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The science of sanctions compliance
The science of sanctions compliance
© Picture Alliance / dpa / Olivier Hoslet
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    Embargoes and sanctions restrict freedom in foreign trade. Insurance companies must ensure they comply with sanctions regulations not only on the underwriting side but also in claims settlement. IT-based solutions provide a sound basis but are no substitute for a detailed review of each individual case.
    Not only the United Nations, but also the European Union and individual countries can impose trade restrictions on goods and services, as well as international capital transactions and payments. Sanctions imposed by the EU automatically apply in all member states. The Deutsche Bundesbank lists 25 countries (as at April 2016) against which the EU has imposed sanctions on capital transactions and payments. In addition to the restrictions which apply to individual countries, it also lists restrictive anti-terrorism measures (so-called personal sanctions not related to a specific country) targeting individuals, institutions or organisations.

    Depending on their objective, sanctions can have manifold consequences. They can range from the total cessation of trade relations to restrictions for  certain branches of industry (such as offshore exploration and oil drilling in regions north of the Arctic Circle).

    As a rule, the aim of financial sanctions is to prevent money and other economic resources from being directly or indirectly made available to listed individuals or organisations.

    Sanctions lists provide an overview

    The insurance industry must apply internal procedures and guidelines to ensure compliance with the applicable regulations imposed by sanctions and embargo rulings. Non-compliance entails a high reputational risk, as it can give rise to substantial monetary fines or even prison sentences and may result in the loss of market access in certain regions.

    Sanctions lists provide an overview of the individual parties affected by restrictions. These official lists identify the individuals, groups, organisations or assets against which or whom economic and/or legal restrictions have been imposed. Here we have the first challenge, for the consolidated list of EU sanctions contains several hundred entries, including several with different spelling. Another problem is that the UN, the EU and the US refer to different sanctions lists and directives which are not always congruent. Moreover, the lists do not directly specify whether they refer to individual assets or branches of industry; this is something which must be established from the respective directives.

    Which sanctions apply depends on a company’s corporate structures: the decisive regulations are those which apply in the country where an insurance company, for example, has its head office. However, they also affect the foreign branches and subsidiaries of major corporations, for these are part of the legal entity under company law and are therefore bound by the imposed sanctions. On the other hand, while independent foreign subsidiaries are excluded from the imposed sanctions in purely legal terms, they are still governed by the regulations of the country in which they are located. In their case too, however, the type of business can provide an indication as to whether or not sanctions apply. Attention must also be paid to the possibility of such criminal acts as evasion or aiding and abetting. Employees abroad must additionally ensure that they comply with the requirements specified for their respective nationalities. A German employee working in Singapore, for instance, must comply not only with the sanctions in force there, but also with the requirements specified by the EU.

    Consequences for the insurance industry

    Fig. 1: Decision tree for underwriting
    © Source: Group Compliance, Munich Re
    Fig. 1: Decision tree for underwriting
    The diagram illustrates the procedure when checking a business deal with regard to sanctions. The actual process is even more complex in practice.
    For a long time, insurers and reinsurers were not explicitly mentioned in the directives imposing sanctions. This situation changed in 2009, with the result that the insurance industry is now under a much greater obligation. The existence of potential touchpoints with sanctions regulations must now be checked at the underwriting stage (Fig. 1). As the marine insurance example in Fig. 2 shows, this check can prove fairly complex due to the large number of parties involved. The regulations governing the primary insurance client are another important factor in reinsurance. If both insurers are governed by European law, it may normally be assumed that the client will act in conformity with the sanctions, as it operates in the same legal environment. Despite this, however, the reinsurer should ensure through its own due diligence processes that the client is aware of the reinsurer’s approach to sanctions. Further due diligence processes and above all more in-depth checks are needed if the primary insurer is located outside the EU. Appropriate exclusion clauses must be agreed if there are any doubts concerning compliance with the imposed sanctions. The business must not be written if this is not possible.

    Additional diligence must be exercised if claims payments are to be made at a later date within the framework of the insurance contract. For the insurer’s claims management, this means that due diligence checks are obligatory during claims handling and above all immediately prior to settlement of the claims. This is because the sanctions regime may have changed considerably in the meantime.

    The currency of the insurance contract may also play a part here. Since all payments in dollars pass through a US clearing house, US sanctions law must also be observed. The same also applies in cases in which payments are remitted in a different currency but are handled by a US bank.
    Fig. 2: Points to check in marine insurance
    © Source: Group Compliance, Munich Re
    Fig. 2: Points to check in marine insurance
    The underwriting team must first establish whether regulations have to be observed and, if so, which. These are then interpreted in the context of the business written and the risks covered. Since sanctions are increasingly imposed as a means of enforcing political goals, this topic will become more and more important for insurance companies.

    Challenges for operative business

    The following fictitious example illustrates the challenges that may arise in day-to-day business. In 2013 a Russian cedant requests cover for a project in its country. The cedant has more than 30 original insured parties and is promised cover following a review by the European reinsurer. Since there were no sanctions on Russia in force at the time, a review by the underwriting team was not required. The situation changed when the EU imposed sanctions against Russia in March 2014. When the project suffered a loss in 2015, the reinsurer had to take account of the changed situation.

    For a complete review within the framework of due diligence, it is not sufficient to limit the investigation under sanctions law to the cedant alone, although it is the only other party in the contractual relationship. On the contrary, the reinsurer is obliged to vet all possible beneficiaries (insofar as they are known) who might profit from a payment by the cedant in order to ascertain whether any relevant sanctions are in force. This applies in particular because the cedant is domiciled outside the EU and is therefore not bound by EU regulations. The cedant is consequently free to remit payments to individuals or organisations against whom or which the EU has imposed sanctions. Companies and individuals inside the EU, on the other hand, may neither directly nor indirectly make economic resources available to sanctioned individuals or companies.

    Where possible, shareholder structures must also be considered when investigating whether or not a company is subject to EU sanctions. For instance, one or more shareholders may be named in the sanctions list, but not the company itself. If the shareholding exceeds a threshold of 50%, the company must be treated as though it was also the subject of a sanctions regime. Indemnities actually accruing to the company as a result of the loss must not be disbursed. This can be achieved by commensurately reducing payments to the cedant or alternatively by agreeing on a settlement with the cedant ensuring that the sanctioned company does not receive any payments.

    Screening with special software

    Special screening tools are useful when analysing complex shareholder structures. With these tools, scheduled payment transactions and customer data can be checked for violations of embargo regulations and financial sanctions. The market offers innumerable software products which allow a company’s own data to be compared with those on the sanctions lists. Execution of a payment order must be stopped if the screening tool reveals that a sanctioned individual or organisation could benefit from the payment.

    Individual checks are often required additionally, as sanctions lists do not contain all details relating to sanctions (such as relevant shareholdings) and the automated comparison may deliver erroneous results. Munich Re has set up the “Central Unit Sanctions” for this purpose. The unit is part of Group Compliance and is staffed by specialists who have considerable experience in analysing sanctions clauses and in operative business.

    The Central Unit Sanctions investigates whether a payment order does indeed violate sanctions regulations. Another conceivable case, in addition to the aforementioned analysis of shareholder structures, would be one in which the beneficiary of the payment is not the same as the sanctioned individual – in other words, both have the same name, but a different address or date of birth. The Central Unit Sanctions is also responsible for documenting every decision for auditing purposes.


    Companies will find it more and more difficult to comply with sanctions clauses, not least because such programmes are becoming increasingly prevalent and comprehensive. In addition, the regulations governing individuals, goods and services are constantly being supplemented and updated, which makes it even more difficult to keep track of requirements. Insurers must keep an eye on developments, initiate suitable compliance measures and scrutinise the legal situation in individual cases. This will help them to avoid violations which could have considerable consequences.

    It is no longer enough to simply review the sanctions lists with the aid of IT-based screening tools. Specialists are needed to establish such aspects as the precise shareholding structures or the exposure of covers, and to carefully analyse the sanctions clauses. The only possibility for small and medium-sized insurance companies is to call in an external service provider if they cannot manage the task themselves. In all cases, however, responsibility for correct compliance with the regulations remains with the company itself.
    Urs Alexander Mayer
    is a compliance officer at Munich Re and advises the company on all matters related to sanctions.
    He has 15 years’ experience as a lawyer in insurance and reinsurance.


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