{"id":13993,"date":"2025-01-16T21:57:44","date_gmt":"2025-01-16T21:57:44","guid":{"rendered":"https:\/\/www.americanconference.com\/fcpa-dc\/?page_id=13993"},"modified":"2025-01-16T22:03:24","modified_gmt":"2025-01-16T22:03:24","slug":"addressing-sanctions-compliance-challenges-in-the-insurance-industry","status":"publish","type":"page","link":"https:\/\/www.americanconference.com\/fcpa-dc\/addressing-sanctions-compliance-challenges-in-the-insurance-industry\/","title":{"rendered":"Addressing Sanctions Compliance Challenges in the Insurance Industry"},"content":{"rendered":"
\r\n

By Jaclyn Jager<\/p>\r\n

Thursday January 16, 2025<\/p>\r\n<\/div>\r\n\r\n

The ever-evolving global sanctions landscape continues to impose new restrictions on companies across many industries, but the insurance industry must navigate and overcome some especially unique sanctions compliance challenges.<\/p>\r\n \r\n

This article highlights some of the insurance industry\u2019s toughest challenges, explores recent amendments to the Office of Foreign Asset Control\u2019s (OFAC<\/abbr>) Frequently Asked Questions (FAQs<\/abbr>) for the insurance industry<\/a>, and discusses risk management and due diligence best practices. <\/p>\r\n\r\n

Insurance industry challenges<\/h5>\r\n\r\n

What makes sanctions compliance uniquely challenging for insurance industry participants, including insurers, reinsurers, underwriters, brokers, and agents, is that they are vulnerable to sanctions risks that apply not only to their own operations, but also those of their insured clients.<\/p>\r\n \r\n

If a policyholder engages with a sanctioned person on OFAC<\/abbr>\u2019s Specially Designated Nationals and Blocked Persons List (SDN<\/abbr> List), or within a jurisdiction subject to OFAC<\/abbr> sanctions, that can indirectly expose the insurer or reinsurer to sanctions violations.<\/p>\r\n \r\n

\u201cInsurers have to manage the indirect exposure often with less information than their insureds have,\u201d Crowell & Moring partner David Wolff told ACI Insights. Establishing a robust sanctions compliance program and monitoring for sanctions risk in the insurance industry requires understanding the insured\u2019s sanctions risk exposure and internal controls.<\/p>\r\n\r\n

A second key challenge is conflicts in global sanctions regulations. U.S. insurance companies have clients across multiple industries, and oftentimes these companies operate internationally in jurisdictions that don\u2019t have the same sanctions restrictions as the United States.<\/p>\r\n\r\n

One example is OFAC<\/abbr>\u2019s sanctions targeting Cuba<\/a>. The European Union, for example, does not impose economic sanctions on Cuba. Practically speaking, it becomes a challenge for U.S. insurers or reinsurers to mitigate sanctions risks when their insureds aren\u2019t subject to the same sanctions requirements.<\/p>\r\n \r\n

Another example is when the United States withdrew from the Iran Nuclear Deal, and Europe did not. \u201cThere is anxiety around whether or not that will become true again with Russia,\u201d Wolff said.<\/p>\r\n \r\n

For legal and compliance professionals in the insurance industry, key questions to consider may include: In what jurisdictions of insured policyholders do sanctions conflicts exist? How does the business monitor for sanctions risk? Do risk management measures need to be reviewed, and enhanced? <\/p>\r\n\r\n

Newly amended OFAC<\/abbr> FAQs<\/h5>\r\n\r\n

To assist insurance industry participants in addressing common sanctions compliance challenges, OFAC<\/abbr> on Nov. 13, 2024, amended 10 insurance-related FAQs and published two new ones (FAQs 1199 and 1200).<\/p>\r\n \r\n

For those who have been practicing in the industry for quite some time, the amended FAQs are \u201cwelcome guidance,\u201d Wolff said. They also reflect that sanctions expectations and compliance have evolved over the last two decades when many of these FAQs were last amended.<\/p>\r\n\r\n

The most substantive changes are summarized below:<\/p>\r\n\r\n

Ongoing sanctions screening:<\/strong> Another sanctions compliance best practice OFAC<\/abbr> highlighted in the amended FAQs is the importance of sanctions screening. \u201cWhile OFAC<\/abbr> does not technically require parties to screen against sanctions lists, the only practical way to ensure you do not transact with a sanctioned party is to conduct screening,\u201d Wolff said.<\/p>\r\n\r\n

In FAQ 65, in addressing how frequently to screen databases, OFAC<\/abbr> recommended insurers use a risk-based approach to sanctions compliance in line with OFAC<\/abbr>\u2019s \u201cFramework for Compliance Commitments<\/a>.\u201d In that framework, OFAC<\/abbr> stressed that a central tenant of a risk-based approach is a risk assessment because it\u2019s \u201cintegral\u201d in informing the sanctions compliance program\u2019s policies, procedures, internal controls, and training.<\/p>\r\n\r\n

A risk assessment should review all of an insurer\u2019s touchpoints, including its customer base; products and services; its geographic location, as well as those of its customers. Screening frequency will vary \u201cdepending on the size and nature of an insurer\u2019s business, including the particular risk factors of its products and customer base, and its relevant regulator,\u201d OFAC<\/abbr> stated in the FAQs.<\/p>\r\n\r\n

OFAC<\/abbr> additionally stressed in FAQ 65 the importance of screening throughout the lifecycle of the insurance policy, \u201cat policy renewal, policy amendment (including, but not limited to, the addition of insured parties or beneficiaries to the policy), claim submission, claim payment, updates by OFAC<\/abbr> to its sanctions or sanctions lists, and at any other time when an insurer may be exposed to sanctions risk.\u201d<\/p>\r\n\r\n

Exclusionary clauses<\/strong>: In amended FAQ 102, OFAC<\/abbr> reinforced the importance of utilizing an exclusionary clause as \u201cthe best and most reliable approach for issuing policies with global risk coverage without violating U.S. sanctions law.\u201d<\/p>\r\n\r\n

An exclusionary clause, also called a sanctions clause, \u201cprevents the extension of a prohibited service, such as insurance coverage or indemnification, to sanctioned persons or jurisdictions, or for prohibited activities,\u201d stated OFAC<\/abbr>, clarifying that the \u201cwording of such clauses may vary depending on the type of policy.\u201d<\/p>\r\n\r\n

Many insurers or reinsurers will include a clause in their policy that states, \u201c\u2018This policy is either suspended or excluded concerning any risks that expose the insurer or reinsurer or broker to sanctions risk,\u2019\u201d Wolff noted.<\/p>\r\n\r\n

Exclusionary clause exception<\/strong>: In some international markets, non-U.S. insurers will issue global insurance policies without an exclusion that applies to U.S. sanctions. In FAQ 103<\/a>, OFAC<\/abbr> advises, \u201cIn cases where an exclusionary clause is not commercially feasible, but the policy would involve the provision of coverage to a sanctioned person or jurisdiction, or prohibited activity, the insurer should apply to OFAC<\/abbr> for a specific license prior to issuing the global insurance policy.\u201d<\/p>\r\n\r\n

Additional FAQs<\/h5>\r\n\r\n

Some of the amended FAQs address questions regarding blocked portions of a group policy. in FAQ 63<\/abbr><\/a>, OFAC<\/abbr> advised that, where a policyholder or a named beneficiary of a group health plan, for example, is added to OFAC<\/abbr>\u2019s SDN<\/abbr> List or located in a sanctioned jurisdiction, \u201cin most cases, insurers should cease providing coverage to the relevant policyholder or named beneficiary \u2026 unless authorized by OFAC<\/abbr> or otherwise exempt.\u201d<\/p>\r\n \r\n

Furthermore, in FAQ 64, OFAC<\/abbr> clarified that a claim made under the blocked portion of a group policy, such as a worker\u2019s compensation policy, cannot be paid without OFAC<\/abbr> authorization. FAQ 64 further advises that any premium payments made by or on behalf of the blocked person \u201cshould be blocked and placed in a blocked interest-bearing account at a U.S. financial institution.\u201d<\/p>\r\n\r\n

Newly added FAQ 1199 addresses the question as to whether a claim can be paid under a blocked policy if the payment is for an innocent third party, such as in the event of an accident. In these circumstances, the insurance company should contact OFAC<\/abbr> to discuss the specific circumstances.<\/p>\r\n\r\n

Newly added FAQ 1200 addresses the question of whether an insurance company may pay a claim from a non-sanctioned person for a loss caused by a blocked person, such as a specially designated terrorist organization. OFAC<\/abbr> confirmed, under such scenarios, that \u201cthe mere fact that a blocked person has caused the loss does not in and of itself create a blocked interest in the policy or any claim or payment under the policy.\u201d A U.S. insurer or reinsurer may pay such claims to non-sanctioned persons.<\/p>\r\n\r\n

OFAC<\/abbr> further encouraged insurers who receive such claims \u201cto conduct necessary due diligence to ensure there are no other potential sanctions risks associated with making or facilitating related claim payments,\u201d such as the involvement of a blocked financial institution.<\/p>\r\n\r\n

Unanswered questions<\/h5>\r\n\r\n

Ryan Fayhee, a partner at law firm Akin, told ACI Insights that while OFAC<\/abbr>\u2019s amended FAQs are \u201chelpful,\u201d they aren\u2019t as helpful as direct engagement with the private sector, which he commented OFAC<\/abbr> has been resistant to historically, as compared to agencies like the U.S. Department of Commerce\u2019s Bureau of Industry and Security (BIS<\/abbr>).<\/p>\r\n \r\n

Importantly, the insurance-related FAQs don\u2019t address every issue. For example, one question that has been a topic of much debate is whether a Director & Officer (D&O<\/abbr>) insurance policy can cover a director or an executive in the United States alleged to have directed or facilitated sanctions violations with a sanctioned party.<\/p>\r\n \r\n

If the insured is not a sanctioned entity, and the director or executive is not a sanctioned person, can that individual still be covered by the D&O<\/abbr> policy? \u201cThere just isn\u2019t enough consistency around the answer to that question,\u201d Fayhee said.<\/p>\r\n\r\n

For questions that the insurance-related FAQs do not address, legal and compliance professionals in the insurance industry should refer to current OFAC<\/abbr> resources, such as its \u201cFramework for Compliance Commitments<\/a>,\u201d implementing regulations<\/a>, and the Sanctions Programs and Country Information<\/a>. Participating in industry networking events is also advised to stay on top of the latest sanctions compliance best practices.<\/p>\r\n\r\n

ACI will be holding its \u201cAML & Sanctions Compliance for the Insurance Industry\u201d event on Jan. 22-23, 2025, in New York. For more information, and to register, please visit: <\/strong> https:\/\/www.americanconference.com\/aml-ofac-insurance\/<\/a><\/p>\r\n","protected":false},"excerpt":{"rendered":"By Jaclyn Jager Thursday January 16, 2025 The ever-evolving global sanctions landscape continues to impose new restrictions on companies across many industries, but the insurance industry must navigate and overcome some especially unique sanctions compliance challenges. 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