New US sanctions that came into effect on 1 July 2010 have dramatically extended the scope of restrictions against Iran and will have a direct impact on the insurance market.
The Comprehensive Iran Sanctions, Accountability and Divestment Act imposes sanctions on any person who knowingly helps facilitate the supply of refined petroleum products to Iran, which includes providing shipping, insurance, or financing services for such activity. "Person" is widely defined to refer specifically to financial institutions, insurers, underwriters, guarantors and any other business organisation. The Act also confirms the liability of successor entities, parents and affiliates of an entity that engages in sanctionable conduct.
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The Comprehensive Iran Sanctions, Accountability and Divestment Act ("the Act") came into effect on 1st July 2010, and dramatically extends the scope of restrictions against Iran, with a direct impact on the insurance industry, imposing sanctions on any companies that knowingly help facilitate the supply of refined petroleum products to Iran, which includes providing shipping, insurance, or financing services for such activity. It also establishes additional sanctions prohibiting specified foreign exchange, banking, and property transactions.
Background
In 1997 President Clinton signed Executive Order 13059 which brought into force a prohibition on virtually all investment and trading activities with Iran by US persons, wherever located. A breach can lead to a fine of up to $1,000,000 or imprisonment of up to 20 years.
In general, unless licensed by OFAC (Office of Foreign Assets Control), goods, technology or services may not be exported, directly or indirectly, from the United States, or by a US person or company, wherever located, to Iran. The ban on providing services includes any brokering function (including insurance). Goods or services of Iranian origin also may not be imported into the United States, with only a few exceptions. All US persons are prohibited from providing financing for prohibited import transactions, which includes any type of insurance.
The Act
The Act substantially extends the activities covered by sanctions under current law to include efforts by foreign companies to:
- sell, lease, or provide to Iran any goods, services, technology, information, or support that would allow Iran to maintain or expand its petroleum refineries; or
- supply refined petroleum products to Iran (applicable to all activities valued above $1 million).
This significantly expands the effect of the current sanctions to potentially include companies in many new sectors, including financial services, telecommunications, logistical, consulting and business services, and any other sector capable of providing support to Iran's petroleum refineries.
The three new sanctions to be applied against sanctioned companies are:
- a prohibition on foreign exchange transactions subject to US jurisdiction;
- a prohibition on banking transactions to financial institutions subject to US jurisdiction; and
- a prohibition on transactions involving property of the sanctioned entity.
The sanctionable assistance must "directly and significantly" assist Iran in the development of refined petroleum capacity or in obtaining refined petroleum products. These terms are not defined in the Act so will remain an interpretive issue to be addressed as the law is implemented.
The Act also requires that any assistance be done "knowingly", which is defined as including both actual knowledge or where the person "should have known, of the conduct, circumstances or the result".
"Person" is also expanded to specifically refer to financial institutions, insurers, underwriters, guarantors and any other business organisations. The Act confirms the liability of successor entities, parents, affiliates of an entity that engages in sanctionable conduct. "Parent" is defined broadly as any entity that owns or controls the acting company, and for a parent company to be subject to sanctions, the parent must only have had actual knowledge or should have known its subsidiary was engaging in sanctionable activities. (Previous law held parent companies liable only if they approved and/or facilitated the prohibited activity). The sanctions apply to any foreign subsidiary of a US parent and any US parent companies will be liable for the acts of their non-US subsidiaries that engage in transactions with Iran.
Penalties for wilful violations include a fine of up to $1 million and/or imprisonment of up to 20 years.
It is thought that the impact of the Act, and whether it meets its objectives, will be shaped in large degree by the regulatory implementation and whether, and if so how, the US Administration exercises its enforcement and waiver authorities. The reaction by foreign firms and foreign governments to the extraterritorial nature of the Act also will play a key role in shaping its impact.
Impact on Insurers
The Act imposes sanctions on any companies contributing to Iran's ability to import refined petroleum products, and those directly affected will include insurance, reinsurance, broking, financing and shipping activities.
These restrictions will only apply to contracts entered into after the Act was signed into law, on 1st July 2010.
The classes where these issues most frequently arise are marine cargo (which includes goods in transit on land and by air) and political risks (trade credit). The explicit knowledge requirement ensures that insurers will only be subject to the sanctions if they were deemed to know or should have known about the link between the cargo they are underwriting and Iran's petroleum supplies. It is therefore important for each underwriter and broker to undertake their own due diligence rather than relying on others.
The manner in which business is typically conducted in the cargo market means that in many cases, underwriters agree to "facilities" where the insured is automatically covered within certain parameters, or the ability to bind insurance is delegated to an intermediary, and the underwriters will typically not be aware of the nature of the goods being transported or the destinations. This will not necessarily be problematic, provided it is normal and there is no intention of underwriters or brokers deliberately turning a blind eye, but if there is reason to suspect that exports of refined petroleum products to Iran are included, then questions must be asked and appropriate action taken.
Conclusion
It is probable that insurers will be more reluctant to underwrite risks for vessels that transport cargo in light of these new broad sanctions, because of the difficulties in identifying companies that will be subject to the sanctions. However, if insurers exercise due diligence and can show that they have tried not to do business with Iran, they can avoid being subject to these sanctions.
It is therefore more important than ever for insurers and brokers to have relevant knowledge of the Act and other sanctions, ensuring the appropriate level of awareness on the part of all relevant individuals. If the general level of awareness is kept high, insurers are vigilant and take appropriate consideration of sanction issues, the underwriting process should not be hindered, and underwriters will be protected when writing worldwide profitable business.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 20/07/2010.
