Sanctions in the insurance market: What you need to know. What you need to do. Alex Denslow Caroline Hobson John Markham Leonid Zubarev 29 January 2015
How EU sanctions regimes work and how the letter of the law applies to insurance Caroline Hobson
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Sanctions what are they and why do we have them? Financial sanctions / trade restrictions / travel bans Distinct from export control regime: apply to specific destinations/institutions/individuals; apply to non-military products too. Use of sanctions now routine political tool in EU: rarely adopted before 1990 (First Gulf War/Balkans); e.g. Ukraine sanctions on Russia; Arab Spring sanctions on Egypt, Libya, Syria, Tunisia US influence There is no such thing as general sanctions law : each legal instrument is unique (e.g. country-specific) most financial sanctions regimes more complex than a simple embargo 4
Current EU financial sanctions regimes Afghanistan North Korea Belarus Republic of Guinea Central African Republic Republic of Guinea-Bissau Democratic Republic of the Congo Somalia Egypt South Sudan Eritrea Sudan Iran (human rights) & (nuclear proliferation) Iraq Ivory Coast Lebanon Syria Tunisia Ukraine (Russia) Zimbabwe Liberia Libya Al-Qaida Terrorism and terrorist financing 5
Legal Basis EU regulations directly applicable in all 28 EU Member States But licensing, penalties and enforcement applied nationally national legislation Sometimes unilateral national sanctions measures Sanctions rules of other jurisdictions may also apply US is a particular concern In UK different Government departments depending on scope: asset freezing HM Treasury restrictions on transportation HM Revenue and Customs general policy brief FCO travel bans UK Border Agency (export control BIS) 6
Jurisdictional scope of EU sanctions EU sanctions typically apply to: Directors, officers, employees, agents that are EU nationals even if located outside EU Any entity incorporated in EU Any entity incorporated outside EU but only in respect of business conducted in the EU Directors, officers, employees located in the EU (excludes subsidiaries of EU companies incorporated and operating outside EU) 7
Main elements of a sanctions regime EU Regulation(s) Implementing national measures penalties will differ between jurisdictions List of designated parties Asset freeze Detailed and very specific trade measures may include: various forms of funding, loan and corporate investment controls on the supply of products, related services, technical assistance and financing (often sector specific) import controls Exemptions and licensing grounds largely the same between all sanctions regimes 8
Designated parties Can include a wide range of parties individuals, corporates and even charities Asset freeze = no dealing with frozen funds and economic resources belonging to, owned, held or controlled by DPs No funds or economic resources must be provided or made available, directly or indirectly 9
Indirect dealings DP X Funds/Economic Resources (Directly or Indirectly) Y Consider: corporate structures contractual/commercial relationships family relationships 10
Designated parties issues to watch Subject to continual change the Consolidated List Who is designated discrete company or entire corporate group? Important to consider corporate group issues: beneficial owners subsidiaries and other group entities Screening 11
Importance of economic resources Anything can be an economic resource if it could potentially be turned for a profit. Therefore any sale of any (otherwise non-prohibited) product may be caught where you ought to have known that: it could be imported into the country in question; it could find its way into the hands of a designated party; and the designated party could profit from it. 12
Licensing and penalties Licensing is available but typically on narrow specified grounds Licence applications made to HM Treasury A body corporate and/or individuals acting on its behalf can be penalised under the UK sanctions regulations: maximum prison term for individuals two years no ceiling to a potential fine for individuals fine can be imposed in addition to imprisonment 13
The EU rules for Iran prohibit insurance and brokering services A person ( P ) must not provide or broker insurance or re-insurance to (a) Iran or its Government, or its public bodies, corporations or agencies; (b) any other Iranian legal person, entity or body; or (c) a person, entity or body acting on behalf of or at the direction of a person, entity or body referred to in sub-paragraph (a) or (b), if P knows or has reasonable cause to suspect that the insurance or reinsurance is being provided to such a person, entity or body. Exemptions: e.g. healthcare/diplomatic/aircraft Export credit insurance relating to military products or insurance relating to oil are specifically prohibited 14
On 25 November 2014, the EU confirmed the extension of an exemption, suspending a number of measures in the Iran regulation until 30 June 2015 including the prohibition on providing insurance to the energy sector Unclear how a temporary suspension can help with insurance contracts and regarding the exact scope of territorial application Reflects ongoing EU3/EU+3 diplomatic negotiations 15
The EU rules for Syria prohibit insurance provided to the state Similar to the Iranian position, but more limited scope Insurance brokering services are not explicitly covered New measure in December 2014 prohibiting the provision of insurance, reinsurance and brokering services in relation to jet fuel. 16
Russia: incidental prohibition of insurance Prohibited to provide, directly or indirectly, financing or financial assistance as well as insurance and reinsurance related to the sale, supply, transfer or export of goods and technology listed in the Common Military List, to any natural or legal person, entity or body in Russia or for use in Russia. A greater concern may be whether insurance provided to Russia could involve the provision of funds or an economic resource which could, directly or indirectly, benefit DPs 17
Guidance for sanctions compliance in the insurance industry John Markham
Overview Two main sources of non-legislative practical guidance HM Treasury Lloyd s Sanctions Market Review Main issue: finding the hidden designated party Summary of compliance measures Screening: what to look for Screening: when to do it The role/duties of third parties/multiple insurers Conclusions on duties and risk 19
Specific guidance for insurers from the Treasury (in 2013 Q&A): is insurance prohibited? the fact of [a party s] designation does not make any insurance cover that they enjoy at the time of designation, or any cover that might be taken out after that date, illegal BUT Sanctions prohibit the payment of funds to or for the benefit of designated persons, e.g. the payment of benefits due under a policy to a beneficiary who is a designated person and the guidance does not say it is OK to receive premiums Lloyd s guidance states tentatively that adjusting claims by keeping funds payable in a separate frozen account may be OK, but the Treasury guidance says nothing and of course insurance may be prohibited anyway (Iran/Syria) 20
More from the HMT Q&A: the main point is identifying Designated Parties Insurers should undertake reasonable enquiries to identify whether the underlying clients or claimants may be sanctioned parties BUT Where it is impossible to draw a conclusion due to non-availability of additional data the insurer may lack the requisite knowledge or suspicion to fall foul of any of the sanctions prohibitions These two points amplified in all the Lloyd s guidelines 21
Lloyd s Sanctions Market Review Market Review 2013/2014 February 2012 Lloyd s Sanctions Due Diligence Guidance still the main benchmark Further guidance expected, possibly replacing the 2012 guidance January 2015 update on Compliance, Delegated Authorities and Claims helpful above all on screening Other useful document: October 2014 guidance on Sanctions Clauses 22
Summary of compliance measures: what to do Warranties from coverholders or introducers (or insureds) of no link to designated parties Appropriate termination clauses in contracts, e.g. triggered on discovery of a link to a designated party Due diligence/screening process (the main focus below) Appropriate governance procedures Have a policy and state it Training and internal guidance notes Record-keeping Engage with government departments (if desperate)? 23
Screening: what to look for Are named parties caught by e.g. Consolidated List of all EU parties? Identity: full details of e.g. corporate ownership of insured? Territory: is the insured domiciled/headquartered in or near a sanctioned jurisdiction? Sector: is the insured activity subject to sanctions and therefore more chance it will involve a designated party? Product risk: does e.g. insured equipment suggest sanctioned activity? Distribution method: complex supply chain with e.g. delegated authorities? Currency of transactions 24
Screening: when to do it Pre-bind: screen when quoting for a risk Pre-payment: automatic screening of claims systems recommended Regular interim checks automated batch screening endorsements/variations renewals 25
Third parties Various forms of intermediary may be involved delegated authorities (coverholders or claims) brokers other agents layers of insurance/reinsurance or all of the above in a lengthy supply chain Multiple parties may be involved co-insurance bordereaux arrangements Compliance cannot be delegated but ensuring third party compliance may be an essential part of compliance 26
Conclusions There is a clear belief from government and industry that insurers are under an ongoing duty to screen all commercial counterparties in any context There is a clear expectation that insurers know of this duty: ignorance is unlikely to represent any kind of defence However, it may be a defence to show that insurers could not reasonably have known of the sanctions connection The one imponderable question: is the duty reduced where the participation in the insurance is arguably minor or remote? e.g. does a following re-insurer of only a fraction of the business really need to do the same checks as a lead insurer the simple answer is YES and that remote involvement is no excuse for noncompliance but the more complicated answer is that it may be necessary in some cases to balance the needs of compliance with the true risk of investigation and infringement 27
A perspective from behind (not yet an iron) curtain Leonid Zubarev
Knee-jerk reaction Visa/MasterCard suspension of processing of payment cards issued by several Russian banks not listed in the Executive Orders; JP Morgan refusal to transfer insurance premiums to SOGAZ Insurance Company; Foreign top managers refusal to attend St. Petersburg Economic Forum; NASA suspension of cooperation with Russia; US freezing cooperation in various other spheres (drug trafficking prevention, military sphere); Investment decisions suspended by foreign investors; Raiffeisenbank hurried closing branches in Crimea; McDonald s hasty closing restaurants in Crimea, etc. Better safe than sorry!
What Russian cedents face Eagerness of Western reinsurers to underwrite, but: Dominance by compliance departments of Western reinsurers Red tape Less available capacity Sanctions clauses everywhere!
What Russian cedents fear Ultimately - getting no reinsurance money! Being squeezed between demanding insureds and over-compliant reinsurers Having international brokers involved Seeing sanctions clauses work
What Russian cedents do Look East Take more risks on own retention (self-insurance by insureds) Try to exclude international brokers from the picture Hope sanctions clauses would not work under Russian law Hope for the best, prepare for the worst
Questions?