Sanction clause in a usance L/C

[Shahed]

A LC issued by XYZ Bank contained a sanctions clause as follows "All parties to this transaction are advised that the U.S. and other Government and/or regulatory authorities impose specific sanctions against certain countries, entities and individuals, Banks may be unable to process a transaction that involves a breach of sanctions, and authorities may require disclosure of information. Issuing bank is not liable if it, or any other person, fails or delays to perform the transaction, or discloses information as a result of actual or apparent breach os such sanctions".

Beneficiary submit the documents to ABC Bank to discount.

ABC Bank sends the documents to the Issuing Bank for their acceptance.

Issuing Bank confirms its acceptance and due date of payment by authenticated Swift to the documents remitting bank.

Upon receipt of such acceptance from the issuing bank, ABC bank discounts the bill.

However, few days before the due date, the issuing bank notify ABC Bank that they are not in a position to effect payment under the documents submiited by ABC Bank cause these (documents) are not complied with sanctions imposed by other Government and/or regulatory authorities as stated in the L/C.

My question is can the issuing bank refuse its payment obligation to the beneficiary's bank against documents that have been accepted by them.

I believe when the issuing bank accepts documents, and conveys same to the documents remitting bank with maturity/due date of payment, means they are satisfied with the terms and conditions (including sanctions clause) of the L/C.

Regards,

Shahed
[edited 3/28/2012 2:44:26 PM]

[HOANGTHIANHTHU_invalid]

Hi Shahed,

Sanctions are beyond the control of banks. The issuing bank cannot help complying with the US sanctions or UN sanctions notwithstanding whether such sanctions are issued prior to or after the issuing bank’s acceptance.

Best regards,
N.H.Duc

[DanielD]

I hope ABC bank discounted with a reservation due to the sanction clause

Daniel

[NigelHolt]

The ‘sanctions clause’ seems to me to be quite unclear in its legal effect. Obviously, the issuing bank cannot ignore the law of its place of business. However, it seems to me to be debateable if –for example- the clause covers where an act would not be illegal under the law of the place of business of the issuing bank, as there could not be an actual or apparent ‘breach of such sanctions’ unless the routing of the payment required it to go via a ‘third’ country where the payment would be illegal. (To illustrate what I mean, it would not be a breach of sanctions if a UK office of a UK bank made a payment in GBP to a SDN on the OFAC list –provided the SDN was not a ‘sanctioned party’ in the UK as well- but it would be a breach of sanctions if the payment was made in USD as it would have go via the USA.) Therefore, to me, what matters is establishing what sanctions the issuing bank claims they would supposedly breach if they made payment and –if they are not the regulations of the place in which they operate- taking legal advice on the effect of the clause.

Also, was it the nominated bank or issuing bank that accept the bill? If the latter, it may be possible to sue successfully the issuing bank under the bill rather than the credit.

[Shahed]

Document was accepted by the issuing bank, and coveys its date of acceptance and maturity/due date of payment to the documents remitting bank by authenticated swift.

Regards,

[NigelHolt]

Yes, but my ('rhetorical') question related to the bill that you said had been presented, which presumably was drawn on either the nominated bank or issuing bank and therefore had to be accepted by one or other if the documents complied or 'discounting' took place.

[Shahed]

Draft was drawn on the issuing bank. My question is once the issuing bank conveys its acceptance and due date to the documents remitting bank, can they refuse to make payment at maturity giving reason that documents are caught under "other government and/or regulatory authorities" ?

Regards,

[NigelHolt]

I understood your question perfectly. My point is that a bill accepted by the issuing bank is independent of the credit and therefore not subject to any 'sanctions clause' contained in the credit. Thus, one may be able to obtain payment under the bill where one could not under the credit.

[GlennRansier_olsABN]

Jemery is correct. However, what is troubling is the issuer's message. What exactly prohibits them from making the payment? Is the beneficiary now sanctioned or is it the country of the beneficiary, etc.? If it is not illegal to do so the issuer is obligated to make the payment.

[JudithAutié]

One of the big problems with the sanctions clauses is when a bank includes US clauses when that bank is not in the US. Particularly when that bank has US capital in it and is required by their internal procedures to respect the US clauses which have not been taken in the banks' country.