SANCTION CLAUSE IN A USANCE LC

QUESTION FROM SHAHED – CANADA 28 MAR 2012

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
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COMMENT FROM N.H.DUC – VIETNAM 29 MAR 2012

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
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COMMENT FROM DANIEL D – SWITZERLAND 29 MAR 2012

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

Daniel
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COMMENT FROM JSMITH – UNITED KINGDOM 29 MAR 2012

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.