«Sanctions and their impact on domestic and international ... · • Burma • Central African ... • Specially Designated Nationals list (“SDNs”) ... whether the name of the

Association Internationale de Droit des Assurances

Swiss Chapter

«Sanctions and their impact on domestic and international insurance business»

AIDA Swiss Chapter

Zurich, 19 January 2015

Program of today

Topic Speakers

Introduction AIDA Swiss Chapter Organizing Committee

Sanctions and their impact on domestic and international insurance business Presentations and Panel Discussion

— Andrew J. Tobin (Cozen O’Connor)

— Dr. Lara Martiner (Allianz Risk Transfer AG)

— Dr. Michael W. Faske (EY) and Rachel Sexton (EY)

— Moderation: Dr. Stefanie Gey (EY) and Dr. Peter

Hsu (Bär & Karrer AG)

Networking Reception

2

Christian Lang – Chairman Swiss Re

Lars Gerspacher gbf Attorneys-at-Law

Dr. Stefanie Gey EY

Prof. Dr. Helmut Heiss University of Zurich

Dr. Peter Hsu Bär & Karrer

Rolf Staub Zurich Insurance Company

AIDA Swiss Chapter – Organizing Committee

3

AIDA Swiss Chapter Organizing Committee:

AIDA Swiss Chapter Support: Dominik Skrobala and David Hirzel

AIDA Swiss Chapter – Announcements

4

Next AIDA Swiss Chapter Event: Wednesday, 15 April 2015, 18.00h at University of Zurich

AIDA Europe Conference 2015: 11 / 12 June in Copenhagen Link to registration on: www.aidaswisschapter.org Suggestions for future topics are welcome

http://www.aidaswisschapter.org/





AIDA Swiss Chapter - Sponsors

We thank our sponsor of today‘s event:

We thank our donators for their constant support:

5

EU and US Sanctions

Legal Implications for Insurers

AIDA Conference – Zurich

Andrew J Tobin

Partner

London

[email protected]

+44 (0)20 7864 2027

January 2015

mailto:[email protected]

Cozen O’ Connor

• 600 lawyers

• HQ Philadelphia

• 22 Offices US/Canada

• London office

• Coverage / Subrogation

• Aviation

• Regulatory / government relations

Overview

• EU and US Sanctions

• Ukraine / Russia

• Who must comply?

• What do sanctions prohibit?

• Penalties for breach

• Licences

• Contractual issues

US Sanctions • Balkans

• Belarus

• Burma

• Central African Republic

• Counter narcotics

• Counter terrorism

• Cuba

• DRC

• Iran

• Iraq

• Lebanon

• Liberia (Charles Taylor)

• Libya

• Magnitsky (Russia)

• Non-proliferation

• North Korea

• Rough diamond trade controls

• Russia / Ukraine

• Somalia

• Sudan

• South Sudan

• Syria

• Transnational criminal Sanctions

• Yemen

• Zimbabwe

• Also general and specific arms and

technology export controls

EU Sanctions • Afghanistan

• Al Quaida

• Belarus

• Central African Republic

• DRC

• Egypt

• Eritrea

• Yugoslavia / Serbia

• Guinea

• Guinea-Bissau

• Iran (human rights)

• Iran (financial sanctions)

• Iraq

• Ivory coast

• Lebanon and Syria

• Liberia

• North Korea

• Somalia

• Sudan

• South Sudan

• Syria

• Designated persons – terrorism

• Tunisia

• Ukraine / Russia (misappropriation and

human rights)

• Ukraine / Russia (sovereignty and

territorial integrity)

• Zimbabwe

• Also arms export and technology

controls

US Sanctions • Sources: Multiple Act of Congress and Executive

Orders

• Office of Foreign Asset Control (“OFAC”)

– Issues regulations / implements Orders

– Grants licences

– Enforcement

• Types:

– “Blocking” – freezing asset and prohibition on transfers of

money, goods and services to or from Specially Designated

Nationals (“SDNs”)

– “Sectoral Sanction” – targets types of transaction

– Broad trade embargoes (Iran / Cuba)

– Modern times – list based

– Arms / dual use / import export controls

US Sanctions

• Who must comply (general)?

– US citizens or permanent residents anywhere in the world

– Everyone (person and companies) in the US

– US companies, including foreign offices or branches –

worldwide

• Extra-territorial sanctions

– Can apply to non-US subsidiaries

– Imports / exports to US

– Businesses using US banking system to clear US dollars

Russia / Ukraine Sanctions • Blocking Sanctions (against “SDNs”)

6 March 2014 EO13660 – foundation

18/20 March: EO13661/2 – named govt

officials and energy / mining /

metals / engineering / defence

targets / Putin allies

19 December: EO13685 – expanded list;

focus on Crimea

• Sectoral Sanctions

1 July / 12 Sept Prevents financing / dealing new

debt with maturity greater than 30

days.

Blocking Sanctions (US) • “All property and interests in property that hereafter

come within the United States, or that are or hereafter

come within the possession or control of any United

States Person (including any foreign branch) of the

[listed] person are blocked and may not be transferred,

paid, exported, withdrawn or otherwise dealt with in.”

• OFAC guidance: “Property” very widely defined,

includes money, cheques, debts, obligations,

guarantees, letters of credit etc and insurance”

• Include reinsurance

• Specially Designated Nationals list (“SDNs”)

What does Blocking Mean?(US) • OFAC: Blocking is another word for “freezing:”

• “it is simply a way of controlling targeted property. Title

to the blocked property remains with the target, but the

exercise of powers and privileges normally associated

with ownership is prohibited without authorisation from

OFAC. Blocking immediately imposes an across the

board prohibition against transfers or dealings of any

kind with regard to the property.”

What Does Blocking

Mean?(US)

• Blocking applies immediately. Applies to existing

contracts.

• Policy cannot be issued to SDN.

• Any monies received from SDN must be blocked

• If a policy has been issued to an SDN then OFAC must

be told immediately and a licence applied for.

• OFAC may allow premiums to be paid, with licence.

• Claims cannot be paid out, without licence.

• “The important thing to remember is that the policy

itself is a blocked contract and all dealings with it must

involve OFAC”

Blocking Sanctions (US) • Property and “interests in property” of SDN are

blocked.

• Blocked person has an “interest in property” in which it

owns, directly or indirectly, a 50% or greater interest.

• “The property and interests in property of such an

entity are blocked, and [it is] … blocked regardless of

whether the name of the entity is incorporated into …

the SDN list.”

Blocking Sanctions (US)

• Simply relying on SDN list not enough

• Identify ownership and control necessary

• Russians many overseas investments. Not obvious.

• Opaque ownership structures. Enhanced due diligence

Blocking in Practice (US) • Insurers must frequently screen databases for OFAC

compliance. (Because the assets are to be frozen

immediately).

• Pre-policy issuance screening alone not sufficient.

Frequent screening expected. SDN list changes

• Screening loss payees, mortgagors, others with

interest in policy.

• New insureds, assignees etc

Blocking in Practice (US) • Insurers can notify insureds that their policies are

blocked and advise that premium payments will be

placed in a blocked account.

• Blocked account – held by insurers, interest bearing.

Only OFAC authorised debits can be made.

• Notify OFAC in 10 days of receipt.

Blocking in Practice (US) • Can be single or multiple accounts. Audit trail needed.

(E.g. “blocked Russian funds”).

• OFAC recommends explicit exclusion in insurance

policies for risks that would violate US Sanctions laws.

• What if you find a breach?

– Self report to OFAC. Self reporting is a mitigating factor

– OFAC “reviews the totality of the circumstances surrounding

any violation, including the quality of the company’s OFAC

compliance program.”

Sectoral Sanctions (US)

• “SSI List”

• Russia / Ukraine. Directives 1 and 2 under EO

13662. Focus on energy and finance

• Not blocking sanctions. Apply prospectively.

• Prohibit:

– “providing financing for, or otherwise dealing in debt

with a maturity of longer than [30] days or equity is

issued on or after [July 16 2014] by or on behalf of,

or for the benefit of the persons operating in

Russia’s [financial / energy sector as listed]”

– 30% Russian banks locked out

– Effect on credit insurers – loss of business

Facilitating / Circumvention (US)

• Facilitating:

“A person commits an offence who intentionally

participated in activities knowing that the object of

them is (whether directly or indirectly) to circumvent

any of the prohibition…”

• Circumvention

“A person commits an offence who intentionally

participates in activities knowing that the object or

effect of them is (whether directly or indirectly) to

circumvent any of the prohibitions …”

• E.g. “routing” through reinsurance or

subsidiaries to evade sanctions prohibited

US Penalties • Civil fines up to $250,000 per transaction or twice

amount

• Wilful violations – criminal fines and up to 20 years

prison

• Recent cases:

– BNP Paribas – US$8.9Bn fine (Iran, Sudan, Cuba).

Prosecutions possible

– Standard Chartered - $327m (Iran – deletion of records)

– HSBC – US$1.9Bn $1.92 Bn (Mexico money laundering, Iran,

Libya, Sudan, Cuba. “Woefully small compliance department”)

– ING - $619m (Cuba, Iran)

• Regulatory action – e.g NYC

US Extra-Territorial Sanctions • Extra caution: N. Korea, Syria, Iran, Cuba

• Sanctions rules can apply to companies owned or

controlled by US businesses, even if foreign.

• Foreign companies using US goods, software,

technology, involving US persons, or clearing US

dollars through US financial system can be subject to

certain sanctions obligations.

• Penalties on foreign include: Sanctions, travel bans,

denial of US loans, use of US dollars, import bans,

bank account restrictions and others

EU Sanctions

• Focus on Ukraine / Russia

• Made by EU Regulation

– Regulations 269/2014 and 208/2014 and others

– Progressively widened

– Directly applicable each member state

– Each member States enforces (UK: HM Treasury)

• Types:

– Travel Bans

– Asset Freezes – like Blocking

– Restrictive Measures – control access to finance /

markets

– Export / Arms / Technology

Who must comply? (EU)

• Everyone in EU (regardless of nationality or

place of incorporation)

• EU registered companies and citizens

anywhere in the world

• No mention of affiliates and subsidiaries (cf.

US). But beware of circumvention offences

Asset Freeze (EU)

• Article 2 (similar to Blocking) – “(1) All funds or economic resources belonging to, owned or

held by any natural or legal person [listed in the annex], entity

or bodies associated with them shall be frozen.”

– (2) No funds or economic resources shall be made available

directly or indirectly to or for the benefit of natural persons,

entities or bodies associated with them listed in Annex 1.”

• “Owned or held by …” means non-named entities can

be subject to sanctions. Consider shareholding, voting,

control.

• Economic resources means “assets of every kind”

Asset Freeze (EU) • Article 11:

“No claims in connection with any contract or transaction, the

performance of which has been affected, directly or indirectly, in

whole or in party, by the measures imposed under this

Regulation, including claims for indemnity or any other claim of

this type … or payment of a guarantee or indemnity… of whatever

form, shall be satisfied if they are made by [sanctioned entities or

their agents.]”

Asset Freeze (EU) • “Freezing of economic resources means preventing

any move, transfer, alteration of use, access to, or

dealing with fund in any way that would result in any

change in their volume, amount, location, ownership,

possession, character, destination or any other change

that would enable the funds to be used …”

• Premium, premium returns, and claims payments must

be frozen.

• Blocking means no payment without licence from

Treasury. (Blocked account may be helpful)

HM Treasury Notice • Ukraine (Sovereignty and Territorial Integrity) Notice, 28 July 2014

• “3. What you must do:

i. check whether you maintain any accounts or hold any funds or

economic resources for the persons set out in the Annex to this Notice;

ii. freeze such accounts, and other funds or economic resources;

iii. refrain from dealing with such accounts, funds or economic resources or

making them available to such persons unless licensed by the Treasury;

iv. report any findings to the Treasury, together with any additional

information that would facilitate compliance with the Regulation; and

v. provide any information concerning the frozen assets of designated

persons that the Treasury may request. Information reported to the Treasury

may be passed on to other regulatory authorities or law enforcement.

4. Failure to comply with financial sanctions legislation or to seek to

circumvent its provisions is a criminal offence.”

EU - General

• Fines, imprisonment, personal liability of

directors and officers

• FCA / Lloyd’s action

• Self reporting – mitigation

• Circumvention – “(2) A person commits an offence who intentionally participates in

activities knowing that the object or effect of them is (whether directly

or indirectly)— (a) to circumvent any of the prohibitions in regulations

3 to 7, or

– (b) to enable or facilitate the contravention of any such prohibition.”

• Similar to US. Routing through reinsurance /

subsidiaries prohibited

• Licenses can be sought

Blocking and Reinsurance

• Clear

– Cedant an SDN – blocked

– Cedant owned / controlled by SDN –

blocked

• Unclear

– If r/i should refuse indemnity to reinsured

because insured is blocked.

– Does insured have direct interest in

reinsurance?

– Treaty facultative / fronted?

– Cut through clauses?

Sanctions Clauses

• OFAC / HMG recommend contracts have sanctions

exclusions.

• LMA 3100 (under review):

– “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 or 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 sanction, laws or regulations of the European Union,

United Kingdom or United States of America.”

• Clause alone is not enough

Contractual Position • Are sanctions a contractual defence to an insurance

claim?

– England: Contracts can be “frustrated” by illegality

(including sanctions)

– But, courts may expect insurers to seek a licence:

Melli v Holbud (2013)

– Iranian Bank (asset frozen) sued customer for fees

– Customer refused to pay, citing sanctions.

– Judgment for bank. Customer could and should

have got licence.

“designation of the Bank did not render the contract incapable

of performance where, as here, a licence could be sought

and, on the evidence, could be expected to be forthcoming.”

Contractual Position

• Melli – implications for re/insurers

– Obligations not necessarily ended by sanctions –

just suspended

– Sanctions not a defence to a claim if licence not

sought

– i.e. insurers should apply for licence.

Contractual Position • Arash Shipping v Groupama [2011]; Court of Appeal

– Marine insurance policy issued pre-sanctions to Iranian

Shipping Co

– EU Regulation 961 prohibited renewal / extension of certain

Iran re/insurance after 27 October 2010.

– Argument about proper interpretation of Reg. 961

– Iran sanctions clause allowing cancellation where : “assured

may … in the opinion of the insurer, expose the insurer to the

risk of being subject to any sanction …”

– Dec 2010 insurers gave prospective notice of non-

renewal/cancellation.

– Court of Appeal upheld notice of cancellation. Reasonable and

in good faith. It was enough that insurers might be subject to

sanctions

Danger Areas

• Open covers

• Automatic renewals

• Loss payees / mortgagors

• Joint ventures

• Unnamed insureds (e.g. contractors and

“affiliates”)

• Policy assignments

• Fronting / cut throughs

• Subrogation

Conclusions

• Robust compliance department

• Risk based approach

• New and current business to be screened

• Care at all stages: new business, dealing with

premium, payment of claims

• Audit trail of due diligence

• Consider licences

• Consider exclusions

• Seek advice promptly if concerned of breach

• Self report = mitigation

Disclaimer

• This informal presentation does not constitute legal advice and no reliance should

be placed upon the same. Cozen O Connor assumes no liability, including for

negligence. Formal legal advice should always be sought.

• © Cozen O Connor 2015.

Allianz Risk Transfer AG

AIDA Swiss Chapter (Re)Insurance Business – Sanction Risks & Mitigants

19 January 2015 Lara Martiner ART Group Compliance Officer

This presentation was prepared for the AIDA Conference on Sanctions of 19 January 2015.

The information provided in this presentation reflect the professional views of the author and do not purport to reflect the views or policies of Allianz Risk Transfer AG or Allianz Group. The terminology used may not necessarily be consistent with Allianz official terms. This information is given in summary form and does not purport to be complete.

Unless otherwise specified, this presentation should not be changed, distributed or reproduced without the prior written consent of the author.

Disclaimer

© Copyright Allianz Risk Transfer

2

© Copyright ART Group

Agenda 1 Sources, scope and definitions

2 Restrictive measures

3 Preventive measures

4 Consequences of violations

3



1 Sources, scope and definitions

4


Multiple sanction regimes

local

local

local

local

All Sanction regimes have the UN as the common denominator (for UN member states)

All of them have country restrictions and listed individuals (including companies, planes and vessels) All need to be applied to financial services companies and all their business activities

5


Compliance with sanctions

Challenges

Multiple sanction regimes Extraterritorial reach Apply to whole life cycle of insurance business Controls to be embedded in key business processes

Indirect activities and facilitation Payment system High fines &

strong enforcement

6



2 Restrictive measures

7


Restrictive measures

Trade embargoes (e.g. arms, oil, goods and services related to certain activities, dual-use goods) Payment restrictions Prohibition on investment and financing (e.g. oil & gas industry) Restrictions on access to financial markets (e.g. bonds) Restrictions on access to the US market (e.g. IFCA)

Restrictions often include (re)insurance

Restrictive measures

Countries Entities/individuals

8

Goods/services


How do sanctions programs work?

1. Country Programs*

* These are examples only. General sanction programs are similar in most jurisdictions but the detailed bans and restrictions vary and have to be checked in every single case – this is only an indication of applicable sanctions

Cuba

Iran, North Korea, Syria, Sudan (North) Wide restrictions

US sanctions only

Ban of specific goods/services, asset freeze for specific entities/individuals

Ivory Coast, Kongo, Belarus, Russia, Ukraine, Zimbabwe etc.*

9

2. Entities/individuals Individuals Companies Agencies Entities & Vessels etc.

Asset freeze

Transaction/ services bans or

restrictions

Individual name check

required “SDN-List”



3 Preventive measures

10


Sanction checks – overview of general process

Transaction Check involved countries

Check involved goods & services

Check involved parties

Go ahead

Any of the following countries involved? - Iran - North Korea - Sudan - Cuba - Syria

Any of the following goods & services involved? - Arms/ weapons - Military operation &

services - Nuclear material - Dual use goods - Diamonds

Check against the applicable individual lists (SDN lists): - Country of nationality of

employees - Parent company country - Country where located - Country of transaction

currency

11

No business partner(s) from a country or territory on the applicable country sanctions list (e.g. Iran, North Korea, Sudan, Cuba, Syria)

No goods or services prohibited by one of the applicable sanctions lists (e.g. arms, nuclear material, dual use goods, diamonds)

No business with individuals, institutions, entities, charities, vessels or any special designated nationals (SDNs) list (e.g. Russian or Ukrainian blacklisted individuals)


Identify potential sanction exposure and set appropriate mitigants Review transaction, risk, coverage and counterparties and perform appropriate due

diligence Document checks performed and findings made Escalate and report any concerns Implement mitigants

For international coverage a formal assessment of sanction related risks should be made: prior to closing of a new transaction prior to renewal or amendment of an existing transaction prior to making any claims payment or other payment

Sanction assessment

12

Objective


Sanction program - Underwriting

1. Underwriting controls

13

Underwriting sanction checks for existing business, new business, renewals, amendments Counterparty database Sanction assessment / UW due diligence Exclusions (territorial scope/ risks) Sanction exclusion clause Automated screening & red flags Escalation & sign-off procedure


UW Controls - UW Due Diligence

Underwriters need to understand…

Overall geographic scope of coverage/scope of underlying risks; risk scenarios / specific activities

Name & corporate domicile of counterparties and relevant transaction participants (e.g. policyholder(s), named insureds and of all such assureds and loss payees who are reasonably identifiable (e.g. list of affiliated entities))

Nature of the counterparty’s business (such as industry segments, target markets, target and/or existing customers)

Counterparty’s own policy and approach to ensure compliance with international sanctions regimes

14


Sanction program - Claims

2. Claims controls

15

Claims sanction checks for claims settlements & payments Claims database Automated/manual screening Sanction flags (frozen/limited account) Claims due diligence/assessment


Name and corporate domicile of counterparties/claimants/beneficiaries and other payment recipients (e.g. policyholder(s), named insureds and of all such assureds and loss payees who are reasonably identifiable (e.g. list of affiliated entities)

Claims Controls – Claims Due Diligence

Claims managers need to understand…

Origin of claims (geographic origin of claim and coverage/underlying risk; nature of risks/claims)

Countries involved: Name and corporate domicile of counterparties/claimants and any other relevant payment recipients

Nature of the counterparty’s business (such as industry segments, target markets, target and/or existing customers)

16


Sanction program - Others

3. Other controls

17

Finance & Accounting: payments review SAP/payment system screening Red flags Escalation procedure

HR: employee screening

Procurement: supplier & vendors check SAP/payment system screening Red flags


Challenges

Critical elements are:

Uncertainty of coverage (e.g. worldwide or undefined)

Cover is too broad to verify compliance with sanction laws Open covers and other contractual features where policyholders determine in their

discretion which risks are attaching in the future Nature of underlying risks and business

Counterparties involved

All reasonable steps

18

Critical aspects


Sanctions compliance program

What measures should a compliance program include?

Policy & guidance: clearly documented requirements & instructions

Awareness & training: requirements, processes, case studies, alerts

Processes & controls: screening, due diligence, red flags, escalation & sign-off

Documentation & audit trail

Monitoring: compliance checks, file reviews, audits

Reporting

19



4 Consequences of violations

20


Insurance-related sanctions

21

Influencing factors Severity of the breach (impact) Precedents (one-off) Systems & controls in place/ mitigating measures (planned actions)


Consequences of non-compliance

Fines are the tip of the iceberg

Personal consequences

Results and profitability negatively impacted

Fines

Personal consequences

Tarnish reputation

Remediation costs

Management time

22


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the only ones that should be used. (1) dark

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Sanctions and the insurance industry: Lessons Learned from Lookback Investigations and a case study

19 January 2015

Michael Faske, Head of Fraud Investigation

& Dispute Services

Rachel Sexton, Partner, Fraud Investigation

& Dispute Services

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Agenda

► Introduction

► Recent developments in economic sanctions

► What could go wrong and things to consider

► My thoughts on an effective Sanctions Compliance

Function

19 January 2015 Page 1

Recent developments in economic sanctions

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► Landscape is rapidly changing

► Scope and complexity of sanctions has increased in recent years

► especially for organisations operating across many jurisdictions

► Expanded use of Extraterritorial sanctions by the US

► Targeted sanctions are being used rather than countrywide sanctions

► Overlapping and uncoordinated US Executive Orders and legislation makes

understanding new requirements difficult

► There are differences between US and EU sanctions

► Different products were covered in the Russian sanctions

► And on the enforcement side -

► Enforcement has become more common – and regulators are more active

► Different US authorities enforcing sanctions:

► US Treasury Department / OFAC

► US Statement Department

► US Commerce Department Bureau of Industry & Security (BIS)

► HSBC settled with the Department of Justice, the US Federal Reserve, OFAC and FinCEN with $1.92

billion in fines


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► All of these factors make economic sanctions compliance much more complex

► AND, this requires more resources...


Insurance Company

Increasing

risk and

complexity

Downward

pressure

on

resources

What could go wrong and things to consider

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Information Technology

Automated Screening / Filtering Tool

► Screening tool not implemented by IT Function as intended

► Sensitivity of screening tool not set appropriately (i.e., fuzzy matching)

► Should be set in line with the risk assessment

► Updates are not received from third party provider in a timely manner

► Updates received from third party provider are not processed properly or timely

► Coding issues when screening tool is updated

► Not all SWIFT message types and/or fields are screened

► Different systems are used in different parts of the organisation

► Legacy systems should be considered

► Customer records for corporate accounts do not include directors and/or

beneficial owners

► Changes to directors and/or beneficiaries are not captured

► Cannot rely on banks to do this screening when payments are made!


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Updating sanctions screening list Process – third party provider

Page 7

Perform Testing

Load into live

environment

Monitor for unexpected

changes in match

rates

Updated

sanctions screen

list file

Import Updated

Sanctions

Screening List file

Load into test

environment

Determine whether

training/guidance for

staff reviewing matches

needs updating

No further Action Update

training/guidance

Communicate

updated

training/guidance

Sent by File

transfer

Issues Found

Yes

No Issues Found

No

Resolve

Issues

- Agreed process

for the file

upload

- Documentation

of each upload

Segregation of duties between those who

upload and test

19 January 2015

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People and Processes

Evaluating Changes to Sanctions Regimes

► Not enough resources to monitor for changes in sanctions legislation

► Resources not appropriately skilled to evaluate changes

► New or revised sanctions regulations are not interpreted or understood properly

► Different parts of the organisation are not joined up – unclear roles and

responsibilities

► Misunderstandings regarding which products are included in sanctions restrictions

► Legal advice not sought in a timely manner

► Uncertainty around which sanctions apply in which jurisdictions

► Unintegrated compliance function


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People and Processes

Processing Potential Matches

► Matches not processed in a timely manner

► Matches being deemed false positive without sufficient evidence

► Evidence for dismissing a match not retained

► Guidance given to match processing team is not up-to-date

► Guidance is updated but not communicated in a timely manner

► “Standard operating procedures” are established which contradict formal

guidance

► Insufficient management involvement in escalation procedures


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Interpreting & understanding changes to sanctions regimes

Page 10

► Compliance and legal departments, in consultation with law firms that specialise

in sanctions law in the relevant jurisdiction(s)

► May have had early consultation with authorities as new sanctions were being

contemplated

► Enables the organisation to start interpreting the legislation and preparing

necessary communications

► A risk assessment is performed to identify the affected businesses

► Communications are prepared to provide:

► A summary of the sanctions changes in clear language including the scope, FAQ

and contacts

► A statement of the organisation’s position (e.g., applying new sanctions

irrespective of currency and jurisdiction; consistent with the financial

institution’s risk appetite; what standard to apply where sanctions differ)

► Immediate actions that must be taken (e.g., changes to operational

guidance)

► Collection of management information to monitor/validate impact of the sanctions

19 January 2015

The Sanctions Compliance Function

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The Sanctions Compliance Function

► Should be a well-designed function

► That is flexible and can be updated and respond to changes quickly

► Have appropriate senior management involvement and approval

► When changes are announced, it is critical for the organisation to consider its:

► operations

► types of business transactions affected

► Robust controls are needed when the process is updated to identify issues

quickly

► Reporting including exception reporting should be designed to monitor changes

from day-to-day as well as over a period of time

► Operational issues faced as a result of changes in sanctions regimes need to be

considered

► Clear responsibility for monitoring changes to sanctions regimes and SDN lists –

either internal or external or a combination

► Little or no guidance given by OFAC


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One final topic to consider…

► Strong compliance culture

► Understanding of WHY procedures are designed the way that they are

► Impact of sanctions breaches

► not just fines and reputation

► but real impact of financing terrorism and other criminal activity


Case Study

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Case Study


► New York's Department of Financial Services,

has uncovered evidence that at least three non-

U.S. firms (Lloyd’s of London, Swiss Re AG and

Hannover Re SE) have insured shipments to Iran

► The evidence allegedly ties the reinsurers to

deals for shipments of alumina to Iran by trading

firms Glencore Xstrata PLC and Trafigura Beheer

BV

► The U.S. President signed an expanded

sanctions law1 that bans any financial firm that

does business in the U.S. - including reinsurers -

from providing services to companies that trade

with Iran

► The law applies to any foreign firm doing

business in the U.S., even if the activities aren't

in violation of rules in the firm's home country or

region

► In 2012, non-U.S. reinsurance firms issued $400

billion of premiums last year and 40% to 60% of

that business came from the U.S.

1 see EO 13645

http://www.whitehouse.gov/the-press-office/2013/06/03/executive-order-authorizing-implementation-certain-sanctions-set-forth-i

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Case Study


► In July 2013, the Department of Financial Services

sent a letter to 20 non-U.S. reinsurance companies

► The letter requests that all companies provide

detailed copies of all policies issued to Glencore

Xstrata and Trafigura

► It asks that the firms explain in detail their policies

for complying with the new sanctions and that

additionally, the firms list all instances in which a

policy was denied because it didn't comply with

sanctions

► As well, the letter requests a list of any insured firm

that a company officials suspect may be doing

business with Iran or a person affiliated with Iran

► The Department of Financial Services regulates

banks and insurance companies that do business

in New York state and are licensed by the

department. The department has the power to

rescind a license from an institution the department

finds is in violation of the law.

► The DFS’s scope has now been expended to also

include US reinsurance companies.

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Examples of sanctions issues in insurance

► An Iranian citizen living in Los Angeles (who is not sanctioned by the United States)

dies, having identified as his beneficiary a relative living in Tehran (who is a sanctioned

person under U.S. law, and to whom U.S. companies therefore generally cannot send

payments).

► Mechanical difficulties force an insured ship to take refuge at Port Sudan, where it

requires repairs otherwise covered as sue-and-labor expense under an ocean marine

policy before it can continue on course. Payments of repair and related expenses to

Sudanese entities arguably violate U.S. laws.

► A U.S. citizen legally traveling in Iran is injured in a car accident and receives medical

treatment in an Iranian hospital. Can the U.S.-based insurer, which promises global

coverage, reimburse the Iranian hospital for covered services?

► While driving in Mexico, a U.S. individual causes a collision with a Cuban citizen, who

sustains injury and property damage covered by the U.S. auto policy.

► A policyholder's goods are aboard an Iranian-registered vessel when a covered event

occurs.

► A policyholder's bank account, to which claims should be paid, is co-owned by an

individual living in Burma.


Lessons Learned

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Rachel Sexton

Partner, Fraud Investigation & Dispute Services

EY Switzerland

Direct Tel: +41 58 286 31 11

Mobile: +41 719 88 76

Email: [email protected]

Michael Faske

Partner, Fraud Investigation & Dispute Services

EY Switzerland

Direct Tel: +41 58 286 3292

Mobile: +41 58 289 3292

Email: [email protected]

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