395. Do Directives 1, 2, and 3 prohibit U.S. persons from dealing in or processing transactions under a letter of credit that was issued on or after the sanctions effective date and that carries a term of longer than the applicable tenor specified in the relevant Directive when the beneficiary or the issuing bank of that letter of credit is one of the entities identified as subject to the Directives?
U.S. persons may deal in (including act as the advising or confirming bank or as the applicant (i.e., the purchaser of the underlying goods or services)) or process transactions under a letter of credit in which an entity subject to Directive 1, 2, or 3 is the beneficiary (i.e., the exporter or seller of the underlying goods or services) because the subject letter of credit does not represent an extension of credit to the SSI entity. U.S. persons may deal in (including act as the advising or confirming bank or as the applicant or beneficiary) or process transactions under a letter of credit where the issuing bank is an SSI entity provided that the terms of all payment obligations under the letter of credit conform with the debt prohibitions under the applicable Directives. For example, a U.S. bank acting as the negotiating bank for a letter of credit issued after November 28, 2017 by an SSI entity subject to Directive 1 should ensure that it receives reimbursement from the SSI entity within the allowable 14-day debt limit.
U.S. persons may not deal in (including act as the advising or confirming bank or as the beneficiary) or process transactions under a letter of credit if all of the following three conditions are met: (1) the letter of credit was issued on or after the sanctions effective date, (2) the letter of credit carries a term of longer than the applicable tenor specified in the relevant Directive, and (3) an SSI entity is the applicant of the letter of credit. This would constitute prohibited activity because the subject letter of credit would represent an extension of credit to the SSI entity. [11-28-2017]
1) FAQ # 395 is of interpretive significance for the "new debt" prohibitions for a few reasons.
First, it clarifies the meaning of "debt of" a given sanctions target. The prohibitions apply to "debt of" persons subject to the prohibition, not "debt involving" such persons. This is why there is a distinction between (i) "a letter of credit in which an entity subject to Directive 1, 2, or 3 is the beneficiary" (not debt "of" that person because credit is not being extended) and (ii) situations in which an SSI entity has debts. Refer to https://imgur.com/a/azOBj2x for a chart summarizing this FAQ. When an SSI is an importer/applicant for a letter of credit, that would constitute an extension of credit to that person. Likewise, "a U.S. bank acting as the negotiating bank for a letter of credit" would be "extending credit" to an SSI reimbursing bank, even when neither the importer nor the exporter are SSI entities.
Second, the FAQ appears to confirm that where debt tenors denoted in a letter of credit would otherwise implicate the sanctions prohibitions, the letter of credit is not "new debt" if the actual instrument was issued prior to the sanctions effective date. In other words, on day 1 the letter of credit is issued, on day 2 the reimbursing bank is made subject to "new debt" prohibitions, and on day 150 the reimbursing bank makes an out-of-tenor reimbursement to a U.S. bank. This is not prohibited because the obligation of the reimbursing bank is back-dated to the issuance of the letter of credit, not the specific date on which the payment obligation arose. This is fully consistent with OFAC's position in other contexts (see FAQ # 394 and comments thereto).
2) FAQ # 516 adds to the "letter of credit" question by stating that "U.S. persons are not prohibited from dealing with the Government of Venezuela when it plays the role of underwriter on new debt of a non-sanctioned third party exceeding the applicable authorized tenor or accepting payment under a letter of credit with terms exceeding the applicable authorized tenor that is issued, advised, or confirmed by the Government of Venezuela, so long as the Government of Venezuela is not the borrower".
* See generally General Note on the Prohibitions on Dealings in “New Debt” of Certain Sanctions Targets (System Ed. Note)