Complying with sanctions laws can often be problematic. Apart from sanctions imposed by the United Nations Security Council, which all member States of the United Nations are generally obliged to observe and give effect to, many countries have their own lists of sanctioned persons and possibly countries.
For a bank that is operating in Singapore, it would strictly speaking be necessary only for the bank to observe local sanctions laws. However in practice, a bank will also want to ensure that what it does is not in contravention of the sanctions laws of other countries, particularly those countries in which it also operates or has substantial business interest.
The result is that a bank will often have to grapple with a patchwork of sanctions laws and does what it can to ensure that it does not fall foul of the sanctions laws of numerous other countries. To do this, many would rely on third party screening systems as a tool to help make sure that the parties that they are dealing with are not parties on whom some country has imposed some form of sanctions.
However, determining whether a party is subject to sanctions measures of some kind by some country is not necessarily a simple task of running the party's name through a screening system. A screening system will often throw up false positives and manual effort is often needed to check that the hit is a genuine positive hit. As a result, most modern banks employ a small army of analysts who would be responsible to investigate all the hits thrown up by its screening system. And to enable the bank to avoid any obligations in the event of a genuine hit, it is common for a bank's legal documentation to explicitly provide that the bank is not obliged to perform its contractual obligations in the event that doing so would involve contravening sanctions laws. Due to the uncertainty and changing nature of sanctions laws across the globe, it would also be particularly tempting to scope such a sanctions clause as widely as possible. For instance, a bank in Singapore might want to have the ability to step away from its contractual obligations if a borrower is found to be subjected to sanctions measures not just in Singapore but also in the US, even though the transaction the bank is involved in has no connecting factor to the US at all.
The use of sanctions clauses are of course aimed at giving the bank as much flexibility as possible, and particularly to enable them to get out of certain awkward situations, so that they do not, in the course of performing contractual obligations in one country, risk breaching the sanctions laws of another country. However, sanctions clauses that are drafted in very broad terms can have potentially undesirable effects.
One instance of this would be in trade finance documentation, particularly documentary letters of credit and standby letters of credit, where broad sanctions clauses have the effect of threatening the principles of certainty of payment that underpin the world of international trade finance.
Sanctions clauses are non-documentary conditions for the purposes of the Uniform Customs and Practice (UCP) and the Uniform Rules for Demand Guarantees (URDG). Traditionally, banks operating in this space will examine the documents submitted for payment and determine, from a face value examination, if conforming documents have been submitted so as to trigger the obligation to make payment. However, with a sanctions clause, it is often very difficult to make such determination without screening the names of the relevant parties through a screening system and spending time to investigate the outcomes from such screening.
Recently, the Banking Commission of the International Chamber of Commerce (ICC) issued a short addendum to its 2014 Guidance Paper on the use of Sanctions Clauses, highlighting once more this particular problem.
The ICC Banking Commission noted that sanctions laws can restrict a bank's ability to perform its role as contemplated in trade finance documentation subject to the UCP or URDG.
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The guidance paper gives various examples of broadly worded sanctions clauses that are increasingly common and apt to cause difficulty. One example worth repeating is the following:
Faced with such a clause in a documentary letter of credit, a nominated bank that is seeking payment from the issuing bank would be put in an impossible position. By incorporating internal policies (to which an outsider would have no access or knowledge), there would simply be no way to know whether the issuing bank would or would not pay under the letter of credit.
Left unchecked, broadly worded sanctions clauses designed to allow the issuing bank to refuse payment on broad, often undeterminable grounds would undermine the utility of letters of credit and other similar instruments.
Accordingly, the ICC has recommended that banks who issue letters of credit and other similar instruments ought to refrain from routinely including sanctions clauses that qualify their obligation to pay by reference to matters that go beyond directly applicable statutory requirements. If a particular situation does require that a sanctions clause be included, then the clause should be worded in very clear terms, and ought to refer only to laws that apply to the bank on a mandatory basis, such as the following:
What should not be included are unparticularised references to laws generally (such as "any applicable local or foreign laws") or references to internal policies and procedures, which an outsider would never be able to learn of. The temptation to include catch-all language must therefore be strenuously resisted.
A copy of the ICC Banking Commission's addendum to its 2014 Guidance Paper on the use of Sanctions Clauses may be accessed here.
Originally published May 2020 .
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