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Article | FI Observer

A Directors & Officers (D&O) insurance primer

For senior executives and anti-money laundering officers

Financial, Executive and Professional Risks (FINEX)
N/A

By Susan Finbow and John M. Orr | January 12, 2021

What are the personal liabilities for Directors and Officers in financial institutions? And how can these risks be mitigated?

Regulatory expectations for individuals in key functional roles are constantly evolving, and with an increasing volume of global transactions and creative money laundering schemes, the personal liability consequences for non-compliance can be concerning to senior executives and the individuals responsible for implementing and maintaining the financial institution’s anti-money laundering (AML) program. We explore how D&O insurance may provide a valuable back-stop to personal liabilities arising from regulatory risk.

In the decade following the financial crisis of 2008-2009, total fines and penalties paid by the global banking industry to prudential regulators for conduct-related matters is estimated at USD$350 billion to USD$470 billion1. Accountability regimes, intended to drive desirable conduct and culture within financial institutions, have been instituted around the world and, depending on the jurisdiction, may hold the institution and executives in key functional roles accountable for their decisions and oversight.

The scope of these accountability regimes varies by country, however, with regard to the applicable AML and counter-terrorism financing (CTF) laws, there may be fines, penalties or pecuniary sanctions (civil and/or criminal) levied against the institution and the individuals responsible for oversight of the transaction monitoring framework.

In the case of a former Chief Operational Risk Officer at a U.S. bank, on March 4 2020, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) announced its assessment of a civil monetary penalty against the banking executive totaling $450,000 because the executive failed to prevent violations of the Bank Secrecy Act (“BSA”) and failed to ensure the bank's compliance division was appropriately staffed to meet its compliance obligations2. Similarly in 2018 the Financial Conduct Authority (FCA) published a decision notice on the CEO of a UK Authorized Bank for failings in relation to AML systems and controls, imposing a personal fine of £76,4003.

The guidance from the FCA could not be more clear:

“We expect senior management to take clear responsibility for managing financial crime risks, which should be treated in the same manner as any other risks faced by the business. They should evidence that senior management are actively engaged in the firm’s approach to addressing risk”4.

Coverage for civil fines or penalties may be available on a case-by-case basis in some jurisdictions.

D&O policies can provide an important financial back-stop for individual insured persons, however, the policy should be specifically structured to contemplate the exposure. For instance, fines and penalties are not typically covered under a D&O policy, however, in the context of an individual’s (good faith) failure to comply with applicable anti-money laundering laws, coverage for civil fines or penalties may be available on a case-by-case basis in some jurisdictions. Whilst in the UK the FCA expressly prohibits insurance against fines in other jurisdictions it may be permissible5. However, it is important to highlight that D&O insurers have only been willing to consider this extension of coverage when indemnification by the insured organization is not possible.

Frequently asked questions

The following FAQ may be helpful for financial institution executives and individuals in key functional roles including those responsible for implementing and maintaining adequate AML programs:

Is there an insurance policy available that provides coverage for individuals and executives responsible for carrying out key compliance and anti-money laundering functions within financial institutions?

A D&O insurance policy provides legal liability protection for individual directors and officers of an insured organization. If the organization’s indemnification is not available to them, and this can be due to insolvency or legal prohibition, coverage applies under what is commonly referred to as Side A D&O coverage.

Who is covered under a D&O insurance policy?

The definition of an insured person under a D&O policy can vary by insurer, however, it typically includes duly elected or appointed directors and officers, and may extend to include employees of the insured organization. On a case-by-case basis, coverage can be specifically negotiated to include others in key positions, such as the organization’s compliance officers and money laundering reporting officers in each jurisdiction.

Does the policy cover fines and penalties for individual insured persons?

The scope of coverage for each policy can vary significantly, however, most D&O policies do not contemplate coverage for fines and penalties. Nevertheless, in the context of an individual’s failure (in good faith) to comply with applicable anti-money laundering reporting obligations that can trigger a civil fine or penalty, coverage may be negotiated on a case-by-case and risk-specific basis to include coverage (where insurable) subject to an applicable sublimit negotiated with the insurer. Criminal fines and penalties for deliberate or egregious acts (including aiding and abetting) would not be contemplated for coverage under a D&O policy.

What conditions must be met for coverage to apply?

Policies will vary, sometimes significantly by jurisdiction, however, in some instances where the policy covers civil fines and penalties, the insured person must have acted honestly and in good faith with a view to the best interests of the organization. Other policies may provide such coverage where the fine or penalty is predicated on unintentional conduct. We encourage individuals to review their organization’s policy for conditions specific to them.

Are there any exclusions that may apply?

There are certain exclusions that could negate coverage under a D&O policy. However, solely in respect of an individual insured person, there are conduct exclusions that, when proven, could negate coverage. Examples include deliberately criminal or deliberately fraudulent acts, and any personal profit or financial advantage gained to which the individual insured person was not legally entitled.

Will a D&O insurer provide defense costs if the allegations made against the individual insured person may lead to a fine or penalty being imposed?

Generally, D&O insurers cover defense costs arising from allegations that could lead to a fine, penalty or pecuniary sanction being imposed on an individual insured person, but if a criminal finding is reached, then such defense costs may become repayable by the individual insured person to the D&O insurer.

What is the limit of liability available for civil fines or penalties under a D&O policy?

The limit of liability purchased varies greatly from one organization to another, however, in many jurisdictions, coverage for civil fines and penalties may be limited to a modest amount.

Is there a deductible applicable to the coverage provided to an individual insured person?

No, there is not typically a deductible applicable to the Side A coverage that applies to individual insured persons covered under a D&O policy.

It is recommended that organizations talk to their brokers and understand the breadth, scope and limitations of coverage afforded under their D&O policies. At Willis Towers Watson, we can assist organizations in navigating through the expectations of the regulators and how insurance can play its part in providing the appropriate level of protection for senior executives and anti-money laundering officers.

Footnotes

1 Banking Conduct and Culture: A Permanent Mindset Change, Group of Thirty, Page 3, November 2018

2 https://www.fincen.gov/index.php/news/news-releases/fincen-penalizes-us-bank-official-corporate-anti-money-laundering-failures

3 https://www.fca.org.uk/news/press-releases/fca-publishes-decision-notice-against-former-ceo-sonali-bank

4 FCA Financial Crime Guide 2.2.1

5 Insurance against financial penalties GEN 6.1.5 R 01/01/2004 RP

Disclaimer

Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In the United States, Willis Towers Watson offers insurance products through licensed subsidiaries of Willis North America Inc., including Willis Towers Watson Northeast Inc.

Authors

Global Head of FINEX Financial Institutions

D&O Liability Product Leader

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