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Clifford Chance

Clifford Chance

Regulatory Investigations and Financial Crime Insights

The ICC emphasises the threats that sanctions clauses pose to trade finance

The ICC Banking Commission has issued updated guidance to banks concerning the use of sanctions clauses in trade finance-related instruments subject to the ICC Rules, including documentary and standby letters of credit, documentary collections and demand guarantees and counter-guarantees.

In response to an apparent resurgence in the use of sanctions clauses, in May 2020 the International Chamber of Commerce ("ICC") issued an Addendum to its 2014 Guidance Paper for banks concerning the use of sanctions clauses in trade finance-related instruments.

Sanctions clauses – what are they and what are the risks?

Sanctions clauses are provisions designed to assist a commercial party in controlling its sanctions risk exposure.

Depending on their wording, these clauses can allow participants in trade finance-related instruments a level of discretion as to whether or not to honour their obligations if sanctions risks arise, even where performance would not be illegal. For example, clauses incorporating references to sanctions which do not apply directly to the parties, or to non-performance where contrary to a bank's internal sanctions-related policy (which may go beyond the legal requirements applicable to it).

In the ICC's view, such clauses introduce uncertainty and bring into question the irrevocable and documentary nature of letters of credit or guarantees. Left unchecked, the ICC considers that the use of such clauses "could eventually damage the integrity and reputation of letters of credit and demand guarantees which may have a negative effect on international trade".

The updated Guidance Paper is aimed at tackling this "problematic issue".

The Guidance

There are two key messages to take from the ICC's latest guidance:

  • The ICC advises that sanctions clauses should not be used routinely in trade finance-related instruments; however
  • Where they are used, such clauses should be drafted in clear terms with reference to the ICC's sample clause.

The ICC's basic position remains that banks should refrain from issuing or accepting trade finance instruments that include sanctions clauses purporting to impose restrictions beyond those that apply as a matter of law.

If, however, after consulting with the customer and counterparties, a bank does decide to include a sanctions clause, the ICC advises that this provision should be limited to refer only to those mandatory laws applicable to the bank, suggesting (with a clear disclaimer that it should not be viewed in any way as recommended practice) the following sample clause:

“[notwithstanding anything to the contrary in the applicable ICC Rules or in this undertaking,] We disclaim liability for delay, non-return of documents, non-payment, or other action or inaction compelled by restrictive measures, counter-measures or sanctions laws or regulations mandatorily applicable to us or to [our correspondent banks in] the relevant transaction.”

What sanctions are 'mandatorily applicable'

In most cases, a bank seeking to insert a sanctions clause will be seeking contractual cover not to perform when sanctions risk arises. Performance is excused where it would be illegal even without such a clause, but including a sanctions clause protects a bank that chooses not to perform because it assesses the risk to be too high even if the threshold of illegality is not met. In this context, considerations concerning the extra-territorial sanctions imposed by the US are often front of mind.

When drafting sanctions clauses, the ICC recommends that banks consider, in summary, the following additional points:

  • Sanctions regulations may apply as mandatory rules under:

    • The law applicable to the bank / issuing branch;
    • The law applicable to the currency of payment;
    • The law governing performance under a choice of law clause / applicable conflict of laws principles; and
    • International public policy.
  • General references to 'applicable law' or 'bank policy and procedure' should be avoided;
  • Banks should consider avoiding sanctions clauses when operating in jurisdictions that prevent or restrict their inclusion; and
  • Reference should only be made to correspondent banks if located in a different location to the instructing bank and subject to different sanctions restrictions.

Where the template clause is used, it remains to be seen whether it would excuse performance by a non-US bank where payment in US dollars would breach US primary sanctions, or where performance would be contrary to US secondary sanctions. In either case, whether such sanctions would be held to be 'mandatorily applicable' would fall to the courts to determine on the facts in the event of a dispute. Ultimately, where such clauses are used and a bank determines not to perform, it may need to take a commercial risk-based view as to whether non-performance would be excused by the relevant clause.

Conclusions

The latest ICC guidance highlights the apparent tension between ensuring that an issuing bank is sufficiently protected against, effectively, a contractual obligation where performance would expose it to sanctions risk and preserving the utility of trade-related instruments.

The guidance and sample clause go some way toward addressing this tension with regard to breaches of applicable sanctions. However, given the range of 'mandatorily applicable' laws that may be involved in a transaction, the potential uncertainty as to the meaning of that term and the potential (criminal and reputational) consequences that can arise under sanctions, they are also a reminder of the difficulties in composing a clause that covers all potential sanctions legal risks.

As conceded by the ICC, the sample clause does not contemplate every conceivable instance where sanctions risk may apply, nor will it exempt banks from abstaining from the performance of its obligations from liability in all cases where there is no specific or identifiable legal prohibition. This guidance is however intended to encourage banks to consider carefully the scope of their sanctions clauses in trade finance related instruments.