US and EU Sanctions: How

are Insurers Affected? Matthew Getz, Debevoise & Plimpton

Konstantin Bureiko, Debevoise & Plimpton

US and EU Sanctions: How

are Insurers Affected?

19 June 2015

Matthew Getz

Konstantin Bureiko

Agenda 1. Introduction to Sanctions

2. Overview of EU and US Sanctions

3. Sanctions Enforcement

4. Key Sanctions Regimes Affecting Insurers:

1. Iran

2. Russia

3. Cuba

5. Other Sanctions Risks

6. Dealing With Sanctions Risks

1. Systems and Controls

2. Sanctions Clauses

7. Future Developments

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INTRODUCTION

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Main Objectives of Sanctions

• Induce change by governments disfavoured by international community. For example:

– Force Iran to stop developing nuclear weapons

– Foster regime change in Syria

– Stop Russia undermining the territorial integrity of Ukraine

• Cut off resources to terrorists, drug traffickers, nuclear proliferators, human rights violators and others

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Applicable Sanctions Regimes

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Sanctioned territory United States European Union

Afghanistan √

Belarus √ √

Bosnia and Herzegovina * √

Burma/Myanmar √ √

Central African Republic √ √

China √

Cote d’Ivoire (Ivory Coast) √ √

Cuba √

Democratic Republic of Congo √ √

Egypt √

Eritrea √

Guinea-Bissau √

Haiti √

Iran √ √

Iraq √ √

Lebanon √ √

Liberia √* √

Libya √ √

Moldova √

North Korea √ √

Republic of Guinea √

Russia √ √

Serbia & Montenegro/Federal Republic of Yugoslavia * √

Sierra Leone *

Somalia √ √

South Sudan √ √

Sudan √ √

Syria √ √

Tunisia √

Ukraine √ √

Venezuela √

Western Balkans √*

Yemen √ √

Zimbabwe √ √

EU Sanctions

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US Sanctions

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Overview of US and EU Sanctions

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EU Sanctions – Generally

• Sanctions are formulated and promulgated by the EU, with direct effect in Member States

• Enforcement by Member states

– Criminal / Financial / Insurance Regulators

• Broad jurisdictional reach, including:

– EU citizens and companies anywhere in the world

– Any business that takes place in the EU

• Prohibitions of circumvention or facilitation

• Licences sometimes available

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Types of EU Sanctions

1. Asset freezes

2. Targeted sanctions. E.g.:

– Oil industry in Iran

– Named Russian banks

3. Export controls

4. Fund transfer restrictions

5. Restrictions on admission / travel bans

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US Sanctions – Generally

• Sanctions are imposed by US President through Executive Orders or by US Congress through legislation

• Administered and enforced by US Treasury Department’s Office of Foreign Assets Control (“OFAC”) (other government agencies also involved)

– Recent significant enforcement actions against foreign companies

• Broad jurisdictional reach:

– US citizens, permanent residents and US companies, anywhere in the world

– Any business that takes place in US

– “Secondary sanctions” can reach non-US companies

• Prohibitions on US persons “facilitating” restricted transactions or entering into transactions with “intent” or “effect” of evading sanctions

• Licences sometimes available

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Types of US Sanctions

1. “Blocking” sanctions

2. Country-wide embargoes

3. Transaction-based or activity-based restrictions

– Oil industry in Syria

– “Sectoral sanctions” against trade in long-term debt or equity of designated Russian companies

4. Export controls

5. “Secondary” sanctions, applied to Iran and Cuba only:

– Non-US companies can be sanctioned for engaging in certain types of material transactions with Iran, or involving property nationalised by Cuba

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Sanctions Enforcement

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Penalties for OFAC Violations (US)

• For primary sanctions violations

– Civil fines up to $250,000 or twice the amount of the transaction, whichever is greater

– For willful violations, criminal fines up to $1,000,000 and imprisonment up to 20 years

• US enforcement appears to target overseas entities

– Of around $16 billion in sanctions-related fines imposed since 2009 on the finance sector, only $90 million applied to US firms

– US imposed record penalty of $8.97 billion on BNP Paribas in July 2014

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1 – Case also involved lack of money laundering controls 2 – Part of Commerzbank’s fine related to AML failings 3 – ABN Amro was taken over by Royal Bank of Scotland in 2007

Entity Location Sanction Regimes Breached Year Fine

BNP Paribas France Cuba, Iran and Sudan 2014 $8.97 billion

HSBC1 UK Burma, Cuba, Iran, Libya, Sudan 2012 $1.9 billion

Commerzbank2 Germany Burma, Cuba, Iran and Sudan 2015 $1.45 billion

Standard Chartered UK Burma, Iran, Libya, Sudan 2012 $667 million

ING Netherlands Burma, Cuba, Iran, Libya, Sudan 2012 $619 million

Credit Suisse Switzerland Iran 2009 $536 million

ABN Amro3 Netherlands/U.K. Cuba, Iran, Libya, Sudan 2010 $500 million

Barclays UK Burma, Cuba, Iran, Libya, Sudan 2010 $298 million

Clearstream Banking Germany Iran 2014 $152 million

Royal Bank of Scotland UK Burma, Cuba, Iran, Sudan 2013 $100 million

US Enforcement Actions: Financial Sector

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US Enforcement Actions: Insurers

• Insurers are not safe!

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Entity Location Sanction Regimes Breached Year Fine

The American Steamship Owners Mutual Protection and Indemnity Association, Inc

US Cuba, Iran and Sudan 2013 $348,000

AIG US Cuba 2014 $279,038

BUPA Florida US Cuba 2014 $128,704

HCC Insurance Holdings, Inc US Iran 2011 $38,448

UK Regulation

• Violations prosecuted in criminal courts

• Criminal penalties

– Unlimited fines

– Imprisonment (up to 7 years)

• Financial Conduct Authority can punish violations of its Principles of Business: vital to have proportionate systems and controls in place

– Willis: £6.9 million fine for failure to implement controls to prevent financial crimes, including sanctions (2011)

– RBS: £5.6 million fine for failure to implement sanctions controls (2010)

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UK Regulation (cont’d.)

• Lloyd’s of London takes proactive role in overseeing sanctions compliance for its members

– Sets standards of behaviour for insurers through guidance

– Lloyd’s International Regulatory Affairs Team undertakes reviews of insurer sanctions compliance (most recent review completed end of 2014)

– Provides tools and training for insurers to assist with sanctions compliance

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Key Sanctions Regimes Affecting

Insurers - Iran

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Iran Nuclear Deal

• Some sanctions affecting insurance industry already suspended/repealed

• Many more to be suspended from 30 June 2015 under Joint Plan of Action if IAEA approves Iran nuclear progress

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EU Iran Sanctions: Overview

• Currently most comprehensive EU sanctions regime in place, consisting of:

– Asset freezes

– Express prohibition on insuring Iranian legal persons

– Various sectoral and finance restrictions (many of which target the Iranian energy industry)

– Fund transfer restrictions

• All energy industry sanctions and many asset freezes may be suspended from 30 June 2015

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EU Iran Sanctions: Asset Freezes

• EU Asset Freezes affect listed individuals and entities

– EU Asset Freeze list available at http://eeas.europa.eu/cfsp/sanctions/consol-list/index_en.htm

• EU Asset Freezes mean persons are prohibited from

– Dealing in funds or economic resources that belong to or are controlled or held by the listed individuals and entities

– Making funds or economic resources available to the listed individuals and entities, whether directly or indirectly

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EU Iran Sanctions: Asset Freezes (Cont’d)

• Indirectly benefiting: “No funds or economic resources shall be made available, directly or indirectly, to or for the benefit of natural or legal persons, entities, bodies listed”

• There is a presumption that funds or economic resources provided to:

– Persons owned more than 50% by listed persons

– Persons controlled by listed persons

are for the benefit of the listed persons and thus in violation

UNLESS

• Taking all circumstances into account, it can be reasonably demonstrated that the funds or economic resources will not be used by or be for the benefit of the listed person

– Distribution of profits to listed shareholder is not in itself a violation

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EU Iran Sanctions: Transfer Restrictions

• Authorisation needed if transfer to or from Iran of

– EUR 100,000 for transfers in general

– EUR 400,000 for transfers regarding personal remittances

– EUR 1,000,000 for transfers regarding foodstuffs, healthcare, medical equipment, or for agricultural or humanitarian purposes

• Requirement to notify a competent authority of any transfer above EUR 10,000 if made for personal remittances or regarding foodstuffs, healthcare, medical equipment, or for agricultural or humanitarian purposes

• Different limits apply for transfers not between an EU financial institution and Iranian financial institution

• Current authorization limits are temporary – may revert to previous, lower levels

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EU Iran Sanctions: Insuring Iranian Legal

Persons

• Prohibition on providing or brokering insurance or re-insurance for Iranian legal persons

• Exceptions for:

– Iranian natural persons (except where they are acting at the direction of the Iranian government or Iranian companies)

– Compulsory or third party liability insurance for Iranian persons based in the EU

– Insuring Iranian diplomatic or consular missions in the EU

– Limited additional exceptions for insuring activities undertaken by Iranian natural persons acting at the direction of the Iranian government or Iranian companies

• Prohibition on extension or renewal of insurance and re-insurance agreements concluded before 27 October 2010

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EU Iran Sanctions: Pre-October 2010 Policies

• HMT’s Guidance 27 October 2010

– Compliance with pre-27 October 2010 agreements is not prohibited, insofar as they can run their course, but their extension or renewal is not permitted

• Lloyds Market Bulletin, reviewed by HMT, 20 January 2011

– “Optional” renewals not permitted but those which “oblige” the insurer to accept additional risk are

• Arash v Groupama, Court of Appeals, 25 May 2011

– Insurers have right to invoke sanctions clause to deny insurance but the court refused to rule on whether automatic extension is permitted under the EU Regulation

• Ultimate resolution will require a ruling by the domestic criminal or the European courts

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EU Iran Sanctions: Insuring Oil & Gas Trading

Activities

• Prohibition on providing insurance or re-insurance related to the import, purchase or transport of:

– Crude oil and petroleum products of Iranian origin or that have been imported from Iran

– Certain petrochemical products of Iranian origin or that have been imported from Iran

– Natural gas which originates in Iran or has been exported from Iran

• Temporary suspension of restriction on insuring or re-insuring Iranian crude oil, petroleum and petrochemical products

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EU Iran Sanctions: Financial Assistance

Restrictions

• EU Iran sanctions (and other EU sanctions regimes) prohibit the provision of financial assistance for certain trade activities

– e.g., Iran sanctions prohibit the provision of financial assistance for any sale, supply, transfer or export of military goods to an Iranian entity or for use in Iran

• No formal definition of what “financial assistance” covers, but BIS does not consider a prohibition on financial assistance as prohibiting the provision of insurance and re-insurance, unless the relevant legislation expressly refers to such activities

– UK High Court has noted that interpretation of scope of “financial assistance” differs between EU member states

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• Statutory Developments

– ISA: Iran Sanctions Act

– CISADA: Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010

– NDAA: National Defense Authorization Act of 2012

– ITRSHRA: Iran Threat Reduction and Syria Human Rights Act of 2012

– IFCPA: Iran Freedom and Counter Proliferation Act of 2012 (effective 1 July 2013)

• Past 5 Years: 30+ New Regulations and Executive Orders

US Iran Sanctions: Overview

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• US persons must not deal, directly or indirectly, with:

– The Government of Iran and its controlled entities (e.g., the National Iranian Oil Company, IRISL, etc.)

– Companies and individuals in Iran

– Goods and services of Iranian origin

– Goods and services for export to Iran

– SDNs of Iran

• Also applies to foreign companies acting in the US, or in their dealings with US companies and individuals

• Also applies to companies “owned or controlled” by a US person – that is, non-US subsidiaries

US Primary Sanctions: US Companies and

Subsidiaries

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• Secondary sanctions on Iran seek to restrict non-US companies from trading with Iran

• Secondary sanctions do not apply to all transactions with Iran

– Rather, secondary sanctions apply only to specified commercial activities, which include certain transactions with Iran’s energy sector

• If a non-US company engages in these activities with Iran, the US may impose certain sanctions on that company

US Secondary Sanctions: What are they?

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• Effective July 1, 2013, sanctions applicable against those knowingly providing support, goods or services (including insurance or reinsurance):

– With respect to Iran-related activities for which sanctions already have been imposed under US law

– To persons in the auto, energy, shipping, ship-building or ports sectors of Iran

– To persons with respect to the sale or transfer to Iran of certain materials (e.g., graphite, aluminum, steel, coal)

– To persons designated as SDNs

US Secondary Sanctions: Non-Financial Non-

US Firms

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Key Sanctions Regimes Affecting

Insurers - Russia

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EU Russia Sanctions: Overview • 4 sanctions regimes working in parallel

I. Asset freeze on individuals associated with the former Ukrainian government

II. Asset freeze on political and military figures from Crimea and Russia and companies associated with these figures

III. Trade restrictions on businesses and entities in Crimea and Sevastopol

IV. Trade and financial restrictions on Russian military, oil and banking industries

• Licences are available in very limited circumstances

• Sunset provision: EU decision implementing sectoral sanctions expires 31 July 2015, unless renewed (Regime II has been extended to at least September 2015)

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EU Russia Sanctions: Oil Industry

Restrictions

• Authorisation required for the sale, supply, transfer or export of certain listed oil industry-related products for use in Russia, or related financial or technical assistance

• Prohibition on providing products or services for Russian:

– Deep water oil exploration and production

– Arctic oil exploration and production

– Shale oil projects

• Insuring or re-insuring such activities NOT directly prohibited, but risk of accessory liability if you insure EU person acting in breach of these restrictions

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EU Russia Sanctions: Military and Trade

Restrictions

• Prohibition on the sale, supply, transfer or export of Dual Use goods to Russia if those items are or may be intended, in their entirety or in part, for military use or for a military end-user (or to certain listed entities), or related financial or technical assistance

• Arms embargo on Russia and prohibition on related financial or technical assistance and (re)insurance for sale, supply, transfer or export of military goods to Russia

• Prohibition on insuring or re-insuring import of goods originating in Crimea or Sevastopol

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Key Sanctions Regimes Affecting

Insurers - Cuba

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Cuba Sanctions for US Companies and

Subsidiaries

• With very limited exceptions, US companies and individuals, and companies “owned or controlled” by a US person must not deal, directly or indirectly, with:

– Cuban government and Cuban nationals (including SDNs of Cuba)

– Companies in which Cuba owns a substantial equity interest

– Individuals, business operations or property in Cuba

– Goods or services of Cuban origin

– Vessels that have been in a Cuban port in the last 180 days

– Goods or services to be imported from or exported to Cuba, including aircraft flying from or to Cuba

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Cuba relaxation

• In December 2014, US President announced beginning of normalisation of US/Cuba ties

• Embargo remains in place

• Some relaxation for travel to Cuba and related travel insurance

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Other Sanctions Risks

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Other insurance-specific sanctions

Syria

• No insurance to (i) the state of Syria, the Syrian Government, its public bodies, corporations and agencies and (ii) any natural legal person, entity or body when acting on behalf of legal persons, entities or bodies referred to in (i)

• No insurance for Syrian oil and petroleum industry

• No insurance or reinsurance for sale, supply, transfer or export of various goods that can be used for internal repression or the construction of new power plants, or for import of military goods originating in Syria

Sudan, South Sudan, Central African Republic, North Korea

• No insurance or reinsurance for sale, supply, transfer or export of military goods

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UK Export: Military Trade Controls

• Export Control Order 2008 controls movement of certain categories of military goods from one third country to another third country

• Restricts insurance for:

1. Supply or delivery of “Category A” military goods from one third country to another third country

» “Category A” military goods = execution equipment, cluster munitions

2. Supply or delivery of any military goods from one third country to an embargoed destination

» Embargoed destinations include Russia, Syria and Iran

• Licences available (though unlikely to be granted)

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Dealing with Sanctions Risks:

Systems and Controls

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Sanctions systems and controls

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• Appropriate systems and controls, including:

– Clear governance structure and allocation of responsibility for sanctions compliance

– Policies and procedures introduced on a risk-sensitive basis

– Appropriate levels of sanctions training provided to employees

» E.g., underwriters should have ability to spot likely sanctions issues as early as possible

– Appropriate due diligence and screening processes

– Monitoring and reporting systems

– Appropriate record keeping

Due Diligence

• Ensure employees understand how to use relevant screening software and company’s due diligence policies

• Necessary to have “red flag” system to ensure employees know when to escalate issues

• Due diligence must be properly documented

• Employees must be ready to ask for more information about the insured or the subject matter of the policy

– Ensure that due diligence queries are followed-up

• On-going monitoring of policies required as sanctions regimes can change quickly

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What if only limited information is

available?

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• What if it’s not possible to know the identity of every beneficiary in a delegated authority arrangement?

– HMT FAQs: Take reasonable measures to establish that third party understands its obligation to comply with UK sanction laws and that third party’s systems and controls are commensurate with UK financial sanctions obligations as they apply to the delegated activity. Consider making specific reference to sanctions compliance in terms of business

– Lloyd’s Guidance: Insurer should ensure that entity with delegated authority performs pre-payment sanctions due diligence and screening on the same basis as if they were handling the claims themselves. Prior to appointing entity with delegated authority, insurer should request information from that entity about their sanctions screening and include contractual terms about sanctions compliance standards

What if only limited information is

available? (cont’d)

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• As an insurer, I may only receive partial information from third parties. What should I do?

– HMT FAQs: Undertake reasonable enquiries and maximise detail of info provided, check details against lists. If no conclusion can be drawn, the insurer may lack requisite knowledge and suspicion to breach sanctions

– Lloyd’s Guidance: Managing agents must implement reasonable and proportionate due diligence and screening processes to prevent infringement of financial and trade sanctions and to comply with regulatory requirements. Where identity of the insured is unknown, or activities subject to the cover are unknown, managing agents are strongly recommended to use sanctions exclusions and maintain on-going vigilance relating to the contract

Dealing with Sanctions Risks:

Sanctions Clauses

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Sanctions Clauses

• A sanctions clause warns counterparties that sanctions legislation may prohibit an insurer from providing cover or paying out a premium in respect of claims in relation to certain countries, persons or assets

• It provides contractual protection if an insurer needs to halt business or claims to comply with sanctions

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What Matters in a Sanctions Clause

Type of liability excluded – the exclusion of liability should be wide enough to prevent any benefit from being provided if the clause is triggered (e.g. also covering return premiums, if relevant)

Timing – the clause should cover both the sanctions in force at the time that the contract is executed and at any time thereafter

Applicable Sanctions Regimes – all of the sanctions regimes likely to apply to the cover should be excluded

Types of Sanctions and Embargoes covered – the clause should cover all types of sanctions and trade restrictions, not just “economic sanctions”

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2

3

1

4

Is a Sanction Clause Enough?

• Sanctions clauses may not work where the insurer has knowledge of the activities, transactions or sanctioned entities at the time of writing the risk or where a premium has been allocated specifically to such activities, transactions or sanctioned entities

• Treasury’s view is that a sanctions clause can only be relied on if “having conducted due diligence, insurers have no reasonable cause to suspect there is a sanctions breach”

• If you know or suspect that an aspect of a policy might be in breach of sanctions, expressly exclude it!

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LMA 3100

• 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 sanctions, 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

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Future Developments

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Future Developments

• Russia: EU targeted sanctions require renewal by 31 July 2015

– Minsk ceasefire appears to be barely holding (e.g. reports of fighting around Shyrokyne)

– Reports that some member states (e.g. Greece) will oppose renewal

• Iran: on 2 April 2015, E3+3 countries reached high level agreement on key parameters of a Joint Comprehensive Action Plan

– Agreement must be finalised by 30 June 2015

– Some EU/US sanctions will be suspended on Iran fulfilling its obligations under the agreement

– Unclear if all sanctions will be lifted (including oil-related sanctions) even if Iran meets obligations

– US Senate gave itself approval rights over lifting of Iran sanctions, but President can veto

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Contact Details

Matt Getz

– mgetz@debevoise.com

– 0207 786 5518

Konstantin Bureiko

– kbureiko@debevoise.com

– 0207 786 5484

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BILA would like to thank

Matthew Getz &

Konstantin Bureiko