LawFlash

OFAC Settlement Extends Violations to “Support Service” Providers

November 03, 2014

OFAC stated that an insurance company and its affiliates violated OFAC regulations by providing insurance support services for policies that were issued to, or provided coverage for, persons designated on the OFAC Specially Designated Nationals list.

On October 29, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced a consent settlement that raises novel and important implications for support services providers in the securities, insurance, and financial industries. The respondents were an insurance company and its affiliates, which are Florida corporations that provide insurance support services, and the settlement was for an agreed upon civil penalty of $128,704. The settlement involved potential civil liability for 39 apparent violations of various OFAC regulations, for which the maximum fine could have been $9.75 million.

The primary violation was that insurance provider issued health insurance policies or otherwise provided health insurance coverage to certain beneficiaries that were persons designated on the OFAC Specially Designated Nationals (SDN) List.

However, the most novel and important aspect of this case is that OFAC stated that, separately, the insurance support service providers rendered insurance support services for policies that were issued to, or provided coverage for, SDNs and that mere provision of these support services also constituted an OFAC violation in its own right.

The insurance support services provided, according to the settlement document, encompassed a wide range of marketing, accounting, administrative, and operational services, including the retention of agents, premium processing, underwriting, claims payments, claim preauthorization, claim review, claim adjudication, and customer service, as well as issuing claim and reimbursement checks and accounting reports.

A health insurance policy was issued to an SDN by the insurance provider. Thereafter, a support service provider—who was not the policy issuer—serviced two policies issued to the SDN by specifically transmitting policy documents, maintaining policy records, preparing accounting reports, processing premium payments, and making two claim payments. Another support service provider—who also was not the policy issuer—provided claims-processing services by processing four claims under the insurance policy. The insurance issuer and the support service providers were collectively found liable for apparent OFAC violations.

Implications

This case raises important implications for support services providers that work in the securities, insurance, and financial industries—particularly in light of the recent Ukraine-related OFAC sectoral sanctions imposed against certain debt and equity of Sectoral Sanctions List entities in Russia.

For example, assume a company provides various reporting of essential fund information, straight-through transaction processing, or marketing and sales services or that it staffs a call center or performs trade order processing or accounting services. However, in so doing, also assume that the company is only a support service provider for such funds or investments and has nothing to do with the selection of the investments in these funds.

Applying the OFAC policy underlying this recent case, by providing any of these support services to a fund manager or investment house that has dealings with OFAC-prohibited Russian sectoral sanctions list entities’ debt or equity, the fund’s support service provider may be exposed to OFAC violations. This is the case even though the support service provider made no decision to hold or deal in such assets and had no input in the underlying prohibited investment decisions.

We recommend that support services providers—especially those working in the securities, insurance, and financial industries, particularly in light of the recent Ukraine-related OFAC sectoral sanctions—implement thorough and ongoing screening for all OFAC-sanctioned entities.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Washington, D.C.
Margaret M. Gatti
Louis Rothberg