Geopolitical forces and the evolving landscape of documentary credit

Published on July 24, 2025 by Erangi Perera

Introduction

Geopolitical forces have played a crucial role in reshaping trade finance and become significant since 2018 due to increased trade restrictions created by the US-China tariff war. This, along with other geopolitical events, has had a significant impact on trade finance, reconfiguring trade flows, market strategies and risk perceptions. High inflation, disruptions to trade routes and supply chains, high insurance costs due to higher risk and increasing economic sanctions are the key issues as a result of geopolitical shifts. The primary focus of this blog, however, is on economic sanctions as a tool of foreign policy and their impact on documentary credit.

The US imposed an unprecedented number of economic sanctions and entity-based export controls in 2024 in response to Russia’s war in Ukraine, tensions in Iran and Isreal, and the deterioration in political and economic relations with China. In addition to the US government’s list of Specially Designated Nationals and Blocked Persons (SDN) and of entity-based controls, there are country-specific authorities targeting a wide range of activities deemed contrary to the US’s national security and foreign policy. Despite most of these sanctions targeting Russia, Iran and North Korea, there are a number of regulations designed to counter illegal activity in countries such as Belarus and Venezuela. The EU and the UN also play a vital role in imposing sanctions to achieve diplomatic objectives.

These sanctions have made cross-border trade and financial transactions more difficult, complicating transfer of funds and issuance of letters of credit. They have also directly impacted financial institutions that facilitate trade under the current version of the Uniform and Practice for Documentary Credit (UCP 600) and other standard practices.

Economic sanctions and their implications for UCP 600

Guidelines established by the International Chamber of Commerce (ICC), such as UCP and the International Standard Banking Practice (ISBP), are designed to standardise documentary credit while ensuring fairness and efficiency. They also intend to ensure that trade transactions are processed based on documentary compliance rather than on subjective or external aspects. However, the recent surge in economic sanctions and the subsequent sanction clauses introduced to address the issue have impeded the fundamental nature of documentary credit. While UCP remains neutral, financial institutions must comply with economic sanctions imposed by governments and international organisations such as the EU and the UN. Anti-money laundering (AML), counter terrorism financing (CTF) regulations and trade restrictions associated with political conflicts are also key considerations. Therefore, financial institutions face the dual mandate of fulfilling their contractual obligations under UCP 600 and not breaching applicable sanction laws.

The frequent imposition of sanctions has hindered the implementation and interpretation of documentary credit in multiple ways. The most common concerns are as follows:

1. Compliance challenges between UCP 600 and sanction regulations

The imposition of sanctions would cause situations where a bank is contractually bound to honour a transaction as it adheres to UCP guidelines but must reject it, as it is legally prohibited due to sanction regulations. Failure to comply with sanction regulations has severe consequences, including criminal prosecution, imprisonment and substantial fines.

Case examples: In 2019, Standard Chartered Bank was fined USD1.1bn^[1] by UK and US authorities for violating sanctions against Iran and a few other countries. HSBC was also fined USD1.9bn^[2] for violating sanctions against Iran and failing to prevent money laundering in 2012.

2. Sanction clauses conflicting with the autonomy principle of UCP 600 Sanction clauses are designed to ensure that financial institutions comply with applicable sanction regulations that prevent transactions with certain countries, entities and individuals. These sanction clauses range from statutory obligations to a bank’s internal policy and discretion to refuse payment. The following are a few types of sanction clauses:

Clauses relating to sanction laws and regulations applicable to the bank
Clauses relating to the bank’s internal policy to include international sanction lists
Clauses relating to the bank’s discretion to refuse payment

On the other hand, the autonomy principle regarding documentary credit states that a bank’s obligation to pay is based solely on the presentation of documents and is independent from the underlying contract. The inclusion of these sanction clauses may override this autonomy principle by adding an external factor. Although sanctions are a force of law that overrides the UCP regulations, it creates uncertainty and questions letters of credit as a reliable method of payment. Judges and arbitrators frequently struggle to strike a balance between the sanctity of documentary credit and the necessity for sanctions compliance.

3. Challenges of sanction evasion and risk of trade-based financial crime With the increased imposition of sanctions, the likelihood of evading them has also increased. Despite the stringent controls, global trade remains prone to criminal exploitation of the autonomy principle of documentary credit and its focus on documentary compliance to conceal prohibited transactions. The resulting increase in risk has led banks to advance their due diligence procedures and engage in more rigorous scrutiny of transactions, requiring more time and effort.

4. Banks’ conservative approach to sanctions compliance Banks must balance between contractual obligation and legal compliance. However, due to the complexity of the sanction clauses and the severe consequences of non-compliance, banks may take a risk-averse approach that may extend beyond directly sanctioned parties. This may also affect business with other parties linked to the sanctioned entities.

Case example: Kuvera Resources Pte Ltd vs JP Morgan[3] Chase Bank. In 2023, Singapore’s Court of Appeal ruled that the bank cannot refuse to pay Kuvera Resources Pte Ltd under a letter of credit, as the bank had not sufficiently proven the transaction was subject to sanctions.

5. De-risking and exclusion

Many international financial institutions have chosen to respond to geopolitical uncertainty by de-risking, which involves withdrawing from high-risk jurisdictions. The absence of financial institutions willing to process documentary credit is limiting the effectiveness of UCP 600.

Case example: In 2022, US banks[4] closed accounts of Somali American remittance companies due to the risks related to transferring money to Somalia. This resulted in significant financial exclusion for Somali Americans who trusted these remittance services to send money back to Somalia.

6. Legal ambiguities

While UCP 600 sets rules for trade transactions, it does not explicitly address how to manage conflicts between UCP guidelines and regulatory sanctions. This places banks in a position where they must exercise caution in managing the risks of penalties, contract breaches and reputational damage.

Outlook: Future of UCP 600 amid geopolitical tensions

Trade restrictions fuelled by geopolitical forces have significantly increased over the past decade, and as new geopolitical rivalries form, new sanctions and related restrictive measures are expected to increase. The current direction of the US government further emphasises the ability to use potential sanction regimes as a tool of foreign policy.

In response to this, many banks use sanction clauses as a risk-mitigation tool. However, ICC guidelines recommend that banks consider these only in specific transactions and refrain from using them regularly.

Furthermore, there is increased tendency for banks to explore the possibility of using advanced technology in sanctions compliance. These technologies rely heavily on AI and machine learning to enhance sanctions screening processes. It is unadvisable to rely solely on technology to interpret and implement UCP 600, as there is a significant amount of judgment required due to the growing complexity in the trade finance sector.

Trade experts believe it is time to revise UCP 600 to explicitly address the complexities caused by sanctions regulations to ease the burden on financial institutions and related entities. However, for a revision to UCP 600 to be effective, it should provide clarity and the flexibility required to keep up to date with rapidly changing geopolitical developments. Given the voluntary acceptance UCP 600 requires, it must be widely accepted by international trade financing and banking communities.

How Acuity Knowledge Partners can help

Our services include a comprehensive economic sanctions screening process that includes the following:

Document screening
Managing false positives
Ongoing monitoring
Screening database management
Reporting

We also provide end-to-end support throughout the entire trade finance lifecycle. With our deep domain expertise, we manage every aspect of trade operations with robust risk-management techniques. These services primarily include the following:

Issuance, advising, confirmation, transfer, back-to-back, counter-guarantee, demand/claim validation, invoicing fees, auto-renewal, amendment
Examination of electronic, digital and physical documents under letters of credit/standby letters of credit
Preparing physical and digital/electronic documents in line with terms and conditions of trade finance instruments and/or contractual terms
Preparing collection instructions, handling trade documents and SWIFT messages and tracking payment, recording and tracking payment undertaking and avalisation
Preparing, reviewing and validating invoices, purchase orders and supporting documents for financing, tracking and settlement of financing, AML checks

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About the Author

Erangi Perera

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Erangi Perera has 18 years of professional experience, including 15 years in banking, focusing on loan operations, corporate banking, and accounting. She has hands on experience in platform migration, process improvement, and lean management. Erangi is a Fellow member of CIMA(UK) and holds an MBA, and a BBA from the University of Colombo.