Political Barriers.

U.S. economic sanctions pose hidden risks to insurers, who face penalties if they do business with corporations and individuals in targeted countries.

Domestic and foreign insurers and brokers might be at risk from economic and trade sanctions imposed by the U.S. government. The federal government currently maintains economic and trade sanctions against several countries, including Cuba, Iran, Iraq, Libya, North Korea, Sudan, Burma (Myanmar), the Federal Republic of Yugoslavia (Serbia and Montenegro), Syria, Afghanistan's Taliban organization and Angola's UNITA party. With few exceptions, the sanctions prohibit U.S. companies and citizens from conducting business with companies and people in these "targeted countries." U.S. insurers need to be aware of these restrictions.

Consequences for ignoring the sanctions can be severe. Criminal violations can result in fines of up to $1 million and incarceration of up to 12 years. Large civil penalties often are imposed.

The U.S. Treasury Department's Office of Foreign Assets Control (OFAC) administers the sanctions programs of the United States, in conjunction with the U.S. departments of Commerce and State, pursuant to U.S. statutes and presidential executive orders.

The scope and coverage of the sanctions vary among the targeted countries. Thus, an insurance transaction that is permissible in Sudan might be illegal if it involves an insured in Cuba.

It is generally believed that these sanctions affect only U.S. citizens and U.S. companies in the conduct of their business. But companies based outside the United States can be subject to the U.S. sanctions, and foreign nationals in the United States must comply with U.S. sanctions.

On Feb. 23, 1999, the U.S. Office of Foreign Assets Control issued an advisory that clarifies the application of the U.S. sanctions to the insurance industry. This advisory is published on the Internet at www.treas.gov/ofac/.

In its advisory, the Office of Foreign Assets Control illustrated the point:

"[U.S.] insurance companies should not engage in transactions with respect to an existing policy which has been discovered to cover or facilitate an unlicensed prohibited commercial activity or otherwise constitute an illegal export of a service, whether or not the policy involves a blocked property interest [that is, a property interest (such as a claim payment) belonging to a firm in a targeted country]. In no case should a U.S. insurance company pay a claim under or otherwise service such a violative policy without first contacting OFAC for a specific license, which may or may not be granted depending on the circumstances.

"Recently, a five-figure claim payment due from a U.S. underwriter was stopped en route to a U.S. broker's account. The payment was interdicted electronically when it reached the wire room of a U.S. bank because the payment referenced 'Tripoli Loss.' Both the broker and the U.S. underwriter involved in the underlying reinsurance contract are at risk for having issued a policy and processed a claim without an OFAC license covering a foreign insured's worldwide operations, which include commercial activity in Libya."

Scope of U.S. Sanctions

The U.S. sanctions policy extends beyond the borders of the targeted countries. They extend to specifically listed foreign agents, reputed or known terrorists or terrorist organizations, narcotics traffickers, nationals of certain targeted countries and entities identified as "front organizations" for a listed person, organization or targeted government, no matter where they are located. These persons and organizations on the list are designated as "Specially Designated Nationals and Blocked Persons." The list, which is published on OFAC's Web site, contains 5,000 names of individuals, governmental entities, companies and even merchant vessels around the world.

Persons within the scope of the U.S. sanctions, including insurers, cannot do business or facilitate business with any person or entity on the list or in the targeted countries. It should be standard procedure in insurance transactions involving foreign persons to check the names and residences of insureds, claimants and other parties to a transaction against the list.

The Enforcement Jurisdiction

Insurers and brokers based abroad and foreign-based insurance transactions might be covered by the U.S. sanctions laws, so it is worthwhile to review the law that defines the "persons" and the "property" that come within the scope of the U.S. sanctions.

The U.S. sanctions apply to "property subject to the jurisdiction of the United States"; "persons subject to the jurisdiction of the United States"; and "persons within the United States." If an insurance transaction involves both an insured in a targeted country or one who is listed as a Specially Designated National and a person or property subject to the jurisdiction of the United States, the transaction could violate U.S. sanctions.

Property subject to the jurisdiction of the United States generally includes property physically located in the United States, including money, contracts, accounts, securities and insurance policies, as well as goods and services. In the example that OFAC cited, in which the payment of a claim called "Tripoli Loss" was stopped, the money that made up the payment of a U.S. reinsurer's share of a claim to an insured in Libya was physically in the United States. Accordingly, the United States had jurisdiction to block the payment. Property subject to the jurisdiction of the United States also can include property outside of the United States, which, in the case of securities, was issued in the United States or, in the case of goods, was made in the United States.

A person subject to the jurisdiction of the United States covers any person who is a citizen, permanent resident alien or, in some cases, a resident of the United States. It includes U.S. companies and their foreign branches. In the case of North Korea and Cuba, the term also includes foreign subsidiaries of U.S. companies. For example, a U.S. corporation that is a broker at Lloyd's, which sells insurance abroad, is subject to the jurisdiction of the United States. Because the sanctions apply to all U.S. citizens, one employed by a foreign insurer abroad may not be involved in a transaction prohibited by the sanctions.

Sanctions apply to anyone who is within the borders of the United States, whether or not that person is a U.S. citizen. Because that term is not limited to U.S. citizens and U.S. corporations, the sanctions also apply to U.S. branches and U.S. subsidiaries of foreign companies, as well as foreign nationals residing or temporarily present within the United States.

Prohibited Transactions

For insurers and brokers who must comply with the sanctions, some fairly basic insurance transactions with persons or firms in targeted countries or on the Specially Designated Nationals are be prohibited. These include routine insurance transactions, such as the issuance of a policy, receipt of insurance premiums, administration of the policy, receipt of policy-loan interest payments, repayment of loans and the payment of claims to insureds or third parties on behalf of the insured.

With respect to payments to Specially Designated Nationals and other persons in targeted countries, the payment may be blocked; that is, it must be deposited in an interest-bearing "blocked" account in a U.S. financial institution and reported to OFAC. In addition, payment by a foreign insurer of a claim to a Specially Designated National through a U.S. financial institution may be blocked. Transactions not required to be blocked still might be prohibited and subject to enforcement action.

The enforcement mechanism generally relied upon by OFAC is interdiction software used by U.S. financial institutions in the United States and abroad. This software is programmed to identify and freeze transfers that refer to a destination, entity or person targeted by the United States.

Prohibited activities or transactions by a person subject to the jurisdiction of the United States include:

* brokering, insuring or reinsuring a hull or liability policy that names as an additional insured an entity on the Specially Designated Nationals list, such as a bank in Iran or Libya that holds a mortgage or security interest in the covered asset, such as an aircraft, vessel or building;

* payment of an injury claim to a citizen of Cuba or North Korea under a liability insurance policy;

* brokering, insuring or reinsuring a property insurance policy written for an international hotel chain that covers hotels in targeted countries; and

* payment of a life insurance claim to a person in a targeted country or, in some cases, a person who is a national of a targeted country.

A U.S. corporation prohibited from involvement in a transaction cannot refer the business to its overseas branch, because the branch is subject to the U.S. jurisdiction. In the case of Cuba and North Korea, the business cannot be referred to foreign subsidiaries of U.S. corporations, because foreign subsidiaries of U.S. corporations are equally subject to the Cuban and North Korean sanctions. Under certain sanctions programs, U.S. persons cannot even refer prohibited business to foreign persons not subject to the sanctions. Such a referral would be considered facilitation of a transaction, which would be prohibited.

U.S. citizens who work for foreign insurers or serve as directors and officers also are at risk if they participate in any part of the foreign insurer's provision of coverage or payment of a claim that is prohibited by U.S. sanctions.

Guidelines for Compliance

OFAC wants affected U.S. companies to decline business where the trade and economic sanctions would be violated or insert geographic exclusions of coverage and/or exclusions of coverage for activities that would violate the sanctions. This might be commercially impossible in many instances.

Obviously, the sanctions, as applied to insurance, are designed to withdraw U.S. insurance capacity from insureds in the targeted countries or on the Specially Designated Nationals list. OFAC also wants insurers and brokers to monitor their insurance business for possible violations by appointing a compliance officer and conducting compliance training. Given the complexity of

the regulations and the nature of the insurance business, monitoring compliance will be a difficult task. Nevertheless, being aware that the U.S. economic sanctions might affect an insurer is an important first step.

U.S. sanctions pose hidden risks to insurers and impose costly administrative burdens. Part of the problem is that OFAC, which is overworked and understaffed, does not have an intimate understanding of the workings of the insurance industry. OFAC may not know what a U.S. insurer or reinsurer really knows about an insured or its worldwide business and how an insurer or reinsurer can adhere to the sanctions policy without detailed knowledge about the insured and the risks. Thus, a program to educate OFAC in these matters would undoubtedly benefit the insurance industry.

Thomas J. Whalen is a partner, David G. Schryver is a senior attorney, and David F. Rifkind is associate attorney, Condon & Forsyth LLP, Washington, D.C.

Warning Signs for Insurers

Business may be subject to U.S. sanctions if it meets any of the following criteria:

* the insured appears on the Specially Designated Nationals list;

* the insured is located in, or is a national of, any of the targeted countries;

* the claim is to be paid to a person or entity who is a citizen of, or located in, a targeted country or appears on the Specially Designated Nationals list;

* any of the insured's property or commercial operations are located in the targeted countries;

* the insured, regardless of its location, is controlled from a targeted country;

* the policy to be issued for any insured covers imports or exports of goods and services to or from, and commercial activity in, a targeted country;

* the policy covers exports of arms, petroleum, mining equipment, motorized vehicles, watercraft, spare parts for motor vehicles or watercraft, aircraft and parts to Angola, or imports of diamonds from Angola;

* the policy covers shipments anywhere of goods made in, exported from, or destined to, a targeted country; and

* the policy covers vessels, aircraft or other vehicles that are used in providing transportation service to and from a targeted country.

If a transaction falls within one of these categories, it might be permissible to conclude the transaction without seeking a license and without taking the risk, for example, that a U.S. reinsurer will be unable to pay its share. The regulations will need to be consulted to determine whether a particular transaction is permissible. If the transaction is not permissible without a license, an affected party can apply for a license from U.S. Treasury Department's Office of Foreign Assets Control (OFAC). But OFAC has not been liberal in granting licenses and, unless it is politically expedient, OFAC generally does not act quickly on license applications. In most cases, because brokers and underwriters must make decisions quickly, seeking a license for a specific transaction may not be a practical alternative.

These guidelines, which should be helpful to U.S. insurance firms, nevertheless assume that the U.S. insurer or reinsurer can make these kinds of determinations, which is easier said than done. For example, a U.S. rein-surer may take a piece of all of a foreign insured's coverage without knowing exactly all the risks that are being reinsured. A foreign insured might own a hotel or mine in Cuba or Libya. While commercially unpalatable, the U.S. reinsurer might need to have an agreement with the reinsured to the effect that risks in violation of the U.S. sanctions are exempted from coverage.