Law 360s "Insurers' Compliance With Iranian Investments"


    Originally published in Law360

    Related Attorney: Timothy S. Farber

    Related Practice: Corporate Insurance

    Law360, New York (June 24, 2010) -- We have often discussed efforts by the California Department of Insurance to assist the federal government in the war on terror and those that pose a threat to the safety and security of the United States.[1]

    We have noted that the CDOI has requested all insurers licensed in California (foreign and domestic) to provide specific information regarding any investments they may hold in the government of Iran, in securities denominated in the government of Iran, or in entities that conduct business in the defense, nuclear, petroleum, natural gas or banking sectors of Iran.

    Such information was sought so that the CDOI could evaluate whether such investments are sound and in compliance with applicable law. Below we provide an update on these matters both in California and at the federal level.

    California Inquiry

    California Insurance Commissioner and former 2010 gubernatorial candidate Steve Poizner has stated that his department’s inquiry revealed that insurance companies licensed to do business in California hold $12 billion in indirect investments in companies that do business with the Iranian energy, nuclear, banking and defense industries. The probe uncovered no investments directly in the government of Iran.

    In February, the commissioner released a list of 50 companies that he claims do business with the Iranian oil, natural gas, nuclear and defense sectors. Poizner requested that California-licensed insurers eliminate investments in these 50 companies and also disqualified insurer investments in these companies from counting toward reserve requirements, a figure estimated to be $6 billion as of March 2010.

    As a result of the commissioner’s request, more than 1,000 insurance companies representing more than 75 percent of those doing business in California agreed to eliminate future investments in the 50 companies on the commissioner’s prohibited list. However, approximately 300 companies have refused to comply.

    Many insurers have questioned the commissioner’s authority in this area, and five insurance company trade groups filed a petition with the California Office of Administrative Law seeking to invalidate what they term the “illegal underground regulations.”

    The insurers believe that the commissioner lacks authority to ban otherwise legal investments and that he circumvented due process by not engaging in public hearings or comment. They also believe that the California Insurance Code does not provide the commissioner “any apparent authority to regulate the content of financial statements” and that such regulations as they apply to foreign insurers are “in direct conflict with their respective regulators.”

    The trade groups are also critical of the commissioner for failing to adequately set forth the standards for placing companies on the prohibited list of firms doing business in Iran and also believe that foreign policy and rules on foreign investments are addressed most effectively by federal agencies.

    The CDOI issued a response stating that “ultimately [the CDOI has] the power to do this as the commissioner oversees investments by insurance companies [as these Iranian investments] that are risky, and insurers should not be involved [with the] unstable nature of the Iran regime.” The disputes in this area continue.

    Federal Action

    Current federal law restricts U.S. companies, including insurers, from doing business with Iran. In addition to complying with anti-money laundering requirements, the insurance industry must comply with U.S. trade sanctions regulations administered and enforced by the U.S. Treasury Department’s Office of Foreign Assets Control.

    OFAC currently administers and enforces a number of country-based sanctions programs (including one for Iran), as well as several list-based programs. Unlike the anti-money laundering requirements, these sanctions contain no exemptions for property and casualty and accident and health operations, or for agents and brokers.

    Seeking to increase pressure on Iran, the House and Senate have passed separate bills that would make several changes to existing law and expand the Iran Sanctions Act originally passed in 1996 — which together would have a significant impact on the insurance industry.

    In December 2009, the Iran Refined Petroleum Sanctions Act of 2009 (H.R. 2194) passed the U.S. House of Representatives, while in January 2010 the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2009 (S. 2799) passed the Senate (the “Senate bill” and, together with the “House bill,” the “federal bills”).

    The federal bills would, among other things, explicitly require the president to impose sanctions against foreign or domestic entities that are “underwriting or otherwise providing insurance or reinsurance” for activities that could directly and significantly contribute to the enhancement of Iran’s ability to import refined petroleum products.

    This expands sanctions to cover any insurance or reinsurance activity that could directly and significantly contribute to the enhancement of Iran’s ability to develop or import refined petroleum products.

    Note that the federal bills apply sanctions to foreign as well as domestic entities, where previous sanction programs have typically applied to U.S. residents and, more narrowly, to their foreign subsidiaries. Under the House version of the legislation, the sanctions would even apply retroactively to any person engaged in the restricted export activity as of Oct. 28, 2009.

    The federal bills are currently being reconciled in committee, but further action was put on hold at the request of the Obama administration as sanctions in the United Nations progressed. However, activity is expected to heat up once again after recent U.N. action.

    On June 9, 2010, the U.N. Security Council passed a fourth round of sanctions on Iran. Among other items, financial transactions, including those related to insurance and reinsurance, are barred if they may be deemed to have a nuclear purpose.

    White House Press Secretary Robert Gibbs says the Obama administration will now work with U.S. lawmakers and allies worldwide to pursue further measures on Iran. Gibbs said:

    "U.N. sanctions are not a magic bullet. There are steps that we can take as a government, and have. There are steps that Congress will take, as part of our government. And we are working with the House and Senate on a bill that I understand is currently in conference."

    House Committee on Foreign Affairs chairman Howard Berman says Congress will pass sanctions on Iran by the end of June.

    As the federal bills are reconciled and move toward likely passage, insurers and reinsurers should be reviewing and updating their compliance programs as well as their insurance and reinsurance treaties to ensure compliance with the latest sanctions involving Iran.

    Insurers and reinsurers must know precisely what they are insuring and reinsuring under existing treaties to ensure that they do not inadvertently violate the new restrictions when such legislation is ultimately passed. Companies must be careful not to run afoul of the law in this fluid and complex area.

    --By Timothy S. Farber, Locke Lord Bissell & Liddell LLP

    Dean Conlin is a partner with Locke Lord Bissell & Liddell in the firm's Chicago office. Timothy Farber is an associate with the firm in the Chicago office.

    The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or Portfolio Media, publisher of Law360.

    [1] See the Locke Lord Bissell & Liddell LLP client alerts from Dec. 11, 2009, titled "OFAC, AML and FCPA Compliance Update: California Insurance Commissioner Turns Up the Heat as State Departments of Insurance Assist Uncle Sam" and from Aug. 18, 2009, titled "OFAC, AML and FCPA Compliance: State Departments of Insurance Lend a Helping Hand To Uncle Sam."

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