The Case:

Between 2008 and 2011, Navigators, along with its London branch, reportedly provided protection and indemnity (P&I) insurance policies to twenty-four North Korean flagged ships and covered incidents that occurred in, or involved, Iran, Sudan and Cuba – all countries that are US trade sanctions.  During this time $1,142,237 was collected in premium payments from these policies. Between February 2009 and October 2010, seven claims were paid in relation to these policies totalling $12,236. Between March 2009 and May 2010, Navigators issued eleven claim payments totalling $72,962 for incidents involving Iran. Between April 2009 and February 2010, five claims involving Sudan resulted in payments totalling $260,912. In April 2011, one claim payment of $21,736 was made in which a Cuban national had a beneficial interest.

Trade Restrictions:

Sanctions that place restrictions on trade are employed by governments in an attempt to influence another state’s behaviour. At one level, they are designed to force the sanctioned state to alter a course of action that the other finds unacceptable through the application of economic pressure. At another level, sanctioning trade with a certain country may be designed to deprive it of the technology that it would need to develop those activities. Often sanctions are designed to operate at both of those levels. In the case of Iran and North Korea, both are currently subject to trade embargos in an effort to deprive them of the technology they would need to further their respective WMD programs, as well as exert pressure on the country’s economy. In the case of Iran, the importance of sanctions can be seen by the prominent place that sanctions relief that was agreed  as part of the recent nuclear agreement, although it should noted that many sanctions will remain in place on Iran even beyond so-called “implementation day” in early 2016.

Both Iran and Sudan are designated by the US Department of State as sponsors of terrorism. As a result of this, Sudan has been subject to a US trade embargo (among other measures) since 1997. Finally, thanks initially to the 1958 Cuban revolution, and subsequently exacerbated by events such as the Cuban Missile Crisis, a trade embargo has been in place on Cuba since 1962.

Of critical importance when considering compliance with sanctions is the reality that, over and above the physical act of buying or selling of goods, activities that might support or facilitate these transactions are also prohibited. An explicit ban on the provision of insurance to a sanctioned nation’s commercial shipping fleet can be found in the regulations of many trade related sanctions programs. Such a ban is designed to make it more difficult for ships likely to be carrying illicit cargo from operating freely, this is because an un-insured ship is unlikely to be accepted into international ports. Sanctions may also prohibit the long lists of “designated entities” from benefiting from financial assets – including insurance services.

Penalties:

It should be noted that despite the violations and aggravating factors noted by OFAC the $271,815 being paid by Navigators is considerably lower than the base penalty figure for the violations, which stands at $755,042. Several mitigating factors resulted in this lower penalty; prompt remedial action was taken by Navigators in response to the violations, which involved the implementation of a comprehensive OFAC compliance program. Information relating to the issue was also voluntarily disclosed to the regulators. On top of financial penalties, firms must be aware that non-compliance, witting or unwitting, can result in other legal penalties such as custodial sentences, as well as damage to the reputation of the business.

Compliance in practice:

While sanctions compliance for financial service providers is a challenging obligation, there are steps that firms can take to manage compliance requirement and mitigate the risks of non-compliance. A useful starting point is the document “Sanctions compliance in the maritime transport sector”, which was published by the UN Security Council in early 2015 (and drafted by Project Alpha). This document sets out the responsibilities and expectations on firms in the maritime transport sector.

A variety of commercial solutions can also contribute. Polestar for example, offers a ship tracking and screening service that can actively identify potential sanctions violations with each tracked vessel.

Conclusions:

US regulators have been cracking down on firms with business ties to nations that are under sanctions in recent years.  Indeed, this is not the first time that US insurers have come under scrutiny over their dealings with sanctioned nations. In 2014 four firms were subpoenaed in order to determine their compliance with US sanctions against doing business with Iran. The probe resulted in Chubb Corp. distancing itself from dealings relating to Sudan and Syria. Despite the seemingly imminent relaxation of sanctions on both Iran and Cuba, significant trade restrictions remain on a number of countries. This case and others should highlight to insurers and financial service providers the importance of ensuring their compliance with sanctions and having a robust internal compliance program. Any insurer or financial service provider found to be in breach of these regulations, knowingly or unknowingly can face significant financial as well as reputational penalties. Further information on sanctions compliance for the maritime sector can be found in a recent UN published guidance document drafted by Project Alpha.

[1] Broad sanctions relief forms an integral part of the Iran nuclear deal. Assuming that it gains congressional approval, the majority of restrictions put in place on trade with Iran will be removed or relaxed. It should also be noted that the sanctions landscape in relation to Cuba is likely to change dramatically thank to the recent normalising of relations between Cuba and the United States.