A bank had identified a number of refusals that it had received where the wording was (or similar) "NOTE THE DOCUMENTS HAVE BEEN REJECTED AND RETURNED TO YOU BY COURIER BECAUSE OF LOCAL AND INTERNATIONAL LAWS AND REGULATIONS AND INTERNAL POLICY FOR AML/CTF AND FOREIGN SANCTIONS IN ACCORDANCE WITH OUR L/C TERMS."
The credits in question had contained the following text "OUR BANK PROCESS TRANSACTIONS IN ACCORDANCE WITH LOCAL AND INTERNATIONAL LAWS AND REGULATIONS, AND RESERVE THE RIGHT TO COMPLY WITH FOREIGN SANCTIONS AS WELL. CONSEQUENTLY DOCUMENTS ISSUED BY OR SHOWING ANY INVOLVEMENT OF PARTIES SANCTIONED BY ANY COMPETENT AUTHORITY OR CONTAINED ANY INFORMATION THEREON MIGHT NOT BE PROCESSED BY OUR BANK AT OUR SOLE DISCRETION AND WITHOUT ANY LIABILITY ON OUR PART."
The issuing bank when pressed indicated that the refusals had been based on their own internal policies and not the UCP or any regulatory reason.
The analysis indicated, "Whilst banks are required to operate in accordance with relevant internal policies, they should also ensure that such policies do not contravene UCP 600 and, accordingly, should not issue documentary credits that are in breach of such policies. If such policies are in breach of UCP 600, the issuing bank should make clear in the credit the particular express modification or exclusion to the UCP".
It was also noted that the "refusal notice" was not appropriate, as it had nothing to do with the acceptability of the documents to the UCP 600 or to the terms and conditions of the credit.
The analysis also made reference to the ICC Guidance Paper on the use of Sanction Clauses by stating "Reference is made to ICC Document No.470/1238 " Guidance Paper On The Use Of Sanctions Clauses In Trade Finance-Related Instruments Subject To ICC Rules". Chapter 2.4 includes the following wording: "If the sanctions clauses in trade finance-related instruments, including letters of credit or demand guarantees or counter-guarantees, allow the issuer a level of discretion as to whether or not to honour beyond the statutory or regulatory requirements applicable to that issuer, they bring into question the irrevocable and documentary nature of the letter of credit or guarantee. The implementation by a bank of an internal sanctions-related policy that goes beyond what is required under the laws and regulations applicable to that bank is an illustration of that discretion. It may cause a serious problem when considering the role of a confirming bank, a nominated transferring bank, a guarantor or a beneficiary. If the reference to an internal, sanctions-related policy were to allow the bank discretion to honour or refuse payment, one could even question if that bank has in fact assumed a legally binding obligation, a question that of course has to be determined under the applicable law." Furthermore, Chapter 4.2 states that practitioners should refrain from bringing into question the irrevocable and independent nature of a credit, the certainty of payment or the intent to honour obligations."
The conclusion indicated that the issuing bank had an obligation to honour a complying presentation. If it wishes to incorporate conditions relating to its internal policies these should be substantiated in detail with the terms and conditions of the credit. The point was made that any objection to the documents based on a sanction regulation should not be construed as a refusal notice under UCP 600 article 16.
See TA.884rev for the full transcript of the opinion
A credit indicated that the trade terms were CIF Mundra Port, India. However, the routing was stated to be port of discharge Mundra and place of final destination ICD Moradabad, India, with bills of lading the chosen transport document.
The credit indicated "Documents of the following nature are not acceptable:?...?G. Bearing any reference by stamp or otherwise to cost additional to freight charges...". By a subsequent amendment, reference to condition G was removed.
The presented bills of lading indicated shipment to Mundra port and final destination as ICD Moradabad, India. However, the bills of lading bore the following clause "Inland haulage charges from Mundra seaport to ICD Moradabad are to buyer's account. Empty container to return to ICD TKD on consignee's risk & account."
The issuing bank refused the documents for the following reason "Bill of lading states that empty containers to return to ICD TKD on consignees risk and account whereas LC states no such condition."
The nominated bank objected, but the issuing bank maintained its position. The question was asked as to whether the refusal was correct and if not, would the answer be different if clause G had not been deleted?
The analysis indicated, "The stated delivery terms are CIF Mundra. Therefore, the freight costs under the credit are those up to Mundra port. The carriage from Mundra to ICD Moradabad is outside the credit (and the UCP) and on the buyer's account. The reference to costs additional to freight can only apply in the context of the freight costs incurred up to CIF Mundra. The buyer is responsible for all costs from unloading in Mundra to delivery at Moradabad.
The analysis also stated ".. the clause "Empty container to return to ICD TKD on consignee's risk & account" relates to an activity which takes place after delivery to the port to where freight has been paid (Mundra) and is, therefore, outside the credit (and the UCP) and on the buyer's account. As such, UCP 600 sub-article 26 (c) does not apply."
The conclusion indicated that the refusal was not valid and it would be no different if clause G had not been deleted.
See TA.885rev for the full transcript of the opinion