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Legal Ease by Scott Sinder Sanction Sandbag

Think you’ve covered your international business bets if you comply with money laundering and export control laws? Think again. Don’t get bit by economic sanctions. That’s one bite that really hurts.

By  Scott Sinder, Edward Krauland and David Lorello

Say OFAC and I bet that the quacking duck comes to mind (think AFLAC commercial). But OFAC is actually shorthand Washington-speak for the Treasury Department’s Office of Foreign Assets Control. OFAC administers federal economic sanctions on several countries and a large number of individuals and entities. Sanctions generally are imposed to further specific national security objectives, such as isolating pariah governments, countering terrorism, preventing weapons proliferation and combating narcotics trafficking. They restrict a wide variety of services, financial transactions and business dealings that directly and indirectly touch the sanctioned entities.

Many insurance brokers are not aware of OFAC restrictions and may believe that exemptions from other laws with similar objectives (such as anti-money laundering or export control laws) also exempt the industry from OFAC. Not the case. OFAC is attempting to step up both its education and enforcement activities. Still, firms that ignore the rules do so at their own risk. OFAC says restricted, sanctioned “services” can include providing or brokering insurance or reinsurance policies. The restrictions on services are broad and could implicate many routine activities, including processing premiums or claims. Moreover, an insurance policy is considered “property” under the OFAC regulations, which could allow the government to freeze the asset of the sanctioned party.

Sanction issues could arise even when the broker’s direct customer is not a restricted party or based in a restricted country. Under group insurance policies, for instance, a group employer may not be restricted, but a beneficiary under the policy may be. If an insurer or broker learns that a person covered under a group policy is restricted, the claim cannot be paid and that person’s coverage may be blocked. Similarly, under global risk policies, syndicate or pooling arrangements, and treaty-based reinsurance agreements, there could be significant risks where the ultimate scope of coverage includes restricted countries or entities.

These risks may not be immediately apparent, but that contractual separation might not insulate the U.S. provider or broker from liability. OFAC currently enforces very comprehensive economic embargo programs against three countries: Cuba, Iran and Sudan. The office restricts a license for virtually any dealings with these countries. For most transactions involving Cuba and some involving Iran and Sudan, the regulations also require freezing assets. OFAC also administers more-targeted sanctions against Burma, Iraq, North Korea and Syria as well as comprehensive restrictions against certain non-governmental entities and individuals, collectively known as “specially designated nationals” (SDN). For an updated list of SDNs, visit ustreas.gov/offices/enforcement/ofac/sdn/index.shtml.

U.S. persons are restricted from almost all dealings with SDNs and must freeze any SDN assets that come into their possession. Violators can be hit with civil penalties 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—up to $1 million per violation. Prison is also an option. Of course, there are many non-monetary consequences, including commercial disruption, reputation damage (penalties are often made public) and harm to a company’s relationship with the federal government. OFAC encourages parties who violate the regulations to submit voluntary self-disclosures and will often mitigate the resulting penalty or issue a private warning letter in those cases.

If you, your firm, affiliates or subsidiaries are involved in insurance programs that have an international scope, you should examine the economic sanctions laws and regulations carefully and seek guidance from legal and compliance experts. Exercise diligence by inserting policy exclusion clauses into the contracts at the outset that carve out risks that could violate U.S. sanctions law. Many companies with this risk exposure utilize “interdiction” 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 clients, policy beneficiaries, third-party brokers, foreign financial institutions and even your clients’ customers (where appropriate).

You also might want to conduct due diligence on your clients to ascertain if they are aware of any sanctions risks, if they conduct their own sanctions screening and compliance efforts, and if they have activities or contacts with sanctioned parities where brokering insurance services could create liability. Compliance programs also should account for country-based restrictions, and employees and non-U.S. affiliates/representatives should be trained to be aware of U.S. sanctions risks. The risks for the insurance industry are significant, but effective compliance strategies are available and those risks can be managed. For more information, visit www.treas.gov/offices/enforcement/ofac. The site includes useful guidance and documents on how the sanctions restrictions apply in specific contexts, including the insurance industry.

Sinder, a partner at Steptoe & Johnson, is CIAB general counsel.

Krauland, is a Steptoe & Johnson partner in the firm’s International Dept.

Lorello is an associate in the Steptoe & Johnson International Dept.

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