Lloyd's of London has launched an investigation into potential breaches of international sanctions by members of its insurance market.Investigators at Lloyd's are reviewing the controls used by the market's members to prevent them breaking sanctions with countries such as Iran and North Korea, as regulators become more concerned about potential breaches at some firms.
The review began two months ago with a final report due next year, in what is understood to be the first study by Lloyd's into the issue of sanctions busting that some experts believe could prove to be the insurance industry's "Achilles' heel".
Regulators in the US are understood to be concerned that insurers could be either deliberately or inadvertently providing services to businesses and individuals either directly or indirectly linked to countries that are currently the subject of international sanctions.
About 50 firms make up the so-called "managing agents" that are the backbone of the Lloyd's market.
These firms ensure that all the risks they underwrite are compliant with sanction rules, however, under pressure to find new sources of revenues amid the economic slowdown, increased concerns have been raised over some of the risks they have taken on.
"The Financial Conduct Authority [Britain's market regulator] has continuously imposed large fines on the banks for anti-money laundering (AML) systematic failures," said Richard Berger, a partner at law firm RPC.
"Whereas AML does not feature so heavily on the anti-financial crime agenda for insurers, failure to mitigate the risk posed by trade and financial sanctions, could be insurers' Achilles' heel," he continued.
Many Lloyd's members have no US-based business and the market is ultimately regulated by the FCA and the Treasury. However, it is thought that American regulators could attempt to bring action against firms that are either owned by a US parent group or have American investors, or those with US operations.
For instance, US financial group Travelers operates its own Lloyd's underwriting syndicate and is a managing agent on the market, while many other members have American investors.
Lloyd's review is being conducted by its own regulatory affairs team led by senior market manager Andy Wragg.
Mr Wragg's team is due to complete its report next year, the findings of which are likely to be passed on to the FCA and the Treasury if it finds grounds for further investigation of potential sanctions breaches.
The review is not targeting any individual firm and is understood to have followed an earlier survey by Lloyd's of its managing agents that raised questions about the robustness of current antisanctions-busting processes.
The insurance industry has largely avoided the scandals that have beset banks since the financial crisis, particularly given that most insurers emerged from the crash largely unscathed and without the need for government bail-outs.
However, in light of the increased crackdown on sanctions breaches by major banks, the focus is now shifting towards insurers.
Last year, Standard Chartered was hit with fines totalling 415m by US regulators over its breaches of sanctions with countries including Iran, Libya and Sudan.
Barclays, Lloyds Banking Group and Royal Bank of Scotland have also faced their own fines over sanctions breaches in recent years, while HSBC was hit with a record $1.9bn (1.2bn) fine in December after the US authorities accused Britain's largest bank of processing transactions for terrorist groups and rogue states.
A spokesman for Lloyd's said: "Reviewing all aspects of managing agents' performance is part of the day-to-day role of overseeing the Lloyd's market.
"This includes conforming with all applicable international sanctions, which we have always done," he continued.