Compliance for the Insurance Industry

61. State insurance statutes regulate an insurer's ability to withhold claim payments, cancel policies or to decline to enter into policies. In some cases, insurers must commit an ostensible violation of state insurance regulations to comply with OFAC regulations. Does OFAC have a position as to whether OFAC regulations preempt state insurance regulations in this context?

OFAC's regulations under the Trading with the Enemy Act and the International Emergency Economic Powers Act are based on Presidential declarations of national emergency and preempt state insurance regulations. OFAC regulations are not federal insurance regulations, they are regulations promulgated under the President's exercise of foreign-affairs and national emergency powers.

62. At what point must an insurer check to determine whether an applicant for a policy is a Specially Designated National (SDN) or is on one of OFAC's other sanctions lists?

If you receive an application from an SDN for a policy, you are under an obligation not to issue the policy. Remember that when you are insuring someone, you are providing a service to that person. You are not allowed to provide any services to an SDN. If the SDN sends a deposit along with the application, you must block the payment. If you receive an application from a party on one of OFAC's other sanctions lists, please review the specific treatment prohibitions associated with that list carefully before taking any action.

63. What should an insurer do if it discovers that a policyholder is or becomes a Specially Designated National (SDN)--cancel the policy, void the policy ab initio, non-renew the policy, refuse to pay claims under the policy? Should the claim be paid under a policy issued to an SDN if the payment is to an innocent third-party (for example, the injured party in an automobile accident)?

The first thing an insurance company should do upon discovery of such a policy is to contact OFAC Compliance. OFAC will work with you on the specifics of the case. It is possible a license could be issued to allow the receipt of premium payments to keep the policy in force. Although it is unlikely that a payment would be licensed to an SDN, it is possible that a payment would be allowed to an innocent third party. The important thing to remember is that the policy itself is a blocked contract and all dealings with it must involve OFAC.

64. A workers' compensation policy is with the employer, not the employee. Is it permissible for an insurer to maintain a workers compensation policy that would cover a person on the Specially Designated Nationals (SDN) List, since the insurer is not transacting business with the SDN, but only with his/her employer?

If an insurer knows that a person covered under the group policy is an SDN, that person’s coverage is blocked, and if he or she makes a claim under the policy, the claim cannot be paid. If an insurer does not know the names of those covered under a group policy, it would have no reason to know it needed to block anything unless and until an SDN files a claim under that policy. At that point its blocking requirement would kick in.

If an insurer knows that a person covered under a group policy is on one of OFAC's other sanctions lists, a different set of restrictions may apply. The insurer should contact OFAC if a claim is filed by an individual on one of the other sanctions lists.

65. How frequently is an insurer expected to scrub its databases for OFAC compliance?

That is up to your firm and your regulator. Remember that a critical aspect of the designation of a Specially Designated National (SDN) is that the SDN's assets must be frozen immediately, before they can be removed from U.S. jurisdiction. If a firm only scrubs its database quarterly, it could be 3 months too late in freezing targeted assets. Although the prohibitions and treatments for individuals and entities on OFAC's other sanctions lists are different from those on the SDN list, there may be similar consequences if your firm takes a long time in recognizing a sanctions list match.

OFAC's sanctions lists may be updated as frequently as a few times a week or as rarely as once in a month.

66. Is it sufficient if my company screens life insurance policies only prior to policy issuance?

That is up to your firm and your regulators. Conducting screening only before policy issuance is critical but would not likely achieve your desired level of compliance. After the policy issuance, the U.S. Government may designate an existing policyholder or a named beneficiary as a Specially Designated National or Blocked Person ("SDN"), or it may expand sanctions with respect to a particular country, or impose sanctions against a new country. If an existing policyholder or a named beneficiary became an SDN or otherwise subject to U.S. sanctions, the insurer may be required to "block" the policy, report such blocking to OFAC within 10 days of the SDN designation, place any future premiums into a blocked, interest-bearing account at a U.S. financial institution, and seek an OFAC license before making any payments under the policy. Other restrictions may apply if a policyholder or a named beneficiary is added to one of OFAC's other sanctions lists. Consequently, routinely screening all policies against OFAC’s sanctions lists, as frequently updated, would enable the insurer to comply with the applicable OFAC regulatory requirements. It also is important to screen the policyholder and beneficiary prior to paying a claim.

68. If my screening efforts uncover a policyholder who became a Specially Designated National after policy issuance, can I notify the policyholder that the policy is "blocked"?

Yes, the insurer may notify the policyholder that the policy is blocked, without obtaining a specific license from OFAC.

69. In my letter to the policyholder whose policy is "blocked," may I also instruct the policyholder not to send any more premium or that we will not accept additional premium under this account?

The insurer may instruct the policyholder as follows: "If you send any more premium, we are required under applicable U.S. laws and regulations to place such funds in a blocked account. If you have any questions, please contact the U.S. Department of Treasury’s Office of Foreign Assets Control."

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.

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.

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. Similarly, the issuance or provision of coverage for global health, life, or travel insurance policies for individuals ordinarily resident in a country outside of Cuba who travel to or within Cuba is authorized by general license, as is the servicing of such policies and payment of claim arising from events that occurred while the individual was traveling in, or to or from, Cuba. Additionally, insurers should check OFAC’s list of Specially Designated Nationals and other sanctions lists to ensure that no prohibited services are rendered to persons or entities on those lists.