How US sanctions on Iran will affect insurers

Where things stand today

On 8 May 2018, President Trump announced the end of the US’s participation in the Joint Comprehensive Plan of Action (JCPOA), commonly known as the Iran nuclear deal. He also announced that the US would be re-imposing sanctions against Iran which had been suspended since 16 January 2016 ('Implementation Day'), following the International Atomic Energy Agency’s finding that Iran had complied with its obligations under the JCPOA to wind-down its nuclear related activities.

By ending its participation in the JCPOA, the US has broken ranks with the EU and major economies including China and Russia.

As part of the process for the re-introduction of US sanctions, the US Office of Foreign Assets Control (OFAC) had announced that it will allow two wind-down periods to enable parties already involved in contracts with Iranian contracts, to conclude these contracts.

The first wind-down period ends on 6 August 2018 and the second period ends on 4 November 2018 (i.e. 90 and 180 days respectively from President Trump’s announcement on 8 May 2018).

First wind-down period - ending 6 August 2018

OFAC will allow transactions relating to the following activities to continue up to 6 August 2018:

  • The purchase or acquisition of US dollar banknotes by the Government of Iran.
  • Iran’s trade in gold or precious metals.
  • The direct or indirect sale, supply, or transfer to or from Iran of graphite, raw, or semi-finished metals such as aluminium and steel, coal and software for integrating industrial processes.
  • Significant transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial.
  • The purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt.
  • Iran’s automotive sector.

In addition, following 6 August 2018, OFAC will revoke licenses that had previously been issued to allow the following activities:

  • The importation into the United States of Iranian-origin carpets and foodstuffs and certain related financial transactions.
  • Activities undertaken in connection with the export of commercial passenger aircraft and related services to Iran.

Second wind-down period - ending 4 November 2018

OFAC will allow transactions relating to the following activities to continue up to 4 November 2018:

  • Iran’s port operators, and shipping and shipbuilding sectors, including on the Islamic Republic of Iran Shipping Lines, South Shipping Line Iran, or their affiliates.
  • Petroleum-related transactions with, among others, the National Iranian Oil Company, Naftiran Intertrade Company , and National Iranian Tanker Company, including the purchase of petroleum, petroleum products, or petrochemical products from Iran.
  • Transactions by foreign financial institutions with the Central Bank of Iran and designated Iranian financial institutions under the National Defence Authorization Act for Fiscal Year 2012.
  • The provision of specialised financial messaging services to the Central Bank of Iran and Iranian financial institutions.
  • The provision of underwriting services, insurance, or reinsurance.
  • Iran’s energy sector.

As the purpose of the wind down periods is to allow time for existing contracts in the specified sectors to be concluded, it would not be advisable for parties to enter into new contracts even if it is anticipated that such contracts will be concluded before the end of the wind down periods. Non-US parties that have completed contracts within the wind down periods should however still be entitled to collect payments due after the wind down periods provided that the payments are not made through the US financial system and are not otherwise subject to specific sanctions.

Post wind-down period - 5 November 2018 onwards

From 5 November 2018, OFAC will revoke authorisations previously given to US owned or controlled foreign entities from engaging in activities involving Iran.

By 5 November 2018, OFAC will also re-impose sanctions on persons / entities that had previously been on the US SDN and other sanctions lists prior Implementation Day. This will significantly increase the number of persons subject to US sanctions.

While it is expected that the US will by 5 November 2018, re-impose all sanctions that were previously in place as at Implementation Day, the US could re-introduce sanctions not provided for by the wind down periods sooner.

What does this mean for insurers?

The reintroduction of US sanctions will undoubtedly affect insurers, in particular those engaged in providing marine cover for trades or businesses with a possible Iranian connection.

Although US sanctions regulations are primarily targeted at US persons (including US insurers), US sanctions can also affect non-US insurers in a number of ways:

  • Non-US insurers will not be able to make (or receive) payments using the US financial system in relation to sanctioned Iranian transactions. This can make it virtually impossible for insurers to pay Iran related claims in US dollars.
  • Non-US insurers may find that US reinsurers are not able to provide cover or to make payments in relation to Iranian claims.
  • Non-US insurers could still be found to have contravened US sanctions if they are found to have 'assisted' US insurers or financial institutions to facilitate sanctions transactions. Such situation could arise for example where the Non-US insurer has not informed the US reinsurer that the cover is in relation to an Iranian insured - which leads to the US reinsurer making a payment in breach of US sanctions.
  • OFAC could still impose sanctions against a non-US insurer, even if the non-US insurer is not in direct breach of US sanctions, if for instance the non-US insurer is found to be consistently doing business with SDNs or other sanctioned persons.
  • While the position is not yet entirely clear, the US could in coming months seek to impose worldwide secondary sanctions regulations which will require compliance by all persons (not just US persons) as had been done in the past.

While these risks have always been present, the complexity for insurers in dealing with these risks has now increased following President Trump’s announcement.

  • Although it is clear that the US will re-impose sanctions on the provision of insurance and reinsurance services following 4 November 2018, insurers will still need to investigate and understand what new business they can accept and what payments can be made during this period when the US sanctions are transitioning from the current regime to the pre-Implementation Day regime.
  • As with past instances when the US has passed new sanctions regulations, the boundaries between what is permitted and what is not during the wind down periods is not entirely clear. One of the reasons for this is that OFAC may not be fully aware of all the practicalities involved in winding down the Iranian trades. In the context of shipping Iranian cargo, it would have been helpful, for example, if OFAC had provided clarification as to whether the voyage charter of a vessel for the carriage of Iranian cargo (and the provision of related insurance) prior to the end of the second wind down period is permissible notwithstanding that such charter would be new business. The prudent approach where there is uncertainty however is to either seek clarification from OFAC or to err on the side of caution and decline the business.
  • Unlike in the past where the US’s position in relation to Iran was in line with that of the EU and other economies, the US’s position now is in conflict with much of the rest of the world. The EU and countries such as China and Russia have indicated that they intend to continue doing business with Iran notwithstanding the US’s re-imposition of sanctions and there have been discussions that the EU may enact its own specific regulations to counter-act the effect of the US sanctions. With increasingly complicated and possibly conflicting regulations, it is expected that the lines between what is permitted and what is not may be blurred further.
  • The reintroduction of US sanctions and the increase in number of sanctioned persons will no doubt mean that insurers will need to revise and improve their sanctions compliance processes as there will be more 'boxes' to check.

While the full impact of the re-introduction of US sanctions will only be felt in coming months, insurers should already be conducting risk assessment and reevaluation exercises to understand what their exposure is to sanctions breaches. Insurers should also be looking to update their sanctions compliance processes to take account of the increased compliance requirements.

If the EU and other major economies do follow through with their intention to continue doing business with Iran, it may be that businesses will restructure in such a way that their Iranian businesses are 'ring-fenced' and kept separate from the US businesses. This could mean that Iranian business is done in a currency other than US dollars, with non-US insurers, reinsurers, shipping companies, traders and other related businesses having no exposure in the US.

Until such time a workable solution is found however, insurers will need to carefully consider if it is worthwhile continuing with Iranian business, notwithstanding the increased risk posed by the US sanctions.  

This article is also available on the Asia Insurance Review magazine as a contribution piece.

About the team

Kennedys Legal Solutions’ sanctions and compliance practice group is part of a wider global offering. In Singapore, we specialise in assisting clients in the shipping, international trade and insurance sectors, with issues relating to trade sanctions, anti-money laundering and anti-bribery regulations.

As these regulations continue to change and evolve in both Singapore and globally, we recognise the importance of monitoring key developments and assessing the potential impact on our clients’ businesses. This enables our clients to make appropriate commercial decisions and to ensure their businesses and employees always comply with international trade sanctions and applicable regulations.

Together with lawyers from our offices across the globe, we are able to provide our clients with comprehensive, all-encompassing compliance and regulatory advice in relation to global sanctions, anti-money laundering and anti-bribery regimes.