Q.
As beneficiaries of a Letter of Credit, we have recently had a set of
documents returned by the advising bank in the UK stating that they are not
willing to handle them as there appears to be a problem within the documents
which breaches sanctions regulations. How can this have happened? What can we
do?
A. Banks are very strict these days in ensuring
that they do not breach any regulations relating to countries where sanctions
are in place . It is, without doubt, one of the areas in international trade finance which is now much more carefully controlled than it used to be in previous
years. However, even with these strict controls in place a number of major UK
banks have been found guilty of breaches of sanctions regulations, and the
fines which have been imposed have been very significant, not to mention the
damage that this causes to the bank's reputation. The consequences can be very
severe not only for the bank but also for the bank employee who has been
implicated in the sanctions breach.
Many banks use
sophisticated software in a regimented screening procedure for any documentary
presentation whether it is an Export Letter of Credit, Import Letter of Credit, Export Collection or an
Import Collection . Careful screening is carried out in
order to check that there is no connection within the documents and particular
emphasis is given to;
Any
Organisations/Entities
Countries
Individuals
Specified
goods
Banks –
including reimbursement banks – any bank mentioned.
Documents –
all the below mentioned documents and schedules are scrutinised and the above
highlighted elements are extracted and screened by the software. This
extraction is, in the main, a manual process, and requires a bank employee to
key in the required information into the screening software application relating
to:
Invoices
Bills of
Exchange
Certificate
of Origin
Transport
Documents
Insurance
Documents
Bank
schedules
Customer
schedules
If there is a
“hit” or as it is also called an "alert" this will obviously need to
be investigated,
and in many
cases these instances can be resolved quite easily. It may be that the alert
relates to the name of an organisation, but on closer scrutiny it is clearly a
different entity in a different country. In these, and many other cases the
alert can be eliminated. However, in some circumstances the alert is upheld having
referred the case to their senior compliance officials for a ruling. In these
cases the bank may make the decision to return the documents to the
client.
One of the more common “hits” is a vessel named on a
transport document which is owned by a sanctioned entity on the sanctions list.
In an attempt to get around this, vessel owners rename their ships, but the bank
software that screens the documents is updated on a regular basis.
If a bank
considers that there is a issue with the documents regarding a breach of
sanction regulations it will return the documents to the customer who presented
them and a fairly standard response will be along the lines of ;
"The
bank follows the legal requirements of the UN, EU, UK, USA and all other
jurisdictions that it operates in (this will obviously vary from bank to bank).
Consequently we screen transactions against various lists, especially those
related to the UN Security Council Sanctions, and the FATF guidance related to
Non-Proliferation of Weapons of Mass Destruction (NPWMD). The transaction in
question, when screened against the UN and other NPWMD lists that the bank
employs, includes one or more parties names on those lists. The bank's policy
is to observe these "positive result" findings and to not complete a
transaction should a positive result be found when applying the above criteria.
We trust that this explains the reason that we have declined this transaction.
All the information that we use is publicly available through, either UN or
government web sites, or from specialist companies providing aggregations of
these web sites databases".
Some banks
have added a specific clause which refers to sanctions, and this clause is
included in their terms and conditions stated on the initial advice of the
Letter of Credit to the beneficiary. There has been some suggestion that the
insertion of a "sanctions clause" in a Letter of Credit advice, may
cast doubt on the confirming/nominated bank's (acting upon their nomination)
obligations to honour a compliant documentary presentation. It is therefore
recommended that beneficiaries of Letters of Credit, who have concerns about
these issues should seek legal guidance. It is likely that most major UK banks
would refer any "hits" to their internal legal units, but it is also
likely that the bank's adherence to their policy on sanctions would override
UCP 600.
In answer to the question, it would be
a prudent step for exporters to seek any available assistance from their
freight forwarders regarding the vessel and ownership of the vessel and also
their preferred legal advisor. Should the worst happen and documents be
returned, there is little chance that an alternative bank will be found to
process/handle the transaction as they will all use similar software to screen
the documents /transactions.
It is very clear that the whole issue
of sanctions and their effect on the screening procedure carried out by banks
is still emerging and will continue to change. It is without doubt one of the
most important areas concerning the presentation of documents under Letters of
Credit.
