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The ICC Banking Commission Task Force on Anti-Money Laundering today released guidelines on sanction clauses in trade related products, including letters of credit, documentary collections and guarantees.

Sanctions are imposed by the United Nations, the Council of the European Union or individual countries to prohibit dealings with specific countries, persons, ships, aircraft or goods, especially with respect to import and export licensing of technology or controlled goods.

“The guidance paper does not aim to discuss the sanctions policies of nations, nor their application, only the effect on the instruments in question,” said Neil Chantry, Chairman of the ICC Task Force on Anti-Money Laundering.

The use of clauses related to sanctions in trade transactions has become a problematic issue for banks involved in international trade, and particularly in letters of credit. The ICC Commission on Banking Technique and Practice therefore has decided to draw the attention of the trade finance community to the use and impact of sanction clauses.

With these guidelines, ICC’s primary intention is to make practitioners aware of the need to be careful in their choice of counterparties or service suppliers and to emphasize that it is their responsibility to ensure that they do nothing that brings into question the irrevocable nature of the credit or guarantee, the certainty of payment, or the intent to honour obligations.

The guidelines were drafted under the stewardship of the ICC Task Force on Anti-Money Laundering, a standing body composed of more than 60 experts in the anti-money laundering field.

Banks have increasingly begun including sanction clauses in transactions because they are concerned about the implications of sanctions for their own obligations and trade related transactions. In letter of credit transactions, where sanction clauses give the issuer discretion whether or not to honour, they put in question the independent nature of the letter of credit and its irrevocability.

“Of particular concern are clauses that alter the reimbursement provisions of UCP 600 with respect to nominated banks that have acted pursuant to their nominations or that seek to shift the risk of compliance with sanctions to nominated banks,” said Mr Chantry.

“We expect practitioners to know their contractual partners well,” he added. “Firms engaging in cross-border business should at least be aware that sanctions may be in force in other countries with which they are dealing and should take these issues into account in accordance with their own risk policies.

ICC NewsAlert 26 March 2010