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Underwriting Proliferation: Sanctions Evasion, Proliferation Finance and the Insurance IndustryEmil Dall and Tom Keatinge
Occasional Papers, 9 July 2018
Centre for Financial Crime and Security Studies, Counter-Proliferation Finance, United Nations, North Korea, Proliferation and Nuclear Policy, Sanctions, Proliferation and Nuclear Policy
Securing insurance is key to North Korea’s ability to move sanctioned or restricted goods around the world. Recent high-profile cases of vessels involved in ship-to-ship transfers of diesel and crude oil to North Korean tankers, in violation of UN Security Council resolutions, highlight the importance of insurance coverage in facilitating these operations. The US Department of State, the UN and the Financial Action Task Force, the global standard-setter on government responses to financial crime, have all highlighted the role of insurance in implementing sanctions against North Korea.
As London is the home of global maritime insurance, it is increasingly expected to play a prominent role in global sanctions implementation and in the disruption of North Korea’s illicit commercial networks and activities. This paper argues that just as banks have begun to enhance scrutiny to anticipate the vulnerabilities of both their activities and their clients to abuse for proliferation purposes, so too should similar assessments feature on the financial crime and compliance agendas of insurers, brokers and their regulators. As sanctions requirements against North Korea are expanded to include new forms of restrictions, implementation requirements must also expand to new industries that are key to enforcing these restrictions.
However, this paper finds that the (re)insurance sector is currently hindered from fulfilling this role, due to three issues:
- First, the paper finds that while the industry has experience in countering other types of financial crime risk, such as money laundering, terrorist financing, fraud and corruption, there is less evident industry-wide understanding of how to effectively counter proliferation-related activity. This is mostly due to a lack of relevant government guidance and outreach to the insurance sector, which has left insurers with a false sense of security that proliferation finance transgressions do not affect their industry.
- Second, the paper finds that the unique structures of the insurance industry – such as the division of labour between brokers and insurers – mean that there is a heavy reliance on clients’ information being passed down from other parties, rather than compliance officers interacting directly with clients themselves. This limits the level of insight into the risk, and as a result, the ability to conduct further analysis into specific clients or due diligence concerns that may present a proliferation finance threat. While this paper finds stark regional differences in awareness and approaches, it is also true that London’s dominance in marine insurance and the open sharing of information within the Lloyd’s of London market offers the industry unique tools and opportunities to collaborate on efforts to counter North Korean sanctions evasion.
- Third, current responses are primarily focused on identifying designated entities and individuals, or voiding contracts retrospectively where sanctions exclusion clauses are triggered. However, as insurance acts as a key enabler of the movement of goods and materials, this paper proposes a more proactive approach by (re)insurers to identify and exclude the underlying entities involved and their activities. Such an increase in effort will require support from governments in the form of offering guidance and information. It will also require greater engagement in due diligence by the supply chain that is supported by the provision of insurance, such as the transport sector. This paper finds, however, that the work undertaken in these related sectors is not sufficiently robust to prevent proliferation-linked activities, thus providing limited comfort to the supporting (re)insurers.
BANNER IMAGE: The Lloyd's of London headquarters in central London, the world's centre point for insurance. Courtesy of Wikimedia.