Presented by Kim Christensen

An LC issued by a US bank contained the following clause:

The LC was confirmed by an EU bank.

The beneficiary presented documents - which was approved by the EU bank.

Later the following notice was received:

As it appeared the goods was in fact transported by an Iranian shipping line - this appeared from the B/L - but since Iran was not mentioned in the LC - no-one at the EU bank noticed.

So:

1) what is you reaction towards this? Can the US bank just do this - based on the above facts?

2) There are other of those "clauses" out there - some even requiring that nominated /confirming banks check the OFAC website. What is your general approach to those?

Banks subject to the regulations typically check the various US government lists at the time they establish a customer (frequently referred to as Know Your Customer, or later as Enhanced Due Diligence); at the time they issue a letter of credit they check their applicant customer and the beneficiary and advising bank and countries; and at the time they examine documents.

IF the bank finds a “hit” - a name of a company, individual person, country, of merchandise on one of the US government lists (and there are many lists), they they must follow the regulations.

2 fast reference points are:

www.bis.doc.gov  

http://www.treas.gov/offices/enforcement/ofac/  

This is not a letter of credit matter as all companies, regardless of where they are located, must follow the laws that apply to them.

The foregoing necessitated the GCC bankers to resort to innovate, to improvise and to convert the boycott clauses into something that they call "positive wording" to ensure compliance of local requirements while at the same time, not violating US Regulations.

You know that when it comes to compliance, US banks are known to have been very strict. Many years ago, I have seen one US bank refusing to advise an LC with a stipulation "shipment from any middle eastern port" (as they felt “middle eastern” was a broader term and could include Iran) whereas the beneficiary was based in Sharjah and was shipping from Sharjah. Beneficiary was willing to undertake to the US bank that shipment shall be from Sharjah and even went on to implore the bank officials that if they were not willing to advise the LC, they could retain the LC with them but agree to handle his documents indicating port of shipment as Sharjah.

But the US bank refused to budge from their position. Their stance, as expected, was plain and simple that as a US bank, they are obliged to adhere to US regulations and it was for the opener and the opening bank to ensure compliance and adherence which US banks expected them to be aware of.

Any pleading raised in this regard were mostly ignored or rendered null and void under the pretext that "ignorance of law was no excuse". Post Sep 11 and in pursuance of the US Patriot Act, banks are expected to be more explicit on the compliance issues and now we see US banks inserting clauses of the kinds referred by you, in their LCs. What to talk of LCs, I also see MT 094 (SWIFT broadcast) messages from some US banks referring even to certain bank that has been placed under sanctions.

In regard to your specific questions:

1. In the light of above background, yes. US banks will (there is no question whether they can) refuse payments if they see any document having any referral to any Iranian connection. To avoid any issue arising of the foregoing, it is always pertinent for all parties (beneficiary and negotiating banks in particular) to check OFAC website and other regulations relating to sanctions before handling any US directed/US connected business. I believe that some software are available off the shelf, which could be interfaced with the OFAC alerts/sanction lists to help banks.
    
2. Other clauses requiring confirming/negotiating banks to check OFAC website and presumably confirm compliance on their covering schedule could be problematic as it may be difficult to prove whether a due check was indeed performed. My question is what happens if a beneficiary or a country not on the OFAC list at the time of negotiation but placed under sanction before arrival of documents at the counter of the issuing bank? I for one would not like to confirm such a Letter of Credit or negotiate documents drawn under such LCs unless I could ensure negotiation with recourse.

I hope I have been of assistance.

Indeed, it seems US banks may do whatever they want under umbrella of OFAC list. Furthermore, more and more European banks (EU banks) are refusing to honour transactions involving banks/companies/persons/countries subject to US sanctions (lately of EU sanctions).

If we would be able to identify any connection to such lists/sanctions just from the content of the LCs would be ok (kind of ok), but you may have no data in the LC referring to OFAC/sanctions/etc., and in this case you may face a big problem finding out in the end that some Iranian/Iraqi bank/company is involved in the transaction or shipment of the goods.

You may say that no Iranian company is involved in the transaction as long as by word transaction you understand the contract concluded between the beneficiary and the applicant and the LC issued based on.

Contracting shipment is a separate transaction from the commercial transaction and from the LC, but I believe whatever you will sustain in your defence the US bank will refuse to honour.

2) Here the carrier is Iran based. This is the reason for their application of the sanction.

3) Letters of credit law and practice are custom based and is applicable as long as no local law intervenes. But once injunction or sanctions intervene, it is no longer a letter of credit matter.

In my bank we also negotiated shipping documents. The amount was not large. On receiving the identical refusal notice from the US bank, I went through the same reasoning shown in your materials and actually said most of the same things. The reply was short and crisp. They had obligations to apply the sanctions due to head office policy and as such were unable to pay on the documents.

The documents were returned to us and we received refund from our customer. The customer sent the documents directly to the importer and received payment.

There is a presidential election in the U.S. at present and hopefully with a president from the Democratic Party, there will be relaxation of tension between the U.S. and Iran which is helping no one and actually inconveniencing the rest of the world may finally come to a close.

“A twist to the case!

What if the name and flag of the vessel gets changed after the issue of BL?

We had come across a situation wherein the document indicate name of the vessel as “Iran xxxx” and upon our enquiry with IMB regarding the status of cargo we were advised that the name of the vessel has been changed to “yyyy”  – with no apparent reference to Iran.