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Sanctions Screening and Responsibilities of Insurance Brokers

14th April 2022

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What Sanctions Screening Requires of UK Insurance Brokers

Regardless of their role in an insurance deal, brokers must verify that their potential clients and trading partners aren’t barred from entering insurance transactions. However, carrying out these checks can be a challenging task. What is the impact of the task and responsibilities brokers have and how can they manage risks?

Types of conduct that trigger international sanctions, including money laundering and terrorist financing
WHAT IS A SANCTION?

Sanctions are penalties imposed on a country, its authorities, or individual residents as a form of punishment or to offer disincentives for specific policies and acts, including:

  • Breaking international law
  • Money laundering
  • Terrorist financing
  • Drug trafficking
  • Human rights violation
  • International contract violation
  • Weapon proliferation

Travel bans and export restrictions, as well as trade embargos and asset seizures, are examples of economic sanctions. Such sanctions, by definition, apply to those who are not easily prosecuted by the sanctioning state.

Sanctions responsibilities cannot be delegated to others just because brokers are neither risk carriers nor insurance buyers.

In fact, the role brokers carry out as intermediaries in a complex and everchanging marketplace makes them especially susceptible for targeting by criminals and unwittingly facilitating transactions with sanctioned entities and individuals.

The war in Ukraine has brought sanctions to the wider public attention. The US, EU and UK have together sanctioned over 1,000 Russian individuals and businesses.

The fact remains however, that the necessity for brokers to have in place robust systems and processes for compliance is not a new thing, cannot be ignored and must form part of all brokers overall governance controls.

Regardless of their role in an insurance deal, brokers must verify that their potential clients and trading partners aren’t barred from entering insurance transactions.

However, carrying out these checks can be a challenging task. What is the impact of the task and responsibilities brokers have and how can they manage risks?

How sanctions screening works against government-issued sanctions lists
SANCTIONS SCREENING

Sanctions screening is a technique financial institutions employ to detect, prevent, and manage sanction risks. It involves screening individuals or organisations against sanction lists, a compilation of individual sanctions that have been applied to individuals, countries, groups or companies under international and domestic sanction regimes. Government agencies or bodies issue the lists, including regulators or police and also set the legal requirements for screening.

All UK legal entities established under UK law, including their branches, must comply with UK financial sanctions that are in force, irrespective of where their activities take place.

In addition to the aforementioned legal obligations, insurance brokers in the UK are required by regulation to put in place adequate systems and controls to manage the risks of financial crime, including ensuring compliance with the UK’s financial sanctions regime.

Failure to do so may result in regulatory action by the Financial Conduct Authority against the firm and its senior management. As a result of the Senior Managers and Certification Regime, the liability of senior management for system and control failures should be particularly concerning to brokers.

Common misconceptions UK insurance brokers hold about who needs screening
MISCONCEPTIONS ABOUT SCREENING

Brokers should not make assumptions about screening new and existing customers and trading partners. Short term deals, wholesaled business and/or introductions that arrive via other regulated firms are not reasons for brokers to avoid screening.

Whilst insurance distribution chains can be complex and involve many outsourced roles, brokers must remember that they cannot outsource their legal and regulatory responsibilities.

Screening is not just about customers. It is important that screening and ongoing surveillance is maintained across all counterparties through which a transaction could contravene a sanction. This includes suppliers, markets, TPAs and producers.

Identifying ultimate beneficial owners as part of broker due diligence
ULTIMATE BENEFICIAL OWNERS

As part of a screening process that mitigates risk and improves money laundering prevention, brokers must establish who is ultimately controlling and benefiting from the business relationship.

Identifying and screening the UBO is critical and if transparency cannot be achieved the opportunity should be turned away.

Manual alert review and false positive clearance workloads facing brokers
CHALLENGES FOR BROKERS

Sanctions and AML compliance demand quick and proactive adaption of processes to stay ahead of an increasingly steepening curve.

Whilst many screening processes are now automated, firms still face increasing volumes of highly manual tasks, such as reviewing and clearing alerts and false positives.

It is these inefficient manual processes that result in inaccurate results. Firms should integrate automated solutions into their current IT infrastructure to address these inefficiencies.

Frequently Asked Questions

Can an insurance broker outsource sanctions screening to another regulated firm?

No. Legal and regulatory responsibility stays with the broker even where the screening work itself is outsourced or the business arrives via another regulated firm. Wholesaled business, short-term deals and introductions are not reasons to skip screening. The FCA can take action against the firm and its senior management under the Senior Managers and Certification Regime.

Who does a broker need to screen, beyond customers?

Screening must cover every counterparty through which a transaction could breach a sanction. That includes suppliers, markets, third-party administrators and producers, not just the insured. It also means identifying and screening ultimate beneficial owners, so you know who actually controls and benefits from the relationship.

What is a PEP, and how does it differ from a sanctions match?

A politically exposed person holds or has held a prominent public function, or is a close associate or family member of someone who has. A PEP is not prohibited from transacting; the designation requires enhanced due diligence and ongoing monitoring. A sanctions match is different, it is a prohibition, and the relationship cannot proceed.

Why do automated screening tools still create so much manual work?

Most screening now runs automatically, but the volume of alerts it produces does not. Teams spend their time reviewing and clearing false positives, which is where inaccuracy creeps in. The gain comes from integrating screening with verified counterparty data so the system has enough context to reduce false matches, rather than from screening more often.

How often should a broker re-screen an existing counterparty?

Periodic checks are no longer sufficient. Sanctions listings, FCA permissions and beneficial ownership all change without notice, so screening needs to be continuous with alerts when something material changes. Fixed annual reviews leave a gap between the change and the point at which you find out about it.

This article was published by:

Article author:

Paul Tasker, CEO of REG Technologies
Paul Tasker

Former Chief Executive Officer

Paul Tasker was the former CEO at REG Technologies. An insurance market veteran Paul is passionate about disruptive technologies and innovations that can drive growth, reduce risk and enable businesses to thrive.

View LinkedIn profile

020 3946 2880

info@reg.uk.com

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