Title: Discrepant Beneficiary Disclosure, Hidden PEP Triggers Compliance Block

Scenario: An LC is issued for the import of industrial water filtration equipment from Country A to Country B.

Documents are presented and appear fully compliant under UCP 600 and ISBP 745 standards.

However, upon sanctions and adverse media screening, the ultimate beneficial owner (UBO) of the beneficiary company is flagged as a PEP under FATF definitions, previously investigated for state procurement fraud.

Document Presentation Details:

• Document Type: Commercial Invoice, Bill of Lading, Packing List, Certificate of Origin

• LC Terms: Clean presentation required, reimbursement via MT103

• Documents Presented: Appear compliant under Article 14 of UCP 600

• Discrepancy Detected: Non-documentary compliance red flag

What Triggered the Compliance Hold?:

Upon sanctions and PEP screening (as per OFAC and FATF Recommendation 12):

• The Beneficiary, AquaSys Engineering Ltd., is controlled by a PEP, Mr. M, a former Minister of Infrastructure in Country A.

• The PEP is not listed on the documents, and the company is not on any official sanctions list.

• However, the ownership structure is revealed through enhanced due diligence (EDD) and open-source intelligence.

Although UCP 600 Article 14(a) states that the bank deals with documents, not goods, services or performance, the bank’s AML compliance policy overrides LC rules.

Key Regulatory References:

UCP 600 / ISBP 745

• Article 14(a) – Banks deal with documents only, not the underlying transaction.

• ISBP 745 Paragraph A1 & A21 – Documents must not conflict with each other, but no obligation to investigate the parties beyond the document face.

FATF Recommendation 12

• Financial institutions must apply enhanced due diligence to transactions involving PEPs, their family members, or close associates, whether domestic or foreign.

OFAC Guidelines

• While a company may not appear on the SDN list, ownership or control (≥50%) by a sanctioned or high-risk individual may render the transaction prohibited or reportable under U.S. sanctions compliance.

Final Result: The issuing bank raises a compliance escalation, placing the transaction on hold pending internal investigation and UBO clarification. The advising bank is notified, and the applicant is asked to amend or cancel the LC.

The documents are technically compliant, but the transaction is blocked due to:

• Undisclosed PEP ownership

• Potential reputational and legal risk

• Breach of internal AML/sanctions policy

Key Takeaway: Even perfectly compliant LC presentations can be rejected or delayed due to non-documentary red flags related to AML, PEP involvement, or sanctions exposure.

Banks must align documentary checking under UCP with real-world compliance frameworks including FATF, OFAC, EU Sanctions, and their own risk appetite.

Compliance isn’t just about documents, it’s about who stands behind them.