Sanctions are a foreign policy tool aimed at a nation, individual, or entity to change criminal, aggressive, or hostile behavior. They make a clear statement on the world stage.
Sanctions can be broad or targeted, involving asset freezes, travel bans, financial restrictions, embargoes, and trade restrictions. The measures are imposed for reasons such as war, terrorism, human rights violations, and drug trafficking.
Sanctions laws are implemented to protect national security, so when a new package of restrictions is introduced, it is the responsibility of businesses in every sector to comply. Insurance companies are no exception and must be vigilant in their compliance efforts to avoid inadvertently conducting business with sanctioned entities.
Recently, the US Department of the Treasury's Office of Foreign Assets Control (OFAC) has turned its attention to the insurance sector, which is now facing increased scrutiny from regulatory bodies in relation to sanctions compliance. The recent OFAC sanctions compliance advisory has highlighted potential risks insurance companies face if they engage in activities that violate sanctions laws.
In December 2023, OFAC issued a $466,200 fine to Privilege Underwriters Reciprocal Exchange (PURE) for 39 apparent violations of OFAC’s Ukraine-/Russia-Related sanctions. These violations involved transactions related to four insurance policies for a blocked Panama-based company owned by Specially Designated National (SDN).
Like other regulated businesses, insurance companies must conduct sanctions screening at various stages such as when the application is received, if a party is changed or added, when a claim is presented, and when the claim is paid. It is crucial insurers and reinsurers are aware of their exposure through policies, especially those related to international trade like shipping – non-compliance could lead to severe penalties and legal consequences.
An area of concern are marine insurance and similar transportation policies, as they are considered among the most exposed to sanctions risks. For example, insuring tankers carrying Russian oil could potentially violate sanctions imposed on Russia. An insurance company in the EU, U.K., or U.S. should conduct careful know your customer (KYC) checks when considering coverage in high-risk areas like transportation.
Another example of high-risk activity is an insurance provider offering travel insurance to a U.S. citizen traveling to Cuba. This could result in fines for both travel companies and insurers involved, as it may violate the U.S. sanction laws placed against Cuba.
There are other countries subject to comprehensive sanctions including Iran, North Korea, and Syria - all of which need to be considered and factored into a risk-based compliance program.
It is up to each insurance company or reinsurer how they define their approach to sanctions screening to detect risk and exposure to prevent contravening regulations. Many firms will make sanctions checks part of onboarding and ongoing monitoring, along with other anti-money laundering (AML) checks.
However, compliance processes have historically been manual, and now digital transformation makes adhering to sanctions and conducting screening more efficient and effective. These screening workflows can also provide an audit history of activity and decision making, should compliance come into question.
There are five accepted pillars to an effective sanctions' compliance program. These apply to the insurance sector, as well as other industries.
These five pillars provide a framework for insurance companies to effectively manage compliance with international sanctions. It enables a risk-based approach to be adopted across an organization while mitigating involvement in sanctions evasion.
A sanctions check is the process used to verify that entities are not subject to sanctions before beginning a business relationship, or while engaged in a business relationship. The checks take place against government-issued lists of sanctioned parties as well as entities owner and/or controlled by them. This is done to ensure compliance with laws and regulations that restrict or prohibit transactions with certain designated national, individuals, or entities due to their involvement with financial crime, terrorism, political regimes, or human rights abuses.
Conducting automated sanctions checks - not just at onboarding, but on a real-time basis - helps organizations proactively avoid engaging in business transactions that could result in a legal penalty or reputational damage.
Non-compliance with sanctions can have profound consequences for insurance companies, including fines, imprisonment, reputational damage, and secondary sanctions. It is therefore essential for insurance companies to prioritize sanctions compliance to avoid these risks and maintain their integrity in the industry.
Moody's Grid solution supports companies in different sectors, including insurance, with their sanctions compliance. We provide comprehensive screening of sanctions lists and real-time monitoring, alerting teams when there are relevant changes in a counterparty network. This allows organizations to screen their customers and business partners efficiently and effectively and ensure compliance with sanctions laws and regulations. Moody’s can help mitigate risks related to sanctioned individuals or entities in a business network.
Sanctions compliance is critical in the insurance industry and the duty cannot be overlooked. Insurance companies need to implement robust compliance programs, which can be supported with tools like Moody's Grid. This helps ensure business is conducted ethically and in accordance with international regulations. By prioritizing sanctions compliance, insurance companies can protect themselves from legal and reputational risks and maintain the trust of their clients, stakeholders, and shareholders.
Insurers and reinsurers can enhance risk management efficiency by implementing digital AML and KYC processes. Insurance providers can take a proactive approach to sanctions compliance leveraging solutions like Moody's Grid. Rather than feeling overwhelmed by the need to address ongoing sanctions risks.
Integrating screening tools, streamlining processes, and centralizing KYC data – including sanctions data - in a single platform, insurance providers can work closely with other partners, such as banking partners, to ensure consistent standards and avoid redundant data requests. Actively participating in the risk management ecosystem, particularly in high-risk industries like maritime, travel, and transportation, insurance companies can demonstrate their commitment to sanctions compliance and strengthen their overall risk management practices.
To talk to Moody's about automating your sanctions compliance program, please get in touch - we would love to hear from you.