance-related transactions e.g., to issue or broker a global insurance policy that potentially includes restricted entities on a case-by-case basis.

3 What are the penalties for violating U.S. economic sanctions laws? Violations of U.S. sanctions restrictions including attempts and conspiracies to commit violations are subject to substantial penalties. Civil penalties may be imposed of up to $250,000 per violation or twice the amount of the transactions (whichever is greater). OFAC may also impose criminal penalties, for willful violations, of up to $1 million per violation and/or imprisonment. Of course, there are also many non-monetary consequences of a failure to comply with U.S. economic sanctions, including commercial disruption, reputational damage (OFAC penalties are often made public), and harm to a company s relationship with the U.S. Government.

4 Dos and Don ts 1. DO periodically monitor OFAC s website for changes to the list of countries subject to economic sanctions and the scope of those sanctions. 2. DO screen all potential contacts (including customers, policy holders, beneficiaries, third-party brokers, foreign financial institutions, and vessels) against the SDN list. 3. DO take an active role in economic sanctions compliance, even if the direct customer and known insureds and beneficiaries are not restricted entities. 4. DO inquire of potential customers whether they know of any economic sanctions risk or have connections with restricted countries or entities. 5. Do freeze any assets in your possession if you learn that restricted persons or entities have an interest. This applies to any SDN, or any person or entity located in Cuba, and to a lesser extent, Iran, Sudan, Burma, and Syria. 6. DO ensure that your company s foreign affiliates and agents are trained in U.S. economic sanctions law and compliance procedures. 7. DO contact legal counsel if you have any questions about economic sanctions law or believe a violation of economic sanctions law has occurred. 1. DON T rely on a customer s economic sanctions compliance procedures to protect your company from economic sanctions risk. 2. DON T assume that there is no economic sanctions risk just because your direct customer and other contacts are not restricted persons or entities, or located in sanctioned countries. 3. DON T provide any brokering or other insurance services before undertaking appropriate due diligence regarding sanctions compliance. 4. DON T continue to service a policy or collect commissions on a policy if you learn that an owner/holder/beneficiary of the policy is a restricted entity (either through a change in the sanctions or SDN lists or unrelated discovery). 5. DON T refer business to a foreign company if your company is prohibited from accepting the business because of U.S. economic sanctions. 6. DON T provide brokering or other insurance services related to global insurance policies unless you include a clause in the brokerage agreement requiring compliance with applicable U.S. sanctions laws, or a clause excluding coverage for risks subject to U.S. sanctions laws, or apply for an OFAC license. 7. DON T ignore economic sanctions risks or violations penalties can be significant.

5 Frequently Asked Questions 1. Which countries are currently subject to U.S. economic sanctions, and how can one monitor changes in the list of sanctioned countries? Currently, three countries Cuba, Iran, and Sudan are subject to comprehensive economic embargoes. U.S. insurance brokers should avoid any transactions with, covering, or even indirectly related to, the governments of these countries and parties or property located in these countries. While OFAC also enforces more targeted sanctions against several other countries, the programs likely to be of additional concern to U.S. insurance brokers are those covering Burma (Myanmar), North Korea, and Syria. The countries subject to U.S. economic sanctions change occasionally, and the scope of those sanctions change more frequently. Insurance brokers should monitor OFAC s website periodically for current information on U.S. sanctions programs. OFAC also suggests that users structure their Internet connection to use a Web browser to watch for date changes on the primary page of OFAC s website (or the secondary page entitled Recent OFAC Actions ), which occur when material is updated. 2. What other persons and entities are subject to U.S. economic sanctions laws? How can one monitor changes in this list of entities? The non-governmental entities, individuals, and vessels that are subject to U.S. economic sanctions are collectively known as specially designated nationals (SDNs). OFAC publishes an updated list of SDNs on its website at This list is quite voluminous and it is augmented frequently. Insurance brokers should monitor the SDN list periodically for changes. 3. What individuals and entities must comply with U.S. economic sanctions law? In general, U.S. sanctions apply to U.S. persons. This term includes U.S. citizens or permanent residents, wherever they are located, as well as U.S. companies and foreign branch offices. It also includes foreign persons located in the United States. In addition, the Cuba embargo (and certain North Korea sanctions) apply to foreign companies owned or controlled by U.S. persons. This includes entities owned or controlled by U.S. companies that are incorporated in, or otherwise organized under the laws of, a foreign country. 4. If a company brokers an insurance policy issued by a U.S. insurer, can the broker assume that the U.S. insurer is responsible for identifying and avoiding transactions with restricted countries and entities? While a U.S. insurer may have its own economic sanctions compliance procedures, the broker cannot rely on the insurer s compliance efforts to absolve itself of liability under U.S. economic sanctions law. A U.S. insurer may engage in a prohibited transaction, either because of imperfect compliance procedures or despite its due diligence. In such a case, the broker may also be liable for facilitating the prohibited transaction. Since there is no strict knowledge requirement under U.S. economic sanctions law, the broker may be liable even though it was unaware of the violation. Reliance upon a U.S. insurer s compliance procedures is not likely to be considered sufficient due diligence by OFAC to insulate the broker from liability. 5. In some situations, it may be difficult or impossible for an insurance broker to know whether a policy covers or otherwise deals with a restricted person or entity. What due diligence is required of a broker in these situations? The efforts an insurance broker must undertake to identify possible sanctions risks depends on the situation, and must be reasonable in the circumstances. A company may incur liability for a restricted transaction if it knew or had reason to know that a restricted entity was involved. For example, in brokering liability and collision insurance for a car rental company s worldwide operations, it may be reasonable to determine whether the company has operations in restricted companies. However, it would not be possible to determine whether the insurance will ever cover a car rented by an Iranian government official in a third country. Similarly, OFAC has stated in public guidance that since an insurer does not know the names of employees covered by a workers compensation policy, it would have no reason to know that an SDN was covered until that person file a claim under the policy. Therefore, if

6 the broker does not (or cannot reasonably) know the identity of entities covered by a particular policy, it may have no reason to believe that restricted entities are involved. However, again, its due diligence must be reasonable. If there is reason to believe that a transaction involves a restricted entity, the broker must investigate further, decline the business, or exclude coverage of such restricted entities in its brokerage agreement. 6. Does an insurance broker have any exposure if a country or entity becomes subject to U.S. economic sanctions once an insurance policy is in effect? If the broker has no further involvement with the transaction or the parties involved, then the broker does not face any risk from a change in U.S. sanctions laws. A change in law does not generally have retroactive effect so as to prohibit transactions that took place in the past. However, if the broker continues to have involvement with the transaction or parties (e.g., receiving commissions, servicing the policy), then it may face liability. The broker would be prohibited from engaging in transactions or facilitating transactions with the newly restricted country or entity. For example, a broker would likely be prohibited from receiving commissions on a policy that now covers a restricted country or entity. Similarly, the broker could not service such a policy in any way, or assist in renewing the policy or entending its coverage. In the alternative, it must amend the relevant agreements to exclude coverage of restricted countries or entities. 7. What should an insurance broker do if a potential violation of U.S. economic sanctions law is discovered once a policy is in effect? If a broker subsequently discovers that a policy it has brokered involved a restricted country or entity, it may be liable for unlawful facilitation. If a company believes that a violation of U.S. economic sanctions law may have occurred, it should contact legal counsel to determine the appropriate response for the situation. Of course, the broker should not continue with any activities related to the suspect transaction. It must also determine if it must block any assets or funds in which a restricted entity has an interest. This may also require the filing of a blocked property report with OFAC. One option, which is not required, is to file a voluntary self-disclosure to OFAC on the subject. OFAC generally mitigates any penalty, if one is assessed, for parties that self-disclose potential violations. The company should also work to improve compliance procedures to avoid similar occurrences in the future. 8. How can an insurance broker protect itself from liability when brokering global risk policies? Global insurance policies necessarily involve coverage for potential risk in sanctioned countries and regarding restricted entities. The first step is to conduct appropriate due diligence to try to determine if there is any risk involved in the proposed insurance coverage that would be restricted by U.S. sanctions laws, assuming that the insurance was provided by a U.S. insurer (whether or not that is the case). The safest approach is to include an exclusion clause in brokerage agreements (or in the insurance policy itself) stating that any coverage in violation of U.S. economic sanctions law is null and void. However, OFAC has recognized in public guidance that such an exclusion clause may not be practicable in international markets in which foreign companies are not restricted by U.S. economic sanctions. When such exclusion is not commercially feasible, the insurance broker may apply for an OFAC license for the global insurance policy. In determining whether to grant a license, OFAC will review the facts and circumstances of each global insurance policy, including both risk frequency and risk severity. 9. Is a broker safe from sanctions risk if it does not deal directly with restricted entities? Not necessarily. U.S. brokers and insurers are also prohibited from facilitating a transaction by a foreign person if that transaction would be prohibited for a U.S. person. In other words, a U.S. person cannot support or advance in any way a transaction between a restricted entity and a third party. For example, a U.S. company s brokering of an insurance policy covering a construction company s worldwide operations would be prohibited facilitation if there were operations in Iran, even if the broker only dealt directly with its customer, a French company using a non-u.s. insurance vehicle. In complex insurance arrangements, the ultimate insured may be several levels removed from the U.S. insurer or broker. However, this contractual separateness may not be a legal defense if the U.S. company furthers a transactions connected to restricted countries or entities.

7 10. If a U.S. insurance broker decides that it cannot broker a particular policy because of a possible connection with a sanctioned country, entity, or person, can that broker refer the policy to a non- U.S. person or company that is not subject to the sanctions restrictions? No. Referring business to a non-u.s. company would be considered facilitation of a transaction that would be prohibited if were engaged in by a U.S. person. Even if the customer itself were not restricted and the facilitation were therefore one step removed, the U.S. broker could still not refer this business because it would be knowingly assisting a final transaction that involves a restricted party. 11. How far does the concept of facilitation reach? For example, assume that a U.S. company brokers a marine insurance policy to cover a Greek fleet with all Greek captains and crew, which operates only in European ports and waters. It is theoretically possible that at some point one of these vessels could transport Iranian crude oil which had arrived in Europe by other means. Could the brokerage be considered prohibited facilitation of the shipment of Iranian crude oil, and what due diligence must a U.S. broker undertake to avoid prohibited facilitation? Again, a rule of reasonableness applies. U.S. insurance brokers should adopt compliance procedures to screen for risks that are reasonably knowable at the time. In the situation above, it would be reasonable to determine what flags the vessels fly under and what ports they regularly service. It may even be reasonable, depending on the size and other characteristics of the fleet, to inquire into the nature and origin of the cargo regularly carried, and the customers regularly serviced. For example, sanctions risk would exist if the fleet shipped oil exclusively, often of Iranian origin. However, with a general commercial European shipping fleet, it may not be reasonably knowable at the time that Iranian crude oil may one day be shipped on one of the vessels. A U.S. insurer, on the other hand, would be prohibited from paying a claim for damage to the vessel resulting from shipment of Iranian crude oil. As part of their compliance efforts, brokers may therefore wish to conduct due diligence with their customers, in advance of offering insurance services, to ascertain if the customer (1) is itself aware of any economic sanctions risks, (2) conducts its own economic sanctions screening and compliance efforts in its business, (3) may have activities or contacts with sanctioned countries, entities, or vessels such that brokering insurance services could create liability. 12. Since the Cuba embargo applies to foreign subsidiaries of U.S. companies, isn t it possible that there may be a conflict between U.S. economic sanctions laws and the laws of the countries where these subsidiaries are incorporated? Yes. This conflict is possible because countries such as Canada, Mexico, and the European Union have laws prohibiting their companies from complying with the U.S. embargo of Cuba. For example, if a Canadian subsidiary of U.S. company includes an exclusion clause in a brokering or insurance agreement, or declines business because it would violate the Cuba embargo, that subsidiary could be liable under the Foreign Extraterritorial Measures Act, a Canadian law restricting Canadian persons from complying with the embargo. It OFAC levies penalties against a Canadian subsidiary of a U.S. company for violations of the Cuba embargo, it is not a defense that compliance with the embargo is unlawful in Canada. However, the Canadian FEMA prohibits the enforcement of foreign judgments in Canada for violations of the Cuba embargo, among other foreign laws that are considered to have extraterritorial effect. 13. Short of putting an exclusion clause in all brokerage or insurance contracts, how can U.S. companies ensure that they are not unlawfully dealing with SDNs? Brokers may want to engage in SDN screening to ensure that those with whom they deal are not themselves restricted under these sanctions. Many companies with sanctions risk exposure utilize software programs that screen the company s customer and contractor lists against the SDN list and other restricted party lists published by the U.S. and foreign governments. Parties that may merit screening include customers (e.g. policy owners or holders), policy beneficiaries, third-party brokers, foreign financial institutions, or other entities, depending on the specific risk profile of the broker.