Originally published in The D&O Diary by Kevin M. LaCroix.
As part of its conduct of foreign affairs and of its national security program, the US government has instituted a series of economic and trade sanctions against a number of countries and a long list of designated individuals. The various sanctions programs are administered by the Office of Foreign Asset Control within the US Department of Treasury. The sanctions programs OFAC administers include broad trade embargoes of Iran, North Korea, Sudan, Syria, Crimea and Cuba.
As part of its enforcement power, OFAC has authority to file civil liability actions. In collaboration with the US Department of Justice, OFAC can also pursue criminal actions. OFAC’s exercise of its enforcement authority has recently resulted in a number of high profile penalties and settlements. These settlements have a number of significant implications, and, among other things, may raise concerns about the possibility of D&O insurance coverage for the companies involved.
Since 2008, OFAC has filed nearly 250 civil enforcement actions that have resulted in penalties or settlements. The aggregate amount of the enforcement action penalties and settlements during that period is over $3.8 billion. In 2014, the agency’s enforcement actions resulted in penalties and settlements of over $1.2 billion, the agency’s highest annual total.
Two recent enforcement actions illustrate the nature and scope of the government’s sanctions enforcement efforts.
On March 25, 2015, the US Department of Justice announced that a subsidiary of Schlumberger Ltd. had entered a guilty plea and agreed to pay a $232.7 million penalty for conspiring to violate sanction programs by “willfully facilitating transactions and engaging in trade with Iran and Sudan.” Under the plea agreement, the subsidiary agreed to submit to a three-year probationary period during which it would agree to various types of government supervision. The DoJ’s March 25, 2015, press release can be found here.
The $232.7 penalty includes a $77.5 million criminal forfeiture and a $155 million criminal fine. According to a March 26, 2015, FCPA Blog post (here), the fine is the largest ever criminal fine in connection with a prosecution under the International Emergency Economic Powers Act.
In the Schlumberger action, the government alleged that between 2004 and 2010, a business unit of the subsidiary provided oilfield services to customers in Iran and Sudan. The government also alleged that while the subsidiary had policies and procedures to ensure that it did not violate US sanctions, it failed to train its personnel to ensure that they complied with the sanctions requirements. As a result, the company approved capital expenditure requests from Iran and Sudan, made business decisions specifically concerning Iran and Sudan, and provided technical service and expertise in connection with drilling projects in Iran and Sudan.
In a separate sanctions-related enforcement action, on March 25, 2015, OFAC announced that PayPal, Inc. had agreed to pay the agency $7.65 million settle the company’s potential civil liability for processing 486 transactions totaling $43,934 in alleged violation of US sanctions programs. Specifically, the company was alleged to have mailed to ensure that its payment processing operations blocked prohibited transactions with sanctioned countries (including Iran, Sudan, Cuba) and sanction-designated individuals. The company was also alleged to have processed 136 transactions for a PayPal account registered to Kursad Zafar Cire, an individual designated under a sanction program relating to “Weapons of Mass Destruction Proliferators and Their Supporters.” The agency’s March 25, 2015, press release regarding the PayPal settlement can be found here. The FCPA Blog’s March 27, 2015, post about the settlement can be found here.
The types of fines and penalties entered in these sanctions enforcement actions would not be covered by D&O insurance, as the typical D&O insurance policy definition of Loss covered under the policy expressly provides that Loss does not include fines, penalties and matters deemed uninsurable under applicable law.
However, as discussed in a May 8, 2015, post on the Orrick law firm’s Policyholder Insider blog (here), there may be coverage for the costs incurred in connection with the investigation that precedes the settlement or penalty. As the blog post puts it, “companies forced to incur costs responding to and defending against these investigations should closely inspect their D&O policies to determine whether they provide coverage.”
Depending on the specific nature of the sanctions enforcement investigation involved, the government’s investigation may constitute a “Claim” triggering the policy’s coverage. However, it should be noted that public company D&O insurance policies provide entity or company coverage only for “Securities Claims.” In most circumstances, a sanctions violation investigation or enforcement action would not meet the policy’s definition of a Securities Claim. Many carriers would like take the position that because a sanctions violation investigation or enforcement action does not meet the definition of a “Securities Claim,” there is no coverage under the policy’s entity coverage for the investigation or enforcement action.
As the blog post also notes, even if there is no formal proceeding and no subpoenas have been issued the “Pre-Claim Inquiry” costs coverage found in many more up-to-date D&O insurance policies these days could be triggered. This policy feature provides coverage for costs associated with interviews and responses to document requests from an “Enforcement Body,” as defined in the policy. The scope of the coverage available will of course depend both on the nature of the governmental inquiries and the specific policy wording involved. However, it should be noted that this coverage is typically available only to Insured Persons–that is, individual directors and officers. It is typically not available to the corporate entity itself.
Because there may be possibilities to find at least some coverage under the D&O insurance policy, the law firm blog post suggests, “policyholders should not assume that simply because the fines imposed for failure to adhere to economic sanctions would not be covered, other associated costs incurred by the company in connection with the OFAC investigations also are not.” As the blog post concludes, it always pays to think carefully about coverage and to read the policy carefully.
In addition to possible coverage for sanction-related investigative costs, the D&O insurance could also become relevant in the event of a follow-on civil lawsuit asserting claims against company officials in connection with a sanctions investigation and penalty. As noted in an earlier post (here), there are examples of shareholders filing derivative lawsuits against company officials after the company has paid a sanctions-related penalty or settlement. The earlier post described a shareholder derivative lawsuit filed against the board of J.P. Morgan Chase after the company reached an $88.3 million settlement with OFAC. The company’s D&O insurance could be called upon to fund the defense of a claim of this type. In addition, the D&O insurance potentially could fund a settlement of the lawsuit as well, although, as I noted in my earlier post, there are some potentially interesting questions about the possibility of insurance funding the settlement of this this type of claim.
Kevin M. LaCroix is an attorney and executive vice president, RT ProExec, a division of R-T Specialty. RT ProExec is an insurance intermediary focused exclusively on management liability issues.
Kevin has been involved in directors’ and officers’ liability insurance for nearly 30 years. He began his career as a coverage attorney and partner at the Washington, D.C law firm of Ross, Dixon and Bell. More recently, Kevin served as President of Genesis Professional Liability Managers, a D&O underwriter and part of the Berkshire Hathaway group of companies.
