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

2. International Sanctions - background

3. 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

4. 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

5. 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

6. Requirements - financial institutions

7. 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

8. 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 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
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

9. 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

10. 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

11. 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)

12. What if you get it wrong?

13. 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

14. US & overseas sanctions

15. 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?

16. 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

17. US PENALTIES Lloyds TSB case (2008):
Between 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

18. International developments

19. 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 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

21. What’s new

22. 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 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
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

23. “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?

24. 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

25. 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

26. 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

27. conclusion

28. 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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