Letters of credit and sanctions

Letters of credit and agreements issued by the bank are subject to ICC rules and the local / international regulations of the parties involved in the transaction. This often puts banks in a "catch 22" situation.

ICC confirms its guidance that sanctions clauses should not be used generally. Nevertheless, if a bank, after consultation with its customer and counterparty in the trade finance transaction, considers that a sanctions clause is to be used, ICC recommends that the clause should be drafted in clear terms, restrictively, to limit the reference only to mandatory law applicable to the bank.??

While such clause may not contemplate every conceivable instance of sanctions application or, indeed, exempt the bank abstaining from the performance of its obligation from liability, it does give notice that the bank will comply with the sanctions to which it is subject and that the bank disclaims liability for doing so.

ICC recommends that the following Guidance is noted when drafting a sanctions clause:

?? Sanctions clauses should not be used routinely. They ought only to be considered

?? in specific transactions, and only after consulting with the customer and counterparties in the relevant transaction.

?? Specific sanctions regulations may be referred to in the clause (e.g. sanctions administered and enforced by the Hong Kong Monetary Authority) provided, however, that those references are limited to those regulations directly and mandatorily apply to the bank.

?? Sanctions regulations may apply as mandatory rules in several situations, including, without limitation, the following situations: — As the law applicable to the bank or, if relevant, the branch that issued the relevant undertaking in the trade finance instrument;

?? As the law applicable to the currency of payment of relevant undertaking in the trade finance instrument;

?? As the law governing the performance of the relevant undertaking in the trade finance instrument as a result of choice of law clause, or of the determination of the applicable law in accordance with the conflict of laws rules in the competent jurisdiction;

?? As international public policy where the arbitral tribunal or the court with jurisdiction so characterise the particular multilateral sanctions regulations.

?? Clauses should refrain from including unparticularised references to laws generally (e.g. “any applicable local and foreign laws”).

?? Reference to “bank policy and procedure” should be avoided at all times.

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?? There are jurisdictions in which the local law prevents the inclusion of a sanctions clause that references the laws of a foreign jurisdiction on the grounds of illegal discrimination or otherwise. To the extent that the law of those jurisdictions applies to the bank or to the transaction, banks ought to consider not using sanctions clauses in the trade finance instrument and to seek legal advice as to their liability if they were to contravene such laws.

?? The reference to correspondent banks should be added in a sanctions clause only if a correspondent bank is in a different location from that of the instructing bank and would be unable to complete the transaction due to sanctions directly applicable to the correspondent bank that are not applicable to the issuing bank. An example is

?? a correspondent bank in the US, therefore subject to primary US sanctions, which is clearing USD payments on behalf of a non-US bank.

Source CONSOLIDATED ICC GUIDANCE ON THE USE OF SANCTIONS CLAUSES IN TRADE FINANCE-RELATED INSTRUMENTS SUBJECT TO ICC RULES---Guidance Paper on the Use of Sanctions Clauses in Trade Finance-related Instruments Subject to ICC Rules (2014)

> Addendum to Guidance Paper (2020)