Letters of Credit: A Question of Sanctions

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.