INTRODUCTION
The Office of Foreign Assets Control ("OFAC") of the U.S. Department of Treasury administers a series of laws that impose economic sanctions against hostile entities to further U.S. foreign policy and national security objectives1. OFAC regulations promote national and international security by requiring asset freezing of: oppressive governments, international terrorists, narcotics traffickers or other specially designated nationals ("SDNs") and blocked persons (collectively referred to herein as "OFAC Targets")2. With respect to the insurance industry, OFAC regulations generally prevent underwriters, brokers, agents, primary insurers and reinsurers ("persons" and "entities" subject to U.S. jurisdiction) from issuing insurance policies and reinsurance contracts involving OFAC Targets.
All property, including insurance contracts, in which there is a direct or indirect interest of any OFAC Target is considered "blocked" or "frozen". Claims involving an OFAC Target cannot be adjusted or paid. Additionally, premium payments, policy loan interest payments, and repayments of policy loans related to blocked insurance contracts must be credited to an interest bearing blocked account established on the books of a U.S. financial institution. Proceeds due under blocked policies may not be set-off against past due policy receivables or other claims and must also be paid into an interest bearing blocked account. Rights in blocked policies may not be transferred without authorization from OFAC - changing a beneficiary or assigning an insured’s interest under a blocked policy would be considered illegal transfers involving blocked property. Exemptions or exceptions can be made only by obtaining a license from the OFAC.
Simply put, it is a violation of federal law to issue a policy, engage in a transaction (including receipt of premiums and payment of claims), or to facilitate any transaction with an OFAC Target3. OFAC provided the following examples of transactions which would be prohibited or blocked:
- An aviation policy, issued to a non-blocked foreign airline, which names a bank which is an SDN as an additional insured because the bank holds a mortgage on the aircraft;
- A liability policy covering the pharmaceutical operations of a company in Columbia, which has been named as a Specially Designated Narcotics Trafficker;
- A reinsurance contract for policies underwritten in whole or in part by an insurer which is an SDN;
- A property insurance policy written for an international hotel chain which covers hotels in Iran;
- A liability policy covering a private oil exploration company’s operations in a sanctioned country; and
- Return of a premium overpayment to a Cuban resident in France.
Compliance is challenging because OFAC Targets may appear in transactions in various ways, such as insureds and additional insureds, policyholders, payers of premium, beneficiaries, loss payees, intermediaries and administrators of all variety, banks as lien holders, banks to which premiums and claims payments are deposited or routed, or even third-party liability claimants. If a person or entity that is anyway involved with an insurance contract or transaction turns out to be a OFAC Target, the insurance contract or funds involved in the transaction may well be considered "blocked property" subject to OFAC regulations.
COMPLIANCE PROGRAM FOR INSURERS
The breadth and scope of a company’s OFAC compliance program depends largely on the type of risks it insures and the location of those risks. At the very least, a company should designate an OFAC compliance officer and maintain written policies and procedures for its OFAC compliance program. OFAC policies and procedures should be written and approved by senior management, and distributed throughout the company.
Roles and responsibilities should be assigned to persons in the IT and other key areas. Internal training of all relevant personnel is a necessity and periodic internal audits should be conducted. Any OFAC program must, at a minimum, establish screening, blocking, reporting and record keeping procedures.
I. Screening
The first step is to create a system to check the SDNs List whenever: (1) an application is received; (2) a request to change an insured owner or beneficiary or to add an additional insured, loss payee, or lien holder is received; (3) a claim is presented; and (4) a claim payment is made, including one requiring a deposit in or a transfer through a bank. It should be noted that the OFAC requirements bind insurers on an ongoing basis. If a policy is issued when none of the relevant entities or persons are OFAC Targets, but that changes after issuance, all transactions must cease and a report must be issued; therefore, companies should also periodically screen their existing policy holders, claimants and beneficiaries against the SDNs list.
Most companies use OFAC screening software called "interdiction" software to screen transactions and "scrub" existing policies. Third party vendors also provide OFAC screening to companies4. The OFAC provides a free search tool for the SDNs list at the following website: http://sdnsearch.ofac.treas.gov/. Prior to using the SDNs list search engine, individuals are encouraged to thoroughly read through OFAC’s instructions for use of the search tool. The instructions can be found on the following webpage: http://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/fuzzy_logic.aspx. Screening can also be, at least conceivably, achieved by manually checking persons and entities against a printed SDNs List.
II. Blocking and Reporting
A. Blocking
If an apparent match is found during the screening process, it is necessary to determine whether the match is accurate, or a "false positive." This requires research and analysis by company personnel. If a match proves to be accurate, all transactions with respect to that person or entity should be ceased immediately as the insurance contract is considered "blocked property".
Claim payments due to an OFAC Target, or due to be deposited to or transferred through a bank which is an OFAC Target, must be stopped before they are made. As discussed above, premium payments, policy loan interest payments, and repayments of policy loans relating to blocked insurance contracts must be credited to a "blocked interest-bearing account" established on the books of a U.S. financial institution5. Specific requirements for blocked interest-bearing accounts differ slightly depending on the OFAC Target, but generally the funds must be deposited in an account at a federally insured U.S. bank or credit union and must earn interest at rates that are commercially reasonable6. Claimants and policyholders may be notified that their policy is blocked in the normal course of business.
The following Frequently Asked Questions and Answers found on the OFAC website illustrate the blocking process
What should an insurer do if it discovers that a policyholder is or becomes an 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.
If my screening efforts uncover a policyholder who became an SDN 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.
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."7
B. Reporting
Any person (i.e. an insurance company) holding blocked property must report the blocked property to the OFAC8. For example, if a search of the SDNs List identifies that a confirmed OFAC Target has an interest in a claim or policy ("blocked property"), an initial report must be filed with OFAC within ten days of the property becoming blocked9. OFAC suggests that the company should also immediately contact the OFAC compliance office for assistance in determining the appropriate course of action. Initial reports on blocked property are required to:
- describe the owner or account party, the property, its location, any existing or new account number or similar reference necessary to identify the property;
- provide the actual or estimated value of the blocked property;
- state the date the property was blocked;
- provide the name and address of the holder of the blocked property; and
- provide the name and telephone number of a contact person from whom compliance information can be obtained10.
OFAC regulations also require a comprehensive annual report on all blocked property as of June 30 of the current year to be filed annually by September 3011. Annual reports are required to be filed on Form TDF 90-22.50, Annual Report of Blocked Property, which can be found online. All reports (initial and annual) must be filed with the Office of Foreign Assets Control, Compliance Programs Division, U.S. Treasury Department, 1500 Pennsylvania Avenue NW.--Annex, Washington, DC 20220.
III. Record keeping
If the company is holding property (i.e. funds or an insurance policy) that is blocked, the company is required to: "keep a full and accurate record of such property, and such record shall be available for examination for the period of time that such property is blocked and for at least 5 years after the date such property is unblocked."12