Navigating the sanctions maze

Sanctions. It’s a word you hear on the news and then dismiss as a subject that won’t affect you. However, it’s a subject that every insurer needs to take seriously. It might mean the difference between survival and disaster.

Insurance is an increasingly international business, with tendrils of finance spreading everywhere. It’s because of this that insurers need to make sure that the risks that they are covering aren’t in some of the less salubrious areas of the world.

Just as important, insurers also need to make sure that they aren’t financially linked to a person or a company that has been targeted by international sanctions. If they are there can be financial penalties—or even legal consequences.

Lloyd’s, being the global insurance market that is, keeps a constant—and careful—eye on the current state of sanctions and says that for it the most important sanctions are those imposed by the US government and the European Union (EU).

Lloyd’s points out that EU sanctions are typically imposed through Council Regulations, which have immediate legal effect in member states (including the UK). In the US and the EU, sanctions often implement measures contained in Resolutions of the UN Security Council. In addition sanctions can be applied unilaterally or collectively and different rules will apply to each sanctions regime. Some of these sanctions affect designated individuals only in the targeted country. There are also sanctions in place against named individuals or entities who are related, or belong, to the Taliban and the Al-Qa’ida network or other suspected terrorist organisations.

In the UK the Treasury publishes a consolidated list of financial sanctions targets listed by the UN, the EU and the UK. This list includes all individuals and entities noted on all current sanctions lists.

According to Lloyd’s there is no specific statutory or regulatory obligation on general insurers to check their customer lists against the HM Treasury sanctions lists. In order to avoid committing an offence of non-disclosure, however, Lloyd’s says that it would be ‘prudent for firms to do so’.

Lloyd’s adds: “There are a number of statutory instruments relating to financial sanctions and terrorist financing. These measures apply to all firms regulated under the Financial Services and Markets Authority (FSMA, rather than just to banks, on whom additional obligations are placed) and create a number of offences including that of failing to disclose knowledge or suspicion that any person on the relevant HM Treasury sanctions list is, or has been, a customer of the firm.”

The need to keep an eye on sanctions is especially important in that they can change. In recent years all eyes have been on sanctions intensifying, such as those surrounding a number of key figures in Russia, such as Vladimir Putin. However, lower ranking people in the Russian government are also impacted by sanctions and companies who invest in Russia need to be aware of who these people are.

Tehran calling

In 2016 some sanctions have started to be dismantled. The announcement in July 2015 of a multinational agreement called the Joint Comprehensive Plan of Action (JCPOA) on Iran’s nuclear facilities was followed by news in January this year that the first inspections had been carried out and that some of the extensive economic sanctions levied on Iran had been lifted.

Not all of the sanctions have been lifted however, and anyone seeking to get involved in the country or the area therefore needs to know just what is or is not allowed.

Some companies are already looking at the possibilities that could now be opening up in Iran after years of economic isolation. Robert Easton, head of Iran at Lloyd’s broker Matrix says: “The Iranian market is currently generating roughly $7 billion in gross premiums, with substantial energy, marine, banking and treaty reinsurance opportunities.

“We started travelling to Iran earlier this year and have established relationships with the insurance market and the regulator. We are also in the process of opening a representative office in Tehran which we believe will ensure not only closer relationships with the Iranian market but also give full access to Lloyd’s and the international markets via our various international offices.

“We have already quoted a number of Iranian accounts in the international marketplace and expect the volume of business that we transact to steadily increase over time.

“With sanctions being lifted by the EU and to a lesser extent by the US there is some confusion and fear surrounding the whole arena which means that we tread very carefully and consult our legal advisers on a case-by-case basis to ensure that we act fully within the legal framework of the sanctions.

“We have found that markets which have no US shareholders are very keen to do business in Iran and with Matrix too. We did foresee a possible problem with payment of premiums and claims, but we now see an increasing number of banks that are prepared to deal with Iran, meaning that our fears in this regard have proved to be unfounded.”

As the time of writing sanctions continued to be lifted and Iranian involvement in economic affairs in the Gulf region increased. However, some still stress caution.

Alex Denslow, partner at law firm CMS, says that underwriters and brokers should adopt a cautious approach to Iranian business, particularly where there is US involvement.

He points out that EU companies which are owned or controlled by US corporations will fall under US jurisdiction and will therefore continue to be subject to US primary sanctions. However, the US Treasury Department’s Office of Foreign Assets Control, through its issuing of General License H, authorises non-US entities to engage in business with Iran, subject to certain exemptions and restrictions including strict limitation on the extent of involvement of the parent company.

“A further risk for insurers and brokers alike to consider is the possibility that Iran violates its undertakings in the JCPOA,” says Denslow. “In such a case the EU has reserved the right to re-impose sanctions on Iran—the so called ‘snapback’ provisions. Insurers who have contracted with Iranian companies may therefore find themselves bound by insurance contracts which they cannot perform.”

The imposition and lifting of sanctions on Iran gives a good example of the hazards and opportunities that insurers can face when it comes to this subject. The more attention is paid the better—much rides on that simple word that cannot be taken lightly.