Written by Kazi Suhel Tanvir Mahmud, Trade Finance & Letter of Credit Specialist.
Where OFAC Compliance Ends Under UCP 600: What Banks Are (and Are Not) Responsible For
In contemporary trade finance operations, sanctions compliance—particularly screening under the U.S. Office of Foreign Assets Control (OFAC)—has become an unavoidable part of Letter of Credit processing. Regulatory expectations, enforcement actions, and cross-border risk exposure have pushed banks to integrate sanctions controls deeply into their operational workflows. As a result, sanctions checks now routinely intersect with documentary examination under Letters of Credit governed by UCP 600.
This operational overlap, however, has produced a persistent and consequential misunderstanding. In practice, OFAC compliance is frequently treated as if it were part of a bank’s documentary examination obligation under UCP 600. Payments are delayed, presentations are refused, and communications are issued using UCP language—even where no documentary discrepancy exists. This approach, while often well-intentioned, is not supported by the text of UCP 600 and creates material legal and operational risk.
The root of this confusion lies not in the rules themselves, but in institutional behavior. Sanctions violations carry severe regulatory and reputational consequences, while errors in documentary examination are often viewed as commercial or operational matters. Faced with a sanctions alert, trade operations staff may instinctively rely on the familiar UCP refusal framework to justify non-payment, even though sanctions law and documentary rules operate in fundamentally different spheres. Over time, these practices become embedded as internal policy, despite lacking a contractual foundation under UCP.
To understand where OFAC compliance ends, it is necessary to restate what UCP 600 actually governs. UCP 600 is a contractual set of rules that applies only when incorporated into a credit. It regulates the relationship between banks and parties to the credit strictly in relation to documents. Articles 4 and 5 reinforce the autonomy principle, confirming that a credit is separate from the underlying contract and that banks deal with documents, not with goods, services, or performance. This principle is not merely theoretical; it is designed to prevent banks from becoming arbiters of legality, performance, or regulatory compliance.
Article 14 further limits a bank’s obligation by requiring examination of documents “on their face” to determine whether they appear to comply with the terms and conditions of the credit and with UCP. The phrase “on their face” is decisive. It confines examination to what is apparent from the documents themselves and excludes investigative or external assessments. Sanctions screening, by contrast, relies on databases, designation lists, ownership analysis, jurisdictional reach, and legal interpretation—none of which form part of face-value document examination.
Article 34 of UCP 600 reinforces this boundary by disclaiming bank responsibility for the legal consequences of documents or the accuracy of statements contained in them. Sanctions law is concerned precisely with legal consequences arising from transactions and parties. By disclaiming responsibility in this area, UCP deliberately excludes sanctions legality from the scope of documentary responsibility. Nothing in UCP 600 imposes an obligation on banks to assess whether honoring a complying presentation would breach sanctions law.
OFAC compliance arises from an entirely different source. It is a regulatory obligation imposed by law, often with extraterritorial effect, and enforced through supervisory and enforcement mechanisms outside the contractual framework of the credit. Sanctions screening evaluates whether parties are designated, whether ownership or control thresholds are met, whether goods or services are restricted, and whether licenses or exemptions apply. These assessments are dynamic, jurisdiction-specific, and subject to regulatory interpretation. They cannot be resolved through document examination alone and were never intended to be governed by ICC rules.
Banks therefore operate under two parallel obligations. Under UCP 600, a bank must determine whether a presentation is complying and, if so, honor or negotiate in accordance with the credit. Under sanctions law, a bank may be legally prohibited from making payment or transferring funds. These obligations coexist, but they do not overlap. A sanctions restriction may prevent performance, but it does not retroactively convert a complying presentation into a non-complying one.
The most serious risk emerges when this distinction is not respected. When a bank issues a notice of refusal citing UCP articles and listing sanctions concerns as discrepancies, it mischaracterizes the nature of the issue. A sanctions alert is not a documentary discrepancy, and treating it as such can expose the bank to allegations of wrongful dishonor. Even where sanctions law ultimately justifies non-payment, using UCP refusal mechanics may undermine the bank’s contractual defensibility and invite dispute.
Proper practice requires procedural discipline and precise language. Documentary examination should be completed independently of sanctions screening. If documents comply, that status should be recognized internally, even if payment cannot be made due to regulatory restraint. Sanctions issues should be handled through compliance escalation and, where required, payment should be placed on hold without issuing a UCP refusal that implies documentary non-compliance. Communications should clearly distinguish between contractual compliance and legal inability to perform.
It is also important to recognize what UCP 600 does not say. The absence of sanctions language in UCP is not an oversight. ICC rules are designed to be jurisdiction-neutral and universally applicable. Embedding sanctions obligations— which vary by country and change frequently—would undermine the certainty and predictability that documentary credits are meant to provide. For this reason, ICC guidance and ISBP publications consistently avoid incorporating sanctions screening into documentary examination standards.
Banks that blur this boundary risk expanding their obligations beyond what UCP 600 requires, effectively rewriting the rules through internal policy. This not only increases exposure to dispute but also weakens the integrity of the documentary credit system itself. Sanctions compliance is essential, but it must be applied for the right reason, through the right framework, and with the right procedural safeguards.
Understanding where OFAC compliance ends under UCP 600 is therefore not about minimizing regulatory responsibility. It is about preserving contractual certainty while meeting legal obligations. Documentary credits function because they are predictable; sanctions compliance functions because it is responsive. Confusing the two weakens both.
 |
