On the trail of terror: insurers that do business with known terrorists or drug traffickers may face stiff penalties under new rules enforced by the Office of Foreign Assets Control. (Industry Strategies).

Since Sept. 11, insurers and other financial-services companies have had to conduct their businesses under a new set of rules. Fewer than two weeks after the terrorists' attacks on the World Trade Center and the Pentagon, President Bush issued an executive order prohibiting transactions with persons who commit, threaten to commit or support terrorism and mandating compliance with the Office of Foreign Assets Control. These economic sanctions apply to all financial institutions, including insurers.

The executive order in some ways complicates the insurance business and is not easily applicable to the type of transactions conducted by insurers. As a result, insurance companies had many questions about how to comply with OFAC's provisions. Moreover, the new OFAC compliance issues had to be examined in the confines of complying with existing state insurance regulations and claims-handling practices.

In response to concerns of compliance, the National Association of Independent Insurers and the Chicago law firm Lord Bissell and Brook hosted an informational/educational conference with an OFAC representative participating. What follows are some clarifications about the OFAC mandates and a guide on how insurers can avoid mistakes that could be costly and damaging to their businesses.

Specified Designated Nationals

In July 2001, OFAC issued specific insurance mandates that prohibit insurers from "transacting" business with anyone on its list of "Specified Designated Nationals" or with entities in Cuba, Iran, Iraq, Libya and the Sudan or anyone connected to the Taliban. Companies found to be transacting business with an entity on the list are subject to corporate and personal fines up to $1 million and up to 12 years in jail.

The sheer volume of names on the list is staggering. OFAC has identified and published the names of more than 4,100 Specified Designated Nationals. As OFAC becomes aware of terrorists and their many aliases, it adds the names to the list, which also includes names of narcotics traffickers, global terrorists, terrorist organizations and "kingpins." The ever-expanding list is not updated on a set schedule. These lists once were updated at monthly intervals. Now they are often updated several times a week. Insurance companies can obtain the list at the OFAC Web site, www.treas.gov/ofac.

Experts suggest that companies can best manage the monitoring of the OFAC list by designating a person in the company to check the list regularly. In addition, there are many software systems that can customize the list for insurers--for example, they can call out only the updates to the list or cull the list to include only entities residing in the United States.

Many of the names on the list are common names, and it is often difficult to determine whether a claimant or an insurance applicant is the same individual whose name is on the OFAC list. If insurers provide OFAC with as much identifying information as possible--such as a date of birth, address or nationality--the federal agency can verify whether the individual in question is on the list.

OFAC Requirements

A U.S. insurance company is prohibited, under any circumstance, from paying a claim to anyone on the OFAC list. According to federal regulations, insurance companies cannot engage in transactions to cover an existing policy of a known Specified Designated National or facilitate an unlicensed prohibited commercial activity--and that includes paying a claim.

Prior to paying any sort of claim, whether it is a personal-lines claim or a corporate-liability claim, the insurer must check the name of the claimant against the list. State insurance regulations often mandate that claims be paid within certain time frames. If insurers think that a claimant is on the OFAC list, they should call the agency for verification.

Occasionally, OFAC may need additional time to research the entity and the insurer may have to wait for the final determination, which could delay payment past the state-mandated claims-payment time frame. One suggestion is that insurers should begin claimant verification at the time the claim file is opened and proceed with adjusting the claim while OFAC verifies the classification of the claimant, rather than waiting until the claim has been finalized before checking the OFAC list.

Of course, not "transacting business" with someone on the list means more to an insurer than not paying claims. An entity on the list could be a current policyholder or an insurance applicant that has been issued a binder. OFAC mandates that once an insurer becomes aware that a policyholder is on the list, that policy must be blocked or frozen. "Freezing" the policy means that the insured can no longer derive any benefit from the policy. No claims can be paid from that policy, and the policyholder cannot receive any unearned premium.

If an insurer is not aware that it is insuring an entity that is on the list, such as an entity covered under a reinsurance agreement or an employee covered under a workers' compensation policy that does not specifically name each person covered, OFAC will not hold the insurer responsible for information it does not have. But insurers (particularly U.S. reinsurers) must scrutinize risks that have a greater propensity of involving an entity or country that is blocked. Once an insurer becomes aware that the policyholder or the policy beneficiary is on the list, the policy must be frozen.

Finding a Match

When an insurer has verified that a policyholder matches the OFAC list, the insurer must establish an interest-bearing blocked account through a U.S. financial institution. Any monies due to that policyholder as a result of the policy terms must be placed in the account. Proceeds deposited in this account theoretically will stay in the account, bearing interest, indefinitely. A withdrawal from this account can be made only upon the receipt of a license from OFAC.

Within 10 days of verifying that the policyholder is on the list, the insurer must inform OFAC's Compliance Programs Division about any blocked policies, policy payments and claims related to that policyholder. The policy cannot be canceled, but the unearned premium must be calculated as though the policy had been canceled. This unearned premium then must be deposited in the account established for OFAC-blocked transactions. Additionally, any entity that has a collateral interest in the policy, such as a mortgage company, the department of motor vehicles or commercial ports, should be advised that the policy has been frozen and that no claims can be paid out from that policy.

If a claimant is found to be on the OFAC list, the insurer must continue to adjust the claim according to the insurance contract and state regulations. The claim payment should be made in the name of the actual claimant, but it may not be delivered to the claimant. Rather, the claim payment must be deposited in the account that has been established for OFAC-blocked transactions.

Exceptions to OFAC

Even though OFAC expects 100%, immediate compliance, exceptions occasionally can be made. An example of an exception would be if a U.S. citizen were damaged by the "frozen" policyholder. If a U.S. citizen is in an automobile accident caused by a Specified Designated National, then the claimant could apply for a license from OFAC to allow the insurer to pay the claim against the policy OFAC will issue a license pertaining to the transfer of a frozen transaction. OFAC has issued a general license for the sale of food or medicine to targeted countries. As a general rule, U.S. insurers are authorized to insure licensed shipments, but they should request a copy of the shipper's OFAC license prior to agreeing to any transaction.

Insurers should be aware that if OFAC suspects an insurer of transacting business with an entity on its list, the agency will investigate the company. OFAC will scrutinize a company s policies and procedures to be sure they comply with OFAC regulations. It will check to see if the company maintains a current Specified Designated Nationals list and a current list of the targeted countries. OFAC also will investigate whether an insurer operates foreign branches and whether the foreign branches have access to the latest lists. Finally, OFAC will verify if every transaction and every party in every transaction is checked against the most current lists.

All businesses face new challenges in this century, and this one is likely to persist for many years to come. OFAC compliance requires additional procedures to be put into place, but vigilance and organization should make the task manageable for the insurance industry. With OFAC's help in identifying individuals on the list and by taking advantage of this agency's assistance programs, insurers should be able to comply with this important issue.

RELATED ARTICLE: What to Do If an Insurer Discovers an Unauthorized Transaction

Here are phone numbers and Web sites for more information about the Office of Foreign Assets Control and its list of "Specified Designated Nationals."

* The Office of Foreign Assets Control regularly updates its list on the U.S. Department of the Treasury Web site, www.treas.gov/ofac. Changes to the list also can be obtained in the "Recent OFAC Actions of Interest, What's New" section. OFAC recommends that companies check the page regularly for changes. The list is also available on the OFAC automated free fax-on-demand service at [phone].

* OFAC is aware of the confusion that can be caused by similar names on the list and will provide whatever assistance is needed to help insurers determine whether they are conducting business with a Specified Designated National. OFAC has established a hot line for this purpose--[phone], which is available from 7:30 a.m. to 7 p.m. (EDT) Monday through Friday.

* Within 10 days of verifying a member of the list, an insurer must inform OFAC's Compliance Programs Division about the blocked policies, policy payments and claims via fax at [phone].

Kathleen Jensen is insurance services counsel for the National Association of Independent Insurers.