Volume 23, Number 3 March 2019
InII This Issue... 18 FEATURE
■■■ 3 UPDATES: Previewing the 2019 SIGNIFICANT U.S. LC ISSUES IN 2017 ICC Annual Meeting’s Controversy & Guidance Panel; A Lynchpin for the Each year since 1992, James G. Barnes and Simplified LC of the Future; Canadian City Touts Advantages of Surety Bonds Professor James E. Byrne have co-authored over LCs; Islamic Supply Chain Financing; Appendices Added to Wolfsberg Trade an annual survey of the most significant Finance Principles Document; International Updates; Quote to Note letter of credit issues addressed in cases
■■■ 7 READER REACTION: decided in the United States. Their 2018 ■■■ Bangladesh Regulations and UCP & ISBP survey of LC matters emerging from 2017 ■■■ Incoterms: Not a Matter for Bankers cases represents their last collaborative ■■■ 11 LITIGATION DIGEST: ■■■ Zeeco, Inc. v. JPMorgan Chase Bank, N.A. work together before the passing of ■■■ CPB Contractors Pty Ltd v. JKC Australia Lng Pty Ltd (No 2) Professor Byrne in July 2018. Their annual article primarily consists of two parts. The ■■■ 30 ARTICLES: ■■■ “Rights and Obligations of Banks to Recalculate” first examines pre-honor cases in which a by LIU Shuwen (Vivian) ■■■ “Confronting the Challenges of Unusual or dispute arises before a demand for payment Suspicious Wire Transfer Transactions” by Ahmir MANSOOR under an LC has been honored. These cases
■■■ 38 TEXT: involve discrepancy defenses & preclusion; ■■■ ICC Banking Commission fraud defenses & injunctions. Barnes and Guidance Paper – The Use of Drafts (Bills of Exchange) under Byrne then analyze post-honor cases in Documentary Credits – Executive Summary which disputes arise after the issuer honors
■■■ 41 LC STATISTICS: an LC. These cases involve matters US Branches of Non-US Banks (3Q18) regarding issuer, applicant, and beneficiary ■■■ 44 SCAM SURVEY recoveries.
Published in partnership with BAFT ocumentary Credit World (DCW) Editorial Advisory Board Dr. Karl Marxen Ostfalia University of Applied is published monthly by Sciences (Germany) DDD Documentary Credit World, Inc. Lena Andersson Global Product Specialist Opinions expressed in it do not SEB (Sweden) Khalil Matar Assistant General Manager necessarily reflect the official positions of Pavel Andrle Alinma Bank (Saudi Arabia) the publishers of DCW, its Editorial Trade Finance Consultant Board, Editorial Advisory Board, or the Czech Republic David Meynell Owner, TradeLC Advisory organizations with which they are Hasan Apaydin (Turkey) associated. Authors, editors, members of Neal Millard Michael Evan Avidon, Partner Musick, Peeler & Garrett LLP DCW’s Editorial Board and Editorial Adjunct Professor, USC Law School Advisory Board, and the institutions with Moses & Singer LLP (NY) which they are associated often are Buddy Baker K. Nizardeen FIB (Dubai, UAE) actively involved in the field as lawyers, VP, Investment Banking Division Goldman, Sachs & Co. (Chicago) advisers, parties, consultants, or expert Vincent O’Brien, Technical Trade Advisor witnesses in many of the matters James G. Barnes* China Systems Corporation Baker McKenzie (Chicago) addressed in DCW. The publication often Janis S. Penton, Assistant General Counsel reflects and sometimes adopts their Abdulkader Bazara MUFG Union Bank, N.A. views. Notwithstanding positions Trade Finance Structuring Head Abu Dhabi Islamic Bank (Abu Dhabi) Gabriel Sham expressed in DCW, every effort will be Trade Finance Consultant made to publish differing viewpoints and Jack Chan Singapore Hong Kong contributions expressing such views are Kim Sindberg welcomed. Dr. Alan Davidson, Senior Lecturer Executive Adviser TC Beirne School of Law Nordea Trade Finance (Denmark) University of Queensland (Australia) The support of the Journal of Donald R. Smith* International Commercial Law Roger D. Fayers, LLB President, is gratefully acknowledged. Barrister (UK); Department of Trade Global Trade Advisory, Ltd. & Industry, Soliciter’s Dept. (retired) Soh Chee Seng, Technical Consultant, Documentary Credit World Clyde Fletcher, Documentation Manager Trade Finance Issues, the Association 20203 Goshen Road., No. 343 Fonterra Limited of Banks in Singapore (Singapore) Gaithersburg, MD 20879 USA Xiang Gao Chang-Soon Thomas Song, First Expert, Trade and Services Department, phone: +1-301-330-1970 Dean & Professor of Law, China Univ. of Political Science & Law (Beijing) KEB Hana Bank (Seoul) fax: +1-301-926-1265 Lorna K. Strong e-mail: [email protected] Paula Greaves SVP & Global Trade Operations Deputy General Counsel website: www.doccreditworld.com Procedures & Technical Consultant HSBC Global Trade & Receivables Bank of America Merrill Lynch (Seattle) Finance (London) Founder Hugo Verschoren Professor James E. Byrne A.T.M. Nesarul Hoque Vice President, Consultant, goVer Trade Technologies Mutual Trust Bank (Bangladesh) Belgium Contributing Editors Professor Katsuto Iida Jun Xu Vincent Maulella (retired, Tezukayama Univ., Japan) Deputy General Manager Vincent O’Brien Bank of China, Jiangsu Branch (China) Soh Chee Seng Dean Rafael Illescas Ortiz University Carlos III de Madrid (Spain) KK Yeung Executive Editor Hong Kong Christopher S. Byrnes Chris Jenkins Chief Information Officer Alexander Zelenov, Director Correspondent Editor Standard Chartered Bank (Thai) PCL Bank for Foreign Economic Affairs Lisa V. Chin of the USSR (Moscow) Jin Saibo, Partner Case Editor Beijing Jincheng Tongda & Neal *Denotes Editorial Board member Matthew J. Kozakowski Law Firm (China) Emeritus Board Members Scam Survey Editor Carter Klein, Partner Jenner & Block (Chicago) Jacob A. Manning DCW is grateful to prior members of its Board and appreciates their past Designers Michelle Kelly-Louw Professor in Banking Law service. Emeritus Board Members are Mario Escalera, Christopher V. Sandler University of South Africa recognized on the DCW website at: www.doccreditworld.com Student Research Associates William Mabry IV Published by Documentary Credit World, Inc. ISSN 1520-0221. Copyright © 2019 by Documentary Credit World, Inc. Michelle M. Yearick All rights reserved. No part of this journal may be reproduced in any form, including microfilm, xerography or otherwise, or incorporated into any information retrieval system, without the written permission of the publisher. Single subscription price: $595 per year. Global license information available upon request. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the service of a competent professional should be sought. 2 Documentary Credit World ■ March 2019 UPDAUPDAUPDATESTESTES
Previewing the 2019 ICC Annual Meeting’s Controversy & Guidance Panel he Spring 2019 ICC Banking Commission Annual Meeting in Beijing kicks off with two days of Task Force meetings T beginning 8 April, followed by the Plenary Meeting of 10-11 April. During the plenary sessions, a panel on “Documentary Credit Practices: Controversy & Guidance” will discuss factors contributing to the reported increase in discrepancies and possible approaches to improvement through discussion of topics such as:
• Should the application of ISBP745 (2013) be widened? • Can the existing ‘Opinions’ process be improved? • Is there a business case to develop a ‘lite’ version of UCP600?
A great deal of focus will likely center on education. Education appears to be the primary problem, both in credit issuance and document examination. Simplification of the UCP and ISBP will not resolve a lack of understanding of the underlying process which the LC exists to facilitate: 1. Applicant: Documents evidencing shipment of ordered goods; what the typical documents are, how they work, and their content; 2. Seller: Assurance of timely payment through document preparation and presentation.
Previously when this topic was discussed, comments reflected the belief that:
“The majority of documentary problems are caused by: • Poor drafting of the credit; • Lack of understanding of documentary credit workflows and the principles of UCP 600; • Lack of attention to detail and management of the production, shipment and document collation processes; • Excessive and unnecessary data being added to documents; • Restricted access to ISBP 745. 50% of the problems apply to the presented documents: it is a justifiable assumption that a greater understanding of ISBP 745 would help alleviate these problems and greatly reduce this percentage.”
March 2019 ■ Documentary Credit World 3 UPDAUPDAUPDATESTESTES
A Lynchpin for the Simplified LC of the Future uring the 2019 Americas Annual Survey of LC Law & Practice conference in Tampa on 21 March, one banker expressed in a unique way thoughts on a nagging problem: How to D reduce discrepancy rates. Wouldn’t it be great if we had a UCP article that read: “A bank assumes no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document, or for the general or particular conditions stipulated in a document or superimposed thereon … ”?
Ah, but we already do. Of course, this wording is the opening clause of UCP600 Article 34 (Disclaimer on Effectiveness of Documents). LC specialists have this important yet somehow continuously and increasingly overlooked article that — if it were followed in both its scope and its spirit — would greatly reduce the number of discrepancies being cited today as well as help repair the LCs' reputation as an acceptable payment vehicle.
While most trade bankers share similar views, it just appears that this is not the vision of banks in certain regions who want to use the LC for things it was never intended to do.
The point was advanced that this article would serve as one of the lynchpins for any version of a simplified LC currently being contemplated in segments of the international banking community. The idea can be traced back to Jim Byrne’s proposal for an LC Lite that, for this banker, was really just a way of getting back to the basics on the purpose of the LC. Approached by DCW, the banker elaborated: “If we were able to accomplish this, it would naturally result in LC presentations that yielded far fewer discrepancies; something I’m sure might encourage exporters to take another look at LCs and see them in a much more favorable light than they do now.”
Canadian City Touts Advantages of Surety Bonds over LCs algary became the first large municipality in Canada to permit developers to use surety bonds to secure financial obligations, according to a news release issued by the City of C Calgary. Effective 14 March 2019, Calgary will accept developer surety bonds as an alternative to letters of credit. Previously, Calgary only allowed bank-issued LCs as part of Master Development Agreements (MDAs) for development with the city. Darren Lockhart, managing director of Calgary Approvals, indicated the decision makes the city more appealing for investors “by removing financial barriers for business owners”.
In comparing the two instrument types, the City of Calgary statement said that surety bonds provide greater flexibility for developers seeking to reinvest their working capital that would otherwise be “tied up in a letter of credit” and that surety bonds “may also offer cost savings to some companies” over use of LCs.
The statement added: “In the event of a company transferring their ownership, bonds can be transferred in a manner similar to letters of credit. For companies that choose to use surety bonds to secure their development obligations, The City’s security reduction process will continue to be the same as with letters of credit. Once the Final Acceptance Certificate has been issued, bonds will simply expire after one year; no further action is required by a developer.”
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Islamic Supply Chain Financing
Question: What is the current Islamic invoice financing process and what would be the best practice from a Shariah/risk perspective?
Answer: Since the question is asked about Tawarruq-based invoice financing, let me first explain how the current process works:
Seller delivers the goods. Seller raises an invoice to the buyer under usance payment terms. Buyer countersigns invoice and delivery order, confirming receipt of goods and accepting to pay the invoice at maturity. Buyer submits the invoice to the Islamic bank (IB) for invoice financing. IB will scrutinize the invoice. If satisfied and if the transaction is within the approved available limits, it will keep this payment under the invoice as a collateral or security and enter into a Tawarruq transaction with the seller. IB will enter into a Tawarruq Financing matching with the usance period of the invoice for 90 percent or 100 percent based on the facility agreement. On the due date of the invoice upon receipt of payment, the bank will settle the Tawarruq. This is the simple invoice financing process.
The weakness I see in this process is that Islamic banks do not have appropriate specialized people with adequate knowledge to handle such transactions under the trade finance umbrella. It is recommended that all trade-related transactions are handled end-to-end under one process. In my opinion, such transactions should be handled by invoice/factoring experts at banks specializing in trade tinance with proper processes and guidelines in place.
The recommended process is as follows:
Structure the Islamic invoice financing/factoring with the help of relevant trade team personnel. Ensure that goods are delivered and it is not a fictitious transaction. Inspect the delivery of goods; this will enhance your TBML and Shariah Compliance. Allow only reputed suppliers, if possible, with adequate Takaful credit.
Always ensure that the correct sequence is followed. Under the Tawarruq contract, there are exhibits 1 to 5 and 5 needs to be acknowledged/signed by the buyer assigning or agreeing to pay the funds to the bank. In most instances of fictitious transactions, customers will pursue relationship managers to seek waivers for such signing by the buyer. Therefore, banks should follow exact Shariah sequences and guidelines with operations playing an independent role. This will eliminate 90% of defaults under invoice financing.
March 2019 ■ Documentary Credit World 5 UPDAUPDAUPDATESTESTES
By automating and acting as a factor, Islamic banks can play a major role in the factoring business by finetuning their processes. Using Blockchain for such transactions will have 100% transparency and will eliminate a majority of the operational issues.
Moreover, a proper Takaful scheme should be used to cover risk of non-payment, even though these are short term financings. Stringent payment follow-up processes should be used to ensure there are no delays in payment at maturity. — K. Nizardeen, COO, FIB, Dubai/Malaysia and EXCO Member of the ICC Banking Commission
Appendices Added to Wolfsberg Trade Finance Principles Document he culmination of more than two years’ work, The Wolfsberg Group, ICC, and BAFT jointly announced on 27 March 2019 release of two additional appendices to its 2017 Trade Finance T Principles guidance document. The Trade Finance Principles 2019 document, freely available on The Wolfsberg Group website, addresses the due diligence required by global and regional financial institutions active in the financing of international trade. The bulk of the 83-page document is comprised of 5 appendices: Documentary Credits; Bills for Collection; Guarantees and Standby Letters of Credit; and new appendices on Bank to Bank Loans (also known as Financial Institutions’ Trade Loans) and Open Account Trade Finance. The appendices provide guidance on the specific application of controls for these individual products and services.
International Updates INDIA: On 27 March 2019, the Export Import Bank of India listed medium-term dollar- denominated bonds worth USD 500 million on the global securities market platform of the India INX Exchange. The bonds, maturing in 2024, are part of the bank’s USD 10 billion global medium-term note programme. According to Bloomberg, the bank has signed 245 LCs with 63 countries consisting of nearly USD 25 billion in lending commitments.
UAE: Etihad Credit Insurance (ECI) and First Abu QUOTE TO NOTE Dhabi Bank (FAB) have signed QUOTE TO NOTE a memorandum of “Our focus is currently more in the trade space and understanding to help UAE- trade finance and trade letters of credit. We are based exporters and local “ experimenting with this technology but probably businesses mitigate commercial we are a little bit, like, reserved when it comes to and political risks in making bold public announcements.” international trade. Other areas of cooperative effort — Gulru Atak, Citi’s global head” include trade credit insurance, of innovation for treasury and trade solutions, credit risk, supply risk, export said of Citi’s blockchain strategy in an interview and SME financing, factoring, with CoinDesk, 18 March 2019. and LC confirmations. ■
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BANGLADESH REGULATIONS AND UCP & ISBP The February 2019 issue of DCW mentioned instances where Bangladeshi issuing banks released LC documents to the applicants while the LC transactions remained unpaid or unaccepted due to discrepancies (“Problems Cited with Export LCs from Bangladesh”, Feb 2019 DCW 5).
Such practice is in breach of UCP600 Article 16. However, according to local regulations in Bangladesh, an issuing bank is not authorized to effect payment of discrepant LC documents until the goods have cleared customs and a Bill of Entry is obtained. As a result of this practice, the beneficiary or nominated bank loses the right under the UCP to call back the documents under a discrepant presentation. To be fair to the beneficiary and nominated bank, all LCs issued from Bangladesh should highlight this practice and expressly modify UCP600 Article 16 to such effect.
The same Update also described a particular case where a US bank received acceptance from the Bangladeshi issuing bank with a maturity date of more than 210 days after the issuing bank released the discrepant documents, while the tenor was 180 days after acceptance according to the LC terms.
ISBP745 (2013) has clear guidance on the calculation of the maturity date in the case of a non-complying presentation. According to ISBP745 Paragraph B5(b)(ii), which applies to this case, the maturity date should be at the latest 180 days after the date the issuing bank accepts the waiver of the applicant. In other words, it is the date that the issuing bank accepts the applicant’s waiver which determines the maturity date. Regarding this case, it is questionable why it took more than 30 days after the issuing bank released the discrepant documents for the issuing bank to accept the applicant’s waiver.
In light of the above, it would help if an appropriate authority in Bangladesh could issue guidance to banks in Bangladesh, ensuring: (1) where local regulations override the UCP, it is highlighted in the LC with the pertinent UCP article expressly modified; and (2) where it is not inconsistent with local regulations, banks in Bangladesh need to adhere to the UCP and ISBP, including the calculation of maturity date. – Gabriel Sham Gabriel Sham Consulting Singapore
March 2019 ■ Documentary Credit World 7 READER REACTION
INCOTERMS: NOT A MATTER FOR BANKERS In “Incoterms & Letters of Credit – A Relationship Revisited” (Feb 2019 DCW 28), Pavel Andrle asks “What should a trade finance banker know about Incoterms? Do bankers need to be familiar with them?”
The Incoterms 2010 rules do not concern themselves at all with the method of payment whether LC, collection, open account, or any other arrangement. As a member of the Incoterms 2020 Drafting Group, I am constrained at this time from saying anything specific about the incoming Incoterms 2020 rules but I can say that this position will not change.
UCP600 has two articles which instruct banks very clearly about their involvement with contracts: • UCP600 Article 4(a) states in part: “A credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit.“ • UCP600 Article 14(a) states that banks: “[M]ust examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation.”
From these we can see that the banks are directed not to consider any matters arising from the contractual arrangements between the parties (seller/beneficiary and buyer/applicant), just to look at what the documents state on their face. In fact, UCP600 does not make any reference of “Incoterms” whatsoever.
ISBP745 (2013) Point iii of the preamble is equally clear: “The terms and conditions of a credit and any amendment thereto are independent of the underlying sale or other contract even if the credit or amendment expressly refers to that sale or other contract. When agreeing the terms of the sale or other contract, the parties thereto should be aware of the ensuing implications for the completion of the credit or amendment application.“
This seems to be a warning to “the parties” to be aware when agreeing the terms of the contract that there might be ensuing implications for the LC. That is not in any way an instruction to banks to be aware of the contents of the contract and to enforce them; quite the opposite. The only mention of the word “Incoterms” is in ISBP745 Paragraph C8 which merely directs banks to ensure the source is correctly identified if relevant.
So I suggest that Andrle’s assertion that “Hardly a good letter of credit can be issued based on wrong contract conditions!” is in fact baseless because the LC stands alone, independent of the contract.
It is a sad fact that the vast majority of contracts make no reference whatsoever to any Incoterms rules and a great number of banks’ LC application forms mislead by giving the applicant a limited number of boxes to tick, typically EXW, FOB, CRF, CIF, and Other. So an applicant who doesn’t understand (and bankers would surely agree, that is the majority) would ask his bank “what box do
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I tick?” The banker is likely to answer with “Did you agree to pay the freight (tick CFR) and the insurance (then tick CIF) or is the buyer paying it all (OK, tick FOB).” A poll of bankers worldwide asking if they were familiar with FCA, CPT, and CIP would no doubt result in blank stares most of the time. EXW flies in the face of the concept of the LC calling for “shipping” documents with port and time constraints when in fact the seller/beneficiary is not involved. Andrle correctly asserted that there are difficulties with the D-rules (and by the way, as of 2010 they are not “terms” but “rules”) to which I agree but would go so far as saying that LCs and the D-rules are incompatible.
Andrle’s article is a good explanation of the problems of applicants making LCs fit contracts and beneficiaries making their documents fit LCs without going outside of the underlying contract, but it must absolutely be emphasised that all this is not a matter for bankers. If bankers are asked for advice on the matter, I recommend that they simply inform their client of the existence of the Incoterms 2010 (and soon 2020) rule book for them to read and use the correct manner of determining which rule is appropriate: “What have we and our trading partner agreed for each to do, and which rule then best describes that in a simple three-letter acronym so we can delete all that acronym replaces and simply leave any variances in our contract?”
So to answer Andrle’s questions:
What should a trade finance banker know about Incoterms? Nothing much, they are a “nice to know” rather than a “need to know”.
Do bankers need to be familiar with them? No, there is every chance individual bankers have no idea what goes on before the shipping documents are presented, so until they learn more about how they as bankers fit into the big picture of international trade learning just one aspect may well not be very helpful. – Bob Ronai Import-Export Services Pty Ltd Kewarra Beach, Australia
March 2019 ■ Documentary Credit World 9
LITIGALITIGALITIGATION DIGEST
Zeeco, Inc. v. JPMorgan Chase Bank, N.A. Slip Op., 2018 WL 1414119 (N.D. Okla. Mar. 21, 2018) [USA]
Topics: Invalid Demand; Fraud; Wrongful Honor; Wrongful Reimbursement; Conversion; Conversion-Like Claim; Counter Undertaking; Counter Standby LC; Choice of Law; Restraining Order; Injunction
Type of Lawsuit: Applicant sued Issuer for Wrongful Honor and Wrongful Reimbursement
Parties: Plaintiff/Applicant/Seller – Zeeco Inc., USA
Defendant/Issuer – JPMorgan Chase Bank, N.A., (issuer of counter standbys from U.S. and local bank guarantees from India)
Beneficiary/Buyer – Fernas Construction India Pvt. Ltd., India Underlying Transaction: Supply and installation of flare system in India
LC: Several Counter Standby Letters of Credit. Subject to Oklahoma law. Silent as to governing rules.
Bank Guarantee: Several Local Bank Guarantees totaling USD 1,500,000. Subject to Indian law. Silent as to governing rules.
Decision: The United States District Court for the Northern District of Oklahoma, Dowdell, J., denied motion by Issuer to dismiss the case based on inadequacy of the allegations in the complaint.
Rationale: Applicant’s complaint adequately pleaded that (1) Issuer and Applicant/Seller agreed that Oklahoma law would govern their overall relationship, including the counter standby letters of credit issued from Chicago and the bank guarantees issued from Mumbai, thus requiring Issuer to satisfy the UCC 5-109
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standard of “good faith” (defined as “honesty in fact”) when honoring a fraudulent demand made by the Beneficiary/Buyer on Issuer’s Mumbai branch; and (2) Issuer breached their agreement and wrongfully honored when it paid after being notified of fraud and of entry of an Oklahoma state court injunction against payment and only minutes before Applicant/Seller’s action to obtain parallel injunctive relief from an Indian court was to be heard.
Factual Summary: To support its obligations for the supply and installation of a flare system in India, Applicant/ Seller applied to Issuer for issuance of several counter standby letters of credit from its Chicago branch to its branch in Mumbai, which then issued its bank guarantees (treated by the parties and the court as letters of credit) in favor of Beneficiary/Buyer.
Applicant/Seller alleged it performed under the supply contract and that Beneficiary/Buyer fraudulently drew on Issuer’s bank guarantees. An Oklahoma state court (Tulsa County District Court) granted Applicant/Seller an ex parte injunction against Issuer, prohibiting it from “transferring or paying [Beneficiary/Buyer]”. Applicant/Seller also filed for an injunction in the Mumbai court. Shortly before the hearing in Mumbai, Issuer’s Mumbai branch honored Beneficiary/Buyer’s demands under its bank guarantees. Applicant/Seller sued Issuer for (1) wrongful honor and breach of Loan Agreement, (2) misappropriation of funds based on (involuntary) reimbursement; and (3) indirect contempt of court (which was remanded to the state court that had issued the restraining order).
Legal Analysis: 1. Wrongful Honor and Breach of Credit Agreement: The first claim alleged wrongful honor and breach of the parties’ agreements for lending as well as LC issuance. Issuer moved for dismissal, arguing that Indian law governed the bank guarantees and that Applicant/Seller had failed to allege a violation of Indian law. The Judge noted that the parties’ Credit Agreement provided that Oklahoma law governed and that it set out the terms and conditions purportedly applicable to any letters of credit issued by Issuer on Applicant/Seller’s behalf, including the following:
“In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by Borrowers to, or entered into by Borrowers with, the Issuing Bank relating to any Letter of Credit, the terms of this Agreement shall control.”
The opinion states: “Although the Bank Guarantees are significant to the case, the Court finds that Zeeco’s cause of action ultimately rests upon the Credit Agreement. […] Accordingly, the Court finds that Oklahoma law applies to this claim.”
Issuer then argued that even if Oklahoma law governed, Applicant/Seller failed to allege Issuer’s lack of good faith when honoring the bank guarantees and withdrawing funds from Applicant/ Seller’s account as reimbursement. The Judge disagreed and found that Applicant/Seller had in fact alleged lack of good faith, including “JPMorgan’s knowledge that Fernas’s draw was without basis and would facilitate a material fraud on Zeeco, coupled with JPMorgan’s knowledge of [the U.S. and Indian court proceedings]”.
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Issuer also argued that the claim should be dismissed because Issuer’s Mumbai branch “should be treated as a ‘separate juridical entity’ and Zeeco did not include the Mumbai Branch in this suit.” The Judge disagreed: “It is clear from the plain language of the Bank Guarantees that JPMorgan Chase Bank, N.A., is the relevant entity that undertook to pay Fernas. Half of the Bank Guarantees specifically state, ‘We, JPMorgan Chase Bank, N.A., … issuing this Guarantee through its branch at Mumbai …’.”
The Judge concluded: “If JPMorgan Chase Bank, N.A., is the entity that undertook to pay Fernas under these Bank Guarantees, then the payment to Fernas would amount to JPMorgan Chase Bank, N.A., honoring the Bank Guarantees. Zeeco’s wrongful honor claim would then be properly brought against JPMorgan Chase Bank, N.A. This inquiry strikes the Court as overly fact-dependent for a dismissal motion.”
The opinion includes an interpretation of the “separate juridical entity” provision in UCC Article 5. The fourth sentence in UCC 5-116(b) is consistent with UCP500 (and UCP600, ISP98, and URDG 758) in providing for the treatment of bank branches as separate banks. The opinion states that this UCC provision “only applies if the affected parties have not agreed upon a choice of law.” This interpretation is unfortunate and unnecessary given the interpretation of the Credit Agreement as making UCC 5-109(b) applicable to any claim of wrongful honor of any letter of credit issued from any of the Issuer’s branches. In any event, this interpretation has attracted resistance. See June 2018 DCW pages 8-9, reprint of the 18 May 2018 email to the American Bar Association’s UCC Letter of Credit subcommittee from James G. Barnes criticizing this interpretation in the Zeeco opinion of the “separate juridical entity” provision of UCC 5-116.
2. Misappropriation of Funds: Regarding the second claim, Applicant/Seller argued that Issuer had misappropriated funds by having reimbursed itself from Applicant/Seller’s account. Issuer argued that it did not misappropriate funds because Applicant/Seller had agreed to reimbursement for any payment made on its Counter Standbys “regardless of whether the draw was fraudulent”. The Court pointed out that because Oklahoma law (UCC 5-109(a)(2)) “requires that honor of a letter of credit after notification of fraud be conducted in good faith, if at all, it follows that reimbursement from an applicant’s account following the wrongful honor of a letter of credit would support a conversion-like claim under Oklahoma law.” Accordingly, the Court denied Issuer’s motion to dismiss this second claim by Applicant/Seller in support of its complaint seeking restitution from Issuer.
3. Subsequent History: On 8 February 2019, counsel for Zeeco, Inc. filed a “Joint Stipulation of Dismissal with Prejudice” with the United States District Court for the Northern District of Oklahoma signed by counsel for Zeeco, Inc. and JPMorgan Chase, N.A. The stipulation cited U.S. Fed. R. Civ. Pro. 41(a)(1)(A)(ii), which provides that a plaintiff may “dismiss an action without a court order by filing…(ii) a stipulation of dismissal signed by all parties who have appeared.” On the same day, the District Court, Dowdell, J., issued an order granting an unopposed motion filed by JPMorgan Chase, N.A., which requested to “vacate the Opinion and Order dated March 20, 2018 … and the Amended Opinion and Order dated March 21, 2018.” ■ [WMIV/KM/JGB]
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CPB Contractors Pty Ltd v. JKC Australia Lng Pty Ltd (No 2) [2017] WASCA 123 (30 June 2017) [Australia]
Topic: Injunction
Note: CPB Contractors Pty Ltd (Subcontractor/Applicant) engaged JKC Australia Lng Pty Ltd (Contractor/Beneficiary) to perform engineering procurement, construction, and commissioning works related to the Ichthys LNG Project. Under the terms of the subcontract, Subcontractor/ Applicant was required to obtain two performance bonds in favor of the contractor, which covered 10% of the total contract price.
Pursuant to a liquidation clause in the contract, Contractor/Beneficiary demanded payment for uncompleted work. Subcontractor/Applicant disputed Contractor/Beneficiary’s entitlement to the liquidated damages, and Contractor/Beneficiary gave notice of its intent to draw on the performance bonds. Subcontractor/Applicant then sued to enjoin Contractor/Beneficiary from drawing on the bonds pending a determination of the validity of Contractor/Beneficiary’s claims.
The trial judge dismissed Subcontractor/Applicant’s request for an interlocutory injunction, rejecting Subcontractor/Applicant’s “contention that the contractor’s right to call on the Bank Guarantees is conditioned upon the objective fact that an amount is payable on demand.” Subcontractor/Applicant appealed. On appeal, the Supreme Court of Western Australia the Court of Appeal, Buss P, Murphy, Beech, JJA., affirmed.
Subcontractor/Applicant argued that the trial judge erred (1) in denying the injunction because the bond dispute was subject to the dispute resolution process outlined in the subcontract, and (2) in not finding the term “payable” within GC 35.3(a) of the subcontract to mean only those funds objectively determined to be payable.
The appellate court agreed with the trial judge’s dismissal of Subcontractor/Appellant’s first argument, ruling that “[a] duty to cooperate cannot be imposed on a party so as to compel that party to bring about a circumstance or result which the contract does not require”.
The appellate court further found that Contractor/Beneficiary had a right to have recourse to the guarantee at any time, and no duty of cooperation could be extended to impair that right.
The appellate court also rejected Subcontractor/Applicant’s second argument, and found the contract “entitle[d] the [Contractor/Beneficiary] to have recourse to the Bank Guarantees if at any time the [Contractor/Beneficiary] [had] an honest claim” under the subcontract. The court ruled that “due” and “payable” meant “any sum that a person is legally liable to pay, irrespective of whether the time for payment has arrived”.
Text: The Opinion provided several excerpts of the subcontract and performance bonds that follow on the next pages. ■ [MMY]
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Subcontract Clause 35: Bank Guarantees “Subcontractor thereby agrees to provide irrevocable guarantee(s) provided by an approved bank, insurance company or other financial institution (as the case may be) payable on first demand of the contractor and a Parent Company Guarantee to guarantee the due performance of the subcontractor’s obligations under the Subcontract as provided in the remaining part of GC 35. The irrevocable guarantees provided by an approved bank, insurance company or other financial institution are referred to in the Subcontract as Bank Guarantees.”
Subcontract Clause 35.1(a): Form of Bank Guarantees. It provides that: “(i) … the Bank Guarantees must be capable of being drawn upon and enforced by Contractor in Australia. … (iii) each Bank Guarantee must contain an unconditional and irrevocable undertaking by the Approved bank, insurance company or other financial institution (as the case may be) to pay to Contractor the amount of the security on demand without notice being given to Subcontractor by the bank, insurance company or other financial institution … each proforma in [Annexure 1A (form of Bank Guarantee) is approved].”
Subcontract Clause 35.1(b): “Provides that the initial amount of the Bank Guarantee be 10% of the Subcontract price, to be provided as two guarantees: the Initial Bank Guarantee and the Warranty Bank Guarantee each equal to 5% of the price.”
Subcontract Clause 35.1(c): “Provides for the duration of the Bank Guarantees. The Initial Bank Guarantee is required to be valid until the effective date of the last Provisional Acceptance Certificate issued pursuant to GC 19.3. The Warranty Bank Guarantee is required to be valid until 30 days after the expiry of the last Warranty Period, being the periods stipulated in GC 20.4. By GC 35.1(f) the contractor must return the Initial Bank Guarantee when the last Provisional Acceptance Certificate is issued, and must return the Warranty Bank Guarantee within 40 days after the expiry of the last Warranty Period.”
Subcontract Clause 35.3 provides as follows: “(a) Contractor may have recourse to the Bank Guarantee(s) at any time in order to recover any amounts that are payable by Subcontractor to Contractor on demand. (b) Subcontractor waives any right that it may have to obtain an injunction or any other remedy or right against any party in respect of Contractor having recourse to the Bank Guarantee(s).”
Subcontract Clause 35.4 Proceeds of Security as follows: “(a) If Contractor calls on a Bank Guarantee or a Parent Company Guarantee at any time, the balance of the proceeds (if any) after deducting amounts due and payable to Contractor by Subcontractor must be deposited by Contractor into an interest bearing account with an
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Australian bank (as defined in the Corporations Act 2001 (Cth)) in the name of Contractor. (b) Any interest accrued on the account balance must be retained by Contractor in the account and added to the balance of the proceeds held. (c) Contractor is entitled to withdraw from the account amounts due and payable to it by Subcontractor from time to time. (d) Neither Contractor nor the bank by whom the proceeds are held is to be deemed to hold the proceeds (or the balance thereof from time to time) on trust for Subcontractor, but Contractor must pay the balance in the account (if any), including all accrued interest, to Subcontractor on the expiry of the Warranty Period.”
Subcontract Clause 36 “Provides for liquidated damages to be payable by the subcontractor to the contractor in accordance with Exhibit B, Schedule of Compensation if the subcontractor fails to complete the relevant part of the Works by the relevant Completion Date or Milestone Date. Clause 5 of the Schedule of Compensation provides a daily rate of liquidated damages payable for each of the six stipulated completion events, in each case based on the absence of a Handover Certificate in relation to the relevant part of the Works.”
Subcontract Clause 36.1(b): “‘Subject to Contractor’s rights and remedies provided for under Article 35, sub-Articles 36.3 to 36.5 and Article 50, the payment of liquidated damages under sub-Article 36.1(a) is the sole and exclusive financial remedy of Contractor in respect of Subcontractor’s failure to complete the relevant part of the Works by the Completion Date(s) or Milestone Date(s).’ Liquidated damages are agreed at 15% of the Subcontract price. Taking into account the amendment, the cap for liquidated damages is $39.225 million.”
Subcontract 36.3 Other obligations “Without prejudice to sub-Article 36.1, the payment of liquidated damages under this Article 36 or elsewhere in the Subcontract does not prevent Contractor from exercising any other rights and remedies provided for under the Subcontract (including for the avoidance of doubt its rights under Article 20, sub-Article 35.3 and Article 50), and does not relieve Subcontractor from its obligations to diligently complete the Works…”
Subcontract 36.4 Genuine Pre-Estimate “All amounts of such liquidated damages for which Subcontractor may become liable under the Subcontract are agreed to be a genuine pre estimate of the loss which may be sustained by Contractor in the event that Subcontractor fails to comply with the relevant obligation under the Subcontract and are not a penalty.”
Subcontract 36.5 Enforceability of liquidated damages “lf liquidated damages are found not to be payable or the provisions in the Subcontract in relation to liquidated damages are found to be invalid or unenforceable for any reason, then the Parties agree that Subcontractor’s liability to Contractor will instead be for general damages at law for Subcontractor’s failure to comply with the relevant obligation which shall
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in no event exceed the amount of the Liquidated Damages calculated in accordance with the Subcontract.”
Subcontract Clause 57: Dispute Resolution “(a) In the event of Dispute between the subcontractor and contractor, either party may give the other party a written notice adequately identifying the matters the subject of the Dispute. (b) The parties must endeavour to settle by negotiation any Dispute and all the consequences thereof. The parties must confer at least once within 10 days of the notice of dispute to attempt to resolve the Dispute and failing resolution of the Dispute to explore alternative methods of resolving the Dispute. At any such conference each party must be represented by a person having authority to agree to a resolution of the Dispute. (c) The parties will endeavour to settle such Dispute by negotiation within 35 days from receipt of the notice of Dispute. (d) All Disputes are to be settled by final and binding arbitration. If the parties fail to settle the Dispute by negotiation within the period of time set out in sub-GC 57.3, either party may refer the Dispute to international arbitration in accordance with GC 57.”
Subcontract Clause 57(m) “provides that neither party is prevented or restrained by GC 57 from applying to a court to seek urgent relief (including injunction or conservatory measures).” “The proforma Bank Guarantee includes the following provisions: ‘2. The Financial Institution hereby irrevocably and unconditionally undertakes to pay to the Contractor, forthwith upon written demand from the Contractor, any amount specified in such demand, which when aggregated with all such amounts previously paid under this document does not exceed the Guaranteed Amount. 3. The Financial Institutions’ obligation to make payment under this document shall arise on receipt of a demand without proof of any breach or any other conditions and notwithstanding any contest or dispute by the Subcontractor. The Financial Institution shall not be required or permitted to make any other investigation or enquiry or notify the Subcontractor prior to the satisfaction of the demand. … 6. The obligations of the Financial Institution under this document act as primary obligor and not by way of surety. The Financial Institution shall not be entitled as against the Contractor to make any withholding or deduction on account of any set-off or counterclaim whatsoever and howsoever arising.’”
NEWLNEWLNEWLY DECIDED LC & GUARANTEE CASES
DCW’s listing of newly decided cases now appears on its website, www.doccreditworld.com. Bookmark this page and check in each month for mention of the latest cases relevant to the field.
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LETTERS OF CREDIT*
by James G. BARNES and James E. BYRNE**
This survey concentrates on the most significant letter of credit (“LC”)1 issues addressed in cases decided in the United States in the year 2017.2
PRE-HONOR CASES
Pre-honor cases are those in which a dispute arises before a demand for payment under an LC has been honored. These actions typically involve a beneficiary or other presenter claiming wrongful dishonor by BARNES BYRNE the issuer, and they focus on:
* Originally published in THE BUSINESS LAWYER; Vol. 73, Fall 2018.
** James G. Barnes practices law with Baker & McKenzie LLP in Chicago, Illinois. James E. Byrne directs the Institute of International Banking Law & Practice, Inc. (“IIBLP”). Mr. Barnes chaired the Subcommittee on Letters of Credit from 1991 to 1996, and Professor Byrne from 1996 to 2000. Both authors have played important roles in the reform of letter of credit law and practice on the national and international levels, including U.C.C. Article 5, the United Nations Convention on Independent Guarantees and Standby Letters of Credit, ISP98, UCP600, and most recently the ISP98 Forms. Mr. Barnes assumed primary responsibility for this survey. The research assistance of IIBLP General Counsel Justin B. Berger, IIBLP Research Director Dr. Karl Marxen, IIBLP Senior Student Case Editor Matthew J. Kozakowski (J.D. Candidate 2018, George Mason University School of Law), and Christopher Robertson (J.D. Candidate 2018, George Mason University School of Law) is gratefully acknowledged. Mr. Barnes and Professor Byrne have co- authored this survey annually since 1992.
1. Unless otherwise indicated, “LC” or “credit” means “letter of credit,” “U.C.C.” refers to Revised U.C.C. Article 5 (2011), “ICC” refers to the International Chamber of Commerce, “UCP600” refers to the Uniform Customs and Practice for Documentary Credits, 2007 revision (ICC Pub. No. 600), and “ISP98” refers to the International Standby Practices (ICC Pub. No. 590). “ISP98 Forms” refers to the annotated standby forms (numbered 1 through 8 and 11.1), freely available at www.iiblp.org/ resources/isp-forms/. The texts of these laws, rules, and ISP98 Forms 1 and 2 are reprinted in LC RULES & LAWS: CRITICAL TEXTS FOR INDEPENDENT UNDERTAKINGS (James E. Byrne ed., 7th ed. 2018).
2. This survey also includes a few non-case developments and a few non-U.S. cases of interest in the LC field. For articles of interest and for abstracts of all available LC cases, see 2018 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW & PRACTICE (James E. Byrne et al. eds., 2018). LC cases decided shortly before or after 2017 may be covered in a prior or subsequent year’s The Business Lawyer survey.
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(i) whether the issuer gave timely and sufficient notice of dishonor,3 (ii) whether the discrepancies stated in that notice justify dishonor,4 or (iii) whether there are extraordinary reasons requiring or permitting dishonor, such as forgery or material fraud,5 injunction, governmental order, or insolvency.
DISCREPANCY DEFENSES AND PRECLUSION
Wrongful dishonor disputes based on facial compliance or preclusion issues continue to be resolved mostly outside the courts. This is attributable to the clarity with which U.C.C. Article 5 recognizes standard LC practice, including the role of incorporated international LC rules, and also to the continuing elaboration of standard LC practice in published materials applying the concepts of preclusion and strict compliance to independent undertakings issued subject to UCP, ISP, and other ICC rules.
In ACR Systems, Inc. v. Woori Bank,6 the beneficiary adequately pled a wrongful (partial) dishonor action under a UCP600 LC. The court applied the conflict of laws rules stated in U.C.C. section 5-116. Under sections 5-116(b) and (c), and the terms of the LC, the court determined that the issuer’s obligations to the beneficiary were governed by UCP600 and the ICC’s Uniform Rules for Bank-to- Bank Reimbursements Under Documentary Credits (URR725), and supplemented as necessary by the law of the place of issuance, South Korea.7 (The issuing bank’s New York branch apparently acted as an advising bank but not as a confirming bank.) The court held that the one-year statute of limitations in U.C.C. section 5-115 did not apply because by its terms it applies only to rights and obligations arising under U.C.C. Article 5, citing the recently affirmed 2016 lower court decision in the Indoafric case discussed below.8 Rather, the court applied the applicable contract statute of limitations under New York and Texas law.9
The U.S. Court of Appeals for the Second Circuit in Indoafric Exports Private Ltd. v. Citibank, N.A.10 affirmed dismissal of the beneficiary’s claims of wrongful dishonor by a New York bank that had confirmed a UCP500 LC. The confirmation was issued before U.C.C. section 5-115 became effective, and dishonor occurred nearly ten years before the complaint was filed. The claims were barred by a
3. See U.C.C. § 5-108(b)–(d) (2011).
4. See id. § 5-108(a).
5. See id. § 5-109(a).
6. 232 F. Supp. 3d 471 (S.D.N.Y. 2017).
7. Id. at 476–77.
8. Id. at 477 (citing Indoafric Exps. Private Ltd. v. Citibank, N.A., No. 15-CV-9386 (VM), 2016 WL 6820726, at *3 (S.D.N.Y. Nov. 7, 2016), aff’d, 696 F. App’x 551 (2d Cir. 2017)).
9. Id. at 477–78.
10. 696 F. App’x 551 (2d Cir. 2017), aff’g No. 15-CV-9386 (VM), 2016 WL 6820726 (S.D.N.Y. Nov. 7, 2016).
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six-year statute of limitations, and equitable tolling was not available despite the beneficiary’s claims that the confirming bank concealed from the beneficiary that it had dishonored the long since expired LCs.11 (The beneficiary apparently pursued the issuing bank and the local advising and presenting bank in the interim.) The court refused to apply tolling based on the beneficiary’s delay and lack of diligence in asserting its claims against the bank.12
The ACR and Indoafric cases escaped application of the one-year statute of limitations provided in U.C.C. section 5-115 because the beneficiary’s dispute with the issuer did not and could not have arisen under U.C.C. Article 5. Section 5-115, as revised in 1995, has been effective in accordance with its terms to bar actions against issuers (or confirmers) of an LC (or confirmation) issued from the United States commenced by the beneficiary more than one year after expiry (or after later dishonor, e.g., of a deferred payment undertaking).
A successful wrongful dishonor action requires valid LC issuance and jurisdiction over the dishonoring LC issuer.
In Compass Bank v. Morris Cerullo World Evangelism,13 the U.S. Court of Appeals for the Ninth Circuit affirmed the trial court’s declaratory judgment based on its finding that “there is no actual letter of credit in this case.”14 The purportedly issued LC had not been signed or sent from the bank’s Texas headquarters, and the California branch manager on whom the plaintiff purportedly relied had no actual or ostensible authority to issue any LC. While beneficiary reliance is not a requirement for beneficiary enforcement of an issued LC, it may be a factor in determining whether ostensible authority to issue an LC exists. Based on the court’s conclusion that any such reliance was unreasonable, the court declined to find any ostensible authority.
In Galesburg 67, LLC v. Northwest Television, Inc.,15 the beneficiary of expired LCs argued in an action for breach of an underlying contract that the LCs were not “irrevocable” because they contained a stated expiration date (January 22, 2001). This argument was rightly rejected as contrary to U.C.C. section 5-106, which provides that an LC “is revocable only if it so provides.”16
Deutsche Bank AG v. CIMB Bank Berhad17 involves a nominated bank’s claim for payment from an issuing bank. The London Commercial Court held that an issuing bank’s obligation to reimburse a
11. Id. at 552–53.
12. Id. (citing Abbas v. Dixon, 480 F.3d 636, 642 (2d Cir. 2007)).
13. 696 F. App’x 184 (9th Cir. 2017), aff’g No. 13-CV-654 BAS (WVG), 2015 WL 5039991 (S.D.Cal. Aug. 26, 2015) (discussed in James G. Barnes & James E. Byrne, Letters of Credit, 71 BUS. LAW. 1299, 1301 (2016)).
14. Id. at 185 (quoting Compass Bank, 2015 WL 5039991, at *11).
15. No. 15 C 5650, 2017 WL 3608204 (N.D. Ill. Aug. 22, 2017).
16. Id. at *3 (quoting U.C.C. § 5-106 (2011)).
17. [2017] EWHC (Comm) 1264 (Eng.), http://www.bailii.org/ew/cases/EWHC/Comm/2017/ 1264.html.
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nominated bank is, as stated in UCP600 Article 7(c), conditioned on the nominated bank’s honor or negotiation in fact,18 and allowed the issuing bank limited discovery on whether the nominated bank claiming reimbursement had in fact paid the beneficiary.19 This interpretation of UCP600 Article 7(c) is correct, and it is critical in a significant number of inter-bank LC disputes.20
The troublesome part of the opinion lies in the fact that the LC included a so- called “TT reimbursement” clause in which the issuer undertook to reimburse against the nominated bank’s certification that it honored and forwarded complying documents. An appropriately drafted TT reimbursement clause is an independent undertaking (a mini-standby LC) in favor of the nominated bank, entitling the nominated bank to be paid sooner than under UCP600 Article 7(c) and to hold rather than chase funds if the issuer later challenges the certification and seeks a refund under UCP600 Article 16(g).21
FRAUD DEFENSES AND INJUNCTIONS
U.C.C. section 5-109 applies to an apparently complying presentation that is subjected to a defense or claim that a required document is forged or materially fraudulent or that honor would facilitate a material fraud by the beneficiary.22 Issuers are not legally obligated to raise a fraud defense and are reluctant, if not unable, to do so. Accordingly, most LC fraud claims decided by courts are raised in emergency actions brought by applicants to obtain pre-honor injunctive relief, and section 5-109 dictates how U.S. courts should balance LC independence with fraud deterrence.
There continue to be very few U.S. cases involving applicant injunction actions or issuer defenses based on claims of forged or materially fraudulent presentation, a tribute to the specificity with which the LC fraud exception is addressed in section 5-109 and to the imposition of fees and costs on an applicant or issuer that unsuccessfully invokes the LC fraud exception.23
18. Id. at [38]–[39] (citing UCP600 art. 7(c)).
19. Id. at [40]–[41].
20. An issuer receiving a complying presentation will normally pay the presenter, whether the presenter is the beneficiary or a nominated bank. The status of the presenter becomes important only if there is fraud or other extraordinary reason to dishonor the beneficiary’s facially complying documents. See UCP600 art. 7(c) (“An issuing bank’s undertaking to reimburse a nominated bank is independent of the issuing bank’s undertaking to the beneficiary.”).
21. Compare Deutsche Bank AG, [2017] EWHC (Comm) 1264 [11] (Eng.) (setting forth the TT (tested telex) reimbursement clause), with James G. Barnes, TT Reimbursement Misunderstood, DOCUMENTARY CREDIT WORLD, July/Aug. 2017, at 42 (discussing the Deutsche Bank case), and James. G. Barnes, TT Reimbursement Clauses—Better Drafting Options, DOCUMENTARY CREDIT WORLD, Nov./Dec. 2017, at 34 (discussing alternative drafts of TT reimbursement clauses). See generally ISP98 Form 7 nn.8–9, www.iiblp. org/resources/isp-forms/ (advising on drafting reimbursement rights under an ISP98 standby LC— Model Standby Requiring Confirmation).
22. U.C.C. § 5-109 (2011).
23. Id. § 5-111(e) (“Reasonable attorney’s fees and other expenses of litigation must be awarded to the prevailing party in an action in which a remedy is sought under this article.”).
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A preliminary injunction against honor of a pending drawing under a standby LC was granted in In re Factory Sales & Engineering, Inc.24 after interlocutory findings and conclusions that the beneficiary’s statement that the underlying contract was terminated by timely notice of termination was so clearly false as to make the drawing materially fraudulent. That conclusion is supportable under U.C.C. section 5-109. The court’s additional conclusion that the attempted termination of the underlying contract violated the automatic stay in bankruptcy (and therefore made the beneficiary’s statement that the contract was terminated materially fraudulent) unnecessarily allows applicant bankruptcy to interfere with drawing and honor of an LC.
In Power Rental Asset Co. Two, LLC v. Forge Group Power Pty. Ltd.,25 the court denied interlocutory injunctive relief against a threatened drawing. The LC required presentation of a beneficiary certification of entitlement to payment as provided in the underlying contract. The underlying contract included additional conditions of drawing that were differently interpreted by the parties. The court applied U.C.C. section 5-10926 and concluded that the beneficiary could non-fraudulently present the required certificate even if the applicant’s interpretation of the underlying contract ultimately prevailed.27
In Empire Room, LLC v. Empire State Building Co.,28 the plaintiff-tenant-applicant, while in pending litigation with the defendant-landlord-beneficiary, sought immediate return of the LC issued in lieu of a security deposit. The court correctly held that return or cancellation of the LC was premature while questions of breach of the underlying lease agreement remained to be determined.29 In general, parties should try to keep standby LCs outstanding while the amount of underlying obligations that they support remains in doubt.
Taurus Petroleum Ltd. v. State Oil Marketing Co.30 started with an English High Court order directing the London issuing bank of a UCP600 deferred payment LC to pay into court, rather than to the account with the New York Federal Reserve Bank that was specified in the LC. The plaintiff had no role in the LC or underlying transaction and was simply trying to collect on an unrelated arbitration award and English judgment against the defendant LC beneficiary. The lower court’s various orders interfering with LC performance were later set aside, and that result was upheld in the Court of
24. Factory Sales & Eng’g, Inc. v. Electrica Nueva Energia S.A. (In re Factory Sales & Eng’g, Inc.), No. 17-11446, 2017 WL 4570813 (Bankr. E.D. La. Oct. 12, 2017).
25. No. 17-cv-03621-RS, 2017 WL 2806715 (N.D. Cal. June 29, 2017).
26. Id. at *4. The issuer (Bank of America) represented that the LC was issued from Pennsylvania, but no party argued that Pennsylvania and California law under U.C.C. § 5-109 were materially different. See id. at *4 n.4.
27. Id. at *5.
28. No. 652017/2013, 2017 WL 2181088 (N.Y. Sup. Ct. May 18, 2017), aff’d as modified, No. 6138, 2018 WL 1526122 (N.Y. App. Div. Mar. 29, 2018).
29. Id. at *3, *6.
30. [2017] UKSC 64 (Eng.), http://www.bailii.org/uk/cases/UKSC/2017/64.html.
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Appeal on other grounds, essentially because New York, rather than London, was treated as the place of the “debts” sought to be attached.31 The 2017 U.K. Supreme Court opinion relocates the “debts” to the place of LC issuance (England), allowing the LC beneficiary’s rights under an English bank LC to be attached and discharged by payment into court.32
U.C.C. section 5-116 would also locate issuer obligations at the place of issuance, absent express agreement to a different location. However, U.C.C. section 5-109 would allow judicial interference with honoring (or drawing under) an LC only after a showing of forgery or material fraud, and sections 5-102(a)(8) and 5-114(a) would not likely treat an issuer’s payment into court as “honor” or the resulting payment as “proceeds of a letter of credit.”33
A 2017 case from Quebec highlights the difficulties of applying the LC fraud exception to counter undertakings, i.e., independent bank undertakings issued in favor of other banks that issue their own undertakings to a local beneficiary (frequently a local government purchaser that has contracted with the applicant for a local bank undertaking). In SNC-Lavalin Group Inc. v. BNP Paris Canada,34 the Quebec court held that it had jurisdiction over the Canadian applicant’s request to enjoin a Canadian counter guarantor, BNP Paribas Canada, from paying its beneficiary, BNP Paribas SA in Poland, that had issued a separate guarantee supporting the applicant’s performance of a construction contract in Poland.35 The court then considered the underlying contract interpretive issues affecting the rightfulness of the demands and held that there was insufficient evidence to satisfy the test provided in Canada’s leading precedent on the fraud exception.36 The court did not address the significance of the fact that the alleged fraud concerned the drawing in Poland under the Polish bank guarantee, rather than the Polish bank’s separate drawing under the Canadian bank counter guarantee. The Quebec court did note that there would be Polish law issues to be considered before any findings of fraud, abuse, dishonesty, or the like could be made.37
31. See [2015] EWCA (Civ) 835 [3], [14]–[24] (Eng.), http://www.bailii.org/ew/cases/EWCA/Civ/ 2015/835.html (discussed in Barnes & Byrne, supra note 13, at 1303–04), dismissing appeal from [2013] EWHC (Comm) 3494 (Eng.), http:/ /www.bailii.org/ew/cases/EWHC/Comm/2013/3494.html.
32. Taurus Petroleum, [2017] UKSC 64 [41]. The case, with its multiple dissents and confusing treatment of the nominated bank, is clear only in its unanimous overruling of existing precedent on the location of LC “debts” and in allowing restoration of the initial attachment orders. See id. at [59]–[60], [72]. (It appears that the payment into court has remained there some five years.)
33. Taurus Petroleum may invite more attachment actions against English issuing and confirming banks and lead to cases testing whether the attached banks may be sued elsewhere by the beneficiary or a nominated bank, and whether their applicants may face litigation or arbitration testing whether the underlying obligations were effectively discharged. (Standard LC reimbursement and indemnity agreements would likely protect issuers as against their applicants.)
34. 2017 QCCS 3694 (Can. Super. Ct.), http://canlii.ca/t/h5c3m.
35. Id. at paras. 8–16.
36. Id. at paras. 17–39, 45 (citing Bank of Nova Scotia v. Angelica-Whitewear Ltd., [1987] 1 S.C.R. 59 (Can.)).
37. Id. at paras. 28, 45.
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Douglas County v. Hamilton State Bank38 affirmed dismissal of a beneficiary’s wrongful dishonor claim against a bank that had assumed the standby undertakings of a failed bank. The beneficiary had made an “extend or pay” demand on the issuing bank, for which it received no response, and then made a post-expiry payment demand on the successor bank. Dismissal was based on the beneficiary’s failure to exhaust its administrative remedies against the FDIC. The court treated the undertakings, which were identified as performance and maintenance bonds, as “standby letters of credit” as defined in the assumption agreement and applicable regulations.39 Lack of clarity about whether a bank undertaking is a letter of credit or a surety undertaking may explain the court’s not deciding whether the “extend or pay” demand was wrongfully dishonored under U.C.C. section 5- 108(c) on preclusion and whether the later payment demand was rightfully dishonored under U.C.C. section 5-108(d) on post-expiry presentations.
POST-HONOR CASES
Disputes that arise after the issuer honors an LC typically focus on: (i) whether the issuer is entitled to reimbursement, indemnification, subrogation, or other recovery from the applicant or, in some cases, from the beneficiary or other presenter, or (ii) whether the applicant or beneficiary may have impaired or enhanced rights against each other based on honor of the LC.
ISSUER RECOVERIES
In Bank of India v. Essar Steel Holdings Ltd.,40 the issuer sued in New York (the issuer’s location under U.C.C. section 5-116) to enforce its reimbursement rights against the applicant following LC honor. The applicant moved to dismiss for lack of personal jurisdiction on the basis that it was a non- U.S. corporation without any presence in New York and did not transact any purposeful business in New York related to the LC. The court denied the motion after referencing the defendant-applicant’s execution of agreements with the plaintiff-issuer covering the transaction and LC-related contacts in New York.41 Absent agreement on a different forum, anyone requesting a bank to issue an LC from the United States should expect to be sued in the courts located where the issuer is located to enforce the issuer’s post-honor reimbursement rights. This result is dictated by U.C.C. sections 5-116 (applicable law and forum) and 5-108(i)(1) (reimbursement), as well as the typical bank LC application forms that supplement U.C.C. Article 5 rights and remedies.42 In this regard, a claim of reimbursement from an issuer made by a confirmer that has honored its confirmation similarly arises
38. 798 S.E.2d 509 (Ga. Ct. App. 2017).
39. Id. at 510–11 (quoting the Purchase and Assumption Agreement and citing 12 C.F.R. § 337.2(a) to define “standby letter of credit”).
40. No. 655315/2016, 2017 WL 4284557 (N.Y. Sup. Ct. Sept. 27, 2017).
41. Id. at *3–5.
42. U.S. LC issuance should not be a factor in determining U.S. court jurisdiction over an applicant in a suit against the applicant filed by the beneficiary to enforce the underlying agreement. See Viewpoint Prof’ls LLC v. Nat’l Inv. Co., No. 16 CV 1468-LTS, 2017 WL 4122620, at *3 (S.D.N.Y. Sept. 14, 2017).
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from a targeted request to issue a specified LC undertaking subject to the reimbursement obligations provided in UCP600, ISP98, and U.C.C. Article 5.
CapitalPlus Equity, LLC v. Tutor Perini Building Corp.43 is an unusual case in which it appears that the issuer sued the beneficiary to recover LC proceeds in escrow, alleging that the issuer negotiated for and relied on pre-issuance “no default” representations from the beneficiary that were contradicted post- issuance by the beneficiary’s certifying default and demanding full payment. The court held that the allegations were sufficient to establish personal jurisdiction over the beneficiary and a cause of action for fraudulent inducement to issue the LC.44 This case should go nowhere unless the claimed fraudulent inducement to issue the LC was followed by a materially fraudulent drawing under U.C.C. sections 5-109 and 5-110.
Many LCs are issued under multi-bank credit agreements that include an LC subfacility with segregated cash collateral securing LC issuers. In re Energy Future Holdings Corp.45 quotes extensively from and analyzes the priority provisions in such agreements.
APPLICANT/BENEFICIARY RECOVERIES
Post-honor disputes between applicants and beneficiaries are typically based on the underlying agreements between them but are sometimes importantly supplemented by U.C.C. Article 5.46
In Kirchhoff-Consigli Construction Management, LLC v. Deluxe Building Systems, Inc.,47 the defendant- subcontractor-applicant moved to amend its counterclaims to address a post-complaint drawing and honor of a standby LC in favor of the plaintiff-contractor-beneficiary. The court permitted adding to the existing counts allegations that the honored drawing breached the LC as well as the underlying subcontract.48 The court did not permit the addition of a new count for breach of the U.C.C. section 5-110(a)(2) post-honor warranty that “the drawing . . . does not violate any agreement between the applicant and beneficiary or any other agreement intended by them to be augmented by the letter of credit.”49
The opinion focuses on the failure to allege that the beneficiary’s drawing violated the underlying subcontract (as distinguished from alleging violation of the LC itself) and on the failure to identify
43. No. 3:17-cv-00051 REEVES/GUYTON, 2017 WL 5586663 (E.D. Tenn. Nov. 20, 2017).
44. Id. at *5.
45. Marathon Asset Mgmt., LP v. Angelo Gordon & Co. (In re Energy Future Holdings Corp.), No. 14-10979-CSS, 2017 WL 1170830 (D. Del. Mar. 28, 2017), aff’g 548 B.R. 79 (Bankr. D. Del. 2016), appeal filed, No. 17-1958 (3d Cir. May 2, 2017).
46. See U.C.C. §§ 5-110, 5-117 (2011) (providing applicants with post-honor warranty and subrogation rights). Insolvency laws also may affect the application of LC proceeds.
47. No. 4:15-CV-01462, 2017 WL 3601981 (M.D. Pa. Aug. 22, 2017).
48. Id. at *6–7.
49. Id. at *6, *8–11.
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the violated terms of the underlying obligations.50 The Official Comment to section 5-110 explains that this warranty applies where “the beneficiary’s drawing violated its express or implied obligations in the underlying transaction.”51 This allows for consideration of more than the express terms of the subcontract and should cover an honored drawing under any LC intended to support the subcontractor’s obligations. The honored standby LC is quoted in the opinion. It required the beneficiary to present statements concerning performance under the subcontract with a draft that “does not exceed the amount due and owing” under the subcontract.52 The weakness in the amended allegations lies, not in failing to identify any subcontract provision that prohibited the drawing, but in failing to identify the obligations intended by the parties to be enhanced53 by the LC.
The opinion in Kirchhoff-Consigli helpfully focuses on the U.C.C. text and Official Comments54 which make clear that the section 5-110(a)(2) warranty supplements the rights and remedies of the applicant against the beneficiary that are available under contract and unjust enrichment law applicable to the LC- supported obligations.55 To the extent that the text of the statutory warranty and this opinion indicate that “violate” means more than “breach,” it should be noted that the remedies for this statutory warranty are linked to the damage remedies for breach of the underlying obligation56 and that the statutory warranty requires that the violation/breach occur when the drawing is made and not, for example, when the proceeds of a drawing are later misapplied to discharge obligations other than those intended by the applicant and beneficiary to be supported by the LC.
In International Cards Co. v. MasterCard International Inc.,57 the defendant-beneficiary obtained honor of an LC by presenting a statement demanding payment of the full amount of the LC “representing funds . . . due and payable.”58 A jury found for the applicant on its conversion claim, essentially
50. Id. at *10.
51. Id. at *8 (quoting U.C.C. § 5-110 cmt. 2 (2011)).
52. Id. at *4 (quoting revised irrevocable standby LC).
53. The U.C.C. style committee substituted “augmented” for “enhanced.” See U.C.C. § 5-110(a)(2) (2011) (“If its presentation is honored, the beneficiary warrants ... to the applicant that the drawing does not violate any agreement between the applicant and beneficiary or any other agreement intended by them to be augmented by the letter of credit.”). The marketplace has come to prefer “supported.”
54. Kirchhoff-Consigli, 2017 WL 3601981, at *8 (quoting from U.C.C. § 5-110 cmt. 2 (2011)).
55. The opinion unhelpfully cites cases decided under pre-revised U.C.C. Article 5, which included a totally different statutory warranty.
56. See U.C.C. § 5-110 cmt. 3 (2011).
57. No. 13 Civ. 2576 (LGS), 2017 WL 3623684 (S.D.N.Y. Aug. 21, 2017), appeal filed, No. 17-3099 (2d Cir. Sept. 29, 2017); see also Int’l Cards Co. v. MasterCard Int’l Inc., No. 13 Civ. 2576 (LGS), 2016 WL 3039891 (S.D.N.Y. May 26, 2016); James G. Barnes & James E. Byrne, Letters of Credit, 72 BUS. LAW. 1119, 1127 (2017) (discussing the 2016 Int’l Cards decision).
58. Int’l Cards, 2017 WL 3623684, at *1 (quoting standby LC). See generally ISP98 Form 1 nn.25– 29, www.iiblp.org/ resources/isp-forms/ (providing alternative forms of beneficiary statements with payment demands—Model Standby Incorporating Annexed Form of Payment Demand with Statement).
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reversing the effect of the beneficiary’s drawing. The court rejected the beneficiary’s post-trial motions, holding that reasonable jurors could conclude that the beneficiary converted the entire amount drawn when it drew under the LC.59 The opinion summarizes the evidence that the drawing was fraudulent and not permitted by the parties’ underlying obligations to each other, i.e., that the beneficiary breached its warranties in U.C.C. sections 5-110(a)(1) (“no fraud”) and (2) (“no violation”).60 Unfortunately, the opinion does not mention U.C.C. Article 5 or its effect on treating a drawing as fraudulent or as a taking of applicant property.
As discussed in prior surveys,61 a drawing under an LC effects a transfer of funds of the issuer, not the applicant. There are contract, restitution, and fraud laws, supplemented by U.C.C. Article 5, that provide post-honor rights and remedies to aggrieved applicants who, after reimbursing their LC banks, deserve an accounting from a beneficiary who drew too much or too soon.
Accounting for LC proceeds can be difficult, particularly if the underlying contract providing for LC support is unclear about the conditions under which they may or may not be held interest-free to secure disputed underlying obligations. The U.S. Court of Appeals for the Eleventh Circuit in Veolia Water North America Operating Services, LLC v. City of Atlanta62 for the second time remanded an amended judgment on contractual claims and counterclaims for recalculation of prejudgment interest attributable to an LC drawing.63 The underlying applicant-beneficiary contract provided for interest on all underlying obligations, but did not provide clearly enough for the treatment of LC proceeds, e.g., as interest bearing cash collateral or as a non-interest bearing advance available for application by setoff in the discretion of the beneficiary. In Veolia, the drawing was not challenged as wrongful under U.C.C. Article 5 or under the underlying contract.
540 North LaSalle, LLC v. Inter-Track Partners, LLC64 is another case involving the treatment of LC proceeds held by a landlord in a case in which the landlord and the tenant pursued valid claims and counterclaims. The lease agreement provided a favorable interest rate for the landlord’s unpaid rent claims, whereas the tenant’s counterclaims for breach of the lease agreement based on the landlord’s
59. Int’l Cards, 2017 WL 3623684, at *3–5.
60. It appears that the parties, from the outset, treated applicant’s breach of contract claim as focused on recovering consequential damages for wrongful termination of the underlying contract and its conversion claim as one focused on wrongful drawing.
61. See, e.g., James G. Barnes & James E. Byrne, Letters of Credit, 65 BUS. LAW. 1267, 1276 n.69, 1277–78 (2010) (discussing multiple applicant post-honor claims, explaining the role of U.C.C. Article 5 in supporting post-honor accounting under the law applicable to the underlying obligations, and noting the awkwardness of relying on conversion theories “because LC proceeds may not qualify as applicant property subject to conversion”).
62. No. 16-15049, 2018 WL 507170 (11th Cir. Jan. 23, 2018); see also Veolia Water N. Am. Operating Servs., LLC v. City of Atlanta, 546 F. App’x 820 (11th Cir. 2013) (remanding for recalculation of damage avoidance costs and prejudgment interest attributable to letter of credit drawing in 2006); James G. Barnes & James E. Byrne, Letters of Credit, 69 BUS. LAW. 1201, 1209 n.61 (2014) (discussing the 2013 Veolia decision).
63. Veolia, 2018 WL 507170, at *6–7.
64. No. 1-16-0481, 2017 WL 2829705 (Ill. App. Ct. June 29, 2017).
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drawing and retaining LC proceeds were entitled to interest at a much lower statutory rate. The court rejected the tenant’s argument that the claim and counterclaim amounts should have been offset before determining the net amount of the judgment in favor of the landlord.65 The court accepted the interpretation of the lease agreement that permitted the landlord to be treated as the prevailing party entitled to its attorney’s fees, notwithstanding the considerable extent to which the tenant prevailed on its counterclaims.66 These results might have been different if the tenant had earlier demanded that LC proceeds be applied to its rent obligations as they came due or if the tenant had counterclaimed under U.C.C. section 5-110(a)(2) and sought attorney’s fees as the prevailing party under U.C.C. section 5-111(e).
Whether LC rights might limit remedies for breach of the underlying obligation(s) was considered in a pre-honor case decided by the Appellate Division in New York. In BP 399 Park Avenue LLC v. Pret 399 Park, Inc.,67 the court affirmed dismissal of an affirmative defense that the landlord’s claims were barred because the landlord had been compensated by an LC provided under its lease agreement. The LC in favor of the landlord, which was insufficient to cover all remaining rent, did not operate under the lease as the landlord’s exclusive remedy. (It is not clear whether the defendant was responsible for reimbursing any draw under the LC.)
OTHER DEVELOPMENTS
In December 2017, the EPA announced its decision, to become effective in 2018, not to issue final regulations under CERCLA section 108(b) for the hard-rock mining industry that would have included specified standby LC wording for financial assurance.68 In May 2017, the IIBLP submitted a comment addressing the EPA’s proposed wording and recommending alternative wording for standby LCs to be issued in favor of the EPA (or a trustee) based on ISP98 Model Form 11.1 (Model Government Standby Form).69
IN MEMORIAM PROFESSOR JAMES E. BYRNE
Jim Byrne died at home with family on July 1, 2018. His passing brought forth tributes from letter of credit bankers and lawyers worldwide, including Fred Miller (chair of the Business Law Section’s UCC Committee and Executive Director of the Uniform Law Commission during the 1990’s revision of UCC Article 5) and Mike Avidon (current Chair of the UCC Committee’s Letter of Credit Subcommittee).
65. Id. at *7–8.
66. Id. at *10.
67. 55 N.Y.S.3d 168 (App. Div. 2017).
68. See Financial Responsibility Requirements Under CERCLA Section 108(b) for Classes of Facilities in the Hardrock Mining Industry, 83 Fed. Reg. 7556 (Feb. 21, 2018).
69. See IIBLP Comment on EPA Proposed Regulation Under CERCLA Section 108(b), DOCUMENTARY CREDIT WORLD, June 2017, at 34.
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Fred Miller’s tribute aptly emphasized the real world orientation of Jim Byrne’s career:
Jim was in every sense an extraordinary individual. While he chose to pursue an academic career and his teaching and academic writing soon brought him recognition as one of the foremost attorneys in his chosen legal field of letter of credit law, Jim was not a so-called “ivory tower” academic. For example, Jim was a major force in the Institute of International Banking Law and Practice which annually conducted continuing legal education courses on letter of credit cases and developments including book materials the equal of treatises which led him to be the author of the Hawkland UCC series on letter of credit law and practice, one of the leading commercial law works, as well as the annual surveys on letter of credit law in the American Bar Association annual surveys in the Business Lawyer on the UCC and letters of credit. But Jim was not satisfied with merely discussing the law. His work, which emphasized his view that not only the law but also the practice mattered, encompassed work on the International Standby Practices (ISP98) rules and those of the Uniform Customs and Practices for Documentary Credits (UCP) and the revision of the basic letter of credit law in the United States, UCC Article 5, where he brought to the work top experts on letter of credit law and practice to advise the drafting committee of the National Conference of Commissioners on Uniform State Laws as to not only the appropriate statutory rules but also how they should interrelate to letter of credit practice. Nor were his efforts in this regard limited to the U.S. as he had an international view and worked on the United Nations Convention on Independent Guarantees and Standby Letters of Credit.
Jim Byrne could explain more about how LC bankers actually operate than any lawyer I ever met. He took his law students to New York to study bank LC operations. When he chaired the task force that launched the revision of UCC Article 5 in the 1990s, he made sure that it included non-lawyer LC bankers (who proved their worth to me and to others on the task force and again during the drafting of revised UCC Article 5).
Blessed with great energy, Jim Byrne was central to the many accomplishments in the LC field, particularly during the 1990s. (I chronicled the harmonization then of domestic and international letter of credit law and practice in Internationalization of Revised UCC Article 5 (Letters of Credit), 16 NW. J. INT’L. L. & BUS. 215 (1995).) Jim’s crowning achievement was the International Standby Practices, which was drafted over several years with help from bankers, lawyers, and others pulled together by Jim and which he later supported with educational programs, official commentary, and ISP98 forms to assure its widespread use. He organized yearly programs in Asia, as well as Europe and the Middle East. He contributed significantly to the Supreme People’s Court of China rules and provisions on independent undertakings in 2005 and 2016 and worked tirelessly to publish an annotated English translation.
The tribute to Jim Byrne from the ICC Banking Commission closed with “Jim will be missed by the international banking community worldwide.” As co- author with Jim of the Business Lawyer LC survey since 1992, and collaborator or editor on most of his projects and publications since 1984, I will greatly miss him.
Jim Barnes, July 2018
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RIGHTS AND OBLIGATIONS OF BANKS TO RECALCULATETETE
by by LIULIULIU Shuwen (Vivian)*
When calculations are made or not made, banks always quote ISBP 745 (2013) Paragraph A22 as the guideline for examining documents concerning mathematical calculations. But in documentary credit practice, bankers are sometimes still confused about their obligations, rights of calculation, and to what extent they should calculate.
For instance, a typical situation involves the Issuing Bank issuing an irrevocable and freely negotiable documentary credit at sight. The goods description in the LC is mentioned as follows:
Goods name: XXX Quantity: 130,000.00 dry metric tons (+/-10 PCT) Base price: USD 43.75 per DMT.
One of the documents required by the LC is: “signed commercial invoice for 100pct shipped goods value in 4 originals issued by beneficiary. The dry weight calculated based on the bill of lading weight minus moisture content as per certificate of moisture issued by China Certification & Inspection (Group) Co., Ltd at load port and price based on the base price without bonus and/or penalty.” Additionally, the LC requires a full set of original clean on board bill of lading and certificate of moisture.
After receipt of the documents presented under the LC, Issuing Bank recalculates relative data thereof and finds that the dry
* Liu Shuwen is a business manager in the Trade Service Center at China Construction Bank, Head Office, Beijing, China. Her e-mail is [email protected]. The author wishes to express her acknowledgement to Ms. Zhao Yi and Ms. Wang Xuehui for their help in writing this article.
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weight indicated on the commercial invoice was 134,105.607 MTS instead of 134,105.608 MTS (134,105.608 MTS equaled to the wet weight on the bill of lading minus moisture content on certificate of moisture) and the invoice amount was USD 5,867,120.31 instead of USD 5,867,120.35 (USD 5,867,120.35 equaled to the base price multiplied with goods’ dry weight 134,105.608 MTS calculated by Issuing Bank).
Issuing Bank sends a refusal notice to the negotiating bank, stating that they refused to honor due to the discrepancy: “The dry weight should be 134,105.608 DMT instead of 134,105.607 DMT, and accordingly the invoice amount should be USD 5,867,120.35 instead of USD 5,867,120.31”.
Three days later, the negotiating bank responds with a message stating: “We refer to your MT734, we are refuting the discrepancy quoted by your bank. Please note that, detailed mathematical calculations need not be done by bank as per ISBP 745 Paragraph A22. Since quoted discrepancy is invalid and documents complied with credit”.
The question is whether the discrepancy is valid?
Understanding ISBP 745 Paragraph A22 ISBP 745 Paragraph A22 (Mathematical Calculations) states: “When the presented documents indicate mathematical calculations, banks only determine that the stated total in respect of criteria such as amount, quantity, weight or number of packages, does not conflict with the credit and any other stipulated document.”
It is very important for banks to understand the implications of this Paragraph A22 correctly and perform properly. There are three key points for banks to bear in mind.
Firstly, banks are not obligated to recalculate all detailed mathematical calculations indicated in documents. Detailed mathematical calculations that need not be checked by banks would include calculations that are repetitive and complicated calculation tasks. For example, calculations of multiple lines of goods description i.e., 30 different types of particular equipment, values, quantities, and weights listed line-by-line. In such case, banks need not add up all figures but just examine total amounts, weights, quantities, number of packages, etc., to ensure that such totals do not conflict with any data in the credit or that appearing on another stipulated document. Banks have no obligation to recalculate all detailed mathematical calculations indicated in the documents to confirm calculation results.
Secondly, banks are obliged to carry out necessary mathematical calculations to establish compliance. In ICC Official Opinion R391 (2001), the issuing bank failed to discover that the commercial invoice presented by the beneficiary was added up wrongly, by USD8186 in excess. In its Analysis/Conclusion, ICC stated: “Clearly, where a credit has a one-line goods description … it would not be unreasonable to expect the negotiating bank or issuing bank to identify an error in the calculation.”
Thirdly, banks should not refuse on the basis of a minor difference due to a detailed calculation, especially due to mere rounding of figures.
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In documentary credit practice, many disputes arise from minor differences of calculation results. ICC Opinion R775 (TA754rev) (2011) includes the following analysis regarding calculation differences: “It would be unreasonable to expect an invoice to be calculated to three decimal places for an amount shown in EUR, when it operates to two decimal places. The rounding down from EUR50,937.19 to an invoice value of EUR50,937.00 would be acceptable.” ICC Opinion TA875rev (2017) states: “[T]he rounding up or down of individual line items or an invoice value is acceptable.”
Although ICC Opinions R391 and R775 were issued before ISBP 745, the general principle about mathematical calculations in UCP and ISBP remains unchanged across each revision and the Opinions help us better understand ISBP 745 Paragraph A22.
Obviously, in the situation mentioned at the beginning of the article, the total invoice value difference is as miniscule as USD0.04. Caused by rounding up or down, it should not be treated as a discrepancy.
Bankers’ Obligations to Recalculate It is obvious that the “banks” quoted in ISBP 745 Paragraph A22 refer to issuing banks, nominated banks, and confirming banks (if any) who examine documents to determine whether they constitute a complying presentation. The examining results may determine if they will honor or negotiate the documents. Most documents evidencing amount, quantity, weight, or number of packages, etc., may involve mathematical calculations. How can banks make sure that the amount they will pay is correct without recalculating? Especially for bulk commodities such as crude oil and iron ore trades where the invoice value is substantial, the LC invariably stipulates a calculation formula and even specific decimal places in certain figures. For example, an LC may stipulate in 47A the condition: “please round two decimal places in scientific notation for calculation of unit price and total amount, please round three decimal places in scientific notation for weight.” This is because even a very minor error may result in a huge deviation of total amount. It is incredible to think that banks would not recalculate when examining documents presented under such LCs.
In addition, banks are obligated to obey local laws and regulations for the calculation of imported and exported goods’ value which can be very strict requirements in certain countries.
Bankers’ Rights to Recalculate As stated above, banks who examine documents presented under LCs are obliged to recalculate to determine whether documents constitute a complying presentation, as well as to obey local laws and regulations. However, do they have the right to recalculate the beneficiary’s calculation? That is to say, does a bank, especially an issuing bank, have the right to refuse a presentation due to calculation errors discovered after recalculation?
Regretfully, there are no articles in UCP or paragraphs in ISBP to clear up this matter which results in many problems in practice. We find references in the GUIDE TO ICC UNIFORM RULES FOR DEMAND GUARANTEES URDG 7581 (the “Guide”), stating the guarantor’s position in recalculation. URDG758 Article 19(e) (Examination) states: “The guarantor need not re-calculate a beneficiary’s
1. By Dr. Georges Affaki and Sir Roy Goode, ICC published in 2011.
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calculations under a formula stated or referenced in a guarantee”; a principle similar to ISBP 745 Paragraph A22. The “Guide” interprets this article in further: “Article 19(e) indicates that the guarantor need not recalculate a beneficiary’s calculations under a formula stated or referenced in the guarantee (for example, a Platts price reference formula). Thus, if the amount of a demand is based on the beneficiary’s erroneous calculation, the guarantor is entitled to pay the demand without checking and correcting the calculation, provided that the amount available under the guarantee is not exceeded … [I]t is open to the guarantor, if it so chooses, to recalculate the beneficiary’s calculations and, if the beneficiary’s calculations are wrong, to reject the presentation. The opinion is the guarantor’s ISBP 745 Paragraph A22 is not clear enough for alone and is limited only by the requirement that the formula banks to understand their rights and obligations for the beneficiary’s calculations be stated or to recalculate. referenced in the guarantee.”2
This interpretation is not only really instructive for guarantee practice, but also for LC practice as an LC issuing bank has a similar undertaking as the guarantor of a guarantee. If a bank chooses to recalculate a beneficiary’s calculations under a formula stated or referenced in the LC and finds the beneficiary’s calculations are incorrect, then they have the right to refuse to honor or negotiate.
Conclusion ISBP 745 Paragraph A22 is not clear enough for banks to understand their rights and obligations to recalculate. I hope this standard is clarified in the next ISBP revision. The above-mentioned wording in the “Guide” is a good reference.
In documentary credit practice, banks are obligated to make necessary calculations to determine whether the presentation complies with the terms and conditions of the LC as well as local laws and regulations, especially when the LC stipulates a calculation formula and even specific decimal places in certain figures. When banks choose to recalculate and find errors in the beneficiary’s calculation, they have the right to refuse.
Banks should also bear in mind that it is not good banking practice to reject a presentation for a minor calculation error as long as the error does not cause a substantial discrepancy or violate relative laws and regulations. ■
2. GUIDE TO ICC UNIFORM RULES FOR DEMAND GUARANTEES URDG 758, page 127.
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CONFRONTING THE CHALLENGES OF UNUSUAL OR SUSPICIOUS WIRE TRANSFER TRANSACTIONS
by Ahmir MANSOOR*
The layering stage (the second stage in a money laundering cycle) enables a criminal cash asset to be hidden further through repeated banking and commercial transactions designed to make the real origin of the assets as hard as possible to identify and difficult for construction of an audit trail leading back to the proceeds of the original crime and its perpetrators.
Money laundering attracted the attention of law enforcement authorities internationally in the late 1970s and forced financial institutions to expand their role from deposit taker and lender to law enforcer. It is central to the integrity of the banking system to perform Customer Due Diligence/KYC in terms of identification and ongoing awareness of transaction patterns. The scope of activities that constitute money laundering is now quite wide which can vary according to sector and country. This underpins the key role of banks in the prevention, detection, and reporting of money laundering. FATF Recommendation 10 (Customer Due Diligence) is the key for controling criminal proceeds entering into the financial system. CDD measures taken are as follows:
a) Identifying the customer and verifying that customer’s identity using reliable, independent source documents, data or information. b) Identifying the beneficial owner, and taking reasonable measures to verify the identity of the beneficial owner, such that the financial institution is satisfied that it knows who the beneficial owner is. For legal persons and arrangements this should include financial institutions understanding the ownership and control structure of the customer. c) Understanding and, as appropriate, obtaining information on the purpose and intended nature of the business relationship. d) Conducting ongoing due diligence on the business relationship and scrutiny of transactions undertaken throughout the course of that relationship to ensure that the transactions being conducted are consistent with the institution’s knowledge of the customer, their business and risk profile, including, where necessary, the source of funds.
* Ahmir Mansoor is Executive Vice President and Divisional Head Trade Services at MCB Bank Limited in Karachi, Pakistan.
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Lessons learnt from these measures are the good practice principles of “Know Your Customer” (KYC) and “Know Your Business” (KYB) which emphasize the need to understand in detail the type of transaction your bank is undertaking or planning to undertake with a client. It can also extend to knowing the specific characteristics of a client’s business which enables banks to identify, assess, monitor, and manage the risk-based approach (RBA) in an effective way to combat money laundering and terrorist financing. The risks identified by a financial institution will define the requirements and whether to apply enhanced measures when they identify higher risk scenarios to prevent or mitigate money laundering and terrorist financing risks. Where risks are lower, simplified measures may be permitted.
Financial Institutions can transfer in and out of most countries and currencies within 24 hours by electronic payment systems often called wire/swift transfers, but these are vulnerable to money laundering if protective barriers are breached.
MT 103 is a message type sent by or on behalf of the financial institution of the ordering customer directly or through the correspondent to the financial institution of the beneficiary customer. It is used to convey funds transfer instructions in which the ordering customer or the beneficiary customer, or both, are non-financial institutions from the perspective of the sender. MT 103 is used to settle payment claims of the beneficiary against documents sent under open account or collection. MT 202 is a message type sent by or on behalf of the ordering institution directly, or through a correspondent, to the financial institution of the beneficiary institution. All parties identified in the message must be financial institutions. MT 202 is also used for Letter of Credit payments.
Payment message types MT 103 & MT 202 wire transfer (used in trade transactions) are subject to many queries from the intermediary/beneficiary financial institution where the risk of money laundering or terrorist financing is elevated and enhanced CDD measures have to be taken relating to types of customers, countries or geographic areas, products, services, transactions or delivery channels. Examples of potentially higher-risk situations include:
Customer Risk Factors: • The background and purpose of all complex, unusually large transactions, unusual patterns of transactions which have no apparent economic or lawful purpose. • The ownership structure of the company appears unusual or excessively complex given the nature of the company’s business. E.g., importer as one of the directors in the exporter’s company is revealed from the credit report of the beneficiary.
Country or Geographic Risk Factors: Countries subject to sanctions, embargos, or similar measures issued by, for example, the United Nations. Possible variations when appropriate, in money laundering and terrorist financing risk between regions or areas within a country at the time of risk assessment.
Product, Service, Transaction, or Delivery Channel Risk Factors: Payments received from unknown or un-associated third parties not related to the transaction. For small wire transfers with frequent intervals monitoring should be the same as large wire transfers.
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Cross-Border Qualifying Wire Transfers An Interpretive Note to FATF Recommendation 16 (Wire Transfers) provides that qualifying wire transfers should always contain:
a) The name of the originator; b) The originator account number where such an account is used to process the transaction; c) The originator’s address, or national identity number, or customer identification number, or date and place of birth; d) The name of the beneficiary; and e) The beneficiary account number where such an account is used to process the transaction.
The purpose of the basic information on the originator and beneficiary of wire transfer is for ordering, intermediary, and beneficiary financial institutions to facilitate the identification and reporting suspicious transactions.
Despite the above information (a-e) included in MTs, a beneficiary financial institution applying its effective risk policies and procedures for determining when to execute, reject, or suspend a wire transfer may require further information from the originator where the given information does not satisfy their due diligence criteria. This delays the standard processing time and in some cases it takes weeks for processing. Some examples of the nature of information requested by the beneficiary financial institution are:
• Originator Mohammad Zakaria & Sons is detected as suspicious in the name screening at the beneficiary financial institution which requires full name and residential address including numeric postal code, date of birth, citizenship/nationality and confirmation of no connection with Zakariya Jasim Muhammad. • Whether originator company and payment has any connection with Iran, Syria, North Korea, Sudan, Crimea, or any other UN-sanctioned jurisdiction. • Complete details regarding the voyage, port of loading, destination and all ports the vessel had called upon during the course of this voyage. Full vessel name, flag, and IMO numbers for all vessels related to this transaction. • What is the economic purpose of the wire transfer between the ordering financial institution and the beneficiary financial institution. • Description of product and ultimate purpose of the goods. • Was the wire sent on behalf of a 3rd party? • The name and address of the producer of goods.
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Conclusion This article has outlined the challenges in identifying risks associated with wire transfer transactions that may appear unusual or suspicious.
Prior to execution of any wire transfers, financial institutions must ensure that transactions being conducted are consistent with their knowledge of the customer, their business, and risk profile. Ongoing due diligence on the business relationship and scrutiny of transactions of new and existing customers, whether the transaction is of regular or occasional nature, will mitigate the possibility of risk of unusual or suspicious transactions and will optimize processing time which, at times, is disproportionally spent on collection customer information.
Regular staff training is an important aspect for combating money laundering and terrorist financing. Staff should be familiar with the 40 FATF Recommendations, especially those discussed in this article.
Banks are exposed to heavy penalties, legal action, license cancellation, and reputational risks if it is proven that their ineffective, untrained, or dishonest employees are a weak spot in their defence.
As per Michael Chertoff: “Banks are our first line of defence/gate keepers against money launderers, drug dealers and even terrorists who would attempt to abuse our financial institutions. Banks that disregard their duty to conduct adequate due diligence and report suspicious financial activities allow themselves to be exploited for criminal activities.”1 ■
1. Quote from: “The Prevention of Money Laundering and Terrorist Financing” by John Howell, ICC Commercial Crime Services (2006).
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ICC Banking Commission GUIDANCE PAPER – THE USE OF DRAFTS (BILLS OF EXCHANGE) UNDER DOCUMENTDOCUMENTDOCUMENTARARARY CREDITSCREDITSY EXECUTIVE SUMMARY
Introduction A major outcome of the UCP consultation on the revision of UCP 6001 was a need for a greater understanding of documentary credit practices in the market. As such, it was agreed by the Executive Committee of the Banking Commission that more comprehensive guidance should be provided.
One feature of this consultation revealed that a number of ICC National Committees and practitioners questioned whether drafts should be required for presentation under any documentary credit.2 Furthermore, it was highlighted that sight drafts do not provide any benefit to a nominated bank or issuing bank.
It is essential that UCP’s unique characteristic of global acceptance is maintained and suggestions for non-optional changes that only benefit particular business or geographic segments of the user base are inappropriate. Guidance, and not deletion, is the appropriate response to the issue of whether a draft should be required under a documentary credit.
The UCP have evolved over the years, with drafts no longer a mandatory requirement apart from when a documentary credit is available by acceptance, unless required for a specific commercial, regulatory or legal reason for one to be presented. As an example, UCP 600 sub-article 12 (b) was specifically drafted to remove the difference in approach to financing that existed in UCP 500 for documentary credits available by acceptance and deferred payment. As a consequence of sub-article 12 (b), the issuance of documentary credits available by deferred payment should be the preferred choice rather than acceptance. Only where the beneficiary requires the return to it of an accepted draft, should a credit available by acceptance be necessary.
1. Document 470/1272 dated 15 June 2017
2. Numerous practitioners have raised this issue over the last couple of years including at the ICC National Committee ‘Networking Forum’ in Rome on 8 November 2016 and the ICC National Committee ‘Sharing Session’ in Paris on 23 November 2016.
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Likewise, sight or usance negotiation can occur without the presentation of a draft.
It should also be noted that courts do not mandate for the use of drafts; the choice is that of each issuing bank and is largely driven by the pre-printed text appearing in its documentary credit application form.
Drafts are, on occasion, an unnecessary cause of discrepancies and are less relevant than they were in the past. ICC Opinions and DOCDEX Decisions have provided guidance where presentations have been refused due to issues relating to a draft to the extent that, in most cases, the conclusions have indicated that the discrepancies were unwarranted.
It is considered appropriate to discourage the use of drafts with documentary credits issued subject to UCP 600. Drafts should only be required where there is a specific commercial, regulatory or legal reason for one to be presented or, as indicated above, where the beneficiary requires the return of an accepted draft.
Conclusion and Recommendations Ordinarily, a UCP 600 documentary credit need not require a draft to be presented together with the stipulated documents. Accordingly:
1. It is recommended that the habit of requiring a draft for a documentary credit available at sight be curtailed, particularly sight drafts drawn on an issuing bank, confirming bank, or a bank nominated to pay, unless required for a specific commercial, regulatory or legal reason.
2. UCP 600 article 2 allows for negotiation to occur under a documentary credit available by negotiation with or without a presentation of a draft. It is recommended that the habit of requiring a sight draft for a documentary credit available by negotiation be reviewed and that negotiating banks be encouraged to rely, not on negotiable instruments’ law, but instead on specific agreements with beneficiaries evidencing negotiation and their respective recourse and other rights and remedies.
3. It is recommended that banks issue usance documentary credits available by deferred payment as an alternative to availability by acceptance of a draft, unless there is a specific commercial, regulatory or legal reason to create a banker’s acceptance.
4. All banks should review their UCP 600 documentary credit forms, whether in paper format and/or online, to indicate that a draft is not a standard requirement of the issuing bank and to indicate their requirements for another form of demand.
It is recommended that banks arrange for this Guidance Paper to be distributed throughout their network, and particularly to their legal departments. It can also be circulated to clients and, if considered appropriate, to courts and regulatory authorities. Sharing this Guidance Paper on a wider basis will help ensure amelioration of any problems.
Practitioner feedback can be found in the additional material relating to the Guidance Paper. 8 January 2019
March 2019 ■ Documentary Credit World 39 SUBSCRIPTION ORDER FORM
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40 Documentary Credit World ■ March 2019 STSTSTAAATISTICSTISTICSTISTICS US BRANCHES/AGENCIES OF NON-US BANKS
DCW reports the most current data on top US branches and agencies of non-US banks in terms of LC activity. Net Standby LCs are after subtracting respective amounts conveyed to others. Net LCs are totals for Net Standby LCs and Commercial & Similar LCs. Amounts are in USD 1,000s. 3RD QUARTER 2018
Standby LCs Standby LCs Net Commercial Net to US to Non-US Standby & Letters Rank Institution City State Addresses Addresses LCs Similar LCs of Credit
1. SUMITOMO MITSUI BKG NY BR NEW YORK NY 17,591,426 1,368,627 18,344,110 61,537 18,405,647 2. MUFG BK NY BR NEW YORK NY 20,725,028 4,000,898 12,365,517 2,677,447 15,042,964 3. DEUTSCHE BK AG NY BR NEW YORK NY 10,902,972 1,176,749 11,466,513 210,967 11,677,480 4. ROYAL BK CAN 3 WRLD FNCL BR NEW YORK NY 11,134,310 581,643 11,231,199 0 11,231,199 5. MIZUHO BK NEW YORK BR NEW YORK NY 14,286,357 3,102,166 8,583,193 135,680 8,718,873 6. CREDIT AGRICOLE CORP NY BR NEW YORK NY 7,882,974 4,618,076 7,105,411 467,211 7,572,622 7. BNP PARIBAS EQUITABLE TWR BR NEW YORK NY 8,343,445 1,041,716 7,249,263 210,973 7,460,236 8. BANK OF NOVA SCOTIA NY AGY NEW YORK NY 5,888,222 2,691,804 6,456,096 2,002 6,458,098 9. LANDESBANK HESSN-THRN NY BR NEW YORK NY 4,390,912 2,344,848 6,432,407 0 6,432,407 10. CREDIT SUISSE NY BR NEW YORK NY 1,086,340 5,569,945 6,276,861 0 6,276,861 11. STANDARD CHARTERED BK NY BR NEW YORK NY 3,577,488 2,348,658 5,846,411 67,834 5,914,245 12. UBS AG STAMFORD BR STAMFORD CT 5,485,944 1,281,754 4,924,937 0 4,924,937 13. RABOBANK NEDERLAND NY BR NEW YORK NY 4,765,014 174,772 4,369,932 252,778 4,622,710 14. SOCIETE GENERALE NY BR NEW YORK NY 1,735,105 1,837,786 3,557,178 144,369 3,701,547 15. INTESA SANPAOLO SPA NY BR NEW YORK NY 2,827,389 219,491 2,886,031 252,519 3,138,550 16. BANK OF MONTREAL CHICAGO BR CHICAGO IL 2,834,702 1,162,179 3,093,263 23,890 3,117,153 17. NATIXIS NY BR NEW YORK NY 2,786,274 405,553 2,912,319 59,068 2,971,387 18. UNICREDIT BK NY BR NEW YORK NY 2,124,703 851,915 2,925,806 14,130 2,939,936 19. BAYERISCHE LANDESBANK NY BR NEW YORK NY 735,349 2,106,117 2,841,466 0 2,841,466 20. LLOYDS BK PLC NY BR NEW YORK NY 1,478,036 1,126,739 2,604,775 0 2,604,775 21. BNP PARIBAS SF BR SAN FRAN. CA 4,414,344 21,900 2,491,023 329 2,491,352 22. CANADIAN IMPERIAL BK NY BR NEW YORK NY 1,674,190 890,450 2,468,618 0 2,468,618 23. COMMERZBANK AG NY BR NEW YORK NY 2,035,168 409,938 2,445,106 16,512 2,461,618 24. BANK OF CHINA NY BR NEW YORK NY 1,762,301 632,715 2,395,016 0 2,395,016 25. AUSTRALIA & NEW ZEALAND NY BR NEW YORK NY 1,922,784 526,422 2,369,049 13,528 2,382,577 26. NATIONAL AUSTRALIA BK NY BR NEW YORK NY 2,005,342 128,629 2,133,971 0 2,133,971 27. BARCLAYS BK PLC SEVENTH AVE BR NEW YORK NY 1,521,119 460,461 1,981,580 0 1,981,580 28. CREDIT INDUS ET CMRL NY BR NEW YORK NY 1,397,689 491,493 1,889,182 0 1,889,182 29. DNB BK ASA NY BR NEW YORK NY 1,749,148 131,153 1,852,613 0 1,852,613 30. LANDESBK BADEN WURTTMB NY BR NEW YORK NY 490,714 1,304,010 1,794,724 0 1,794,724 31. NORDEA BANK AB PUBL NY BR NEW YORK NY 924,224 752,935 1,677,159 0 1,677,159 32. TORONTO-DOMINION BK NY BR NEW YORK NY 1,241,787 1,921,636 1,667,567 0 1,667,567 33. SVENSKA HANDELS AB PUBL NY BR NEW YORK NY 1,394,131 212,910 1,607,041 0 1,607,041 34. ICICI BK NY BR NEW YORK NY 1,200,988 210,479 1,411,467 23,432 1,434,899 35. BANCO BILBAO VIZCAYA ARG NY BR NEW YORK NY 676,810 582,884 1,259,130 76,045 1,335,175 36. BANK OF NOVA SCOTIA HOU BR HOUSTON TX 205,785 984,273 1,190,058 3,871 1,193,929 37. INDUSTRIAL & CB OF CHINA NY BR NEW YORK NY 910,404 42,061 952,465 79,757 1,032,222 38. STATE BK OF INDIA NY BR NEW YORK NY 955,575 10,830 966,405 0 966,405 39. BANCO SANTANDER SA NY BR NEW YORK NY 782,645 0 782,645 0 782,645 40. COMMONWEALTH BK AUS NY BR NEW YORK NY 280,071 437,015 717,086 0 717,086 41. CHINA MERCHANTS BK CO NY BR NEW YORK NY 6,253 147,922 154,175 553,974 708,149 42. MUFG BK LOS ANGELES BR L. ANGELES CA 517,330 116,799 634,129 0 634,129 43. LLOYDS BK CORP MKTS PLC NY BR NEW YORK NY 519,097 99,338 618,435 0 618,435 44. ARAB BKG CORP NY BR NEW YORK NY 257,679 29,446 287,125 329,703 616,828 45. SWEDBANK AB NY BR NEW YORK NY 457,046 130,774 587,820 0 587,820 46. NATIONAL BK KUWAIT SAK NY BR NEW YORK NY 686,693 25,859 545,515 0 545,515 47. BNP PARIBAS CHICAGO BR CHICAGO IL 520,965 3,143 492,748 0 492,748 48. RIYAD BK HOU AGY HOUSTON TX 420,651 50,000 470,651 0 470,651 49. KOREA DEVELOPMENT BK NY BR NEW YORK NY 414,833 6,505 385,820 1,127 386,947 50. KBC BANK NV NY BR NEW YORK NY 357,342 2,318 359,660 0 359,660
March 2019 ■ Documentary Credit World 41 STSTSTAAATISTICSTISTICSTISTICS
Standby LCs Standby LCs Net Commercial Net to US to Non-US Standby & Letters Rank Institution City State Addresses Addresses LCs Similar LCs of Credit
51. UBS AG NY 787 7TH AVE WMA BR NEW YORK NY 162,644 181,668 344,312 0 344,312 52. NATIONAL BK OF CANADA NY BR NEW YORK NY 68,013 276,697 330,088 0 330,088 53. MEGA INTL CMRL BK LA BR L. ANGELES CA 879 0 879 300,000 300,879 54. MEGA INTL CMRL BK CO NY BR NEW YORK NY 693 0 693 300,000 300,693 55. DEXIA CREDIT LOCAL NY BR NEW YORK NY 269,850 0 257,092 0 257,092 56. MASHREQBANK PSC NY BR NEW YORK NY 26,145 1,250 27,395 215,865 243,260 57. DZ BK AG DEUTSCHE ZNTRA NY BR NEW YORK NY 211,000 6,041 217,041 0 217,041 58. NORDDEUTSCHE LANDESBK NY BR NEW YORK NY 175,029 7,961 182,990 0 182,990 59. BANCO LATINOAMERICNO NY AGY WHITE PLNS NY 0 6,728 6,728 174,583 181,311 60. SUMITOMO MITSUI TR BK NY BR NEW YORK NY 131,776 44,398 176,174 0 176,174 61. UNICREDIT NY BR NEW YORK NY 142,371 4,500 146,871 8,276 155,147 62. BANK HAPOALIM BM NY BR NEW YORK NY 101,211 850 102,061 24,141 126,202 63. BANCO DEL ESTADO CHILE NY BR NEW YORK NY 0 126,000 126,000 0 126,000 64. MALAYAN BKG BERHAD NY BR NEW YORK NY 125,680 0 125,680 0 125,680 65. MUFG BK CHICAGO BR CHICAGO IL 87,556 0 87,556 31,746 119,302 66. NATIONAL BK EGYPT NY BR NEW YORK NY 95,547 110 95,657 20,961 116,618 67. BANK OF CHINA LA BR L. ANGELES CA 115,715 0 115,715 0 115,715 68. ITAU CORPBANCA NY BR NEW YORK NY 0 110,242 110,242 0 110,242 69. UNITED OVERSEAS BK NY AGY NEW YORK NY 106,160 2,130 108,290 0 108,290 70. CHINA CITIC BK INTL NY BR NEW YORK NY 2,872 2,450 5,322 100,493 105,815 71. MITSUBISHI UFJ TR & BKG NY BR NEW YORK NY 0 101,954 101,954 0 101,954 72. ITAU UNIBANCO SA NY BR NEW YORK NY 0 91,445 91,445 0 91,445 73. MEGA INTL CMRL SILICON VAL BR SAN JOSE CA 80,247 0 80,247 0 80,247 74. BANK OF BARODA NY BR NEW YORK NY 3,324 25,393 28,717 50,824 79,541 75. BANCO DE SABADELL SA MIA BR MIAMI FL 48,032 18,390 66,422 4,731 71,153 76. KOOKMIN BK NY BR NEW YORK NY 53,637 10,000 63,637 3,165 66,802 77. SHINHAN BK NY BR NEW YORK NY 11,169 20,270 31,439 30,965 62,404 78. WOORI BK NY AGY NEW YORK NY 53,121 8,952 62,073 14 62,087 79. BANCO DE CREDITO E INV MIA BR MIAMI FL 21,913 34,594 56,507 2,873 59,380 80. TURKIYE VAKIFLAR BK NY BR NEW YORK NY 4,944 6,271 11,215 43,732 54,947 81. WESTPAC BKG CORP NY BR NEW YORK NY 0 50,000 50,000 0 50,000 82. UNITED OVERSEAS BK LA AGY L. ANGELES CA 49,520 0 49,520 0 49,520 83. GULF INTL BK NY BR NEW YORK NY 26,993 0 26,993 22,500 49,493 84. OVERSEA-CHINESE BKG LA AGY L. ANGELES CA 49,147 0 49,147 0 49,147 85. SHIZUOKA BK NY BR NEW YORK NY 47,678 0 47,678 0 47,678 86. UBS AG MIAMI BR MIAMI FL 0 42,137 42,137 0 42,137 87. OCBC NY AGY NEW YORK NY 36,486 907 37,393 0 37,393 88. BANK OF CHINA CHICAGO BR CHICAGO IL 31,996 0 31,996 622 32,618 89. NATIONAL BK OF PAKISTAN NY BR NEW YORK NY 1,659 20,700 22,359 8,924 31,283 90. LAND BK OF TAIWAN LA BR L. ANGELES CA 30,112 0 30,112 0 30,112 91. ALLIED IRISH BKS NY BR NEW YORK NY 28,853 0 28,853 0 28,853 92. CTBC BK CO NY BR NEW YORK NY 26,148 0 26,148 1,246 27,394 93. WOORI BK LA BR L. ANGELES CA 17,115 1,999 19,114 5,132 24,246 94. BANCO BRADESCO SA NY BR NEW YORK NY 930 1,950 2,880 17,999 20,879 95. KEB HANA BK NY AGY NEW YORK NY 1,335 0 1,335 18,787 20,122 96. BANCO NACION ARG NY BR NEW YORK NY 0 9,657 9,657 6,331 15,988 97. BANCO DO BRASIL SA NY BR NEW YORK NY 8,451 4,335 12,786 2,635 15,421 98. UNITED BK AFRICA NY BR NEW YORK NY 0 13,979 13,979 1,277 15,256 99. BANK OF EAST ASIA NY BR NEW YORK NY 14,613 0 14,613 0 14,613 100. SHANGHAI CMRL BK SF BR SAN FRAN. CA 5,989 0 5,989 7,899 13,888
42 Documentary Credit World ■ March 2019 STSTSTATISTICSATISTICSATISTICS
Standby LCs Standby LCs Net Commercial Net to US to Non-US Standby & Letters Rank Institution City State Addresses Addresses LCs Similar LCs of Credit
101. BANK OF INDIA NY BR NEW YORK NY 10,375 0 10,375 1,844 12,219 102. CHIBA BK NY BR NEW YORK NY 11,008 0 11,008 0 11,008 103. BANCO DAVIVIENDA SA MIA BR MIAMI FL 0 9,490 9,490 0 9,490 104. CHINA CONSTRUCTION BK NY BR NEW YORK NY 9,139 0 9,139 0 9,139 105. INDUSTRIAL BK OF KOREA NY BR NEW YORK NY 8,763 0 8,763 170 8,933 106. AGRICULTURAL BK CHINA NY BR NEW YORK NY 3,747 5,040 8,787 0 8,787 107. BANK OF E ASIA LA BR ALHAMBRA CA 8,216 381 8,597 0 8,597 108. FEDERATION DES CAISSES FL BR HALLANDLE FL 7,540 0 7,540 0 7,540 109. ROYAL BK OF CANADA NY BR NEW YORK NY 7,331 0 7,331 0 7,331 110. BANCO LA NACION ARG MIA AGY MIAMI FL 0 6,568 6,568 496 7,064 111. HUA NAN CMRL BK LA BR L. ANGELES CA 6,476 0 6,476 0 6,476 112. SHANGHAI CMRL BK NY BR NEW YORK NY 318 5 323 6,091 6,414 113. WING LUNG BK LA BR NEWPRT BH CA 5,250 0 5,250 0 5,250 114. BANCO POPULAR DE PR NY BR NEW YORK NY 5,183 0 5,183 0 5,183 115. BANCO INTERNACIONAL MIA AGY CRL GABLES FL 0 1,913 1,913 3,215 5,128 116. NONGHYUP BK NY BR NEW YORK NY 3,863 0 3,863 0 3,863 117. BANCA MONTE DEI PASCHI NY BR NEW YORK NY 3,026 713 3,735 0 3,735 118. NORINCHUKIN BK NY BR NEW YORK NY 3,429 0 3,429 0 3,429 119. BANGKOK BK PUBLIC CO NY BR NEW YORK NY 3,207 0 3,207 0 3,207 120. E SUN CMRL BK LOS ANGELES BR INDUSTRY CA 3,168 0 3,168 0 3,168 121. BANK HAPOALIM BM PLAZA BR NEW YORK NY 0 3,104 3,104 0 3,104 122. BANCO DE CREDITO MIAMI AGY CRL GABLES FL 0 2,637 2,637 0 2,637 123. BANK OF TAIWAN LA BR L. ANGELES CA 2,585 0 2,585 0 2,585 124. BANK SINOPAC LA BR L. ANGELES CA 2,554 0 2,554 0 2,554 125. BANCO PICHINCHA CA MIA AGY MIAMI FL 0 1,681 1,681 0 1,681 126. SHANGHAI CMRL BK LA BR ALHAMBRA CA 1,406 0 1,406 0 1,406 127. BANK OF GUAM SAN FRAN BR SAN FRAN. CA 1,338 0 1,338 0 1,338 128. FIRST CMRL BK CO NY BR NEW YORK NY 1,272 0 1,272 0 1,272 129. TAIWAN CO-OP BK LA BR L. ANGELES CA 1,199 0 1,199 0 1,199 130. TAIWAN CO-OP BK NY BR NEW YORK NY 1,037 0 1,037 0 1,037 131. CHANG HWA CMRL BK LA BR L. ANGELES CA 861 0 861 0 861 132. STATE BANK INDIA CHICAGO BR CHICAGO IL 100 117 217 639 856 133. KRUNG THAI BK LA AGY L. ANGELES CA 0 0 0 800 800 134. FIRST CMRL BK LA BR L. ANGELES CA 757 0 757 0 757 135. BANK OF CMNTNS NY BR NEW YORK NY 609 0 609 0 609 136. FIRST ABU DHABI BK USA N WA BR WASH. DC 0 0 0 592 592 137. CHANG HWA CMRL BK NY BR NEW YORK NY 586 0 586 0 586 138. BANK OF CMNTNS SF BR SAN FRAN. CA 0 562 562 0 562 139. TAIWAN BUS BK LA BR L. ANGELES CA 485 0 485 0 485 140. BANCO REPUBLICA ORINTL NY BR NEW YORK NY 0 338 338 0 338 141. LAND BK OF TAIWAN NY BR NEW YORK NY 231 0 231 0 231 142. METROPOLITAN B&TC NY BR NEW YORK NY 0 0 0 190 190 143. PHILIPPINE NB LA BR L. ANGELES CA 150 0 150 0 150 144. TAIWAN BUS BK NY BR NEW YORK NY 79 0 79 0 79 145. GUNMA BANK NY BR NEW YORK NY 73 0 73 0 73 146. MEGA INTL CMRL BK CHICAGO BR CHICAGO IL 71 0 71 0 71 147. P T BK NEGARA INDO PER NY AGY NEW YORK NY 0 0 0 68 68 148. TORONTO-DOMININ BK HOU AGY HOUSTON TX 0 252,443 0 0 0 149. BANK OF TAIWAN NY BR NEW YORK NY 1,519 0 0 0 0
TOTALS 164,878,602 50,294,684 173,891,779 7,098,509 180,990,288
March 2019 ■ Documentary Credit World 43 SCAM SURVEY
Prime Subject in PNB Fraud Case Arrested in UK Nirav Modi, the diamond dealer allegedly involved in India’s largest ever fraud, has been arrested in London. Police have been searching for him since the fraud involving Punjab National Bank was discovered more than a year ago.
According to multiple reports, Modi was arrested on Jacob Manning, 19 March 2019 by London’s Scam Survey Editor Metropolitan Police. He Jacob Manning, a Partner at the law appeared in a Westminster firm of Dinsmore & Shohl, is a Magistrates’ Court where he member of the Pennsylvania, Ohio, requested bail, but the request and West Virginia Bars. His practice was denied and he will be focuses on business and commercial litigation and appellate practice. held at least 10 days. India’s Manning is also an Associate Fellow Enforcement Directorate has of the Institute of International indicated that it will move to Banking Law & Practice. extradite Modi as soon as possible.
According to a CNN report, the arrest of the man once ranked as India’s 85th richest person with a net worth of USD 1.8 billion is timely for India’s Prime Minister, Narendra Modi. Elections in India are set to occur in May and Prime Minister Modi (no relation to Nirav Modi) has promised to fight corruption in India. Nirav Modi’s arrest could help his image.
The process of extraditing Modi to India is ongoing. (Source: CNN)
Claims Dismissed Against Parties Named in Standby LC Scam A case pending in federal court in Maine required a judge to discern the obligations of the parties to a “Profit Participation, Non-Circumvention, Non-Disclosure & Working Agreement.” Unfortunately for the plaintiff, since the judge could not find that any terms within the agreement that required two parties to do anything were breached, he dismissed certain claims against them.
44 Documentary Credit World ■ March 2019 SCAM SURVEY
The case is pending in the United States District Court for the District of Maine. In it, the plaintiff, John F. Chase, alleges RICO violations, breach of contract, fraudulent inducement, negligent misrepresentation, conversion, and unfair trade practices against several defendants. He alleges that the defendants told him for every USD 250,000 he invested in standby letters of credit, he would obtain a return of approximately USD 10,000,000 within 7 to 12 days. According to the Complaint, he invested USD 500,000 and lost everything.
In his breach of contract claim, Chase alleged that several defendants breached an “Irrevocable 17.5% Success Fee Participation & Payorder Agreement” which also called itself a “Profit Participation, Non-Circumvention, Non-Disclosure & Working Agreement.” Two of the defendants named in that cause of action, Mark Cloutier and Robert Cloutier, moved to dismiss the breach of contract claim which was the only claim against them. The motion required the judge to determine whether the plaintiff could allege facts sufficient to hold the two defendants liable for breaching the Success Fee Agreement. In an opinion entered 6 February 2019, the judge granted the motion.
The judge said of the Agreement: “It is a bizarre document, with several nonsensical provisions.” Among those the judge highlighted, the Agreement stated: “The purpose of this instrument is to establish an internationally recognized Non-Circumvention Non-Disclosure, and working Agreement between the participating Parties. This and future transactions shall be conducted under the guidelines of the International Chamber of Commerce.”
The judge also noted that the Agreement “purports to be governed by both ‘the Laws of the United States of America and the United Kingdom.’” He also noted that the Agreement “imposes on all parties a duty not to obtain additional business from sources made available under the agreement; to maintain complete confidentiality; not to disclose contacts or enter into transactions with such contacts; and to ‘not in any way what so ever circumvent each other and/or attempt such circumvention of each other and/or any of the parties involved in any of the transactions the parties wish to enter and to the best and proprietary information established are not altered [sic].’”
The purpose of the Agreement – other than its insistence on confidentiality – appeared to be to memorialize the fee Chase was to pay to various parties. The Agreement provided that Chase would pay the defendants “17.5% (SEVENTEEN AND ONE-HALF PERCENT) of each payout from Private Placement Profits.” The two Cloutier defendants were each to receive 3.375% as their share of any such fee payments Chase made.
Unfortunately for Chase, the judge found that he was unable to plead sufficiently the Cloutiers’ role in the Agreement. The judge found that though the Agreement required the parties to not do certain things, it did not seem to require the Cloutiers to do anything. Even more, the judge did find that the Agreement contained a clause awarding the prevailing party in any litigation concerning the Agreement his attorney’s fees. Thus, not only were the claims dismissed against the Cloutiers, but also, Chase was ordered to pay their attorney’s fees. The case remains pending against the other defendants. (Source: Chase v. Merson, Civil No. 2:18-CV-165 (D. Me. Feb. 6, 2019))
March 2019 ■ Documentary Credit World 45 SCAM SURVEY
Wannabe German Heiress Faces Grand Larceny Charges in NY A Russian-born 28-year-old pretending to be a German heiress who lived in luxury in New York City for nearly a year prior to her arrest went on trial in New York on 27 March 2019.
According to the Omaha World-Herald, Anna Sorokin faces grand larceny and theft of services charges. Prosecutors allege she swindled friends, banks, and hotels out of USD 275,000.
“Her overall scheme has been to claim to be a wealthy German heiress with approximately $60 million in funds being held abroad,” prosecutor Catherine McCaw said after Sorokin’s October 2017 arrest.“ She’s born in Russia and has not a cent to her name as far as we can determine.”
Prosecutors contend that as Sorokin immersed herself in the New York party scene, she started talking up plans to build a multi-million dollar private arts club with exhibitions, installations and pop-up shops. In November 2016, Sorokin searched for a USD 22 million loan for the club. She claimed the loan would be secured by a letter of credit from UBS in Switzerland and produced documentation purporting to substantiate her assets, according to an outline of the charges.
While pursuing the loan, Sorokin reportedly convinced one bank to lend her USD 100,000 to cover due diligence costs but used funds for personal expenses. In May 2017, Sorokin allegedly chartered a round-trip flight to a Berkshire Hathaway shareholders meeting in Omaha, Nebraska, but never paid the USD 35,400 bill.
Regardless of the outcome of her trial, Sorokin could be deported to Germany because authorities have indicated she overstayed her visa. (Source: Omaha World-Herald)
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46 Documentary Credit World ■ March 2019 The Official Commentary on ISP98
A must for those who work with standby letters of credit on a regular basis, The Official Commentary of The International Standby Practices is the first source that bankers, lawyers, corporates, consultants, academics, and other LC professionals turn to for guidance and explanation regarding ISP98.
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48 Documentary Credit World ■ March 2019