Sanctions vs. Honour: What If the LC Has No Sanctions Clause?

Intro

In today’s trade finance world, sanctions compliance has become a minefield. Banks may find themselves caught between UCP obligations on one side and sanctions laws on the other.

A recently raised a thought-provoking question — what if the LC itself says nothing about sanctions, yet the documents reveal shipment from a sanctioned port or on a sanctioned vessel?

Here’s how Mr. Old Man breaks it down.

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Question

Greetings from Arif!

Need your enlightenment regarding a case study.

Is an issuing bank bound to make payment of a clean sight bill where it is evident that the goods have been shipped from a sanctioned port or through a sanctioned vessel?

Suppose the goods have already been released as well. What will be the position of the issuing bank in that case?

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Answer

Dear Arif,

Thank you for your question, Arif. You’ve raised a very practical issue that banks often face these days. Let’s look at it step by step.

1. When the LC contains no sanctions clause

If the LC does not include any sanctions clause, the issuing bank is obliged to honour a complying presentation, even if the bill of lading shows shipment from a sanctioned port or on a sanctioned vessel.

Conversely, if a sanctions clause is clearly drafted as a term of payment, allowing the issuing bank to withhold payment under certain sanctions-related circumstances, such a clause may be acceptable under the UCP. This approach is consistent with the Addendum to the ICC Guidance Paper on the Use of Sanctions Clauses in Trade Finance–Related Instruments Subject to ICC Rules.

In real life, however, things are not always that straightforward. Some banks may refuse payment if the documents reveal data that contravene mandatory sanctions laws (e.g. OFAC, EU or UN measures) applicable to their jurisdiction. In such cases, the issuing bank may be expected to justify its refusal by referencing those binding legal obligations.

2. When the bank has already released the documents

That’s where the dilemma deepens.

Once the issuing bank releases the documents to the applicant, it is generally deemed to have accepted the presentation and therefore must honour, as required under UCP 600 Article 7.

However, if it pays, the bank could risk violating sanctions laws. If it refuses to pay, it could face pressure from the beneficiary, who may demand payment or return of the documents. Either way, it’s an uncomfortable corner for the issuing bank.

To avoid such situations, banks should:

• Screen documents for sanctions exposure before release.
• Incorporate a clear sanctions clause in LCs when necessary.
• Train staff to hold documents immediately if there’s any hint of sanctions involvement.

In short:

Without a sanctions clause, the LC rules require honouring a complying presentation. But in the real world, sanctions law can override LC obligations — and that’s where prudence, not just procedure, must guide the bank’s actions.

Best regards,

Mr. Old Man