QUERY

On 29 August 2022 a documentary credit, denominated in USD and subject to UCP 600 was issued. It was available with any bank by negotiation and contained the following sanctions clause:

QUOTE

BREACHES OF LOCAL AND INTERNATIONAL ANTI-MONEY LAUNDERING OR ECONOMIC SANCTIONS LAWS AND REGULATIONS ADMINISTERED BY, INCLUDING BUT NOT LIMITED TO CHINA, UNITED NATIONS, UNITED STATES, ARE NOT ACCEPTABLE.OUR BANK MAY REJECT ANY TRANSACTION IN VIOLATION OF ANY OF THESE LAWS AND REGULATIONS WITHOUT ANY LIABILITY ON OUR PART.

UNQUOTE

On 30 September 2022, the nominated bank received a presentation of documents under the credit (which included drafts drawn on the issuing bank) that they determined to be complying and forwarded to the issuing bank.

On 17 October 2022, the nominated bank received a SWIFT message from the issuing bank confirming “THAT DOCUMENTS HAVE BEEN ACCEPTED…DUE ON 2022-12-20” in line with the terms of the credit.

On 13 December 2022, the nominated bank received a SWIFT message from the issuing bank stating: “WE REGRET TO INFORM YOU THAT  WE CAN NOT EFFECT PAYMENT UNDER THE SUBJECT L/C  BECAUSE OF LOCAL AND INTERNATIONAL LAWS AND REGULATION AND ECONOMIC TRADE SANCTIONS.”

The nominated bank has subsequently established independently that the applicant appears to have been placed on the US OFAC list on 17 November 2022. Although this has not been explicitly stated by the issuing bank as the basis for not being able to effect the payment, it has been inferred as such.

After further correspondence with the issuing bank’s branch and head office, additional information about the sanctions or prevailing laws has not been forthcoming.

The issuing bank has, however, offered to settle the transaction in CNY or alternatively asked the nominated bank to speak with the beneficiary about arranging a direct payment, both of which the nominated bank has rejected, stating in response that the issuing bank’s obligations under the credit and the accepted draft are independent from any obligation between the issuing bank and applicant. Therefore, the nominated bank has provided both the branch in question, and the head office with a clear demand letter for payment.

Initially, messages from the issuing bank referred to the fact they were still not able to make payment and that they “will continue to pay attention about this matter”, suggesting that they understood that reimbursement obligations remain in place under the LC.  However, their latest message states:

QUOTE

According to the article 1 of the Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication no. 600 (“UCP600”), UCP600 are rules that apply to any documentary credit (“credit”) when the text of the credit expressly indicates that it is subject to these rules. They are binding on all parties thereto unless expressly modified or excluded by the credit, which means all parties are bound by UCP600 as well as stipulations and conditions in the specific L/C; and L/C stipulations and conditions prevail instead of UCP600 in this case. The L/C in this case clearly states that breaches of local and international anti-money laundering of economic sanctions laws and regulations administered by, including but not limited to China, United Nations, United States, are not acceptable. Our bank may reject any transaction in violation of any of these laws and regulations without any liability on our part in 47A.

[The nominated bank] and the beneficiary did not raise any questions when receiving the L/C and presented the documents under the L/C, which means all parties accepted the stipulations and conditions in the L/C and thus are bound by the L/C conditions. As the applicant is under sanction currently, [the issuing bank] may reject any transaction under the L/C without any liability according to above stipulations and conditions of the L/C, which prevail in this case. Therefore, we can not effect the payment under the LC.

UNQUOTE

Given the above, the nominated bank would appreciate an ICC opinion on the following:

1. Is the above sanctions clause considered a non-documentary condition under UCP 600 sub-article 14 (h)?  If that is the case, does the ICC consider that this clause can be disregarded and has no effect on the underlying obligations of the issuing bank and does not absolve the issuing bank of their obligation to honour the credit following a discovery of the applicant’s sanctions status after acceptance of documents by the issuing bank as they have posited above?

2. In accordance with UCP 600 article 4, does the ICC consider that the issuing bank’s obligations under the documentary credit and accepted bill of exchange are independent from their underlying agreement with the applicant and the issuing bank is thus bound to honour their obligation under UCP 600 sub-article 7 (c)?

3. Does the ICC consider that:

  1. unless the issuing bank can provide evidence that there are economic sanctions on the applicant under which they are prohibited under mandatory local or international law that is applicable to them from making payment to the nominated bank, then they should honour immediately;
  2. if it is proven that the issuing bank is unable to pay due to mandatory law/regulation applicable to them and/or in reliance on the sanctions clause, then their obligation to pay the nominated bank remain valid until such time they are able to make payment; and
  3. given the issuing bank has suggested settlement in CNY, this would stand to contradict the position of the local laws preventing payment and this suggests that they recognise their obligation to settle this commitment independent of any sanctions or local laws applicable to the applicant?

UNQUOTE

ANALYSIS

A credit subject to UCP 600, and denominated in USD, was issued available with any bank by negotiation and contained the sanctions clause as quoted in the query.

Documents were presented by the nominated bank. Subsequently, the issuing bank accepted the presentation and confirmed the due date.

Prior to maturity, the nominated bank was informed by the issuing bank that they were unable to effect payment under the credit due to “local and international laws and regulation and economic trade sanctions.”

Despite the apparent sanctions breach, the issuing bank offered to settle the transaction in CNY. As an alternative, they also suggested that the nominated bank could liaise with the beneficiary for the purpose of arranging a direct payment. Both suggestions were rejected by the nominated bank and a further demand for payment was made. In response, the issuing bank stated that, as the applicant was under sanction, they could not effect payment.

The issue of sanctions clauses in documentary credits (and other instruments) has been addressed in several ICC resources, most specifically in the Guidance Paper on the Use of Sanctions Clauses in Trade Finance-related Instruments Subject to ICC Rules (2014) and the subsequent Addendum dated May 2020. Paragraph 1.4 of the Guidance Paper highlights that where sanctions laws and regulations are determined to be applicable to a credit, they are considered as being mandatory and, depending on the exact nature of the law/regulation, may override the ICC rules applicable to that credit and, more generally, the underlying contract terms as well.

More recently, this issue has been addressed in ICC Opinion TA.920rev, wherein it is stated that the Banking Commission cannot comment on specific sanctions or regulations and their application in respect of the involved parties, and that any delay in, or refusal to pay due to a sanctions clause is outside of the UCP 600. It was further stated that, unless mandatory law or regulation prohibits the issuing bank from honouring, it must do so if a complying presentation is made.

The Addendum to the Sanctions Guidance Paper, Introduction 2nd paragraph, states that sanctions clauses are non-documentary conditions for the purposes of the UCP and the URDG and recommends that banks should refrain from issuing trade finance-related instruments that include sanctions clauses that purport to impose restrictions beyond, or conflict with, the applicable statutory or regulatory requirements.

Non-documentary conditions are addressed in UCP 600 sub-article 14 (h) wherein it is stated that if a credit contains a condition without stipulating the document to indicate compliance with the condition, banks will deem such condition as not stated and will disregard it. However, the scope of this sub-article is in respect of determining if the presented documents constitute a complying presentation. The legality or enforceability of sanctions clauses may also involve considerations of mandatory law/regulations which may override the credit and the UCP.

It is stated in ICC Opinion TA.920rev that, “In accordance with UCP 600 sub-article 7 (b), an issuing bank is irrevocably bound to honour as of the time it issues a credit. Sub-article 7 (a) includes that provided the stipulated documents are presented to the issuing bank and that they constitute a complying presentation, then the issuing bank must honour. Any delay or refusal to pay, due to a sanctions clause, is outside the scope of the UCP 600. Likewise, unless mandatory law or regulation prohibits the issuing bank from honouring it must do so if a complying presentation is made.”

UCP 600 sub-article 4 (a) includes the following wording: “A credit by its nature is a separate transaction from the sale or other contract on which it may be based.”

Once a complying presentation has been made, an issuing bank is obligated to honour. If they are prohibited to do so due to a sanctions breach, it would be standard banking practice and prudent to provide any evidence to the nominated bank, to the extent that this does not violate mandatory law.

CONCLUSION

1. Although a sanctions clause is considered as a non-documentary condition, the Addendum to the Sanctions Guidance Paper recommends that banks should refrain from issuing trade finance-related instruments that include sanctions clauses that purport to impose restrictions beyond, or conflict with, the applicable statutory or regulatory requirements.

2. Whilst a credit is separate from the underlying contract, thereby meaning that an issuing bank must honour a complying presentation, any delay in, or refusal to pay due to following a mandatory law/regulation (re-affirmed by a sanctions clause or not) is outside of the UCP 600.

3a). Whether or not an issuing bank is obligated to honour in the event of no evidence being provided, is a matter outside the scope of the UCP 600. However, as stated in ICC Opinion R906/TA884rev, it is expected that a bank should provide a reference to the applicable law or sanction regulation, and the document(s) and /or data in the presentation to which it relates.

3b). At what point in time the issuing bank would be allowed to honour based on a sanctions breach, is a matter outside the scope of the UCP 600 and will depend on the nature of the applicable law(s)/regulation(s).

3c) This is a matter outside the scope of the UCP 600 and cannot be answered by the ICC Banking Commission as it depends on the nature of the applicable law(s)/regulation(s).