International Sanctions

About sanctions

Sanctions are imposed by governments or bodies such as the UK, US and EU or the United Nations or unilaterally by other governments to exert pressure on individuals or political regimes and for the advancement of foreign policy objectives.

Sanctions can be imposed in the form of financial or trade restrictions.  Financial sanctions often take the form of asset freezing restrictions on designated individuals or entities or prohibitions on financing state-owned enterprises.  Trade sanctions often restrict a sector of industry and or trade in certain goods as well as prohibitions on the supply of technical, financial services including the provision of (re)insurance and other assistance.


Requirements

Sanctions compliance applies to both individuals and firms. An individual or a firm may be liable of a criminal offence by breaching sanctions legislation or regulations, as is the case in the UK for UK-enacted sanctions.  

Delegated authorities must ensure that the business they underwrite or the claims process that they manage on a managing agent’s behalf are compliant with the international sanctions that apply to their own organisation as well as to those that apply to the managing agent and that they adhere to any sanctions compliance requirements implemented by the managing agent.

Managing agents should also consider any international sanctions that apply to service providers in the insurance chain such as brokers, settlement and accounting providers, reinsurers, and banks.

Managing agents should ensure that the requirements they implement in relation to sanctions compliance result from a risk-based assessment of the delegated authority’s profile and that procedures are proportionate to the risk and clearly communicated and explained to the delegated authority.

Delegated authorities and their managing agents should be able demonstrate that they operate to reasonable and proportionate sanctions due diligence and screening programmes to comply with the international sanctions that apply to the delegated authority and to the managing agent who has delegated its underwriting or claims settlement authority.

When conducting due diligence, delegated authorities must consider the sanctions (both financial and trade sanctions) that are imposed by the UK, US, EU and UN, plus any others imposed by applicable competent authorities. 

Where trade sanctions apply to prohibit certain activity or trade in certain goods, services such as the provision of (re)insurance or (re)insurance services are frequently prohibited too. Therefore the due diligence process should extend beyond targeted financial sanctions screening and incorporate an assessment of the underlying trade activity.

Sanctions Screening

The delegated authority should operate systems and controls, such as sanctions screening processes, to ensure that risks with a connection to person or entities on any of the sanctions lists implemented by the UK, US, UN and EU and other applicable competent authorities are identified, and economic funds, services and/or benefits are not made available to them. If a delegated authority deviates from this screening requirement, the position must be referred to the managing agent for any derogation to be risk assessed.  If the derogation is accepted, it should be documented with appropriate rationale recorded to explain why the sanctions risk is being appropriately managed in line with the managing agent’s expectations. 

Pre-bind screening

Under sanctions regimes, dealing in the funds, or the provision of services, to a relevant sanctioned party is generally prohibited. For that reason, the acceptance of premium from such a party is also prohibited. 

Lloyd’s recommends that coverholders perform pre-bind sanctions screening to help manage sanctions risk. Where the financial crime risk assessment identifies heightened sanctions risk, pre-bind sanctions screening would be required.

Managing agents may determine, based on their financial crime risk assessment, that pre-bind sanctions screening is not required, such as where the sanctions risk is deemed low. The decision and rationale for the coverholder not to perform pre-bind sanctions screening should be documented by the managing agent.

Pre-transaction payment screening

Payments to sanctioned parties are also prohibited and should be subject to preventative screening so that funds are not made available to sanctioned parties (as sanctions designations may occur part way through the policy term).

Managing agents should ensure that the delegated authority has in place screening processes prior to the payment of any claims, return premiums and any others sums for the benefit of the insured or any person for the benefit of whom payment is being made. This may be achieved through individual transaction screening or through ‘batch’ screening running at a defined frequency.

Managing agents should ensure that the frequency of any ‘batch’ screening is in line with their risk assessment.

Outcome of screening

Where sanctions screening or other due diligence identifies a positive match to a sanctioned party or activity, an underlying process to investigate and log such risk incidents needs to be documented and include mitigation actions and escalation processes, both internally and externally to managing agents and any reporting of suspicious activity to competent authorities.

Screening by the Managing Agent

Dependent on the outcome of their risk assessment on the delegated authority, managing agents may deem it appropriate to also conduct their own sanctions screening of the business bound or administered by the delegated authority.