Sanctions Due Diligence Prof. Dr. Dieter Schwampe Dabelstein & Passehl Hamburg

AIDA: Difficulties arising from Recourse Actions on Basis of Subrogation - Lisbon 08.05.2013

Sanctions Due Diligence

Prof. Dr. Dieter SchwampeDabelstein & PassehlHamburg

2Cefor Annual Seminar 2014 – Oslo, 03.04.2014

Due Diligence

• Which laws require it?

• What are the consequences of a breach?

• Is there any guidance?

• What is enough and what not?


Due Diligence – Which laws require it?

• Art. 32 Regulation 267/2012 (Iran):

in their activities with entities referred to in paragraph 2 and in order to prevent infringements of the provisions of this Regulation, conduct enhanced vigilance as follows:

(a) exercise continuous vigilance over account activity, particularly through their programmes on

customer due diligence




Credit and financial institutions shall, in their activities with entities referred to in paragraph 2 and in order to prevent infringements of the provisions of this Regulation, conduct enhanced vigilance as follows:






Credit and financial institutions shall, in their activities with entities referred to in paragraph 2 and in order to prevent infringements of the provisions of this Regulation, conduct enhanced vigilance as follows:



bureaux de change, credit and financial institutions domiciled in Iran



• No due diligence obligation in respect of insurers

- Art. 35 just prohibits providing of insurance and reinsurance

- No consequence of breach stated

• No due diligence obligations in Resolutions on Syria

→ What is the source of due diligence obligations?



• National Laws regulating the insurer

- External Trade Laws

- Insurance Supervision Laws

- Criminal Laws



• Extra-territorial Effects of US legislation

- ISA 1996: No

- ISA 1996 as amended by CISADA 2010: Yes

- ITRA 2012: Yes

- NDAA 2013: Yes


A brief Intermezzo: the EU “Blocking Regulation”

• Are due diligence systems as such at risk of breaching the Blocking Regulation?

- NO – to the extent that they may aim at abiding to national foreign trade laws, insurance

supervision laws and criminal laws

- NO – as the Blocking Regulation only refers to the „original“ ISA 1996 and not its

amendments by CISADA 2010 or ITRA 2012 or NDAA 2013



• Sec. 5 ISA 1996 as amended by CISADA 2010:

EXCEPTION FOR UNDERWRITERS AND INSURANCE PROVIDERS EXERCISING DUE DILIGENCE.—The President may not impose sanctions under this paragraph with respect to a person that provides underwriting services or insurance or reinsurance if the President determines that the person has exercised due diligence in establishing and enforcing official policies, procedures, and controls to ensure that the person does not underwrite or enter into a contract to provide insurance or reinsurance for the sale, lease, or provision of goods, services, technology, information, or support described in subparagraph (B).



• Sec. 5 ISA 1996 as amended by ITRA 2012:

EXCEPTION FOR PROVISION OF UNDERWRITING SERVICES AND INSURANCE AND REINSURANCE.—The President may not impose sanctions under paragraph (7) or (8) with respect to a person that provides underwriting services or insurance or reinsurance if the President determines that the person has exercised due diligence in establishing and enforcing official policies, procedures, and controls to ensure that the person does not provide underwriting services or insurance or reinsurance for the transportation of crude oil or refined petroleum products from Iran in a manner for which sanctions may be imposed under either such paragraph.


Due Diligence – What are the consequences of a breach?

• Action by Insurance Supervision

• Labor Law Implications

• Public prosecution

- against the acting person

- against the insurer („corporate crime“)


Due Diligence – What are the consequences of a breach?

• Extra-territorial effects of the US legislation:

- Sanctions imposed on insurers and their “corporate officers”

- sanctioned insurer may itself by put on the SDN list


Due Diligence – Is there any guidance?

• Norway: NO

• Germany: NO

• UK: YES

- HM Treasury Financial Sanctions: Frequently asked Questions (August 2013)

- Sanctions due Diligence Guidance for the Lloyd’s Market (6 February 2012)


Due Diligence – Is there any guidance? – United Kingdom

Sanctions Due Diligence Guidance for the Lloyd’s Market

Due diligence is the identification of named (re)insureds, all those associated with or benefiting from the cover (and receiving payments under it) and/or any trade to which the cover relates, which managing agents are asked to underwrite or the transaction in which they are asked to engage. Where appropriate, due diligence should enable managing agents to determine the ownership and control of their named (re)insureds and those other parties associated with or benefiting from cover. Due diligence should also enable managing agents to obtain a full understanding of the activities in which their client and those associated persons engage.


Due Diligence – Is there any guidance?

• Norway: NO

• Germany: NO

• UK: YES

• US: YES

- State Department Sanctions Information and Guidance (Public Notice 8086)

- OFAC Frequently Asked Questions17Cefor Annual Seminar 2014 – Oslo, 03.04.2014

Due Diligence – Is there any guidance? - United States

• State Department:

- “Due diligence” is not defined in any of the legislation but it generally includes an analysis of whether the foreign person had in place sufficient procedures and safeguards to reasonably protect against the possibility of engaging in

sanctionable conduct. What is required to exercise due diligence will depend on the

circumstances.



State Department:

- conduct rigorous due diligence to “know your customer”

- all persons involved in activities in high-risk sectors should consider implementing enhanced due diligence in order to minimize the risks of inadvertently becoming engaged in a sanctionable transaction. This could include, but is not limited to, confirming that transactions in these sectors do

not involve an entity owned or controlled by Iran or that Iran is not otherwise connected to any entities in the commercial transactions, including by reviewing the OFAC SDN List



• “Frequently Asked Questions and Answers” OFAC“Screening”:

- If it’s hitting against OFAC’s SDN list or targeted countries, continue to 2 below

2 Now that you’ve established that the hit is against OFAC’s SDN list or targeted countries, you must evaluate the quality of the hit. Compare the name in your transactions with the name on the SDN list. Is the name in your transaction an individual while the name on the SDN list is

a vessel, organization or company (or vice-versa)?If yes, you do not have a valid match.If no, please continue to 3 below. 20Cefor Annual Seminar 2014 – Oslo, 03.04.2014


• “Frequently Asked Questions and Answers” OFAC

3 How much of the SDN’s name is matching against the name in your transaction? Is just one of two or more names matching (i.e., just the last name)?

If yes, you do not have a valid match.*

If no, please continue to 4 below.




4 Compare the complete SDN entry with all of the information you have on the

matching name in your transaction. An SDN entry often will have, for example, a full name, address, nationality, passport, tax ID or cedula number, place of birth, date of birth, former names and

aliases. Are you missing a lot of this information for the name in your transaction?

If yes, go back and get more information and then compare your complete information against the SDN entry.

If no, please continue to 5 below. Cefor Annual Seminar 2014 – Oslo, 03.04.2014 22



5 Are there a number of similarities or exact matches?

If yes, please call the hotline at 1-800-540-6322.

If no, you do not have a valid match.

Cefor Annual Seminar 2014 – Oslo, 03.04.2014 23

Due Diligence – What is enough and what is not?

“Screening”:

- Identify insured and all other parties under the contract

- Identify who pays and to whom is paid

- Check ownership and control

Required in this context:



- (a) the size of shareholding, including in comparison to the holdings of other shareholders;

- (b) the nature of shares held – some shares may carry voting rights while others may not;

- (c) the management of the entity and or parent companies (for example the composition of the board of directors);

- (d) the entity’s Memorandum and/or Articles of Association;- (e) voting/veto rights; and- (f) the ability to exercise power over important matters

affecting the company.



- Screening: Identify insured and all other parties under the contract

- Identify who pays and to whom is paid

- Check ownership and control

- Check whether there are indications that funds may be passed to a third party

- Check reliability of information, where appropriate verify it, and secure evidence



- Report positive results to the authorities

- Use sanctions clauses, but they are not enough alone

- Train your employees

- Make test runs to check the efficiency


Due Diligence – Will it ever be enough?

New York Department of Financial Services: Insurance Circular Letter No. 6 (24 July 2013)

- addressed to all foreign accredited reinsurers writing business in NY State

- Long list of requests


Due Diligence – Will it ever be enough?

State whether, following the news reports concerning the Glencore Xstrata and Trafigura, you reviewed your in-force policies to determine whether you insured any of the reported transactions. If yes, please indicate whether you conducted the review before the receipt of this letter and the nature of your review.

Produce a copy of every policy issued by you, a parent, affiliate or subsidiary, to Glencore Xstrata or Trafigura that remains in force on or after July 1, 2013


Thank you

Please feel free to direct questions or comments to

Dieter [email protected]

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Sanctions Due Diligence Prof. Dr. Dieter Schwampe Dabelstein & Passehl Hamburg