The Lawson Firm
A Practical Compliance Guide for Insurers
[2014 Version - Excerpt]
"We will starve terrorists of their funding…and bring them to justice."
President George W. Bush
What is OFAC?
“OFAC” stands for the Office of Foreign Assets Control. It is an office of the Department of Treasury established in 1950. OFAC enforces economic sanctions against terrorists, terrorist organizations, criminals, and organized crime. Its powers are based upon Presidential declarations issued under national security powers (Executive Order 13224) and upon the following nine federal statutes:
● The Antiterrorism and Effective Death Penalty Act
● The Foreign Narcotics Kingpin Designation Act
● The Trading with the Enemy Act
● The International Emergency Economic Powers Act
● The United Nations Participation Act
● The International Security and Development Cooperation Act
● The Cuban Democracy Act
● The Cuban Liberty and Democratic Solidarity Act
● The Iraqi Sanctions Act
OFAC’s rules and regulations apply to all industries in the U.S.; not just to the insurance industry. OFAC regulations prohibit anyone from providing services to, or engaging in a transaction involving a person or organization subject to economic sanctions. Neither insurance companies nor their agents may, without OFAC’s permission, engage in a transaction involving a person or organization listed by OFAC as being subject to sanctions. Insurance contracts in which a listed person or organization has a direct or indirect interest must be frozen or “blocked”. OFAC also prohibits companies from doing business within certain countries or with persons from certain countries or associated with specific government regimes.
Terrorism, Organized Crime, and Insurance
Unlike bank accounts and bank products, most insurance products by their nature, do not allow the owner to store monetary value. It may seem, therefore, that insurance would be an unlikely tool for terrorists and criminals. Both terrorist and criminal organizations have, however, been known to use insurance to support their operations in various ways. Life insurance and annuities, for example, have been used in money-laundering operations. Terrorist organizations have also been known to purchase life and annuity policies as a means of compensating its operatives and to purchase auto insurance in order to allow operatives to drive legally in the U.S. Because insurance is and has been used in these and other ways, the business of insurance has been, and remains, of particular interest to OFAC.
Who Must Comply?
OFAC regulations apply to all insurance lines and products. They apply to all persons who are U.S. citizens, wherever located, and to companies located or incorporated in the U.S. including:
● Primary Insurers;
● Overseas branches of U.S. companies;
● Third Party Administrators; and
● In certain instances, any overseas subsidiaries of U.S. Companies.
Enforcement and Penalties for Non-Compliance
Following the September 11, 2001 terrorist attacks, Presidential orders were issued and increased funding was provided broadening the enforcement powers and reach of federal anti-terrorist agencies such as OFAC. In addition, a number of state insurance departments issued bulletins requiring insurers to comply with OFAC requirements and, in some cases, imposing reporting requirements on insurers as well. These measures eventually involved into formalized state insurance department guidelines making OFAC compliance a part of market conduct examination procedures (see e.g. New York Circular Letter No. 11 (2009) stating New York’s intention to inquire into companies’ compliance with OFAC and other federal regulations in connection with future examinations).
Penalties for failure to comply with OFAC rules tend to be (to borrow an insurance concept) ‘low-frequency/high-severity’ occurrences. While fines against insurers and other entities within the insurance industry tend to be somewhat rare, those fines have, in recent years, been as high at $2.4 million. OFAC possesses the statutory authority to levy fines as high at $10 million, depending upon the violation, and to seek prison terms up to 30 years for intentional violators. Violators are eligible for penalty mitigation by establishing an OFAC compliance program (see "Establishing an OFAC Compliance Program" further on in this Guide).
Violations of OFAC regulations can also generate negative publicity for the company. Even cases in which a violation is inadvertent may attract significant public attention and have a corrosive effect on the violating company’s good name.
Companies are prohibited from engaging in transactions that in anyway involve individuals, entities, or vessels appearing on OFAC’s “Specially Designated Nationals and Blocked Persons List”. This list is maintained and periodically updated by OFAC. It currently contains the names of over 5,000 persons and entities. Individuals appearing on the list are referred to as Specially Designated Nationals or “SDN’s”.
The following are some examples of insurance transactions that would be prohibited by OFAC:
● A personal lines auto or homeowner’s policy covering a person listed by OFAC.
● A life insurance policy naming a listed person as a beneficiary.
● An aviation policy which names a bank listed by OFAC as a lienholder.
● A marine-hull policy covering loss to a vessel listed by OFAC.
● A cargo policy naming an OFAC- listed shipping company as the insured.
● A liability policy covering a pharmaceutical company listed by OFAC.
OFAC has also promulgated special programs aimed at enforcing economic sanctions against Cuba and other “target countries”. The Cuba program is by far the longest standing of these programs and the one that generates the most enforcement actions. Under the Cuba program, companies are prohibited from engaging in transactions with the following, whether or not specifically listed by OFAC:
● Governmental entities and officials of Cuba;
● Companies located in Cuba;
● Companies, wherever located, organized in or controlled from Cuba; and
● Individuals, regardless of citizenship, currently residing in Cuba.
Different rules apply to other target-country programs (i.e., Sudan, Iraq, Iran, N. Korea, Liberia, Burma).
In some cases, OFAC regulations conflict with state insurance regulations that prohibit certain practices such as withholding claim payments, declining certain insurance applications, or cancelling certain policies mid-term. Since OFAC regulations are promulgated under national-security legislation and the President's exercise of foreign affairs and national emergency powers, however, the regulations pre-empt state law. Companies must therefore comply with OFAC regulations even if compliance would result in an ostensible violation of state insurance regulations.
Further on in this Guide....
Compliance Guidelines and General Procedures
Underwriting and Issue, Servicing Existing Policies, and Claims
May a Company Avoid Liability by Excluding Coverage in the Policy?
Where is the OFAC SDN List? What is the Best Way to Check It?
Data Checking and Handling Data Matches
Establishing an OFAC Compliance Program
The Lawson Firm, LLC provides legal and compliance risk management services to the insurance industry. This publication is intended to provide general information only and is not intended to provide solutions to particular situations. Readers are cautioned not to attempt to solve specific problems solely on the basis of the information contained in this publication and, instead, are encouraged to seek knowledgeable advice from a qualified legal professional. The Lawson Firm does not claim expertise in the laws of jurisdictions other than those in which our attorneys are licensed. Certification in any of the practice areas mentioned in this paper is not available in Ohio. Date of publication: August 1, 2013.
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