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: [email protected]
January 12, 2012
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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
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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.
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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 re-
exported, 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
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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”
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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;
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• 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
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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.
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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.
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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
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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/.
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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.
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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
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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
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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
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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.
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Thus a U.S. insurance company4 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: [email protected]
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.