What a fascinating ruling we witnessed last month from the Singapore Supreme Court in the case involving Singapore-based coal trader Kuvesa Resources and JPMorgan*. The case revolved around the reversal of a judgment against JPMorgan, who, in its role as the confirming bank, refused payment under a Letter of Credit due to US sanctions violations as stated in the sanctions clause of the confirmation documentation. The outcome of this case is a fascinating ruling that encompasses multiple facets of today’s complex and contradictory sanctions landscape, presenting challenges for both parties involved.
Although sanctions language in general offers numerous intriguing elements to explore, this case delves into a sanctions clause within the context of a Letter of Credit, making it even more interesting due to its complexity within this context. The Letter of Credit consists of interrelated yet independent unilateral contracts, aiming to provide security to the beneficiary by ensuring payment upon the presentation of compliant documents.
In the underlying case, the confirmation documentation stipulated that JPMorgan would not be able to pay out if the documents ‘involved any country, entity, vessel, or individual listed in or otherwise subject to any applicable restriction’. The Court ruled that JPMorgan, as the party invoking the sanctions clause, failed to meet the burden of proof: there was insufficient evidence to confirm if the vessel involved in the trade was owned by a Syrian party, preventing the conclusion that the deal involved a party subject to ‘any applicable restriction.’
As a result, the case explores the disparity between the burden of proof in court and the risk management methodologies employed by banks, based on regulatory requirements from OFAC and other regulators. JPMorgan’s decision to reject the payment was grounded in its internal risk assessment tools, policies, and procedures. Specifically, the risk assessment was triggered by a match against its internal sanctions watch list (as the vessel was not listed on the OFAC SDN list), certain ‘red flags,’ reports, and lists provided by its risk management solution provider. Additionally, JPMorgan had sought clarification from OFAC regarding their stance in this situation. In this correspondence, JPMorgan among other things writes:
‘..While the information was not conclusive on who the beneficial owners of the vessel were, based on prior knowledge of the Syrian ownership and connections, and the risk associated to the name change, and ownership layers to potentially disguise Syrian ownership as well as continued reference to Sea Sovereignty Shipmanagement in the due diligence, [JPMorgan] made a risk-based decision to retain the vessel on its internal filter as a Syrian-owned vessel.’
OFAC subsequently replied as follows:
Research by [JPMorgan] and its Singapore branch indicated that the vessel is owned by the Syrian commercial entity Ali Samin Group, located in Tartous, Syria. Had [JPMorgan] and its Singapore branch not rejected the trade documents for a non-U.S. person’s sale of cargo shipped via a Syrian vessel, it would have resulted in an apparent violation of OFAC regulations.
While this phrasing is typical for OFAC, one could argue that, in this case, it’s questionable how this would have been an ‘apparent’ violation, given that the ownership of the vessel was never duly confirmed to be Syrian, according to the information provided by JPMorgan.
JPMorgan’s approach aligns entirely with industry standards; banks frequently reject transactions based on their internal risk assessments. The common explanation given is ‘due to the bank’s internal compliance policy,’ which often causes confusion among other banks involved in the transaction.
In this particular case, the Court of Appeal rejected the approach due to the narrowly defined sanctions language in the contract, coupled with the security nature of the Letter of Credit and the unilateral nature of the contract. In many cases however, transactions are not governed by contracts containing sanctions language; instead, they fall under the bank’s broadly defined general terms and conditions, allowing the bank significant flexibility to reject transactions based on internal policies.
The exponential growth of sanctioned entities, coupled with intense regulatory pressure regarding the circumvention of sanctions through the use of complex ownership structures and (to use OFAC’s words) ‘apparent’ low standard of proof from a regulatory requirement standpoint to reject transactions, is likely to erode banks’ risk appetite further. This, in turn, is expected to lead to increased legal uncertainty.
Interestingly, in the end this phenomenon is likely to undermine the very purpose of the vast complexity of contemporary sanctions programs, namely to minimize the impact of sanctions on the sanctions authority’s own economy and the ordinary citizens in the target country.
Afterwards, I will explore the other interesting elements, including the validity of sanctions clauses in Letters of Credit and the extraterritorial elements in sanctions wording.
******
More information:
Lupicinio International Law Firm
C/ Villanueva 29
28001 Madrid
P: +34 91 436 00 90
info@lupicinio.com
