Wednesday, June 8, 2016

Sanctions Clauses in trade finance instruments? – No, thank you!

When I throw the key words “sanctions” and “trade finance” at you, I trust that you immediately think about ruthless bankers sacrificing honorable political goals for big personal bonuses at the end of the year.

The reality is pretty different today, as I have recently experienced firsthand, where banks wanted to be better than the best in class by introducing ever more contractual clauses allowing them to impose sanctions laws on their counterparts.

This situation is strange. Let me make an example: In my country, insider trading is forbidden and punished as a crime. Before I started working for my bank, I actually didn’t negotiate a clause in my employment contract saying that I cannot be obliged to do insider trading for my bank. I don’t think that anybody would have been particularly impressed by my integrity if I had tried to negotiate such a clause. It is simply unquestionable that both my bank and I respect the applicable criminal Law, in particular with regard to insider trading. The fact that insider trading cases regularly pop up in the financial press doesn’t really change anything here.

But – surprise – this is exactly what happens today when banks would start trying to negotiate sanctions clauses in trade finance instruments. I admit, the question of the applicable law is a bit trickier than in my example. But still, there are rules in place to determine the applicable law.

This is why I think it is a good moment to remind the ICC’s recommendation of 2014 to not include sanctions clauses in trade finance instruments:

  • Banks should refrain from issuing trade finance-related instruments that include sanctions clauses that purport to impose restrictions beyond, or conflict with, the applicable statutory or regulatory requirements.
  • In trade finance transactions involving letters of credit or demand guarantees subject to ICC rules, practitioners should refrain from bringing into question the irrevocable, independent nature of the credit, demand guarantee or counter-guarantee, the certainty of payment or the intent to honor obligations. Failure to do so could eventually damage the integrity and reputation of letters of credit and demand guarantees which may have a negative effect on international trade.”

Let me sum up the ICC’s reasons for its recommendations in my own words:

  • First, if you start rewriting obligations in your contract that apply to you anyway, people will start wondering why you do so and whether you don’t have any hidden agenda. In addition, there is a high chance that you will create problems when reformulating national laws and regulations in your contract and putting them in another (contractual instead of criminal) context. In some countries, it may even be illegal to go beyond applicable sanctions and, thus, discriminate parties who are not meant to be discriminated against.
  • Sanctions clauses in trade finance instruments can question the irrevocable / documentary nature of a guarantee / letter of credit. This can ultimately interfere with the equilibrium among all stakeholders that the ICC Rules on trade finance instruments have had a hard time to implement in the first place.