Sanctions
WHAT ARE SANCTIONS
Sanctions are, in the main, financial or trade restrictions but can also include arms embargoes, travel bans and reduced diplomatic links. There are also specific sanctions aimed at denying financial support for those involved in terrorism and/or supporting Al-Qaida and Taliban.
Sanctions can range from prohibiting financial transactions relating to a particular country or government, such as those imposed by the UK, EU and US against Iran or can be financial restrictions against making funds or economic resources available to targeted entities and/or individuals. (Re)insurance coverage is subject to the effect of these sanctions.
WHAT ARE SANCTIONS - Continued
Financial restrictions usually take the form of asset freezing provisions, as the governing legislation may require that funds and/or assets belonging to certain entities, individuals or governments are frozen.
Trade sanctions may have a general application. such as an export or import ban. or can be limited to prohibiting dealing in particular commodities, such as petrochemical products, diamonds or arms. Trade sanctions can also prohibit the trade in certain goods, such as military goods and also prohibit related activities, such as the provision of re/insurance or require that it is licensed before proceeding.
WHY ARE SANCTIONS IMPOSED
Sanctions are put in place to persuade another country or individual into changing their activities and policies, so that they no longer threaten international peace and security or abuse human rights. Sanctions are also used to target the activities of terrorists and those involved in nuclear proliferation activities.
WHO IMPOSES SANCTIONS?
A number of different bodies impose sanctions but the main ones are:
United Nations
The UN Security Council decides and administers the sanctions regimes, which are binding on UN member states. UN member states are legally obliged to implement sanctions imposed by UN Security Council Resolutions.
The UN Security Council decides and administers the sanctions regimes, which are binding on UN member states. UN member states are legally obliged to implement sanctions imposed by UN Security Council Resolutions.
USA
Those subject to US sanctions are listed on the website of The Office of Foreign Assets Control ("OFAC") of the US Department of Treasury. US Treasury administers and enforces the US sanctions regime and maintains jurisdiction over all US dollar transactions, with the aim that no sanctioned countries, entities or individuals engage improperly in US dollar denominated transactions. OFAC is extremely proactive and diligent in enforcing sanctions and coverholders need to consider very carefully the impact of any US sanctions on their business activities. Most US sanctions are more aggressive and far-reaching than the sanctions imposed by the UN Security Council or the EU.
Those subject to US sanctions are listed on the website of The Office of Foreign Assets Control ("OFAC") of the US Department of Treasury. US Treasury administers and enforces the US sanctions regime and maintains jurisdiction over all US dollar transactions, with the aim that no sanctioned countries, entities or individuals engage improperly in US dollar denominated transactions. OFAC is extremely proactive and diligent in enforcing sanctions and coverholders need to consider very carefully the impact of any US sanctions on their business activities. Most US sanctions are more aggressive and far-reaching than the sanctions imposed by the UN Security Council or the EU.
WHO IMPOSES SANCTIONS? - Continued
Europe
The European Union promulgates and administers financial and trade sanctions, which have direct effect in all EU Member States. These sanctions are usually broader than those imposed by the UN Security Council. Details can be found on the EU's Europa website.
Individual Countries
Most countries also enforce their own sanctions, which again may target additional entities, persons and activities beyond those targeted by the UN or EU.
The countries, regimes and entities currently subject to UK sanctions can be found on the UK HM Treasury's website.
Most countries also enforce their own sanctions, which again may target additional entities, persons and activities beyond those targeted by the UN or EU.
The countries, regimes and entities currently subject to UK sanctions can be found on the UK HM Treasury's website.
HOW DO SANCTIONS IMPACT ON INSURANCE
There will be certain requirements regarding sanctions (irrespective of jurisdiction) that will impose upon the Managing Agent - Coverholder relationship. The main ones are:
Making funds or economic resources available
Generally it is an offence to make funds or economic resources, directly or indirectly, available to a person or entity that is the target of international sanctions. The specifics of the offence are set out under each country's relevant legislation.
Generally it is an offence to make funds or economic resources, directly or indirectly, available to a person or entity that is the target of international sanctions. The specifics of the offence are set out under each country's relevant legislation.
Therefore coverholders (and managing agents) have a duty to ensure their activities, such as underwriting of (or agreeing to underwrite) (re)insurance contracts, or entering into endorsements or extensions, on behalf of a managing agent do not amount to an infringement of international sanctions.
HOW DO SANCTIONS IMPACT ON INSURANCE - Continued
Any transfer of funds including claims payments and return of premiums to sanctioned persons/entities will amount to a breach of international sanctions.
Controls and checks (discussed later in this module) should be in place to ensure that monies are not paid to targets on sanctions lists, including to entities that are owned or controlled by designated persons. Procedures should also take account of the fact that a policyholder could become a sanctions target post inception of the (re)insurance contract.
Controls and checks (discussed later in this module) should be in place to ensure that monies are not paid to targets on sanctions lists, including to entities that are owned or controlled by designated persons. Procedures should also take account of the fact that a policyholder could become a sanctions target post inception of the (re)insurance contract.
HOW DO SANCTIONS IMPACT ON INSURANCE - Continued
Country-Specific Regimes
Under certain international sanctions (e.g. EU sanctions against Iran and Syria), it is prohibited to engage in any activities with certain countries/regimes/regions which encompasses all coverholder activities including underwriting (re)insurance contracts on behalf of a managing agent (as well as the activities of the managing agents and syndicate concerned in relation to such contracts).
Dealing in the Property/Funds of Designated Persons - Blocking Property and/or Freezing Funds
Where international sanctions prohibit dealing with the property/funds of designated persons, there are ancillary requirements to block/freeze the property/funds of these persons. This will mean that coverholders/managing agents will not be able to use, move or alter any property or funds of a designated person. These restrictions are often accompanied by a requirement to notify the relevant regulatory authority (e.q. HM Treasury in the UK) of the matter.
HOW DO SANCTIONS IMPACT ON INSURANCE - Continued
Trade Sanctions
Certain sanctions regimes prohibit the export of any goods or services, including (re)insurance to a targeted country. In these cases, this will impact on all coverholder activities, including underwriting (or agreeing to underwrite) (re)insurance contracts on behalf of a managing agent (as well as the activities of the managing agents themselves).
Disclosure of knowledge or suspicion of a transaction involving a sanctioned person / entity
Whilst legislation relating to the relevant sanction covers the specifics of the applicable offences, in general terms "failure to disclose knowledge or suspicion* of a transaction involving a sanctioned person or entity to the relevant authorities constitutes an offence.
Whilst legislation relating to the relevant sanction covers the specifics of the applicable offences, in general terms "failure to disclose knowledge or suspicion* of a transaction involving a sanctioned person or entity to the relevant authorities constitutes an offence.
Circumvention and Facilitation
It is prohibited under all international sanctions to undertake any activities which have as their object or effect the circumvention of international sanctions.
Under some international sanctions, it is prohibited for persons to facilitate or approve any activity which they could not have performed themselves under the relevant sanctions.
It is prohibited under all international sanctions to undertake any activities which have as their object or effect the circumvention of international sanctions.
Under some international sanctions, it is prohibited for persons to facilitate or approve any activity which they could not have performed themselves under the relevant sanctions.
HOW DO SANCTIONS IMPACT ON INSURANCE - Continued
Penalties
Penalties for breaching sanctions involve a fine and, potentially, imprisonment.
Penalties for breaching sanctions involve a fine and, potentially, imprisonment.
International sanctions breaches may also expose the coverholder (or the managing agent on whose behalf the coverholder underwrites) to regulatory scrutiny. For example, in the UK, it is expected that regulated firms will maintain adequate systems and controls to prevent themselves from being used for the furtherance of financial crime and involvement in sanctions infringement may be evidence of defective systems and controls. This could result in additional fines or the withdrawal of the Regulatory Authority's permission for regulated activities to be carried out by the firm concerned. In the most serious of cases, persons/entities infringing certain international sanctions regimes themselves risk becoming designated under international sanctions legislation.
HOW DO SANCTIONS IMPACT ON INSURANCE - Continued
LLOYD'S EXPECTATIONS
It should be emphasised that there is an expectation on managing agents to ensure that the requirements are implemented as a result of a risk based assessment of the individual coverholder's profile and that procedures are proportionate to the risk and clearly communicated and explained to the coverholder.
Coverholders must be aware of their international sanctions obligations in respect of their own jurisdiction as well as ensure that business they underwrite on behalf of Lloyd's syndicates is compliant with the legislation applicable to the relevant managing agent. If required by managing agents, coverholders will be expected to incorporate comprehensive sanctions exclusions and warranties into (re)insurance contracts written under the relevant binding authority agreement.
Coverholders breaching any such requirements may give their Managing Agent rights to cancel the binding authority agreement.
CONCLUSIONS
Sanctions are imposed to persuade a country, entity or individual into changing their activities and/or policies when it is deemed necessary in the public interest e.q. when there is a threat to international peace. Sanctions come in many forms, most commonly financial or trade restrictions. Sanctions can be implemented by the United Nations, the European Union or an individual country.
Sanctions impact on insurance (on the activities of both insurers and coverholders) because they often make the provision of funds or economic resources to sanctioned entities illegal which includes payment of claims or return of premiums. Where there are trade restrictions they can extend to the provision of related activities such as the provision of (re)insurance for the prohibited trading activity or (re)insurance itself can be designated a prohibited export.
CONCLUSIONS - Continued
Lloyd's expects coverholders to comply with international sanctions including ensuring any underwriting on behalf of a managing agent is compliant with the sanctions regimes applicable to the managing agent.
A coverholder should be able to demonstrate that they operate reasonable and proportionate sanctions due diligence and screening programmes. Any breach of international sanctions regimes creates criminal liability. Lloyd's expects managing agents to guide coverholders as to what screening is required.
What are the most common international sanctions?
Financial and trade restrictions
Withdrawal of aid and restrictions on cultural/sporting links
Travel bans and flight bans
Suspension from international organisations
Who can impose sanctions?
United Nations
Individual countries
European Union
All of the above
You are a coverholder underwriting a piece of business on behalf of a Lloyd's Syndicate at Lloyd's. Which sanctions regimes must you ensure the business is compliant with?
You must always ensure the business is compliant with UN, EU, OFAC and HMT sanctions regimes.
You only need to ensure the business is compliant with sanctions regimes applicable to the coverholder.
You must ensure the business is compliant with all sanctions regimes applicable to the managing agent and those applicable to the coverholder.
You only ever need to ensure the business is compliant with UN and EU sanctions regimes.
When is it important to conduct sanctions screening?
Before agreeing to underwrite the business
Before returning any premium monies
Before paying any claim monies
All of the above
You are a coverholder and you have received a claim on a piece of business you wrote on behalf of a Lloyd's syndicate. What should you do before paying the claim in order to avoid breaching any sanctions?
You should check that the recipient of the claim funds was screened for sanctions before the business was written. If there was no problem then you should pay the money.
You should mirror those procedures that Lloyd's would expect the managing agent itself to perform if the business had been written direct.
You should screen the recipient of the claim funds for sanctions (even if they were screened prior to the business being written) before releasing any funds. You must then pay the money regardless but also report any sanctions issues.
You should do nothing. It is fine to immediately pay the claim.
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