A Matter of National Security: Compliance with Foreign Assets Control Regulations

Many in the insurance space are blind to the fact that the Office of Foreign Assets Control (OFAC) is lurking in the shadows. A federal agency in the U.S. Department of Treasury responsible for the administration, implementation and enforcement of economic sanctions programs, OFAC is on the lookout for bad actors — oppressive governments, narcotics traffickers, terrorists, and other specially designated nationals and blocked persons (SDNs) that pose a threat to our national security.

But what does OFAC’s interest in these wrongdoers have to do with insurance-related entities? The answer to that question is squarely addressed in OFAC regulations, which prevent brokers, agents, insurers, and reinsurers from issuing insurance policies and reinsurance contracts involving OFAC targets.

A Bit of Background

Several different federal statutes, first among them, the International Emergency Economic Powers Act and Trading with the Enemy Act, authorize OFAC to administer and enforce economic sanctions against a long list of countries and SDNs — those associated with the governments of sanctioned countries.

As a rule, engaging in business or financial transactions with anyone identified on OFAC’s SDN list is strictly prohibited. This applies to players in the insurance sector, which are obligated to exercise diligence to make sure they do not insure people and property designated as SDNs.

OFAC Regulations Preempt State Insurance Laws

Those in the insurance business may believe that state insurance laws alone govern what they can and cannot do in terms of the placement of coverage and payment of claims. But that is not the case when it comes to OFAC’s authority in connection with insurance transactions.

The issue of pre-emption was addressed nearly two decades ago in written FAQs issued by the Treasury Department. Indeed, on September 10, 2002, the following question was officially posed regarding compliance for the insurance industry:

“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?”

In response, the Department of Treasury explained:

“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. [Emphasis added.]”

By virtue of this federal preemption, carriers must abide by certain OFAC compliance procedures to ensure that prospective policyholders and claimants are not listed on the SDN list or that property to be insured is not property in which an SDN has any interest.

OFAC Compliance

Screening: Step one for any insurance

company (1) preparing to issue a policy of insurance, (2) making a change to an existing policy, or (3) examining a claim is a screening of the SDN list. This should be done upon receipt of an application, a claim or request to change a named insured.

The screening requirement lives on throughout a policy’s term and should also be implemented prior to paying any claim. This is because of the possibility that changes may occur within a policy period resulting in the inclusion of an SDN that triggers OFAC regulations. Consequently, insurers should periodically screen existing policyholders, claimants and beneficiaries against the SDN list.

Blocking and Reporting: Next, if a match found on the SDN list is confirmed to be accurate after appropriate investigation, the carrier must immediately notify OFAC and cease all transactions with respect to that identified person or entity, at which point the policy will be deemed “blocked property.”

Likewise, payment of any claim due to an SDN, or due to be deposited to or transferred through a bank which is on the SDN list, must be frozen. Also, premium payments, policy loan interest payments, and repayments of policy loans relating to blocked insurance policies must be credited to a “blocked interest-bearing account” established on the books of a U.S. financial institution.

There is more. OFAC regulations obligate insurers to timely report blocked property to OFAC within 10 days of that property becoming blocked. In addition, carriers have to file a comprehensive annual report on all blocked property as of June 30 of the current year (the filing is due by September 30).

Regulation and Self-Reporting Violations: Failure to comply with OFAC regulations (read: issuing policies or paying claims to those on the SDN list) carries significant civil and criminal penalties that can exceed several million dollars. That being said, insurance companies that have not complied with OFAC’s screening, blocking or reporting requirements are encouraged to voluntarily disclose past violations.

OFAC considers such self-disclosure a mitigating factor in a civil penalty proceeding. And while OFAC does not have an amnesty program, it does review the totality of the circumstances surrounding any violation, including the quality of a carrier’s OFAC compliance program.

The Takeaway

By way of OFAC regulations, insurers are tasked with doing their part to minimize threats to national security here in the U.S. They can do so with available OFAC compliance software and by implementing comprehensive OFAC compliance plans.