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Documentary Credit World

Documentary Credit World (DCW) - January 2024 Vol. 28 No. 1 section - Updates

Cautionary Sanctions Clauses

In advance of Bangladesh’s national elections of 7 January 2024 and speculation that voting improprieties could lead to the imposition of sanctions by members of the global community against Bangladeshi entities, one garments exporter informed the Bangladesh Garments Manufacturers and Exporters Association (BGMEA) it received a letter of credit containing the wording: “We will not process transactions involving any country, region or party sanctioned by the UN, US, EU and UK.”

According to Gulf Today which reported on the matter, BGMEA considered the statement a cautionary clause. “From BGMEA, we have already contacted buyers and the issue was sorted out. It was just a cautionary clause inserted by the bank who prepared the LC on behalf of buyers. It doesn’t mean that any country is planning to impose some sanctions on our industry”, said BGMEA
President Faruqe Hassan. Specifically how the situation was “sorted out” was left unexplained in the report.

Use of sanctions clauses in LCs is not a new trend for Bangladeshi exporters, according to DCW sources familiar with the market. In the past, exporters did not feel a potential risk attached with sanctions clauses in LCs. This was different. Exporters were on edge with such clauses used during election time, amid rumors that certain foreign jurisdictions may introduce sanctions against Bangladeshi entities. BGMEA fielded concerns when its member exporters received export contracts with sanctions clauses that they had not experienced before. The elections now over, it is largely business as usual.

Commenting on the phrasing and categorization of the clause reported, Vincent O’Brien said: “There is no such thing as a ‘cautionary clause’ in a documentary letter of credit. Once included in the terms and conditions of the letter of credit then the wording takes precedence over practice rules. It can be argued that this is a non-documentary condition and accordingly be disregarded but that is a perilous stance to rely on for any beneficiary of a credit which includes such a clause.”

“This begs a bigger industry-wide question: Has any bank been fined or suffered from doing some processing action of a documentary letter of credit such as examining documents to determine if they comply with the credit terms or simply receiving documents into a mail room? I don’t believe so. The crux of the matter pivots on the movement of funds”, added O’Brien.

Another subtle observation of how this and other sanctions clauses like it are constructed: If a bank feels compelled to inform of its intention to comply with sanctions regulations, use of the conjunction “and” seems to denote much more than intended. Reference to the series “UN, US, EU and UK” could be reasonably interpreted to mean all four jurisdictions. Sanctions regulations may not be imposed by all jurisdictions named or otherwise may be misaligned.