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Sanctions compliance / due diligence – lloyd’s viewAndy wragg/Steve payne, International Regulatory Affairs

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International Sanctions - background

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Recent International developments

Traditionally banks have been the main compliance targets

but Insurance is now recognised by law-makers as a key “lever”:

Remove ability to access insurance… ….Removes ability to trade Insurance specifically named in new legislation: CISADA, EU Iran

Regulations, Syria Insurers therefore can no longer risk

A benign regulatory response to non-compliance ignoring World events or Ignoring developments in legislation and therefore must be ready to react to very fluid international legal and regulatory

developments

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Sanctions

Why

Political - to change policies to:

Strengthen security of unions such as EU & UN

More than ever these days: To control rogue states!

What are sanctions

Country Specific

Smart

Terrorist

Diplomatic

Narcotics

Who imposes sanctions

UN, EU,US, UK and other countries

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Current uk SANCTION regimes Al-Qaida & Taliban Belarus Burma/Myanmar Democratic Republic of the Congo Egypt Eritrea Federal Republic of Yugoslavia & Serbia Iran Iraq Ivory Coast Lebanon and Syria Liberia Libya North Korea (Democratic People’s Republic of Korea) Republic of Guinea Somalia Sudan Syria Terrorism and terrorist financing Tunisia Zimbabwe

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Requirements - financial institutions

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Regulatory expectations

Sanctions:

Increased risk of regulatory or criminal censure for failures and inadequate systems and controls: fines and reputational damage

Requires a complete understanding of: customer base (CDD) territorial risks (KYB) risk appetite (RBA)

to meet regulators’ expectations regarding sanctions compliance:

“…strict liability, not risk-based but proportionality an important principle” HMT

“…absolute regime, although we advocate risk-sensitive systems & controls” FSA

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Sanctions IMPACT ON INSURANCE• Duty to disclose knowledge or suspicion of transaction (ongoing requirement)

• Duty to ensure that funds are not made available to those sanctioned via claims/return premiums

• However, provision of insurance per se is not considered an offence – does not constitute “economic resources” (except Iran and Syria)

• A breach is a criminal offence

• Different positions under different sanctions regimes can impact, e.g.:

• Reinsurers prevented from paying claims even if you can

• Banks blocking payments

• Regulatory requirement of appropriate systems and controls

“Firms … cannot outsource their responsibility to meet either their legal obligation to ensure that UK financial sanctions are not breached, or our requirements to have in place effective systems and controls to prevent the firm being used for purposes connected with financial crime”

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Market expectations

Follow Crystal/lloyds.com and Corporation guidance

Lloyd’s Due Diligence guidance (later)

Tracking information sources UN, EU, OFAC, HMT websites (lists / subscription sign-up) and general heightened awareness of Worldwide events

Note new Patton Boggs guidance re US sanctions

Consider screening systems (such as software for client screening) – not mandated but…

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Our expectations of the Market

Sanctions legislation requires the Market to understand the implications of their: Customer base where they are doing business, and their risk appetite for non-compliance

Managing Agents responsible for ensuring:

adequate systems and controls to comply with legislation

client take on decision is correct

Legal / compliance advice taken where necessary

Sanctions “hits” / other breaches reported

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Other expectations

We also expect managing agents to ensure:

coverholders are aware of their obligations in respect of sanctions and ML and have adequate systems and controls in place to ensure compliance/reporting (Delegated Authority Code of Practice).

coverholder audits focus on sanctions and ML compliance.

coverholder staff are trained (Crystal and other training - later)

NB, as “Specially Designated Nationals” vary across jurisdictions, coverholders also need to:

Screen insureds against:

- local sanctions’ lists (protects the coverholder)

- UK (HMT) lists (protects managing agents)

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What if you get it wrong?

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penalties

Internationally (including the UK) criminal offences faced:

‘Failure to report’ - Duty to disclose knowledge or suspicion of transaction (ongoing requirement)

Making funds available - Duty to ensure that funds are not made available to those sanctioned via claims/return premiums

Increased risk of regulatory or criminal sanction if systems and controls preventing financing of terrorism and crime generally are inadequate

Cost of ignoring international legislation:

Fines

Criminal sanction, potentially imprisonment e.g. ECO breaches

Potential serious reputational damage

RBS fined £5.75m (FSA) – inadequate systems and controls

US penalties – potentially very large

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US & overseas sanctions

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US and overseas SANCTIONS compliance

• Complexities for entities with US ownership / capital / presence

• US directors and staff

• Facilitation prohibition - US Persons may not facilitate transactions by non-US Persons that would be prohibited if performed by a US Person

• Penalties for non-compliance

• Reinsurance and banking counterparties - $ transactions

• Extra-territoriality: e.g. CISADA and Somalia Piracy Order

• To follow or not to follow?

• Whether to approach OFAC?

• Ever able to totally ignore?

• Local sanctions regime: who to follow?

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US penalties

OFAC penalties:

• US insurer settled 2 cases, paying a total of US2.4M for entering into reinsurance contracts in Cuba following violations by UK subsidiaries (UK entities may not be subject to a fine but US capital providers will be for Cuba and North Korea business)

• Barclays Bank – fined $176million for breach of Sudanese sanctions

• Balli Group and Balli Aviation Ltd find £15million for exporting 3 commercial airlines from US to Iran

• HCC Ins Holding fine $38,000 for breach by subsidiary which insured commercial flights in Iran

• Gen Re fined for paying a two excess-of-loss reinsurance claims to Steamship Mutual. These were found to relate to losses suffered by the National Iranian Tanker Co

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US PENALTIES

Lloyds TSB case (2008):

Between 1995-2007 Lloyds TSB in London & Dubai assisted customers to undertake transactions to US sanctioned countries

Countries incl. Libya, Sudan & Iran

Process – Lloyds TSB falsified wire transfers by removing customer info to transfer money undetected through US financial institutions – process = “stripping”/”repairing”

Deliberate circumventing of US sanctions compounds the breach

$350 million fine paid to US government

Authorities involved – DOJ, OFAC & New York District Attorney

Other banks recently caught (ANZ bank, UBS)

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International developments

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International sanctions developments

Unprecedented recent activity: September 2009 – Iranian entities named under HMT’s CTA powers April 2010 – US Somalia Executive Order: blocking property and interests of

pirates and those who “materially assist in those activities” July 2010 – CISADA: US sanctions against any entity that (re)insures exports of

refined petroleum to Iran July 2010 – Lloyd’s Direction – no new contracts allowed for Iranian refined

petroleum risks October 2010 - EU Iranian Regulation March 2011 – comprehensive Libyan sanctions (broadly lifted December 2011)

and other regional sanctions arising from the “Arab Spring” September 2011 – Syrian petrochemical prohibition (includes (re)insurance) January 2012 – comprehensive Syrian sanctions, including ban on provision of

coverage for government entities January 2012 – EU decision regarding export of Iranian crude and refined oil July 2012 – EU ban on Iranian oil becomes effective

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What’s new

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Sanctions clauses

No (re)insurer shall be deemed to provide cover and no (re)insurer shall be liable to

pay any claim or provide any benefit hereunder to the extent that the provision of such

cover, payment of such claim or provision of such benefit would expose that

(re)insurer to any sanction, prohibition or restriction under United Nations resolutions

or the trade or economic sanctions, laws or regulations of the European Union, United

Kingdom or United States of America LMA 3100

• Used primarily in international placements, particularly where there is deemed a higher risk of sanctions issues. Becoming standard in all placements

• Provides contract certainty for the insurer and expectations on the (re)insured

• Does not avoid need for due diligence prior to claims payment or coverage

• Not negotiable – if such a clause is necessary on a placement, can be no external influence over its use

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“Special Agreements” and other considerations

Clause on crude oil contract covering shipments from Iran to China:

“Reinsurers shall give cover to export shipments from Sanctioned Countries to

China ONLY. And such coverage only becomes effective once cargo is on

board vessel (after loading)”

What is problem with the above?

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Delegated Authority Workstreams

Binding authority financial crime clause development

Code of Practice update

Crystal guidance updated – AML / Sanctions / B and C

E Learning tool for coverholders developed

Coverholder compliance manual development

Coverholder financial crime risk matrix

Sanctions portal

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Lloyd’s Due diligence guidance

Sanctions Due Diligence Guidance launched 6 February 2012

Prepared in consultation with the LMA and reviewed by HMT who are linking the guidance from its website

Targeted at managing agents but relevant to brokers when placing at Lloyd’s.

Covers financial / trade sanctions – predominantly EU/UK perspective

Guidance not prescriptive but designed to assist in formulating compliance processes and benchmarking of existing procedures

Guidance is risk-sensitive – expectations of reasonable and proportionate due diligence and screening by considering exposure to risks created by specific business underwritten

Guidance on identifying risk factors and setting a framework for screening including timing, extent, frequency and issues specific to certain lines of business

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Lloyd’s Due diligence guidance

Due diligence / screening to be undertaken prior to underwriting, where possible

Due diligence/screening to take place at other points – prior to claims payment. Guidance covering context of Claims Transformation Project

Guidance on methods of acceptance covers delegated authorities and issues specific to the subscription market.

Market must be open and collaborative as to how sanctions affect them and what they will do to address it

Guidance also covers use of exclusion clauses

Brokers considered key source of information for purposes of due diligence and screening. Will have conducted own due diligence and expected to act as conduit for further information as necessary

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conclusion

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summary Offences increasingly impacting on insurance and other industries

U.S. sanctions are different but have wide scope – cannot be ignored but also legally difficult to follow as well

Ultimately, Market’s responsibility to:

Know their business, customers, ultimate owners etc

Understand implications of where doing business (esp. new markets)

Refer to Due Diligence guidance and other material

Correctly use sanction clauses

Agree procedures with their coverholders

Must consider geo-political environment – ignore at peril

Getting it wrong has serious ramifications

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