Sanctions compliance / due diligence – lloyd’s view Andy wragg/Steve payne, International Regulatory Affairs 1

International Sanctions - background

Recent International developments Traditionally banks have been the main compliance targets but Insurance is now recognised by law-makers as a key “lever”: Remove ability to access insurance… ….Removes ability to trade Insurance specifically named in new legislation: CISADA, EU Iran Regulations, Syria Insurers therefore can no longer risk A benign regulatory response to non-compliance ignoring World events or Ignoring developments in legislation and therefore must be ready to react to very fluid international legal and regulatory developments

Sanctions Why What are sanctions Who imposes sanctions Political - to change policies to: Strengthen security of unions such as EU & UN More than ever these days: To control rogue states! What are sanctions Country Specific Smart Terrorist Diplomatic Narcotics Who imposes sanctions UN, EU,US, UK and other countries Sanctions are used to bring about a change in activities or policies such as violations of international law or human rights, or policies that do not respect the principles of democracy. They also are used to strengthen the security of EU, UN by safeguarding common values & interests and ensuring the independence & integrity of those unions. If threat to international peace or act of aggression, there to maintain and restore peace 4 4

Current uk SANCTION regimes Al-Qaida & Taliban Belarus Burma/Myanmar Democratic Republic of the Congo Egypt Eritrea Federal Republic of Yugoslavia & Serbia Iran Iraq Ivory Coast Lebanon and Syria Liberia Libya North Korea (Democratic People’s Republic of Korea) Republic of Guinea Somalia Sudan Syria Terrorism and terrorist financing Tunisia Zimbabwe 5

Requirements - financial institutions

Regulatory expectations Sanctions: Increased risk of regulatory or criminal censure for failures and inadequate systems and controls: fines and reputational damage Requires a complete understanding of: customer base (CDD) territorial risks (KYB) risk appetite (RBA) to meet regulators’ expectations regarding sanctions compliance: “…strict liability, not risk-based but proportionality an important principle” HMT “…absolute regime, although we advocate risk-sensitive systems & controls” FSA

Sanctions IMPACT ON INSURANCE Duty to disclose knowledge or suspicion of transaction (ongoing requirement) Duty to ensure that funds are not made available to those sanctioned via claims/return premiums However, provision of insurance per se is not considered an offence – does not constitute “economic resources” (except Iran and Syria) A breach is a criminal offence Different positions under different sanctions regimes can impact, e.g.: Reinsurers prevented from paying claims even if you can Banks blocking payments Regulatory requirement of appropriate systems and controls “Firms … cannot outsource their responsibility to meet either their legal obligation to ensure that UK financial sanctions are not breached, or our requirements to have in place effective systems and controls to prevent the firm being used for purposes connected with financial crime” FAILURE DISCLOSE KNOWLEDGE OR SUSPICION OF TRANSACTION constitutes an offence under some of the sanction regimes applicable in UK. 1. Most of the sanction regimes apply this to firms regulated by FSA but some sanctions regimes also apply it as an offence to any person (ie firms and individuals ) in UK too. List of statutory instruments and what offences on www.lloyds.com Making funds available – is also an offence under some of the sanctions regimes applicable in UK but is usually applicable to any person in UK (therefore Managing Agents too). Even if Lloyd’s entities not subject to US sanctions, US re-insurers & retro-cessionaires may not be permitted to pay a RI claim to u/ws if proceeds will ultimately be paid to target/funds may not be able to be deposited or could be blocked if paid through a US bank 8 8

Market expectations Follow Crystal/lloyds.com and Corporation guidance Lloyd’s Due Diligence guidance (later) Tracking information sources UN, EU, OFAC, HMT websites (lists / subscription sign-up) and general heightened awareness of Worldwide events Note new Patton Boggs guidance re US sanctions Consider screening systems (such as software for client screening) – not mandated but… 9

Our expectations of the Market Sanctions legislation requires the Market to understand the implications of their: Customer base where they are doing business, and their risk appetite for non-compliance Managing Agents responsible for ensuring: adequate systems and controls to comply with legislation client take on decision is correct Legal / compliance advice taken where necessary Sanctions “hits” / other breaches reported

Other expectations We also expect managing agents to ensure: coverholders are aware of their obligations in respect of sanctions and ML and have adequate systems and controls in place to ensure compliance/reporting (Delegated Authority Code of Practice). coverholder audits focus on sanctions and ML compliance. coverholder staff are trained (Crystal and other training - later) NB, as “Specially Designated Nationals” vary across jurisdictions, coverholders also need to: Screen insureds against: local sanctions’ lists (protects the coverholder) UK (HMT) lists (protects managing agents)

What if you get it wrong?

penalties Internationally (including the UK) criminal offences faced: ‘Failure to report’ - Duty to disclose knowledge or suspicion of transaction (ongoing requirement) Making funds available - Duty to ensure that funds are not made available to those sanctioned via claims/return premiums Increased risk of regulatory or criminal sanction if systems and controls preventing financing of terrorism and crime generally are inadequate Cost of ignoring international legislation: Fines Criminal sanction, potentially imprisonment e.g. ECO breaches Potential serious reputational damage RBS fined £5.75m (FSA) – inadequate systems and controls US penalties – potentially very large

US & overseas sanctions

US and overseas SANCTIONS compliance Complexities for entities with US ownership / capital / presence US directors and staff Facilitation prohibition - US Persons may not facilitate transactions by non-US Persons that would be prohibited if performed by a US Person Penalties for non-compliance Reinsurance and banking counterparties - $ transactions Extra-territoriality: e.g. CISADA and Somalia Piracy Order To follow or not to follow? Whether to approach OFAC? Ever able to totally ignore? Local sanctions regime: who to follow?

US penalties OFAC penalties: US insurer settled 2 cases, paying a total of US2.4M for entering into reinsurance contracts in Cuba following violations by UK subsidiaries (UK entities may not be subject to a fine but US capital providers will be for Cuba and North Korea business) Barclays Bank – fined $176million for breach of Sudanese sanctions Balli Group and Balli Aviation Ltd find £15million for exporting 3 commercial airlines from US to Iran HCC Ins Holding fine $38,000 for breach by subsidiary which insured commercial flights in Iran Gen Re fined for paying a two excess-of-loss reinsurance claims to Steamship Mutual. These were found to relate to losses suffered by the National Iranian Tanker Co 16

US PENALTIES Lloyds TSB case (2008): Between 1995-2007 Lloyds TSB in London & Dubai assisted customers to undertake transactions to US sanctioned countries Countries incl. Libya, Sudan & Iran Process – Lloyds TSB falsified wire transfers by removing customer info to transfer money undetected through US financial institutions – process = “stripping”/”repairing” Deliberate circumventing of US sanctions compounds the breach $350 million fine paid to US government Authorities involved – DOJ, OFAC & New York District Attorney Other banks recently caught (ANZ bank, UBS) 17

International developments

International sanctions developments Unprecedented recent activity: September 2009 – Iranian entities named under HMT’s CTA powers April 2010 – US Somalia Executive Order: blocking property and interests of pirates and those who “materially assist in those activities” July 2010 – CISADA: US sanctions against any entity that (re)insures exports of refined petroleum to Iran July 2010 – Lloyd’s Direction – no new contracts allowed for Iranian refined petroleum risks October 2010 - EU Iranian Regulation March 2011 – comprehensive Libyan sanctions (broadly lifted December 2011) and other regional sanctions arising from the “Arab Spring” September 2011 – Syrian petrochemical prohibition (includes (re)insurance) January 2012 – comprehensive Syrian sanctions, including ban on provision of coverage for government entities January 2012 – EU decision regarding export of Iranian crude and refined oil July 2012 – EU ban on Iranian oil becomes effective

What’s new

Sanctions clauses 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 sanction, 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 LMA 3100 Used primarily in international placements, particularly where there is deemed a higher risk of sanctions issues. Becoming standard in all placements Provides contract certainty for the insurer and expectations on the (re)insured Does not avoid need for due diligence prior to claims payment or coverage Not negotiable – if such a clause is necessary on a placement, can be no external influence over its use FAILURE DISCLOSE KNOWLEDGE OR SUSPICION OF TRANSACTION constitutes an offence under some of the sanction regimes applicable in UK. 1. Most of the sanction regimes apply this to firms regulated by FSA but some sanctions regimes also apply it as an offence to any person (ie firms and individuals ) in UK too. List of statutory instruments and what offences on www.lloyds.com Making funds available – is also an offence under some of the sanctions regimes applicable in UK but is usually applicable to any person in UK (therefore Managing Agents too). Even if Lloyd’s entities not subject to US sanctions, US re-insurers & retro-cessionaires may not be permitted to pay a RI claim to u/ws if proceeds will ultimately be paid to target/funds may not be able to be deposited or could be blocked if paid through a US bank 22 22

“Special Agreements” and other considerations Clause on crude oil contract covering shipments from Iran to China: “Reinsurers shall give cover to export shipments from Sanctioned Countries to China ONLY. And such coverage only becomes effective once cargo is on board vessel (after loading)” What is problem with the above?

Delegated Authority Workstreams Binding authority financial crime clause development Code of Practice update Crystal guidance updated – AML / Sanctions / B and C E Learning tool for coverholders developed Coverholder compliance manual development Coverholder financial crime risk matrix Sanctions portal Presentation name 00 July 2005

Lloyd’s Due diligence guidance Sanctions Due Diligence Guidance launched 6 February 2012 Prepared in consultation with the LMA and reviewed by HMT who are linking the guidance from its website Targeted at managing agents but relevant to brokers when placing at Lloyd’s. Covers financial / trade sanctions – predominantly EU/UK perspective Guidance not prescriptive but designed to assist in formulating compliance processes and benchmarking of existing procedures Guidance is risk-sensitive – expectations of reasonable and proportionate due diligence and screening by considering exposure to risks created by specific business underwritten Guidance on identifying risk factors and setting a framework for screening including timing, extent, frequency and issues specific to certain lines of business

Lloyd’s Due diligence guidance Due diligence / screening to be undertaken prior to underwriting, where possible Due diligence/screening to take place at other points – prior to claims payment. Guidance covering context of Claims Transformation Project Guidance on methods of acceptance covers delegated authorities and issues specific to the subscription market. Market must be open and collaborative as to how sanctions affect them and what they will do to address it Guidance also covers use of exclusion clauses Brokers considered key source of information for purposes of due diligence and screening. Will have conducted own due diligence and expected to act as conduit for further information as necessary

conclusion

summary Offences increasingly impacting on insurance and other industries U.S. sanctions are different but have wide scope – cannot be ignored but also legally difficult to follow as well Ultimately, Market’s responsibility to: Know their business, customers, ultimate owners etc Understand implications of where doing business (esp. new markets) Refer to Due Diligence guidance and other material Correctly use sanction clauses Agree procedures with their coverholders Must consider geo-political environment – ignore at peril Getting it wrong has serious ramifications

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