Sanctions and the Insurance Industry

Transcription

1 Centre for Science & Security Studies Sanctions and the Insurance Industry Challenges and Opportunities Matthew Moran and Daniel Salisbury CSSS Occasional Papers 2/2013 September

2 About the Centre for Science and Security Studies The Centre for Science and Security Studies (CSSS) is a multi-disciplinary research group in the Department of War Studies at King s College London. CSSS was created by a grant from the John D. and Catherine C. MacArthur Foundation in 2003 and brings together scientific experts with specialists in politics, international relations and history. Members of the Centre conduct scholarly and policy-relevant research on weapons proliferation, nonproliferation, verification and disarmament, space security and mass effect terrorism including the CBRN (chemical, biological, radiological and nuclear) dimension. About the CSSS Occasional Papers Series The CSSS Occasional Paper Series aims to provide an insight into some of the research being conducted at the Centre for Science and Security Studies Acknowledgements This paper was prepared as part of a project funded by the Economic and Social Research Council (ESRC), AXA, Freshfields Bruckhaus Deringer LLP, Marsh & McLennan Companies, Lloyd s, and Swiss Re. Copyright 2013 King s College London The information in this report may be used for educational purposes. All material reproduced should clearly cite the source: Matthew Moran and Daniel Salisbury, Sanctions and the Insurance Industry: Challenges and Opportunities, CSSS Occasional Paper Series, (London: King s College London, 2013). Cover Image Image Container Port, Cape Town, by Flickr user Delgoff licensed under a Creative Commons Licence. ISBN King s College London

3 Sanctions and the Insurance Industry: Challenges and Opportunities

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5 Table of Contents About the Authors 4 Sponsors 5 Acknowledgements 6 Abbreviations 7 Introduction 9 Part One: Sanctions on Iran: Policy Goals 11 and Latest Developments Part Two: The Challenges of Sanctions Legislation 23 Part Three: Compliance and Enforcement 31 Part Four: Promoting Coherence between Policy Makers 39 and Practitioners Conclusion 47 Annex 1: Project Alpha 49

6 About the Authors Matthew Moran is Deputy Director for Research Development at the Centre for Science and Security Studies at King s College London. He studied for a BA (Hons) and MA at the National University of Ireland, Galway and holds a PhD from University College London. His research interests include nuclear non-proliferation and sanctions. His latest book, Exploring Regional Responses to a Nuclear Iran: Nuclear Dominoes?, will be published by Palgrave Macmillan in October Daniel Salisbury is Researcher at the Centre for Science and Security Studies at King s College London. His work focuses on proliferation and illicit trade. He holds a BA in War Studies, an MA in Science and Security, and is currently completing a PhD at King s College London. 4

7 Sponsors 5

8 Acknowledgements The authors would like to thank Andrew Bardot, Jonathan Brewer, David Brummond, Christopher Pickup, Ian Stewart and Andy Wragg for their comments on earlier drafts of this report. It should be noted that the report does not necessarily reflect the views of these individuals or their organisations. Any faults in the text, and the arguments presented, are the sole responsibility of the authors. 6

9 Abbreviations Bpd CISADA EU IAEA IFCA IRGC IRISL ISA TRA NDAA NPT NITC OFAC P&I SDN UANI UK UN UNSC US USD Barrels per day Comprehensive Iran Sanctions, Accountability, and Divestment Act European Union International Atomic Energy Agency Iran Freedom and Counterproliferation Act Islamic Revolutionary Guards Corps Islamic Republic of Iran Shipping Lines Iran Sanctions Act Iran Threat Reduction and Syrian Human Rights Act National Defence Authorisation Act Treaty on the Non-Proliferation of Nuclear Weapons National Iranian Tanker Company Office of Foreign Assets Control Protection and Indemnity Insurance Specially Designated Nationals United Against a Nuclear Iran United Kingdom United Nations United Nations Security Council United States United States Dollar 7

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11 Introduction Since December 2006 four sets of UN Security Council sanctions have been imposed on Iran over its nuclear programme, with Tehran still yet to satisfy the international community that its intentions are solely peaceful. UN sanctions have been augmented by unilateral sanctions (particularly on the part of the United States) and sanctions imposed by the European Union. The various regimes target multiple economic sectors. However, while sanctions constitute a valuable tool for the international community to apply pressure on Iran to negotiate over its nuclear programme, the wide range and scope of the various regimes, and in many cases a lack of detailed guidance on implementation, mean that there can be uncertainty within industry with regard to their implementation. Much attention has been focused on the banking sector in recent years as policy-makers have adapted tools initially designed to target the assets and money-laundering capabilities of terrorist organisations and organised crime to meet the needs of non-proliferation sanctions. This focus on the banking sector has forced banks and financial institutions to enhance greatly their compliance capabilities and procedures. However, other financial service sectors, such as the insurance industry, have not been subject to similar attention and, consequently, have faced difficulties in developing similarly sophisticated compliance capabilities. This position has changed somewhat in recent years, primarily due to the increasing scope of Iran sanctions, but challenges remain. Moreover, the rapidly-evolving sanctions environment has added an additional layer of complexity to compliance efforts within those industries already attempting to make up ground. The obligation to comply with sanctions extends to a range of insurance products and activities, especially where these relate to commerce. Insurance companies have taken significant steps to adapt to the restrictions imposed by sanctions, such as putting standardised sanctions clauses in insurance contracts, for example. However, sanctions implementation can be costly and complex and it can be difficult to determine whether compliance policies and procedures meet the challenges. In the context of reinsurance, for example, ensuring compliance on broad-based, multiactivity coverage has become an important challenge for reinsurers. The shipping industry has been dramatically affected due to the implications of the sanctions both property underwriters (hull and machinery and cargo) and protection and indemnity (marine liability) insurance coverage. Unusual measures have in some cases been adopted. The government of Japan, for example, has extended sovereign insurance coverage to Japanese tankers whose insurance is affected by the EU and US measures on Iran to allow them to continue importing Iranian oil permitted under US waivers. Of course, the challenges associated with sanctions and their implementation are not limited to industry practitioners. Sanctions are as much a political tool as an economic one and policy-makers are often required to develop and legislate on sanctions without having adequate time to fully consider the range of challenges and difficulties that these measures will pose to commercial stakeholders. This means that policy makers have faced difficulties in making sure that new sanctions measures may be developed and implemented with minimum risk to commercial activities and to the interests of third parties who may suffer as a consequence of such measures. 9

12 In this context, King s College London hosted a two-day expert workshop entitled Sanctions and the Insurance Industry on 4-5 June Focusing primarily on Iran sanctions and their impact, this workshop brought together practitioners from major global insurance and reinsurance providers and brokers (compliance officers, etc.), representatives from industries covered by relevant insurance policies, representatives from the policy community (UK Treasury, US Treasury, the UN Panel of Experts on Iran, and the European External Action Service) and academics, for a frank discussion under the Chatham House rule. The aims of the workshop were twofold: To contribute to the effective implementation of sanctions in the insurance industry by addressing directly the risks and challenges faced by industry practitioners, particularly those working in the area of compliance, and facilitating a dialogue between practitioners and policy-makers on how best to overcome, or at least mitigate these challenges. To offer policy-makers the opportunity to engage with industry on the subject of sanctions and better understand the particular sanctions-related challenges that the insurance industry faces. A number of initiatives aimed at exploring the impact of sanctions across different industries have taken place at the regional level; however the lack of sector-specific initiatives means that policy-makers have few opportunities to engage with practitioners in a focused and targeted manner. In broader terms, the workshop aimed to make a contribution to strengthening the resilience of the insurance industry, both in the United Kingdom and beyond, in the face of complex and rapidly-evolving sanctions regimes. In particular, the workshop was intended to enhance the ability of policy-makers to translate the political need for sanctions into robust and effective legislative measures that do not unnecessarily hinder commercial activities. The workshop was generously funded by a number of partners: The Economic and Social Research Council (ESRC) AXA Freshfields Bruckhaus Deringer LLP Lloyd s Marsh & McLennan Companies Swiss Re The following report brings together the key points of discussion and the conclusions reached during the workshop. The report also includes a number of recommendations relevant to the effective implementation of sanctions in the insurance industry. Given that the workshop was held under the Chatham House Rule, all points and information arising from participants contributions have been anonymised. The report largely mirrors the workshop agenda, beginning with a broader discussion of the policy goals and objectives of sanctions, particularly with respect to Iran, before moving to look at the practical challenges faced by the insurance industry. The final section focuses on ways and means of promoting coherence between policy-makers and practitioners with a view to facilitating the successful implementation of sanctions with minimum risk to industry. 10

13 PART ONE: SANCTIONS ON IRAN: POLICY GOALS AND LATEST DEVELOPMENTS 11

14 Sanctions on Iran Sanctions on Iran are not new; the country has lived with US sanctions in some shape or form since the 1979 takeover of the US embassy in Tehran when US diplomats were detained for 444 days. In recent years, however, and particularly since the first round of UN sanctions was imposed in 2006, sanctions have gained unprecedented momentum and visibility in the context of international efforts to halt or even reverse Iran s nuclear trajectory. Sanctions is a term used to describe a range of punitive legislative provisions that are put in place with a view to altering political and/or military behaviour. A distinction can be made between targeted or smart sanctions and comprehensive sanctions. Targeted sanctions are directed at leaders, their core allies in the regime s hierarchy, and/or specific enterprises and agencies engaged in the proscribed behaviour. 1 The aim here is to minimise unintended, undesirable, or indiscriminate consequences for the broader public. 2 Sanctions have provoked controversy in the past in this regard, being cited as responsible for civilian suffering in Iraq in the early 1990s for example. Comprehensive economic sanctions, however, target both the macro-economy and macropolitics of states, so that punishments [...] are extended over wide segments of the population. 3 The distinction here is important since sanctions on Iran have evolved in recent years from a targeted approach to what is now a wide-ranging, comprehensive sanctions regime. More than this, the current mosaic of sanctions regimes imposed upon Iran is breaking new ground. On one hand, the U.S. has used its leverage over the international financial system to create the most comprehensive unilateral sanctions regime in history. 4 On the other, the 2012 EU oil embargo signalled the emergence of an unprecedented international coalition around sanctions on Iran and marked a significant escalation in the punitive measures being applied to the country. Sanctions have, apparently, thus far failed to change Iran s nuclear calculus; however they have placed considerable strain on the Iranian economy. In January 2012, for example, the announcement of additional EU sanctions caused the value of the Iranian Rial to plummet as Iranians rushed to convert their currency into US dollars. And recent research reveals that the value of the Rial has continued to fall: the unofficial value of the Rial has gone from Rial 20,000 to the US dollar in January 2012 to Rial 33,000 in January In this context, and before beginning to explore the practical challenges associated with sanctions in the specific context of the insurance industry, it is thus useful to set out the policy goals and objectives of sanctions and how they these translate into practice, as well as highlighting potential future developments. The following section approaches these issues from the perspective of the United Nations Security Council (UNSC), the United States, the United Kingdom and the European Union (EU). 1 Etel Solingen (ed.), Sanctions, Statecraft, and Nuclear Proliferation (Cambridge & New York: Cambridge University Press, 2012), p Ibid. 3 Ibid. 4 Bijan Khajehpour, Reza Marashi and Trita Parsi, Never give in and never give up : The Impact of Sanctions on Tehran s Nuclear Calculations, (Washington, DC: National Iranian American Council, 2013), p.3. 5 Ibid., p

15 Policy Goals and Objectives While there are some differences between the objectives of various state actors and international organisations, all share the broader goal of impeding Iran s nuclear progress. 6 Sanctions regimes thus target, to varying degrees, individuals and organisations that support the country s work in the area of nuclear and ballistic missile development. Unilateral sanctions have also targeted key sectors of the Iranian economy, such as the automobile industry, in a bid to affect Iranian decision making. Iran s nuclear programme was propelled to the top of the international security agenda in 2002, following revelations of a number of undeclared nuclear facilities. In 2005, the IAEA Board of Governors found Iran to be in non-compliance with its NPT safeguards obligations and, in 2006, referred Iran to the United Nations Security Council (UNSC). Since this point, sanctions have been imposed upon Iran have been imposed in an increasing number of areas by a range of actors. A first round of sanctions was imposed on Iran by the UNSC in December 2006 under Resolution This was followed by the imposition of additional sanctions in 2007 (Resolution 1747), 2008 (Resolution 1803), and 2010 (Resolution 1929). These measures constitute a direct response to Iran s non-compliance with its NPT safeguards obligations. The primary policy objective is to impede the progress of Iran s nuclear and ballistic missile programmes and force Tehran to comply with requirements of the IAEA, and this is reflected in their comparatively limited scope. UN sanctions are focused on technologies and entities directly associated with Iran s nuclear and missile programmes. UNSC resolutions are binding on all UN member states under international law. US, UK and EU sanctions go beyond the scope and reach of UN sanctions. Indeed, it has been pointed out that UN sanctions were seen - at least by the EU, the United States, and others - as an international imprimatur for additional sanctions to be enacted by regional bodies or individual countries after UN action. 7 The sanctions which have had the largest impact on the insurance industry are those put in place by US and EU legislation. UK and US policy towards Iran s nuclear programme has been broadly based on a dualtrack approach that comprises diplomatic engagement and pressure. In a recent statement to accompany the announcement of additional US sanctions related to Iran, for example, the Office of the Press Secretary reiterated that sanctions are part of President Obama s commitment to prevent Iran from acquiring a nuclear weapon, by raising the cost of Iran s defiance of the international community. Even as we intensify our pressure on the Iranian 6 It should be noted that sanctions have also been imposed on Iran by the EU, among others, on human rights grounds. In the EU these take the form of asset freezes against some individuals and trade restrictions relating to telecoms/internet intercept and monitoring equipment, including restrictions on insurance and reinsurance. See Financial sanctions, Iran (human rights), HM Treasury < 7 Meghan L. O Sullivan, Iran and the Great Sanctions Debate, The Washington Quarterly (2010), Vol.33, No.4, p

16 government, we hold the door open to a diplomatic solution that allows Iran to rejoin the community of nations if they meet their obligations. 8 However, with Iran moving closer to a nuclear weapons capability and the threat of Israeli military action ever-present, recent years have seen a steady increase of punitive pressure on Iran as the international community seeks to secure a peaceful solution to the Iranian nuclear challenge. In the case of the European Union, prominent members such as the UK, France and Germany have, for some time, lobbied for more punitive sanctions on Iran. These efforts played a significant role in the 2012 decision by the European Union to impose a phased oil embargo on Iran. The push for stronger sanctions is unsurprising; European powers have played an important role in negotiations with Iran since 2003, when the Foreign Ministers of the E3 (France, Germany and the United Kingdom) attempted to negotiate a halt to Iran s work on enrichment as well as seeking transparency over its nuclear activities past and present. The broader EU engagement that followed was motivated both by a desire to avoid a potential military conflict between Iran and Israel and by a wish to play a more prominent role in nonproliferation issues. In official terms, the objective of the EU continues to be a comprehensive, negotiated, longterm settlement, which would build international confidence in the exclusively peaceful nature of the Iranian nuclear programme, while respecting Iran s legitimate right to the peaceful use of nuclear energy in conformity with the Non Proliferation Treaty and fully taking into account UN Security Council and IAEA Board of Governors resolutions. 9 In terms of policy objectives, then, US, UK and EU goals overlap significantly. However, in terms of legislation, the United States has imposed the most stringent and wide-ranging sanctions upon the Islamic Republic. Consequently, the objectives and goals of other sanctions efforts are, to a large extent, overshadowed by the weight of the US sanctions regime. US sanctions have, for example, long incorporated an extraterritorial element the Iran and Libya Sanctions Act of 1996 (later the Iran Sanctions Act) placed restrictions on the activities of foreign nationals who have neither personal nor territorial connections with the United States. 10 However, the extraterritorial scope of economic sanctions against Iran was significantly expanded with the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA). The objective here has been to force a choice on private sector actors around the world: individuals and organisations can either do business with the United States or Iran, but not with both. 8 Statement by the Press Secretary on the Announcement of Additional Sanctions Related to Iran, The Office of the Press Secretary, The White House, 3 June 2013 < 9 European Union, Factsheet: The European Union and Iran, 6 June 2013 < 10 Matthias Herdegen, Principles of International Economic Law (Oxford: Oxford University Press, 2013), p

17 There are also elements of the US political establishment that regard sanctions as having the broader and more extreme objective of regime change. 11 However, it is important to note that such a position contrasts starkly with the official policy of the Obama administration, the UK government and other countries around the world. Current State of Play and Recent Developments The sanctions environment is a fluid and fast-changing one. In recent years, a host of new, more restrictive measures have been introduced in the Iranian context, presenting a considerable challenge to private sector firms as they attempt to stay abreast of compliance requirements. This section will offer an insight into the state of play with regard to sanctions on Iran as of July 2013, setting out key legislative developments and what these entail, particularly with regard to the insurance industry. Recent UN Developments Only two UN resolutions make explicit reference to insurance (see 1929 and 1803 in the table below), however, all place prohibitions on certain activities which impact upon the insurance industry. There have been no developments in UN sanctions legislation since the passing of UNSCR1929 in June The UN Panel of Experts established pursuant to resolution 1929 is monitoring implementation and recently had its mandate extended until summer Table 1: UNSC Resolutions imposing sanctions on Iran Date Resolution Summary of selected provisions 9 June March 2008 UNSC Resolution 1929 UNSC Resolution 1803 Prevents Iran from acquiring commercial interests in Uranium mining Effectively imposes an arms embargo Prohibits ballistic missile activities Directs states to take actions to prohibit designated individuals from entering or transiting through Calls upon states to inspect cargo in certain circumstances Prohibits the provision of fuel or supplies, or other servicing of vessels, to Iranian-owned or -contracted vessels Expands certain provisions of previous resolutions to apply to IRISL and the IRGC Puts certain prohibitions on Iranian banking operations Prohibits the provision of financial services, including insurance or re-insurance, if those services could contribute to Iran s proliferation-sensitive nuclear activities, or the development of nuclear weapon delivery systems Asks states to exercise vigilance and restraint regarding the entry into or transit through their territories of individuals who are engaged in Iran s nuclear and missile activities Revises export restrictions of sensitive technologies Calls on states to exercise vigilance regarding the activities 11 See for example Kate Gould, Iran Leak Reveals Senate Push for Regime Change, The Huffington Post, 10 May 2013 < 15

18 24 March December 2006 UNSC Resolution 1747 UNSC Resolution 1737 of Iranian banks in particular with Bank Melli and Bank Saderat Calls upon states to inspect Iranian vessels and planes when they suspect breaches of resolutions Calls upon all States to exercise vigilance in entering into commitments for public provided financial support for trade with Iran, including the granting of export credits, guarantees or insurance, in order to avoid such financial support contributing to the proliferation sensitive nuclear activities Iran shall not supply aircraft any arms or related materiel, and that all States shall prohibit the procurement of such items from Iran by their nationals States should exercise vigilance and restraint in supplying arms or related services to Iran in order to prevent a destabilising accumulation of arms Prohibits states and international financial institutions not to entering into new commitments for grants, financial assistance, and concessional loans, to the government of the Islamic Republic of Iran, except for humanitarian and developmental purposes Prohibits the transfer of certain listed sensitive technologies Directs states to take the measures to prevent the provision to Iran of any technical assistance or training, financial assistance, investment, brokering or other services Ask states to exercise vigilance regarding the entry into or transit through their territories of individuals who are related to nuclear and missile activities Imposes an asset freeze on listed individuals Recent EU Developments Since 2007, the European Union has introduced a range of sanctions on Iran. These sanctions constitute a response to Iran's proliferation-sensitive nuclear activities, and both work to implement UN decisions and include additional measures adopted independently by the European Union. EU sanctions were last substantially strengthened on 15 October 2012 under Council Decision 2012/635/CFSP. The Council of the European Union also agreed to adopt a number of additional designations on 21 December (Council Decision 2012/829/CFSP). 12 Additional designations were also agreed on 6 June 2013 (Council Decision 2013/270/CFSP). 13 These Decisions took effect through a number of Council Regulations that amended or implemented the landmark Council Regulation (EU) No 267/2012 under which the EU oil embargo was imposed upon Iran. 12 The European Union and Iran - Factsheet, Council of the European Union, 6 June 2013 < 13 Decisions, Official Journal of the European Union, 8 June 2013 < 16

19 Council Regulation (EU) No 267/2012 came into force on 23 March 2012 and gave effect to Council Decision 2012/35/CFSP of 23 January That Decision provided for significant further restrictive measures in relation to Iran, including but not limited to: An import ban on crude oil and natural gas An embargo on key equipment and technology for the oil and natural gas and petrochemical industries A ban on certain investments and the provision of certain services to the oil and natural gas and petrochemical industries A ban on trade in gold, precious metals and diamonds with the Government of Iran Restrictions on the provision of insurance and re-insurance Prohibitions on transfers of funds to financial institutions domiciled in Iran Requirement on financial institutions to exercise continuous vigilance Prohibitions on providing classification services to Iranian vessels The wide-ranging and often imprecise nature of Regulation 267/2012 has resulted in a number of practical issues for industry practitioners. For example, this regulation caused problems with regard to fuel bunkers. In this case, it was not clear if the transportation of Iranian oil by EU-owned ships for their own use as fuel, or by non-eu ships travelling through EU waters for the same purpose, constituted a violation of sanctions. 14 Table 2: Recent regulations adopted by the Council of the European Union 21 December 2012 Council Regulation (EU) No 1264/2012 Implements Decision 2012/829/CFSP and enhanced Regulation (EU) No 267/2012 through additions to the EU list of designated entities. 21 December 2012 Council Regulation (EU) No 1263/2012 Implements Decision 2012/635/CFSP which amends Decision 2010/413/CFSP and enhanced Regulation (EU) No 267/2012, providing for additional restrictive measures against Iran. Prohibits exports of key naval equipment and technology for ship-building, maintenance or refit. Prohibits trade in graphite, raw or semifinished metals, such as aluminium and steel, and software for certain industrial processes. Prohibits the import, purchase or transport of Iranian natural gas 14 Jason Wee & Olivia Furmston, Lifting Iranian Bunkers from Outside of the EU, Standard Bulletin, August

20 Recent US Developments The United States has put in place a complex web of sanctions legislation targeting multiple sectors of the Iranian economy. The Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) of 2010, in particular, marked a watershed in US sanctions legislation. Prior to this date, US sanctions were largely focused on US persons, although secondary sanctions - i.e. sanctions affecting non-us persons - had been introduced with the Iran Sanctions Act (ISA) of In terms of non-us persons, CISADA expanded the sanctions triggers and menu implemented under the ISA. Since then, several pieces of legislation have been passed which have had a significant impact on the financial services industry and, more specifically, the insurance sector. Decision-making regarding US domestic sanctions legislation largely occurs at the congressional level. It is worth noting that the issue of sanctions is a rare source of unity in Congress; there are no large divides over sanctions as there may be for other issues, such as gun control for example. Indeed, Congress is considered to be a principle driving force behind US sanctions on Iran. Table 3: A selection of recent developments in US sanctions legislation Iran Freedom and Counterproliferation Act (IFCA) signed into law on 2 January 2013 as part of the National Defense Authorisation Act Iran Threat Reduction and Syrian Human Rights Act (TRA) 10 August 2012 National Defence Makes significant transactions in any currency with an Iranian SDN grounds for designation by OFAC. Extends the types of transactions for which non-us entities can face penalties. Makes certain sectors of Iran s economy offlimits energy, shipping, shipbuilding. Expands scope of effects on automobile sector Prohibits the provision of certain goods and services precious metals, graphite, semiprecious metals, and certain industrial software. Imposes ISA sanctions on those providing underwriting services, insurance, or reinsurance to activities and persons targeted by US sanctions against Iran (lists a number of specific areas). 15 Expands the scope of CISADA further to include anybody who is Iranian and linked to WMD or terrorism. Extends prohibitions to US subsidiaries in third countries. In this context, relevant subsidiaries are viewed as US persons. Similar to CISADA but introduced new 15 Clifford Chance, Iran Sanctions Expanded by the National Defense Authorisation Act for Fiscal Year 2013, Client Briefing, January 2013, ationaldefens.html. 18

21 Authorisation Act (NDAA) 31 December 2011 restrictive measures regarding business with the Central Bank of Iran based on money laundering concerns. Set up provisions for states to gradually reduce their dependency on crude oil, sanctions waivers and triggers Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) 1 July 2010 Broadened the triggers and the consequences of the Iran Sanctions Act. Expanded the definition of US entities. Expanded the ISA trigger and menu relating to non-us entities. Legislation passed by Congress is often complemented by Executive Orders and guidance which seeks to clarify some of the details of the sanctions in question. This is often in response to issues which have been identified after an Act has been passed or has entered into force. Most recently, in June 2013 for example, President Obama signed Executive Order which significantly expands the jurisdictional reach of US sanctions against Iran. 16 The Executive Order has two principal objectives: It implements certain sections of the Iran Freedom and Counter-Proliferation Act of 2012 (IFCA) It authorises additional sanctions against Iran, primarily targeting certain transactions and activities related to the Iranian rial, Iran s automotive sector, and persons who materially assist Iranian persons on the list of Specially Designated Nationals and Blocked Persons All in all, the multiple formats through which restrictive measures find expression combine to create a complex, multi-layered body of legislation that presents significant challenges to industry practitioners responsible for compliance. Recent UK Developments Much of UK sanctions legislation and related provisions revolves around the obligatory implementation of EU and UN legislation. The UK government website provides a summary of sanctions measures that currently apply in the UK Stephen M. McNabb, Marsha Z. Gerber, Stefan Reisinger, Kimberly Hope Caine, Expansive executive order tightens Iran sanctions as labyrinth of front companies surfaces, Norton Rose Fulbright, 18 June 2013 < 17 See Financial Sanctions, Iran (nuclear proliferation), UK gov.uk Website, < and, more generally, Financial sanctions: Regime-specific lists and releases, HM Treasury < 19

22 At the same time, however, the UK government has implemented additional, independent measures. For example, the Financial Restrictions (Iran) Order 2012 came into force on 21 November This order added the Central Bank of Iran to the Iran (proliferation) specific list of the Consolidated List of Financial Sanctions Targets in the UK. 18 Future Developments in Sanctions Legislation At the UN level there are unlikely to be further sanctions on Iran passed by the Security Council in the immediate future. This relates to current difficulties in securing a consensus within the UNSC. Russia and China, in particular, are opposed to further sanctions and both countries have powers of veto. The potential for further sanctions at the EU level depends upon the interests of EU member states. The current EU focus is on implementation of the sanctions already in place, however, further sanctions should not be ruled out, particularly if there is a lack of progress in talks with Iran. In this context, the UK position mirrors that of the EU. In the US, it is likely that further measures against Iran will be introduced, largely due to concentrated efforts within US Congress to enhance the current Iran sanctions regime. On 1 August 2013, the House of Representatives passed a new bill, entitled the Nuclear Iran Prevention Act, which seeks to impose a near-total oil embargo on Iran as well as expanding restrictions on commercial activities. This bill is due to be voted upon by the Senate in September. 19 A Bird s Eye View: Assessing the Current Sanctions Landscape The sanctions landscape constitutes a complex mosaic of restrictive measures imposed by national and international authorities. For the most part, the different sanctions regimes share common policy objectives. Broadly speaking, the different law-makers agree on the goals that they are seeking to achieve in the Iranian context. However, the practical legislative measures that different authorities adopt in pursuit of these objectives, as well as the rate at which they are imposed, differ significantly. The United States, for example, has imposed a sanctions regime that far surpasses those imposed by the European Union or the United Kingdom in terms of extraterritoriality and severity. Moreover, a considerable political appetite for sanctions within US Congress has meant that sanctions legislation has been passed at a considerable rate in the in recent years. Navigating this sanctions landscape presents a number of risks and difficulties for industry. Inevitably, the rapidly-changing nature of the legislation poses challenges in terms of the compliance efforts of multinational organisations operating in multiple jurisdictions. The need for quick implementation of shock asset freeze measures by industry, for example, means that compliance teams have to respond to new measures almost instantly. Those responsible for compliance are forced to operate in a fluid, rapidly-evolving sanctions environment where there is often a lack of clarity regarding certain aspects of the legislation. 18 The Financial Restrictions (Iran) Order 2012, 20 November 2012, available from Legislation.gov Website, < This Order was revoked on 31 January 2013 after a similar prohibition was introduced at EU level. 19 Iran Sanctions Bill on Oil Passed By US House, BBC, 1 August 2013, < 20

23 The challenges here are compounded by a lack of dialogue between policy-makers and industry practitioners. The unforeseen consequences of legislation mean that there is significant exposure to risk for industry stakeholders. However, while industry experts have much to contribute in terms of identifying potential problems with proposed legislation, there is an absence of regular communication. Consequently, the relationship between industry and the policy community is best described as a reactive one, with both sides constantly playing catch-up as problems are encountered and must be resolved. Finally, in terms of how the insurance industry interprets the sanctions landscape, it is clear that US sanctions represent the benchmark for compliance efforts. The dominant role occupied by the United States and the US dollar (USD) in the global economy means that multinational companies cannot afford to be found in non-compliance with US sanctions. It is thus US legislation that acts as the principal driver of compliance efforts, although this is not to say that firms are not also keen to comply with other sanctions regimes. 21

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25 PART TWO: THE CHALLENGES OF SANCTIONS LEGISLATION 23

26 Practical Challenges of Sanctions Legislation This section will explore some of the practical challenges posed to industry by sanctions legislation. The analysis will use the particular example of marine insurance, a significant sub-section of the insurance industry, to illustrate the nature and scope of some of the problems encountered by industry practitioners. The section will also briefly explore the issue of blocking legislation as another discrete legislative issue with the potential to cause significant problems for businesses operating across multiple jurisdictions. Legislation Challenges: Marine considerations The contribution of shipping to global trade across a range of industries is enormous. In the energy sector alone, more than two-thirds of oil consumed worldwide is transported by sea since shipping offers the most economical means of transportation in bulk. This is particularly important in the Iranian context. Prior to the imposition of the EU oil embargo, Iran was OPEC s second-largest producer and exported most of its 2.2 million barrels of oil per day. 20 Through the imposition of an oil embargo on Iran, the US and the EU have thus used sanctions to target Iran's largest single source of revenue. Supporting global shipping activities is the marine insurance sector. The availability of adequate insurance cover, and in particular marine liability insurance cover, is of fundamental importance to the global shipping industry. Protection and Indemnity (P&I) Insurance is third party liability insurance cover taken out by ship owners to protect against such liabilities as oil pollution, loss of life and personal injury, wreck removal and damage to other vessels and property. In some cases, for example oil pollution and loss of life or injury to passengers, such liabilities are governed by international maritime conventions which mandate the existence of adequate insurance cover or other financial security to very high limits in order to protect third party victims. Such liabilities can run to hundreds of millions or, in the case of passengers and crew liabilities, billions of dollars. It is for this reason that US and EU sanctions targeting maritime trade with Iran have focused on the provision of insurance to ship operators transporting Iranian oil. For while Iran still has a number of willing buyers of oil, petrochemical products and gas, including China, Japan and India, some ninety per cent of the world's tanker insurance is based in the West and the lack of access to this market constitutes a major obstacle to those wishing to transport Iranian cargoes. In this regard, marine insurance has been termed, the stranglehold on Iran. 21 Moreover, while the prohibition preventing US and EU P&I insurers from providing cover has caused shippers wishing to carry Iranian oil as cargo to turn to alternative sources of P&I - such as the Kish P&I club in Iran, or even national governments - these alternative sources providers are untested in terms of their ability to respond to claims arising and the levels of cover available, thus raising some significant questions regarding the viability of coverage and the risks involved. 20 Clare Baldwin and Osamu Tsukimori, Analysis: Marine insurance: the stranglehold on Iran?, Reuters, 17 April Ibid. 24

27 The Difficulties and Costs of Compliance for Marine Insurers The prohibition on the provision of insurance to ship owners transporting Iranian oil has indeed served to significantly reduce Iran s oil market. In June 2013, Reuters reported that Iran's crude exports had dropped to some 700,000 barrels per day (bpd). 22 At the same time, however, it also poses a number of practical difficulties and costs to marine insurance providers. Clearly, the difficulties faced by individual organisations vary according to the nature and scope of their particular business. This said, there are a number of challenges that are common to firms across the marine insurance sector. First, it is often difficult for insurers who are far removed from the commercial activities of insured parties to be confident that sanctions are being complied with. Consider, for example, a P&I insurer of commercial vessels. It is not practical for the insurer, whether it be a mutual club or commercial insurer, to be continuously aware of the exact location of each and every vessel it insures. Consequently, this is not a requirement of the coverage provided. In any case, the continuous monitoring of vessel movements would require considerable resources. In the majority of cases, ship operators will only likely contact the insurer if something goes wrong, and, even in these cases, it is not uncommon for the insurer to hear about potentially sanctions-breaching activity through the press or from governments rather than the operator. Some of the risk here can be mitigated by measures taken by the insurer as part of a comprehensive compliance programme. For example, commercial intelligence can be used to raise a red-flag when an insured ship enters an Iranian port. Once this occurs, a dialogue can begin between the operator and the insurer, and the insurer can take steps to safeguard its commercial and reputational interests. However, incorporating measures such as commercial intelligence into a compliance programme do not come without cost for insurance industry stakeholders. Second, sanctions legislation is often rolled out quickly in response to political drivers. Consequently, legislation can be vague and leave room for conflicting interpretations. For example, if a non-iranian ship is carrying Iranian oil to a country which possesses an NDAA waiver, it is unlawful for an EU insurer to provide coverage to the vessel. 23 Should the insurer then terminate all coverage for the ship in question, or simply withdraw coverage for the particular voyage that violates sanctions? While this is unlikely to be necessary, it still puts the insurer in a difficult situation, not least in reputational terms. Whilst legislative ambiguities such as this are usually resolved by the relevant authorities, this can take time leaving a period of uncertainty for commercial actors. Third, as with other sectors, the marine sector feels the effects of sanctions on Iran in more general terms. For example, the financial costs of concluding operations in Iran, as many shipping companies have, can be significant and the process can be complex. Issues here include the costs of closing offices, or the challenges associated with making payments to 22 Alex Lawler and Nidhi Verma, Sanctions push Iran's oil exports to lowest in decades, 5 June 2013 < 23 Under Article 49(d) of EU Regulation 267/2012, EU sanctions apply to all EU companies in respect of all their business worldwide. EU sanctions prohibit the provision, directly or indirectly, of "financial assistance" for the transport of crude oil (and petroleum products) of Iranian origin. Under Article 11(1)(d) of Regulation 267/2012, "Financial assistance" is expressly stated to include insurance (and reinsurance). 25

28 local staff through Iranian banks. On the other hand, continuing legitimate commercial operations in Iran, however limited, poses a reputational risk to an international organisation. The situation is made more complex by the fact that many organisations have invested considerable time and effort in establishing good business relations in Iran, a country renowned for its bureaucracy and factionalism. Lost Business and Emerging Markets Other important consequences of Iran sanctions relate to lost business and the growth of alternative sources of insurance and reinsurance. While the impact here is difficult to quantify, the fact that US and European P&I insurers can no longer provide insurance to entities such as the Islamic Republic of Iran Shipping Lines (IRISL) and the Iranian National Tanker Company (NITC), or to other non-iranian shipping companies which can quite legitimately and lawfully continue to trade with Iran, translates as a loss of potential revenue. Moreover, sanctions on Iran have led to the further development of the Iranian insurance market. Without the ability to procure P&I cover from the leading P&I clubs, Iranian ship operators have turned to the domestic insurance market, including the Kish P&I club. This, in turn, has facilitated the development of the industry in Iran. Iranian media have claimed that these developments have saved Iranian shipping companies millions of dollars, however this reliance on alternative and less established sources of P&I cover raises a number of important questions (see section below on broader risks). 24 Sanctions have also provided an opportunity for other marine insurance markets to grow around the world. In October 2009, for example, the UK Treasury prohibited business with Iranian state shipping company IRISL, prompting coverage to be withdrawn from UK insurers. IRISL subsequently secured temporary cover from a Bermuda-based provider, and following the passage of legislation in Bermuda in 2010, took cover from an Iranian provider. 25 In broader terms, a number of key growth markets may be identified, including China, India, Japan and Russia. Russia, in particular, has been identified as a good example of how quickly a major market can develop. 26 Despite the emergence of new markets in an uncertain landscape, however, the competitive advantages of UK and US markets should not be forgotten. It is widely accepted that the UK and US insurance markets are well-established, better regulated and more comprehensive than the markets emerging as a response to sanctions. The impact of sanctions on insurance coverage has also resulted in state actors providing sovereign cover. For example, after the EU regulations came into effect in July 2012, the cover that the Japan Ship Owners Mutual P&I Club could provide to ships transporting Iranian oil dropped from $7.6 billion to just $8 million (US $9 million with effect from 20 February 2013). 27 Japan responded to this by passing a bill which would allow for $7.6 billion 24 Insurance Bans on Oil Tankers Save Iran $700m: Official, Press TV, 10 September 2012 < 25 Luke Hunt, Maritime Disaster waiting to Happen, The Diplomat, 22 August 2011 < 26 Workshop participant, 4-5 June Takeo Kumagai, Japan Caught between the Insurance Trap and EU sanctions on Iran oil, The Barrel Blog, 5 June 2012 < 26

29 of sovereign cover to ships importing Iranian oil, allowing imports to continue. 28 India has also provided state backed insurance to allow shipments of Iranian oil to continue, although with much lower limits of liability than would be provided by a conventional P & I insurer. 29 P&I and Broader Risks The risks associated with prohibitions on P&I cover need to be carefully considered. As already mentioned, P&I insurers play a crucial role due to their ability to provide significant levels of coverage in the event of serious incidents at sea. This includes circumstances where a ship has become a casualty and salvage is required; perhaps where a ship has caught fire, grounded or has been lost at sea. P&I cover is in place to pay for the consequential liabilities, including oil pollution and consequential loss and damage claims, loss of life and personal injury wreck removal amongst others, that the casualty may have caused. Given that 90% of global shipping is insured by the London-based International Group of P&I Clubs, and in turn reinsured by the global reinsurance markets, the restrictions placed on the established US and European insurers, including the P&I clubs have serious implications. 30 Potential Accidents With sanctions preventing P&I insurers from covering Iranian shipping or ships carrying Iranian oil, Iranian and other ship operators have been forced to look elsewhere for their coverage. Clubs such as Iran s Kish P&I club claim that they would be able to provide the equivalent of USD 1 billion in coverage. 31 However, there are questions regarding the ability of the Kish club to pay out, particularly in light of the payment restrictions arising under financial sanctions measures imposed on dealings with Iran. 32 Only a serious accident at sea involving a vessel with coverage by Kish or another club would test these claims, with the consequent risk of non-payment falling on innocent third-party victims of the maritime casualty. There are a number of different scenarios which could potentially arise involving a vessel with inadequate P&I coverage. Many vessels believed to be covered by Iranian P&I are those conducting trade with East Asia, including those countries which have been granted waivers from US sanctions on the purchase of Iranian oil. If a vessel carrying Iranian oil, for example, was to become a casualty and to spill its cargo along the coastline of a small state located between Iran and East Asia, would the clean-up be covered? If coverage was disputed, would Iran be liable for cleanup costs, and would the government have the political will or the funds to pay out? Would there be a need to use Iranian banks, and if so, how would this sit with current sanctions regimes? There a large number of variables which make 28 Yuji Okada, Japan set to load first Iran Crude with Sovereign Insurance, Bloomberg News, 13 July 2012 < 29 Pratish Narayanan & Karthikeyan Sundaram, Iran Oil Shipping to Resume as Insurers Step in: Corporate India, Bloomberg, 2 August 2012 < 30 Website of the International Group of P&I Clubs, 10 June 2013 < 31 Website of Kish P&I Club, About Kish P&I, 8 July 2013 < 32 See for example Emanuele Ottolenghi and Mark Dubowitz, Is Iran Resorting to an Insurance Scam to Keep Oil Exports Flowing, Forbes, 15 November 2012 < 27