Sanctions according to the ICC
I have written a number of articles on the issue of sanctions and compliance. They have all started by saying that the issue of sanctions is indeed one of the most troublesome issues within Trade Finance. I still believe that statement to be true – but it really is more than that! It is also an issue where it seems close to impossible to agree on what to say …. So much that at the end of the day almost nothing is being said … Let me illustrate:
Just recently the ICC Banking Commission circulated revision 3 of ICC Opinion TA752. This is in other words an opinion that has been out in 4 (very) different versions. Starting with a long version that surely contained inaccuracies, and did not really say anything. Going to a very short version that said absolutely nothing; to a version that actually tried to say something meaningful. Personally I voted for that one! Unfortunately that one has been circulated for comments – and the result is TA752rev3. A somewhat “naked” Opinion that says exactly what it can say but nothing more – nothing less!
Let’s take a look at the query.
The query is initiated by a beneficiary to a confirmed LC.
The LC contained the following clause:
“[Bank] complies with the international sanction laws and regulations issued by the United States of America, the European Union and the United Nations (as well as local laws and regulations applicable to the issuing branch) and in furtherance of those laws and regulations, [Bank] has adopted policies which in some cases go beyond the requirements of applicable laws and regulations. Therefore [Bank] undertakes no obligation to make any payment under, or otherwise to implement, this letter of credit (including but not limited to processing documents or advising the letter of credit), if there is involvement by any person (natural, corporate or governmental) listed in the USA, EU, UN or local sanctions lists, or any involvement by or nexus with Cuba, Sudan, Iran or Myanmar, or any of their governmental agencies.”
At one point in time the confirming bank informed the beneficiary that because the issuing bank was subject to EU sanctions the confirming bank did not feel obligated to effect payment under its confirmation of the LC. The confirming bank refused to pay and simply returned the documents to the beneficiary.
The beneficiary asks two questions in the query:
1) Does the mere fact that the issuing bank was added to the EU Sanction List after presentation of the documents excuse the confirming bank from its obligations under UCP 600 sub-article 15 (b) and article 8?
2) Does adding such a “sanction clause” to the confirmation relieve the confirming bank of its obligation under UCP 600 sub-article 15 (b) and article 8?
The answer from the ICC Banking Commission is that 1) a confirming bank may decline to pay where economic sanctions that are applicable to it by law/regulation prohibit it from doing so, and 2) that it is up to the beneficiary to question the “sanction texts” that’s banks include into their LC/confirmation…
Hmm … all so true – but does that really help much?
My experience is that it is Wild West out there. Banks react exactly like the one in this query: They get a “hit” against a sanction list – and simply return the documents. It would be like a bank returning documents due to fraud because the LC applicant have convinced the bank that the beneficiary have committed fraud. I guess we all know, that this is not how this works! For a bank not to pay because of fraud, proof must be presented to a court of law. Further – a bank that has paid (following its nomination) is “protected” by the UCP 600 even in case of fraud. When it comes to sanctions no such practice exist. It is that kind of practice I had hoped that TA752 would help create ….
To me a sober International Standard Sanction Practice could include the following:
* A banks obligation under an LC and sanctions are by
nature two different matters. The fact that there are sanctions in force that
prohibit a bank from fulfilling its obligation under an LC does not change the
fact that such bank is obligated vis-à-vis the UCP 600. If there are sanctions
in force the bank may be prohibited from fulfilling its obligation under the LC.
Sanctions are legal requirements; the UCP is a contractual requirement. Legal
requirements will always override the contractual requirement.
* The fact that an LC transaction indicates a person, company, commodity, or country that appears on a sanction list does not in itself mean that an issuing/confirming bank is prohibited from fulfilling its obligation under the documentary credit.
* A bank should only refuse to honour its obligation
under an LC where there are sanctions in force actually prohibiting that bank from honouring its obligation.
* When a bank refuses to honour its obligation under an
LC with reference to sanctions it should provide sufficient proof to the presenter.
* As a general rule a nominated bank that has acted pursuant to its nomination should be protected, just as is the case where the issuing bank is prevented from paying due to an injunction / stop payment order received from a court.
Further it seems relevant to address the sanction clauses that a number of banks include in their LCs. These come in many forms and shapes and (of course) this text is important in the outcome of a case. For Draft Opinion TA752 there is a sanction clause added by the confirming bank that is identical to the one mentioned in the ICC Document regarding sanctions namely the one found in 3.3 (quoted above). This is indeed a problematic sanction clause as it indicates that the bank may refuse to pay based on its own “policies that in some cases go beyond the requirements of applicable laws and regulations.” This means that the beneficiary has a really difficult case, much more difficult than had it merely been a discussion regarding the EU Regulation. Beneficiaries that present documents under an LC with a sanction clause that wide should be aware of the (uncontrollable) potential risk.
Put another way, in this case the beneficiary faces a higher risk compared with an LC that does not include a sanction clause, or one that plainly states the regulations that the bank operates subject to, and nothing more than that.
Or in other words: TA752rev3 is not wrong … but I had really really really hoped that the ICC had taken this opportunity to start creating a good International Standard Sanction Practice.