Twenty Third Annual Aviation Law And Insurance Symposium The Effect of United States Sanctions on Insurance Underwriters, Brokers and Airlines Thomas J. Whalen Eckert Seamans Cherin & Mellott 1717 Pennsylvania Avenue, NW Suite 1200 Washington, DC 20006 Tel: 202-659-6600 Fax: 202-659-6699 E-mail: twhalen@eckertseamans.com January 12, 2012
I. EFFECT OF U.S. ECONOMIC SANCTIONS ON SALE OF U.S.-ORIGIN AIRCRAFT, ENGINES, PARTS AND COMPONENTS Because of the U.S. Government s increased enforcement of the U.S.-imposed sanctions against selected countries, it has become even more important for airlines and insurers to understand how these sanctions might impact their business. U.S.-Imposed Sanctions on Export of Aircraft Equipment The U.S. Government has imposed sanctions against selected countries for national security or foreign policy reasons. Regarding U.S.-origin aircraft, aircraft parts and engines, the United States has imposed sanctions against Cuba, Iran, North Korea, Sudan and Syria. As a result of these sanctions, U.S.-origin aircraft, aircraft parts or engines may not be shipped (exported or reexported) to these countries, unless a license is obtained from the U.S. Government authorizing the shipment. This prohibition also applies to non-u.s. assembled aircraft (like Airbus, Embraer and Bombardier aircraft) which contain U.S.-origin parts in excess of 10%. For such exports or reexports to Cuba, Iran and Sudan, a license must be obtained from the Office of Foreign Assets Control ( OFAC ) of the U.S. Department of the Treasury. For sales to North Korea and Syria, a license from the Bureau of Industry and Security ( BIS ) of the U.S. Department of Commerce is required prior to selling and shipping this equipment to these countries. The possibility of obtaining a license from OFAC or BIS authorizing the shipment of such U.S.-origin products to these boycotted countries is not good, even though a recent statute and some sanctions regulations provide that OFAC and BIS may grant a license to reexport U.S. aircraft parts, if the aircraft part is needed to ensure the safety of civil aviation and safe operation -2-
of commercial passenger aircraft. 103(b)(2)(iv) of the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010, Pub. L. 111-195; 31 C.F.R. 560.528. A license under this exception for aviation safety reasons has not been liberally granted. There are certain exceptions to the prohibition of selling U.S.-origin aircraft parts and engines to these five countries without a license (there is no exception for U.S.-origin aircraft). For instance, the sanctions imposed against Iran permit a non-u.s. airline to sell U.S.-origin aircraft parts and components on a non-u.s. assembled aircraft, if the total value of all U.S.- origin products (domestic content) on the aircraft represents less than ten percent of the value of the aircraft. 1 The regulations imposing sanctions against Iran also permit non-u.s. airlines to ship U.S.-origin aircraft parts to Iran if the aircraft parts were exported from the United States prior to May 7, 1995, if (i) such aircraft parts were not the property of a United States person or entity on May 7, 1995 and (ii) the shipment of the aircraft parts from a country other than the United States to Iran (reexport) did not require a license from the U.S. Government prior to May 6, 1995. 31 C.F.R. 560.414. U.S. assembled aircraft was subject to reexport license requirements prior to May 6, 1995, but many U.S.-origin aircraft parts did not require a reexport license. If a company receives an order for U.S.-origin aircraft parts from a person or entity in Cuba, Iran, North Korea, Sudan or Syria or if the company is aware that the destination of the U.S.-origin aircraft parts will eventually be shipped to one of the five sanctioned countries, the 1 Even though the U.S. content is less than 10%, the export or reexport may be prohibited if the aircraft continued certain highly sensitive sensors. 31 C.F.R. 560.205(b)(2). Another exception applies if the parts or components are substantially transformed into a foreign made product. 31 C.F.R. 205(b)(1). This rarely occurs in respect to aircraft parts and components. -3-
company should reject the order, unless it obtains a license from the U.S. Government. 31 C.F.R. 560.205(a). The regulations also prohibit facilitation that is, approving or financing or assisting a foreign person to enter into a transaction which, if performed by U.S. person, would be prohibited by the sanctions regulations. 31 C.F.R. 560.208 Other Restrictions on the Sale of U.S.-Origin Aircraft Parts Even if a non-u.s. airline sells on the U.S.-origin aircraft parts to persons and entities located in countries other than the five countries subject to sanctions, the shipment of such parts to another country may still require a license from BIS, depending on the U.S.-origin product to be sold and the country of destination for the product. BIS regulates reexports (a reexport occurs when a U.S.-origin product is exported from a country, other than the United States, to another country) of U.S.-origin aircraft, aircraft parts and engines to countries other than Cuba, Iran and Sudan. OFAC regulates the re-exports of U.S.-origin products to Cuba, Iran and Sudan. Only about five percent of all U.S.-made products are subject to reexport controls under the regulations administered by BIS. Being subject to reexport controls means that a reexport license or authorization may be required from BIS prior to the U.S.-origin product being reexported, depending upon the U.S.-origin product to be re-exported and the country of destination. Products that are controlled for export or reexport by BIS are classified in a Commerce Control List. Most aircraft parts and components are controlled under Export Control Classification Number ( ECCN ) 9A991d. Aircraft parts and components controlled under ECCN 9A991d may be re-exported without a license to all countries except Cuba, Iran, North -4-
Korea, Sudan and Syria. However, some U.S.-origin aircraft parts and components are controlled under Chapter 7 of the Commerce Control List. Chapter 7 is entitled Navigation and Avionics. The reexport of such parts and components may require a license. A traffic collision avoidance system ( TCAS ), for example, is classified at ECCN 7A994. The reason products classified under ECCN 7A994 are controlled is due to antiterrorist ( AT ) concerns. AT controls mean that U.S.-origin aircraft parts cannot be re-exported to Cuba, Iran, North Korea, Sudan and Syria unless a reexport license is obtained from the U.S. Government. Another example of controlled products is inertial navigation systems which are controlled by Chapter 7 and not by the blanket classification of ECCN 9A991d. Most inertial navigation systems for civil aircraft are now classified under ECCN 7A103. The reasons for controls on products classified under ECCN 7A103 are due to antiterrorist ( AT ) and missile technology ( MT ) concerns. Sojourner Exception Flights from one country to another country of aircraft containing more than 10% U.S.- origin parts and components are considered a reexport of the U.S.-origin aircraft parts and components to the country of destination. Flights of U.S.-origin aircraft and non-u.s.-origin aircraft containing U.S. parts and components to Iran and Sudan require a license from OFAC in order to reexport the U.S.-origin aircraft or U.S.-origin aircraft parts and components to Iran or Sudan. For example, flights of Boeing aircraft or Airbus aircraft from a country other than the United States to destinations in Iran or Sudan require a license from OFAC in order to reexport -5-
the Boeing aircraft or the U.S.-origin aircraft parts and components located on the Airbus aircraft to Iran or Sudan, even though the flight to these locations is temporary. However, temporary sojourns of Boeing aircraft or Airbus aircraft containing U.S.- origin parts or components to North Korea and Syria and Cuba will not require a license, provided the following criteria (Sojourner Exception) are met: the airline flying to North Korea, Syria or Cuba retains the right, to hire and fire the cockpit crew; the airline retains the right to dispatch the aircraft; the airline retains the right to determine the aircraft s routes; the airline retains the right to perform the principal maintenance on the aircraft; which principal maintenance is conducted outside of Cuba, North Korea and Syria, under nationals who are not nationals of the these countries. Minimum necessary in-transit maintenance may be performed in any country including the above-mentioned three countries; spare parts for the Boeing or Airbus aircraft must not be located in Cuba, Syria, and North Korea; the registration of the aircraft must not be changed to North Korea, Syria or Cuba; no technology relating to U.S.-origin aircraft or U.S.-origin aircraft parts and components may be transferred or conveyed to a national of Cuba, North Korea or Syria, except the minimum necessary for in transit maintenance to perform flight line servicing required to depart safely; -6-
the aircraft must not bear the livery, colors or logos of a national of Cuba, North Korea, or Syria; the aircraft must not fly under a flight number issued to a national of Cuba, North Korea, or Syria; Many non-u.s. airlines operating U.S.-origin aircraft as well as Airbus aircraft have for years operated to Iran, where the sojourner exception is inapplicable. For example, KLM, Lufthansa, Emirates and Kuwait Airways have scheduled flights to Iran. To date, however, the U.S. Government has not made any attempt to bring enforcement actions against those airlines which operate to Iran, probably for political reasons. In effect, the U.S. officials have impliedly applied the sojourner exception to Iran. Because operations by non-u.s. airlines to Iran have been longstanding, the U.S. will not likely take enforcement steps against these airlines without some warning. This is not to say that smaller operators which operate into and out of Iran, scheduled or charter, by wet lease or in their own name, are not exposed to enforcement action by the U.S. Government. Conclusion The Effect on the Airlines As a preliminary matter, leaving aside any political justification for sanctions, these sanctions endanger the safety of passengers traveling to targeted countries on the homeland airlines of Iran, Cuba, Syria and Sudan. Many of these homeland airlines operate Boeing and Airbus aircraft. The need to be able to obtain OEM parts (including U.S. origin parts) to maintain a safe operation is fairly obvious. Attached is an article published in Airline Business in 2006 which addresses this concern. (See attachment). This sanctions policy, in addition to -7-
violating the Chicago Convention, strikes at the heart of the aviation industry s almost obsessive dedication to safety. Efforts to effect a change in U.S. sanctions policy in the interest of air safety through ICAO in 2006-2007 failed. Proposals were indefinitely tabled. Airline (as purchasers) and manufacturers have been adversely affected by these sanctions. Iran Air had to forego orders for Boeing aircraft and instead bought Fokker aircraft in the 1990s. Today, many U.S. origin aircraft in Iran are grounded because of the airline s inability to get genuine U.S. origin parts for their Boeing and Airbus aircraft. These airlines have turned to foreign made aircraft from Russia and other countries. Many writers regard these sanctions are unlawful and ultra vires because they control reexports and are essentially extraterritorial. Nevertheless, airlines remarketing and selling aircraft and parts, aircraft leasing companies, shippers of aircraft parts abroad and anyone dealing with the sale or transfer of aircraft equipment must consider the application of these sanctions to any sale, and whether or not there is a genuine suspicion that the U.S. origin equipment will be reexported to a sanctioned country. Some protection is afforded by contract language in which the purchaser agrees not to resell the equipment to persons. Sellers of such equipment must also be aware that violation of the sanctions may occur by mere facilitation, a concept unclear in its application. In conclusion, airlines and other sellers and lessors of aircraft and parts should consult counsel familiar with these issues and at the very least (U.S. or foreign) should provide in their term sheets that the purchaser or lessee attest that the transaction will not violate the sanctions and that any liability or penalty for such violation will be passed to the purchaser or lessee by indemnity or otherwise. II. -8-
The Effects of U.S. Economic Sanctions on Insurance Business in the United States and Abroad Introduction U.S. and foreign based insurers, brokers and insureds may also be at risk because of these trade sanctions imposed by the United States Government. The U.S. Government currently maintains sanctions against a number of countries, as mentioned above, including Cuba, North Korean, Iran, Sudan and Syria. These trade sanctions generally prohibit U.S. companies and U.S. persons from entering into financial transactions with firms and persons in these targeted countries and includes insurance transactions. The sanctions regulations for each targeted country are broadly drafted and often fail to provide clear guidelines on some issues. They are also highly technical and complicated and vary among the different targeted countries. In other words, an insurance transaction may be permissible as applied to an insured in Sudan, but illegal if it involves an insured in Iran. On April 29, 2004, OFAC issued its latest advisory regarding the application of U.S. sanctions to the insurance industry. It is attached. This paper outlines the basic legal provisions of the sanctions program as they may affect underwriters and brokers of insurance, and offers a few illustrations of fairly common insurance transactions which might violate the U.S. sanctions. Finally, this paper lists a number of "signals" to insurers and brokers that U.S. sanctions may apply to a contemplated transaction, warranting further inquiry. -9-
Scope of the U.S. Sanctions The U.S. sanctions policy extends beyond the borders of the targeted countries described above. They extend to specifically listed foreign agents, reputed or known terrorists or terrorist organizations, and narcotic traffickers, nationals of certain targeted countries, and to entities identified as front organizations for a listed person, organization or targeted government, no matter where they are located. These persons and organizations are designated as Specially Designated Nationals and Blocked Persons (SDN). 2 On the SDN list (which changes frequently), there are over 5,000 names of individuals, governmental entities and companies located around the world. Persons covered by the U.S. sanctions, except as specifically authorized by OFAC or the sanctions regulations, cannot do business or facilitate business, with any person or entity on the SDN list or in the targeted countries. The Broad Enforcement Jurisdiction To dispel the notion that insurers and brokers based abroad, and foreign-based insurance transactions, cannot be subject to the U.S. sanctions laws, it is worthwhile to review the law which defines the "persons" and the "property" which come within the scope of the U.S. sanctions. The U.S. sanctions apply to property subject to the jurisdiction of the United States ; persons subject to the jurisdiction of the United States and persons within the United States. See e.g., 15 CFR 500.313,329, 330. If an insurance transaction involves both an insured in a targeted country or listed as an SDN, and a person or property subject to the jurisdiction of the -10-
United States, the transaction may violate U.S. sanctions laws. Property which is subject to the jurisdiction of the United States generally includes property physically located in the U.S. See e.g. 15 CFR 515.311. It includes tangibles and intangibles. It includes money, contracts, accounts, securities and insurance policies, as well as goods and services. The United States also has jurisdiction to block any payment which cannot be made without a license issued by OFAC. Property subject to the jurisdiction of the United States can also include property outside of the United States which, in the case of securities, was issued in the U.S., and, in the case of goods, was made in whole or in part in the United States. See e.g. 15 CFR 515.313 and 560.205. (See exception in 31 U.S.C. 560.414). The term person subject to the jurisdiction of the United States includes any individual, natural person wherever located who is a citizen, permanent resident alien or, in some cases, a resident of the United States. It includes any corporation organized and established or chartered in the United States and its foreign branches. E.g. 15 CFR 500.329. In the case of Cuba, it also includes foreign subsidiaries of U.S. companies. Id.; 15 CFR 515.329. For example, a U.S. corporation which is a broker at Lloyds, which sells insurance abroad or is a U.S. "name" is a person subject to the jurisdiction of the U.S. A person within the United States is also covered to the extent he is actually within the United States. E.g. 15 CFR 500.330. A person includes an individual, partnership, association, corporation or other organization. E.g. 15 CFR 500.308. Because that term is not limited to U.S. citizens and U.S. corporations, the sanctions laws also reach U.S. branches and U.S. subsidiaries of foreign companies, as well as foreign nationals residing or temporarily 2 This SDN list is published on the Internet at http://www.treas.gov/ofac/. -11-
within the U.S. The sanctions reach the U.S. offices of foreign insurers and underwriters which are involved in a sanctioned transaction. Examples of Prohibited Transactions For insurers and brokers within the scope of the sanctions, there are some basic prohibited insurance transactions with persons or firms in targeted countries or on the SDN list. These include such routine insurance transactions such as the issuance of a policy, receipt of insurance premiums, administering the policy, receipt of policy loan interest payments, repayment of loans and the payment of claims to insureds. Illustrative of prohibited activities or transactions by a person subject to the jurisdiction of the United States, as defined above, would include: Brokering, insuring or reinsuring a hull or aviation liability policy which names as an additional insured an entity on the SDN list, such as a bank in Iran which holds a mortgage or security interest in the covered aircraft. Payment of a passenger claim to a citizen of Cuba under an aviation liability insurance policy. Brokering, insuring or reinsuring an aviation liability policy which covers an airline's scheduled stops in Cuba, or Sudan. 3 15 CFR 515.415; 15 CFR 575.208; 15 CFR 550.203; 15 CFR 538.209. Brokering, insuring or reinsuring a property insurance policy written for an international hotel chain which covers hotels in Tehran, Iran. 3 It is the position of OFAC that these activities are prohibited by U.S. sanctions laws and regulations. The author disagrees that merely issuing, brokering or administering a liability policy to an airline or other Insured based in a non-targeted country will violate the sanctions laws and regulations because it covers commercial activities or scheduled stops in targeted countries. The author recognizes, however, that actual payment of claims by a U.S. insurer or reinsurer to persons in the targeted countries would be a violation. -12-
Brokering, insuring or reinsuring an aviation liability or hull policy covering insureds located in certain targeted countries. The sanctions also extend to the payment of passenger and cargo claims by persons "subject to the jurisdiction of the United States" to nationals of some of the targeted countries. For example, an American reinsurer might have reinsured a passenger liability policy covering a British carrier. If an Iran national was injured by falling baggage on board the British carrier s flight between points in Europe, the U.S. sanctions require, with certain exceptions, that the American reinsurer's share of the loss be paid into a blocked account. Any person having an interest in the claim could request a waiver from OFAC in the form of a specific license which would authorize payment of the claim. Because the sanctions apply to United States citizens wherever they are located, a United States citizen employee of a foreign insurer cannot by law be involved in a transaction prohibited by the sanctions regulations. For example, a United States citizen working as an insurance broker at Lloyds is prohibited under the Iran sanctions regulations from brokering a policy to Iran Air. A U.S. corporation (prohibited by the sanctions laws from involvement in a transaction) cannot refer the business to its overseas branch as the branch remains subject to the jurisdiction of the U.S. In the case of Cuba, the business cannot be referred to foreign subsidiaries of U.S. corporations because foreign subsidiaries of U.S. corporations are equally subject to the Cuban sanctions. Under the Iran sanctions program, a U.S. corporation cannot refer prohibited business to its foreign subsidiary as such a referral will be considered facilitation of a transaction which would be prohibited if performed by a U.S. person. Likewise, a U.S. subsidiary of a foreign parent cannot refer the prohibited business to its foreign parent. United States citizens who serve as directors and officers of foreign insurers are also at -13-
risk, if they participate in the foreign insurers provision of coverage or the payment of a claim that is otherwise prohibited by the sanctions. Guidelines for Compliance and Avoiding Potential Problems OFAC advises that affected U.S. persons should decline business where the trade and economic sanctions would be violated or insert geographic exclusions of coverage and/or exclusions of coverage for activities which would violate the sanctions. Obviously, the sanctions, as applied to insurance, are designed to withdraw insurance capacity from insureds in, or providing services and goods, to targeted countries or to persons on the SDN list. OFAC also wants insurers and brokers to monitor their insurance business for possible violations by appointing a Compliance Officer and conducting compliance training. Given the complexity of the regulations and the nature of the insurance business, monitoring compliance is a very difficult task indeed. Nevertheless, awareness-that the U.S. economic sanctions might impact a firm s insurance business-is an important first step. While the maze of U.S. sanctions is forbidding, the following basic guidelines should prove helpful in signaling the fact that certain insurance business may be subject to U.S. sanctions law, directly or indirectly, and therefore, warrant further scrutiny: 1. Determine if the Insured appears on the SDN list. 2. Determine if the Insured is located in. or a national of, any of the targeted countries: Cuba. Iran, Sudan or Syria. 3. Determine whether the passenger, cargo or other claim to be paid is due to be paid to a person or entity who is a citizen of, or located in, a targeted country or appears on the -14-
SDN list. 4. Determine if any property or commercial activity (or operations) of the Insured is performed or located in the targeted countries. 5. Determine whether the Insured, regardless of its location, is controlled from a targeted country. 6. Determine if the policy to be issued for any Insured covers imports or exports of goods or covers services to or from, and commercial activity in, a targeted country. 7. Determine if the policy covers shipments (anywhere) of goods made in, exported from, or destined to, a targeted country. 8. Determine whether the policy covers vessels, aircraft or other vehicle which are used in providing transportation service to and from a targeted country. If a transaction falls within one of these categories, it might nevertheless be permissible to conclude the transaction without seeking a license. The items on this list are only signals, suggesting further investigation. The regulations themselves need to be consulted to determine whether a particular transaction is permissible. If the transaction is not permissible without a license, an affected party can apply for a license from OFAC. However, it should be said that OFAC has not been liberal in granting licenses and, unless it is politically expedient, OFAC generally does not act quickly on license applications. In most cases, because brokers and underwriters must make decisions quickly, seeking a license for a specific transaction is not a practical alternative. New Developments on Sanctions Affecting Airlines -15-
In 2010, Congress enacted the Comprehensive Iran Sanctions, Accountability and Divestment Act, (Publ. L. 111-195) covering foreign financial institutions which include bank clearing corporations. The pertinent section prohibits such foreign financial institutions from performing a number of activities described in 31 C.F.R. 561.201(a)(1) through (5) including 561. 201(a)(5) which prohibits such institutions from facilitating a significant transaction or transactions... for (i) Iran s Islamic Revolutionary Guard Corps or any of its agents or affiliates where property or interests were blocked, including those on the SDN list. U.S. domestic financial institutions are the prohibited from dealing with a foreign financial institution which has violated 561.201(a)(1) through (a)(5). In July 2011, OFAC and the Department of State designated Iran as a SDN, alleging that Iran Air provided material support and services to the Revolutionary Guards and facilitated the transport of persons and material associated with Iran s nuclear programs. Because IATA has in its Bank Settlement Plan both foreign and U.S. Banks which clear payments for ticket purchases, IATA suspended Iran Air from participation in the Bank Settlement Plan because of its designation as an SDN. Whether Iran Air will challenge the designation by the U.S. Government and whether IATA has any alternative course to support its valued member airline is uncertain at this point, but suspension from the IATA Bank Settlement Plan is a devastating financial reversal for any airline. It seems clear that OFAC and the U.S. Government are reaching into financial transactions of persons in targeted countries, through its broad definition of both U.S. financial institutions and foreign financial institutions. -16-
Thus a U.S. insurance company 4 may not be able to deal with a foreign financial institution which has violated the activities in 561.201(a)(1) to (a)(5). Conclusion These Sanctions Regulations are very complex and complicated, and in many areas, such as facilitation, they are vague. Asking OFAC for an interpretation of a vague provision usually results in an opinion of denial. Going forward is risky, even if OFAC is not consulted. Insurers and airlines must be wary of violating these sanctions where the penalties are severe. Obtaining the advice of counsel in these technical areas is prudent. At the very least, a firm shares the risk of error with counsel. Recently law firms have been sanctioned with heavy fines for wrong opinions. January 12, 2012 Thomas J. Whalen Eckert Seamans Cherin & Mellott 1717 Pennsylvania Avenue, NW Suite 1200 Washington, DC 20006 Tel: 202-659-6600 Fax: 202-659-6699 E-mail: twhalen@eckertseamans.com N0082233 4 It should be noted that unlike foreign financial institutions, U.S. financial institutions does not include in their definition insurance companies. Nevertheless U.S. insurers need to be wary of dealing with foreign financial institutions which have violated this act. -17-