by Kim Christensen

UCP 600 introduced the term "complying presentation", the standard for determining if a presentation under a documentary credit complies with the terms and conditions of the credit.

These days it seems that the key issue in trade finance is not "complying" but rather "compliance", namely whether a bank must ascertain whether various "sanctions" directed toward certain countries, persons, entities and even vessels are being violated or not.

Trade finance is a complex area and questions of compliance are no less complex. Mixing the two can be a deadly cocktail. This two-part article is a status report from a poor trade finance officer desperately trying to tell head from tail in the world of compliance and sanctions.

A means for countries and international bodies to prevent/reduce terrorism, money laundering, etc., is to issue sanctions. These sanctions may be directed against countries, but are normally directed against persons, entities or specified goods and/or commodities (such as petroleum, drugs and weapons) imported from or exported to certain countries. There are even sanctions against named container vessels, which in turn may include sea containers owned by a sanctioned shipping line.

The best-known sanctions list is the OFAC SDN list issued by the US Department of Treasury. While this is a US list, similar lists are also issued by international bodies like the European Community or the United Nations Security Council. Banks and other parties are compelled to comply with the sanctions in accordance with the applicable national law or regulation in the jurisdictions in which they operate.

Sanctions and trade finance instruments

Within the trade finance community, sanctions are one of most troublesome areas to deal with. The reason is that by definition trade finance instruments are independent from the underlying contract and the goods. In addition, the obligation for a bank under a documentary credit is to pay "on the basis of the documents alone" and to determine that the documents appear on their face to constitute a complying presentation. In such cases, the bank must pay, and an interruption of the payment may well be seen as contrary to the independent nature of an L/C.

Some banks have included "sanction texts" in their documentary credits to inform their counterparts about the sanctions they must apply. For the reasons described above, these may work against the nature of a documentary credit, even though they merely reflect what provisions are applicable if they are mentioned in the documentary credit or not.

The ICC Banking Commission has alsoconsidered sanctions. In 2008, a query was sent to ICC asking how banks should react to a sanctions text in a documentary credit. The query (TA 648) was withdrawn at the April 2008 Banking Commission meeting in Athens and no answer was given. Subsequently, ICC established an Anti-Money Laundering Task Force to investigate the issue. The result of its work came two years later in March 2010 with the issuance of the document "Guidance Paper on the Use of Sanction Clauses for Trade-Related Products (e.g. Letters of Credit, Documentary Collections and Guarantees) subject to ICC Rules" 1. Though this document does not offer a solution, it does provide some guidance, for example in the following sections:

There is no standard for these clauses and they vary considerably in their scope. Where they simply inform the parties that the bank is subject to sanctions, they are generally unobjectionable. Where they address the obligations of a bank that has been affected by a governmental sanction, they may usefully supplement the applicable rules of practice.

Of particular concern are clauses that alter the reimbursement provisions of UCP 600 with respect to nominated banks that have acted pursuant to their nominations or that seek to shift the risk of compliance with sanctions to nominated banks.

... it is recommended that practitioners, in transactions subject to ICC rules, refrain from including such clauses that bring into question the bank's commitment or the irrevocable nature of a transaction, or where the use of such a clause is in conflict with local law."

It appears from these statements that the main concern is clauses that go beyond informing the parties that the (issuing/confirming) bank is subject to sanctions. Some clauses may also include the bank's special provisions, as in the following: "Bank X 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 X has adopted policies which in some cases go beyond the requirements of applicable laws and regulations ... [emphasis added]".

Standardized clauses

There is no international standardized sanctions text. Basically, each bank has its own text, and it can be difficult to determine its exact reach. It's unfortunate that the Anti-Money Laundering Task Force did not attempt to draft such a text. Given the above, there's no doubt this would have been helpful.

Even though sanctions are not new, until recently they have not been that commonplace in trade finance transactions. As a consequence, many banks and their trade finance officers react strongly when sanctions appear. They argue that these should not be part of a trade finance transaction, even while recognizing that sanctions are a fact of life and that there is nothing banks can do to make them go away. Some banks, if faced with sanctions clauses, simply throw the documents into an envelope and return them - without any explanation as to what is the problem.

Injunctions and stop payment orders

It's interesting to compare sanctions with injunctions or stop payment orders. It's acknowledged that payment under a documentary credit should not be stopped unless there is documented fraud, i.e., that sufficient evidence to that effect has been presented to a judge. When it comes to sanctions, the situation is like the Wild West. No evidence need be provided! Who should bear the risk of sanction breaches? With injunctions and stop payment orders it is standard practice that a nominated bank having acted upon its nomination is protected in case of fraud. The risk of fraud lies with the issuing bank/applicant. In the case of sanctions, a nominated bank may have paid out to the beneficiary, but is not reimbursed by the issuing bank because of the sanctions. In this case it's just too bad.

Different jurisdictions

This brings up another issue. Different jurisdictions apply sanctions to different parties. For example, a confirming bank may pay the beneficiary based on a complying presentation after a thorough compliance check of the documents, but the bank may not be reimbursed by the issuing bank because of a sanctions list applicable to that issuing bank.

Sanctions in the world of trade finance are troublesome, primarily because it's difficult to have a mature debate about them. In the next issue of DCInsight, I will discuss how they impact on different trade finance products and customers.

Kim Christensen is Vice President and Head of Trade Products and Business Relations at Nordea in Denmark. His e-mail is

1ICC Document No. 470/1129 rev - 26 March 2010.