Reicon14 session 5 ppt final

Seema A. Misra, Moderator
Stroock & Stroock & Lavan LLP
Seth Eichenholtz
Swiss Re America Holding Corporation
Scott Mansolillo
W.R. Berkley Corporation
Inna Tsimerman
Marsh & McLennan Companies, Inc.

 Main Objective of Sanctions:
◦ Induce change by governments disfavored by the international
community
 Foster regime change in Syria and Libya
 Force Iran to stop developing nuclear weapons
 Force Russia to respect Ukraine’s territorial integrity
◦ Reduce/eliminate resources to terrorists, drug traffickers,
nuclear proliferators, etc.
◦ Types of sanctions:
 Trade embargoes
 Export controls
 Asset freezes/travel bans

Iran Sudan Syria North
Korea
Cuba
Key sanctioned countries
Organizations/
deposed governments
Individuals
Vessels
These are targeted because they
are associated with:
 Sanctioned countries or
 Weapons of mass destruction
proliferation or
 Terrorist activity or
 Criminal activity (e.g. drug
trafficking) or
 Human rights violations
Aircraft
Russia

 A division of the U.S. Department of the Treasury that
administers and enforces U.S. sanctions programs and
embargoes.
 Sanctions generally apply to all “U.S. persons”
 U.S. persons are (i) U.S. citizens and permanent resident
aliens, (ii) U.S.-organized entities, and (iii) persons in the
United States.
 In some cases (Cuba/Iran) “U.S. persons” also includes foreign
branches and subsidiaries of U.S. companies.

 Sanctions Programs are of two principal types:
◦ Specially Designated Nationals (“SDNs”/Blocked Persons)
 over 6,000 entities, individuals, vessels and aircraft on the current SDN List
 Other blocked persons include Cuban, Iranian and Syrian governments
◦ Country programs
 Embargoes/trade sanctions in place for numerous countries that prohibit
trade, investment and other financial transactions.
 U.S. has 20 separate sanctions regimes in effect today
◦ Iran, Sudan, Syria, North Korea and Cuba – broadest programs
 European Union has 26 sanctions regimes in effect
◦ Many the same as the U.S.
◦ Cuba not included
◦ China is included

 OFAC violations are subject to substantial criminal and
civil penalties
 Civil penalties can be up to $250,000 or twice the
amount of the subject transaction, whichever is greater
 Civil penalties are based upon a “strict liability” basis
 Existence of a compliance program is a mitigating factor
in determining the amount of a penalty
 Reputational damage is just as significant as OFAC
publishes all penalties on a monthly basis
 Criminal penalties can be as high as $1 million fine
and/or imprisonment for up to 20 years

Direct Sanctions:
 U.S. Law Prohibitions: “OFAC sanctions” generally prohibit virtually all
trade with Iran, including -
 Direct or indirect import to and export from Iran of goods,
technology and services.
 Engaging in any transaction or dealing in or related to Iranian
origin goods, services or technology.
 Engaging in any transaction related to goods, technology, or
services for sale, supply or exportation, directly or indirectly, to
Iran.
 Facilitating any prohibited transaction.
 Applicability: (1) U.S. nationals, (2) U.S. companies, (3) persons in the
U.S., and (4) foreign subsidiaries of U.S. companies (since October 2012
under the Iran Threat Reduction and Syria Human Rights Act (“TRA”)).

 Boycott of Iran: The President is required to designate and impose penalties on any
company anywhere in the world (or its affiliates) engaged in certain “sanctionable”
conduct.
 Companies anywhere in the anywhere in the world could be impacted.
 Sanctionable conduct: Specified activities related to:
a) Iranian petroleum and petrochemical products, and Iran’s petroleum and
petrochemical sectors,
b) Iran’s nuclear and weapons sectors,
c) Iran's energy, shipping, and shipbuilding sectors,
d) The provision of (re)insurance for any activity that is prohibited or
sanctionable under U.S. sanctions against Iran.
 Penalties: Restriction of access to the U.S. trading and financial systems.
 Temporary Sanctions “Suspension” - Joint Plan of Action: This relief and temporary and
limited. U.S. companies and foreign companies owned or controlled by them continue to
be prohibited from engaging in virtually all services directly or indirectly with Iran.

 Escalating Sanctions: Since March 2012, the U.S., EU, Canada and other governments have been designating
additional Russian individuals (chiefly Putin cronies), new leadership in Donbass and the government of Crimea,
and companies as sanctions targets.
◦ Sanctions measures consist of asset freezes and travel bans (in the case of the E.U.) or wholesale
prohibitions on transactions as well as asset freezes and travel bans (in the case of the U.S. and Canada).
 New Capital Market (Sectoral) Restrictions: The U.S. and the EU imposed new sanctions in the form of capital
market restrictions against specifically designated Russian banks and companies (including Rosneft
Gazprombank).
◦ Unlike other sanctions mechanisms, these capital market restrictions do not prohibit any other kinds of
transactions with the listed banks or companies.
 New Export Controls: The U.S. , EU and Canada have also implemented significant new export restrictions
related to:
◦ Armaments and military technologies, and dual use technologies, to Russia; and
◦ Goods and technologies for the Russian petroleum sector (deep water exploration, Arctic, shale)
 Russian Response: Russian retaliatory/responsive measures have been minimal but could ramp up:
 Import restrictions on Western foodstuffs to Russia; travel bans against named Western government
officials.
 New data protection legislation restricting transfer of personal data outside Russia may be implemented
on an expedited basis.

Industry Examples:
 A property insurance policy covering an international hotel
chain with hotels in Iran.
 A marine cargo or “goods in transit” policy insuring a
shipment of Sudanese crude oil from Egyptian ports to a
Spanish buyer, or Cuban sugar shipped from a Venezuelan
port to a Brazilian buyer.
 An aviation policy for a foreign airline known to have regular
flights to Cuba.
 Providing travel insurance to a group of Canadian tourists for
travel to Cuba.

 Sanctions laws apply to insurance and reinsurance, and prohibit :
1. Doing business or engaging in transactions with or related to targeted countries,
organizations, individuals, vessels and aircraft; and
2. Helping clients/cedents/insured, even indirectly, to do business in targeted countries
or with sanctioned governments, organizations, individuals, vessels, and aircraft.
 Facultative:
 Reinsurance coverage for a specific risk under an individual policy requires the reinsurer
to scrutinize all relevant underwriting information, similar to a primary insurance
placement, and decline coverage that would violate sanctions rules.
 Treaty:
 much more difficult from a sanctions perspective
 Due diligence is very difficult:
 May not know ultimate insured
 Need to understand if ceding company and/or broker has done sanctions review
 Treaty may need to include appropriate exclusionary language to protect against potential sanctions violations

 For the period July 2006 – July 2014:
◦ Total insurance files – 386
◦ Reinsurance files – 68
 14 open/54 closed
◦ 14 open – 10 enforcement/4 licensing
◦ 40/68 involve either Cuba or Iran sanctions programs
◦ 54 closed – only 3 with penalties
 Aon International Energy - $36,000
 HCC Insurance Holdings - $38,000
 Gen Re Corp. - $59,000

 In 2011, OFAC reported that AON International Energy, Inc., Houston
Texas (“AON Energy”), a subsidiary of Aon Corporation in Chicago, had
settled allegations of violations of the Iranian Transaction Regulations.
 In October 2005, AON Energy facilitated the placement of coverage and
the payment of premiums for facultative retrocession reinsurance that
reinsured construction risks associated with a petroleum project on
Kharg Island in Iran.
http://www.treasury.gov/resource-center/sanctions/CivPen/Documents/02012011.pdf

 Aon Energy brokered and placed the reinsurance on behalf of a
European reinsurer with two European retrocessionaires.
 The combined premium for the two retrocession reinsurance
placements was $62,883.
 The settlement amount was $36,000

OFAC reported that the Settlement reflects the following
 Aon Energy provides specialized insurance services resulting in transactions that
were particularly harmful to the sanctions program; OFAC viewed the apparent
violations as part of a pattern of reckless, but not egregious, conduct by Aon
Energy in connection with these policies; Aon Energy, under the direction of its
parent, Aon, took several steps to strengthen its OFAC compliance program and
its existing OFAC procedures after the apparent violations; Aon Energy has not
been the subject of prior OFAC penalties or other OFAC administrative actions;
and Aon Energy cooperated with OFAC and also entered into a tolling agreement
with OFAC which was undertaken by Aon on behalf of Aon Energy.

 In 2011, it was reported that General Reinsurance Corporation
(“Gen Re”), had paid $59,130 to settle liability for apparent
violations of the Iranian Transactions Regulations, 31 C.F.R. part
560, that occurred in July and August 2005

 The alleged violations consisted of two reinsurance claim
payments to the Steamship Mutual Underwriting
Association Limited (“Steamship Mutual”) for losses arising
from vessel operations of the National Iranian Tanker
Company. Gen Re made the excess of loss claim payments
pursuant to its facultative reinsurance obligation to
Steamship Mutual for the coverage period June 16, 1998,
to February 20, 2002.

 The combined amount of the two reinsurance claim payments
was $309,740.65.
 The base penalty for the apparent violations was $131,424.
 Settlement amount was $59,130

OFAC reported that the Settlement reflects the following:
 Gen Re is the largest U.S. reinsurer and one of the largest reinsurers in the world;
 The apparent violations resulted from activities of certain claims personnel,
including a Vice President for Claims, that were contrary to Gen Re sanctions
compliance policies and procedures;
 Gen Re subsequently installed enhanced sanctions compliance software and
implemented training programs for personnel who have a high probability of
encountering sanctioned transactions
 Gen Re substantially cooperated with OFAC by signing a tolling agreement and
promptly responding to all requests for information;
 Gen Re has not previously been the subject of OFAC penalties or other OFAC
administrative actions

 In May, OFAC reported that American International
Group, Inc. (“AIG”), an international insurance and
financial services organization headquartered in New
York, New York, agreed to remit $279,038 to settle
potential civil liability for 3,560 apparent violations of
the Cuban Assets Control Regulations, 31 C.F.R. part
515, that occurred between January 1, 2006, and
March 29, 2009.
http://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20140508_aig.pdf

 Between January 2006 and March 2009, two AIG subsidiaries in Canada issued or
renewed three types of property and casualty insurance policies that insured
Cuban risks of a Canadian corporate entity for an estimated aggregate premium of
$486,137.71. The polices involved Comprehensive General Liability, Director’s and
Officer’s (“D&O”) Excess Liability, and Pollution Legal Liability coverages.
 One of the AIG subsidiaries in Canada also maintained a D&O Liability insurance
policy that insured certain directors and officers of three Cuban joint venture
partners of a Canadian corporation between January 1, 2006, and October 4,
2006. The estimated total premium for D&O coverage during this time period was
$55,578.08.

 Separately, from March 17, 2006, through September 30, 2008,
Travel Guard Canada—an AIG subsidiary in Canada—sold,
renewed, or maintained in force 3,446 individual or annual
multi-trip travel insurance policies in which the insured
identified Cuba as the travel destination. The total premium
collected for these policies was $337,973.25. During the
coverage period of these 3,446 policies, and extending to
December 31, 2008, Travel Guard Canada paid 103 claims for a
total value of $96,910.47.

OFAC reported that the Settlement reflected:
 Aggravating Factors: AIG, including certain members of the institution’s
management, had actual knowledge of the conduct that led to the apparent
violations; AIG’s conduct resulted in harm to U.S. sanctions program objectives;
and the compliance programs of AIG’s two Canadian subsidiaries were inadequate
at the time of the apparent violations.
 Mitigating Factors: AIG has not received a penalty notice or Finding of Violation in
the five years preceding the earliest date of the transactions giving rise to the
apparent violations; AIG has taken appropriate remedial action in response to the
apparent violations; and AIG cooperated with OFAC’s investigation by submitting a
voluntary self-disclosure and executing a statute of limitations tolling agreement
and multiple extensions of the agreement.

 Within the framework of global operations, reinsurers and intermediaries should consider their
sanctions risk profile taking into account not only the kinds of coverages and where they have
operations, but also where their clients have operations and where clients’ trading partners may
be located.
• There are some unique challenges here – information may not be available at the time of
broking or underwriting to the broker, (re)insurer or even to the insured!
 Due Diligence: Consider that appropriate level of due diligence.
• What is “reasonable” to know and request?
• There may be different answers depending upon the type of reinsurance at issue
(e.g. Marine verses GL versus Energy vs Property and Facultative versus Treaty)
• What do you screen? When do you screen and how often?
• Think about what you do not screen (e.g. Underlying riskholders/insureds)
• Reevaluate periodically – what is reasonable changes over time.

 Global policies raise the issue of covering sanctions-prohibited
risks.
 Use of “exclusionary clause” language to exclude coverage for
risks that would violate applicable sanctions laws is critical.
 If an exclusionary clause is not possible, the reinsurer should
consider applying for a license for the policy from OFAC or
other applicable regulator.
◦ Separate license will be needed to pay any claims under that policy that
violate OFAC prohibitions.
◦ OFAC licensing process is time-consuming (may take up to 12 months)
and may be limited in its application.

 consider the use of trade sanctions exclusions or territorial exclusions
to address trade sanctions risk.
• The OFAC FAQs address the use of trade sanctions exclusions:
102. How can an insurer participate in worldwide insurance markets through global insurance policies if, by
definition, coverage extends to potential risks in sanctioned countries?
The best and most reliable approach for insuring global risks without violating U.S. sanctions law is to insert in
global insurance policies an explicit exclusion for risks that would violate U.S. sanctions law. For example, the
following standard exclusion clause is often used in open marine cargo policies to avoid OFAC compliance
problems: “whenever coverage provided by this policy would be in violation of any U.S. economic or trade
sanctions, such coverage shall be null and void.” The legal effect of this exclusion is to prevent the extension of
a prohibited service (insurance or risk assumption) to sanctioned countries, entities or individuals. It essentially
shifts the risk of loss for the underlying transaction back to the insured - the person more likely to have direct
control over the economic activity giving rise to the contact with a sanctioned country, entity or individual. [11-
16-07]

◦ 103. What if the commercial setting and/or market circumstances of a global insurance policy does not
permit the use of an OFAC exclusion such as the one noted above?
◦ OFAC recognizes that U.S. insurers often compete in international markets where non-U.S. insurers are
willing and able to issue global insurance policies without a U.S. sanctions exclusion. In cases where such an
exclusion is not commercially feasible, the insurer should apply for a specific OFAC license for the global
insurance policy. In making a licensing determination, OFAC will review the facts and circumstances of each
global insurance policy, including both risk frequency and risk severity, to assure that issuance of the policy
will not undermine U.S. foreign policy goals. A separate license would be required for the insurer to pay
claims arising under any authorized global insurance policy. [11-16-07]
◦ 104. Can an insurer offer global travel insurance and worldwide travel assistance without violating U.S.
sanctions?
◦ The provision of all travel related services are authorized for all OFAC country sanctions programs (including
Burma, Iran and Sudan) except Cuba. Travel related services may only be provided in Cuba pursuant to a
valid general or specific OFAC license. If the traveler is a U.S. person traveling to Cuba pursuant to a valid
OFAC license, travel insurance may be issued to the traveler by a U.S. insurer without a separate license.
While there are some instances when U.S. persons travel to Cuba without a valid license (and thus pose
sanctions problems for U.S. travel insurers), U.S. travel insurance providers most frequently face sanctions
problems when they offer travel insurance products to third country nationals traveling to Cuba. In such
cases the U.S. insurer must obtain a license to issue the travel insurance product. Additionally, insurers must
also be sure to check OFAC’s list of Specially Designated Persons to ensure that no services of any kind are
rendered to persons or entities on this list. [02-11-08]

 Sanctions exclusions:
• Consider the terms of the exclusion and its effect. Does the exclusion
exclude cover for claims where there would be a violation of law or where
there would also be an exposure to penalty even without a violation (e.g.
what about extraterritorial sanctions laws such as ISA and IFCA)?
• An increasingly used exclusion is the Lloyd’s LMA 3100:
 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.
• Not all insurers, reinsurers and brokers are equally positioned
• Because of differences in trade sanctions laws, the effect even the same
sanctions exclusion language may be different depending on the parties
to which it applies.

 To “all Alien Accredited Reinsurers Writing
Business in New York State”
 This Circular Letter seeks information
concerning accredited reinsurers’ compliance
with the Iran Freedom and Counter-
Proliferation Act of 2012 (“IFCPA”).

 Recently, the Department learned that several companies have insured
trades made with Iran. The information received by the Department
parallels recent news reports of a pattern of trades made by Glencore
Xstrata and Trafigura with Iranian entities. While these particular
transactions may not have violated the sanctions regimes in place in the
relevant countries at the time, engaging in a similar transaction now
could be found to violate the IFCPA. The resulting sanctions could
jeopardize the ability of any involved insurer to conduct business in the
United States. The purpose of this letter is to seek information about
reinsurers’ plans to implement compliance and due diligence programs
designed to avoid any potential violations of the IFCPA.

◦ Identify all lines of business, or any other insurance service, that you, your parent(s),
affiliates or subsidiaries write or provide, that may be subject to sanctions under the
IFCPA.
◦ Explain all policies and procedures in place to ensure compliance with the IFCPA.
◦ Provide the Department with representative copies of the relevant compliance policies
and procedures.
◦ Explain how, when underwriting a policy, you ensure that your underwriters correctly
ascertain whether the policy may cover transactions that are prohibited by the IFCPA.
Include within your answer how, and to what extent, representations made by a
potential insured are verified.
◦ Explain what information you require an insured to provide to you regarding each
shipment covered by a maritime policy, including: (1) the port of origin of the
shipment; (2) the nature of the goods being shipped; and (3) whether the shipment
involves or is the for the benefit of a SDN.

◦ Explain what rights you have to verify whether an insured’s representation about the
nature of cargo insured under a marine policy is accurately represented and state the
number of time in the last three years that you have exercised those rights.
◦ State whether, following the news reports concerning the Glencore Xstrata and
Trafigura, you reviewed your in-force policies to determine whether you insured any
of the reported transactions. If yes, please indicate whether you conducted the review
before the receipt of this letter and the nature of your review.
◦ Produce a copy of every policy issued by you, a parent, affiliate or subsidiary, to
Glencore Xstrata or Trafigura that remains in force on or after July 1, 2013.
◦ Identify any instance in which you have invoked a sanctions clause to refuse payment
of a claim. For each instance, please explain how you became aware of the claim and
how the claimant responded, and state whether you currently insure the claimant.
◦ List all insureds that you have identified as potentially engaging in business with Iran
or any entity or person affiliated with Iran.

 Seth Eichenholtz
 Swiss Re America Holding Corporation
 914-828-8951; Seth_eichenholtz@swissre.com
 Scott Mansolillo
 W.R. Berkley Corporation
 203-629-3039; smansolillo@wrberkley.com
 Seema A. Misra
 Stroock & Stroock & Lavan LLP
 212-806-5675;smisra@stroock.com
 Inna Tsimerman
 Marsh & McLennan Companies Inc.
 312-683-7583; inna.tsimerman@mmc.com

Reicon14 session 5 ppt final

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Reicon14 session 5 ppt final