Economic sanctions and insurance – hidden issues

The increasing use of economic sanctions as a political tactic is creating an extra layer of complication in the UK finance and insurance sectors. Many businesses do not realise that working with people or organisations in sanctioned countries could mean they are not insured, for instance. It could also open up the risk of serious punishment if a sanction is unintentionally breached.

Businesses therefore need to be aware of all sanction regimes, not only those imposed by the UK, if they operate internationally or work with suppliers or customers in countries subject to sanctions.

What are economic sanctions?

Firstly, it’s important to note that sanctions are not always imposed for economic reasons. They are commercial and financial penalties applied by one or more countries on a state, group or individual and could have political, military or social drivers too.

Essentially, they are a tool of foreign policy designed to change or punish the behaviour of another country or entity. Sanctions can range from a ban on trading (for instance the sale of arms to a particular regime) to extra tariffs placed on selected goods or restrictions on financial transactions. 

The UK currently has sanctions of varying scope in place for: 

• Russia 
• Venezuela
• Somalia
• South Sudan
• Myanmar 
• Ukraine (Crimea)

This means UK businesses and individuals are bound by the specific restrictions placed on trade with each of these nations. However, other sanctions imposed by foreign governments or entities could impact on UK businesses, too.

Any sanctions imposed by the United Nations Security Council, for instance, are legally binding for all member states.

The European Union’s EU Council also imposes its own sanction regulations, applicable for all EU member states. In fact, any individuals or companies with a registered office in any EU country are affected – including all merchant vessels flying the flag of an EU state.

The United States currently has a range of high-impact sanctions in place. The recent re-imposition of sanctions in Iran, for instance, brought global repercussions – and although US sanctions are primarily targeted at US persons and businesses (including insurers), they can often have a knock-on effect in many other regions.

Other countries where sanctions are in place (September 2019):

• China - by both EU and US
• Cuba - by US
• Indonesia – by Australia
• Iran – by US and allies
• North Korea – by US
• Qatar – by surrounding countries include Saudi Arabia, UAE, Bahrain and Egypt
• Russia – by the US
• Syria – by EU and US
• Venezuela – by EU US, Canada, Mexico, Panama, Switzerland

What are the consequences for the finance industry of breaking a sanction?

The consequences for financial institutions (including insurers) for violation could be extremely serious and include fines and imprisonment. As a result, strict procedures are in place which may prevent businesses from getting insurance cover for certain operations in certain regions.

How do sanctions impact the insurance market?

• The provision of insurance is viewed as assisting trade with a sanctioned territory and therefore falls foul of the sanctions regime. Insurers providing cover to protect against a claim from a sanctioned territory or sanctioned individual are therefore opening themselves up to being held in breach of sanctions legislation. 

• Non-US insurers will not be able to make (or receive) payments using the US financial system in relation to sanctioned transactions. This can make it virtually impossible for insurers to pay any claim related to a sanctioned territory in US dollars because US banks simply cannot pay funds into the country.

Examples of situations which could lead to a business not being insured:

• Having clients in a sanctioned country.
• Disputes involving products from a sanctioned country (even if the product simply originated from the country).
• In some cases, insurers will still insure the business but limit the cover – leaving it uninsured for that area. This can be a significant risk.

What to do if you are concerned about sanctions:

• Review your client base: Find out if any trading is connected to a sanctioned country or group. Remember, this could be directly or indirectly. 
• If your business has recently acquired another business then check their client base, too.
• Consider whether your organisation relies on suppliers or customers that could be affected by sanctions. 
• Check your policy wording – especially if you have been with the same insurer for many years. Look out for exclusions in your policy related to sanctions which may have been added or overlooked.
• Make sure you know if your insurer has any reporting obligations in place, especially for political risk and trade credit products. 
• Educate your employees. Make sure they understand the risks to the business if it trades with a country or group that is sanctioned.
• Remember, a regulator may require professional indemnity cover to be in place for work undertaken, even if it is not provided under their own minimum wording. 

Disguised breaches:

It may not always be easy to know that sanctions are being broken. In August 2019, Lloyds List revealed that marine insurers in Europe, the US and the UK were providing cover for a group of 21 tankers and gas carriers shipping Iranian cargoes to China and Syria, in breach of US sanctions. This was because Iran has been disguising the cargo origin and destination, as well as the ownership of tankers.  

Businesses need to consider whether they have a mechanism in place to identify this type of risk in the first place. Seeking the advice of Howden’s team of experts is a good start to understanding the impact of sanctions.