When sanctions are brought to bear, compliance can be onerous, complex, and even logically impossible. Victor Fornasier and Nina Tulloch give some advice.

Compliance with sanctions can be complex. So what can insurers and reinsurers do? Well, for the moment, they need to ensure that checks are

carried out when considering new business to ensure that the subject matter of the new business will not infringe any sanctions regime in place. OFAC

(see box below) requires that where an application is received from an Specially Designated National or “blocked person” for a policy, there is a positive

obligation upon a reinsurer not to issue the policy. There are also US and EU obligations to contact the relevant authorities once it becomes apparent that business will infringe sanctions restrictions.

Due diligence should be undertaken to examine the claims record with the aim of flagging countries, individuals and organisations that may be subject to sanctions restrictions. Reinsurance presents a

particular problem as reinsurers can be several layers above the ceding entity. Covering a “class of risks” without undertaking sanctions due diligence and/or having appropriate exclusions in place may lead to reinsurers facing criminal and financial penalties.

Once business is underway, regular internal audits should be undertaken to ensure that the organisation remains sanctions compliant.

Whilst there is no perfect solution, businesses

concerned about sanctions infringements might require underwriters to insist upon a warranty from their client to the extent that no breach of any sanctions regime will be committed by subscription to the policy or treaty of reinsurance in question. A breach of that warranty would discharge the reinsurer from liability to the reinsured from the date of the breach. Alternatively, include a wide ranging exclusion of any risk which infringes a sanctions regime which would automatically prevent a reinsurer making a claims payment in breach of a sanctions requirement.

THE CUBAN CONUNDRUM

The solutions outlined above do not overcome what we have termed “the Cuban conundrum”. Say a US parent has a French subsidiary that wishes to write a Cuban property risk. The subsidiary will be subject to both OFAC restrictions (which prohibit trade with Cuba) and the EU Regulation. The EU has deliberately sought to counteract the effect of the US provisions relating to trade in Cuba by adopting measures which prohibit EU companies from complying with OFAC Provisions. The result is that the company in question simply cannot comply with the OFAC Provisions without breaching EU law. And if they comply with the EU regime, they will breach the OFAC Provisions. It is a classic “catch 22” scenario.

There is no simple solution to the Cuban

conundrum. It is possible to apply to OFAC and/or to the European Commission for transaction specific permissions to proceed but this can take some time. Finally, breaking the rules is no minor issue.

A breach of sanctions law can have serious consequences – both the US and the UK have powers of criminal prosecution to deal with alleged breaches.

Victor Fornasier is a partner and Nina Tulloch an associate at Lovells LLP.

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