Increased scrutiny on sanctions breaches: a warning for the insurance industry

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One can barely switch on the television or open a newspaper without seeing an item on sanctions. The US and EU sanctions against Russian and Ukrainian individuals and companies over the annexation of Crimea and the continued sanctions against Iran for its alleged nuclear proliferation ambitions are just two classic cases in point.

So, given this backdrop of high stakes in international politics, it is easy to see how the consequences of breaching sanctions can be extremely serious and severe. Aside from the hefty fines that can and are levied by various regulatory authorities in the West, there are the huge costs incurred in investigations; legal expenses in defending prosecutions; business interruption if a business with a suspected suspicious activity is suspended; the almost incalculable cost of reputational damage; and, of course, there can be the ultimate cost: the loss of one’s liberty if found personally guilty and incarcerated!

Over the last 18 months we have seen US regulators punish a host of European-headquartered banks with multi-million and even multi-billion dollar fines – all for sanctions breaches.

However, despite these stark warnings, the insurance industry has remained, hitherto, largely unscathed by such penalties. As a result there seems to be a rather complacent attitude amongst the insurance fraternity to the gravity of the very real risks that exist. So much so that the FCA has increased its attention to this matter and highlighted it as an area of concern.

No lesser an authority than Clive Adamson, Director of Supervision at the FCA, recently commented on how the regulator has observed “ineffective sanctions screening”, “insufficient care to ensure that…sanctions law” is not breached and “inadequate due diligence of third-party business partners and commission payments” amongst both insurers and brokers.

So, how is this weighty issue best tackled? Every insurance practitioner ought to have a detailed and robust sanctions policy that outlines the Board’s approach to, and risk appetite for, sanctions and its risk mitigation. The policy should be ‘owned’ by the Compliance team and sufficiently and effectively embedded in the business. The ideal sanctions policy should be reviewed and tested on a regular basis. There should be constant, accurate sanctions screening of all policyholders, claimants, loss payees, counter-parties and third parties utilising the most effective and up-to-date sanctions screening tools. There ought to be well documented policies and procedures to escalate matters to the appropriate forum (such as Compliance, Management or Board) should circumstances require. Insurers with delegated authorities need to ensure that their delegated agents have as effective a sanctions policy as their own.

Ultimately, every member of staff should receive sufficient training and education on sanctions and financial crime to ensure that they are fully aware of their responsibilities and the required course of action in this arena.

The topic of sanctions is only going to become more prominent within the insurance industry, so ensure your firm is dealing with it effectively.


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