Policyholders can include violations of economic sanctions among the laundry list of risks their companies face. Economic and trade sanctions are administered by the Office of Foreign Assets Control ("OFAC"), a little known agency within the U.S. Department of the Treasury. The sanctions that OFAC administers and enforces include broad embargoes of Crimea, Cuba, Iran, North Korea, Sudan and Syria, as well as restrictions against doing business with designated individuals and certain of their affiliates. As recent events show, failing to abide by these sanctions can result in significant liability. And where there is liability, policyholders should consider whether there may be insurance coverage.
In late-March, the U.S. Department of Justice announced settlements with Schlumberger Oilfield Holdings, Ltd. and PayPal, Inc. for alleged violations of U.S. embargoes and other economic sanctions. Schlumberger agreed to a $232 million fine and pled guilty to providing oilfield services to customers in Iran and Sudan through overseas subsidiaries between 2004 and 2010. PayPal agreed to a $7.5 million settlement with OFAC for alleged violations of economic sanctions programs including embargoes of Cuba, Iran and Sudan. PayPal's alleged violations involved processing certain transactions without employing adequate procedures to detect potential involvement of individuals targeted by U.S. sanctions.
Of course, the fines paid by Schlumberger and PayPal would not be covered by insurance. But long before the settlements were announced, both companies no doubt were compelled to expend substantial resources to defend against government investigations. OFAC has a broad range of investigative tools at its disposal; it can "conduct investigations, hold hearings, administer oaths, examine witnesses, receive evidence, take depositions, and require by subpoena the attendance and testimony of witnesses and the production of all books, papers, and documents relating to any matter under investigation." 31 CFR § 501.602.
Companies forced to incur costs responding to and defending against these investigations should closely inspect their D&O policies to determine whether they provide coverage. Depending upon the particular investigative tool employed by OFAC, an investigation may constitute a "Claim" triggering the D&O policy's organization or entity coverage. Moreover, even if there is no formal proceeding and no subpoena is issued, many D&O policies offer expanded coverage for "Pre-Claim Inquiry" costs, which may be defined to include costs associated with interviews, and responses to document requests issued by an "Enforcement Body," as defined in the policy. Naturally, the scope of D&O coverage for such costs will vary depending up the language of the policy. But policyholders should not assume that simply because the fines imposed for failure to adhere to economic sanctions would not be covered, other associated cost incurred by the company in connection with OFAC investigations also are not. As always, think carefully about coverage and read your policies closely.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
