Sanctions Screening and the Insurance Industry: The Story of Everybody, Somebody, Anybody, and Nobody

Martin Schofield
SME and Consultant, MSA

Is there a difference in how Brokers, Insurers, and Reinsurers meet sanctions compliance requirements?

The correct answer is that there should be no difference in approach at all. However, in reality, this is not the case.

In my view, the current approach is one of misplaced or assumed reliance — like in this familiar tale:

There were four people, named Everybody, Somebody, Anybody, and Nobody.

There was an important job to be done, and Everybody was sure that Somebody would do it.

Anybody could have done it, but Nobody did it.

Somebody got angry about that because it was Everybody’s job.

Everybody thought that Anybody could do it, but Nobody realized that Everybody wouldn’t do it.

It ended up that Everybody blamed Somebody when Nobody did what Anybody could have done!!

So, each of the connected parties in the insurance industry, including brokers, insurers, and reinsurers, in theory should be doing their own customer checks — and to the same level of diligence.

How Sanctions Screening Should Operate?

Brokers screen at customer onboarding and on an ongoing basis
A broker should not take a customer on board unless they are legally allowed to do so, so any sanctioned target would be a prohibited customer. Further, if the target was sanctioned for terrorism purposes, even giving financial advice would constitute a breach by the broker. Once the broker is satisfied that their potential customer is safe to onboard after a thorough screening against terrorism, AML (anti-money laundering), and PEP (politically exposed persons) lists, they can refer them on to the Insurer. The broker would also need to continually run sanctions checks for that customer, in order to ensure that they are permitted to continue providing services to that customer.

Insurers and reinsurers should screen and monitor as well
The insurer will need to conduct sanctions checks as well, as they too have an obligation not to undertake business with sanctioned targets. Insurers cannot and should not place any reliance on the checks that the broker has undertaken, and of course, those checks would only have been valid for the moment in time that the check was administered. Subsequent to that, if the customer becomes sanctioned, the check done by the broker at the point of introduction becomes useless.

The insurer, too, will have to continue screening the customer to ensure that they do not become sanctioned at a later point in the business relationship. Of course, for the insurer, these checks can be determined by the nature of the insurance coverage and the goods being insured. A large amount of commercial insurance is used to cover goods being shipped under Trade Finance deals, and Trade Finance, as we know, is described by the criminal fraternity as a beautiful market. I often wonder how many insurers have total confidence in what is actually in the shipping containers that they are insuring, and with figures reporting that less than 2% of these containers actually get inspected by customs, will anyone ever really find out?

The reinsurer is required to follow the same procedures as the insurer.

The Reality of Sanctions Screening

For brokers
In reality, I would imagine a large number of brokers do not screen, or at least as thoroughly as they should. This is due to a number of misconceptions, including:

  1. Bank involvement. Brokers consider that the customer is paying for their insurance through a bank, and the bank would have undertaken the required diligence checks and would not permit the insurance premium to be paid if the account was frozen due to sanctions issues,
  2. Informal relationship. Many brokers consider themselves to be only involved at the start of the partnership, therefore the business relationship with the customer is not so structured and formal as that with the intended Insurer,
  3. Fast business. Retained relationships are not so common in today’s world, so most brokers probably do not consider that the customer will be with them any longer than for the period of introduction. After that, when their insurance renews, customers will either retain business relationships directly with the insurer, source a new insurer via a new broker, or source their own insurance policy via the internet. As a result, the original broker would view screening — especially ongoing screening — as an unnecessary expense to cover a limited relationship.
  4. Passing the buck. The broker knows that the insurer will be required to undertake the screening before they actually sign the customer up, which is the point at which the broker will consider if the need to perform the screening really exists. They also consider that engaging with the customer to source an insurance policy is not a formal relationship, as the broker does not get paid (either commission or fee) until the policy is placed and accepted. Therefore, the broker operates under the misconception that until money changes hands, the relationship has not been created.

For insurers
The insurers carry similar misguided attitudes towards proper sanctions screenings as related to:

  1. Pre-screened customers. Insurers will consider that the broker has previously undertaken screening, and would not have introduced the customer to them if the customer had failed a sanctions screening. Insurers assume that they have the time to underwrite and make their decisions, and until an acceptance is issued and/or a premium paid they do not need to conduct any further checks as they are riding on the back of the broker’s check.
    The insurer will also take comfort from the fact that the customer must have been screened by their bank before and after the premium is paid.
  2. Less Risk. The insurer will possibly take the misguided view that insurance is not as risky as bank accounts, and as their product only pays out in the event of a valid claim, they are able to back end control the sanction. In other words, they assume that they would not be responsible for paying money to a sanctioned target in the event of a claim. This belief of course does not consider that accepting money in the form of a premium, or just having the business relationship, might be an offence in its own right.
  3. Safe from prosecutions. The insurer often takes the misguided view that they are “safe” as the lack of prosecutions against an insurer generates this impression. After all, the insurer can only undertake their business activity if the bank allows the premium to be paid, so the insurer is never guilty of the breach it is just the bank. Indeed, the enforcement action, or lack therefore, in this field is conspicuous by its absense. In times of purse watching, an insurer will look at the risk and make a decision as to screen or not based on what history tells us. Unfortunately, insurers, like most financial services companies, put their money where the fines are.

Given all of the above, the insurer considers itself quite removed and dare I say almost exempt or excused from screening requirements in the same way that banks are.

For reinsurers
Reinsurers have an even further removed relationship from the customer, and oftentimes considers themselves even safer, as the customer screening journey has to go via the bank, the broker, and the insurer before it reaches them. It believes each of these parties to have fulfilled their screening obligations and so the customer must be “safe” for them to deal with.

What this means for sanctions screening

What all of these parties fail to take into consideration is that the responsibility to screen at the outset, and thereafter, rests with them. They cannot take comfort from the actions of any other firm — no matter how associated to them they are. Brokers, insurers, and reinsurers must manage their own risks and take charge of their own destiny.

A lack of enforcement action is hardly a justifiable reason for lack of controls. However, I fear that until any enforcement action is taken against an insurer, this attitude will be the one that is given the most credence by the budget holders in the insurance industry. Although perhaps as regulators and enforcement agencies start to become more consistent and collaborative in their approach to this issue, we will start to see some joint enforcement action against banks and insurers together. This could be the catalyst for increased awareness and controls within the insurance sector as a whole.