Volume 22, Number 8 September 2018
InII This Issue... 18 FEATURE
■■■ 3 UPDATES: Antiboycott DOCUMENTARY CREDIT PRACTICES: Regulations Still in Play; DLT and Trade’s New Age; Special Purpose CONTROVERSY & GUIDANCE Vehicle to Drive Trade with Iran?; Banks and Traders Band Together to Four issues deemed worthy of specific focus Launch Komgo; Domestic Correspondent Report: Turkey; Nepal’s Supreme Court and attention will be addressed under this Decides against Local Banks in Guarantees Case; Pilot Test of Fully Digitized “Smart Guarantee” Underway; heading at the October 2018 ICC Banking International Updates Commission Technical Meeting in Tbilisi, ■■■ 9 LITIGATION DIGEST: Georgia. Presenters will take up discussion ■■■ Café Can Cun Co Inc. v. Halcor Development Corp. ■■■ Ottoway Engineering Pty Ltd. v. Westpac Banking of the usage of drafts, negotiation, the Corp. [No. 3] ■■■ Power Rental Asset Co Two, LLC v. Forge Group future of UCP, and discrepancy rates. To Power Pty LTD examine certain onerous challenges and ■■■ 27 ARTICLES: ■■■ “The Digitalisation of considerations on the minds of industry Transferable Documents and specialists, DCW features written segments Instruments in International Trade” by Dr. Alan DAVIDSON on these four areas. What contributing ■■■ “Can a Bank Both Issue and Negotiate an LC? Chinese Court factors make each of these hot-button Affirms Shocking Decision” by YAN Zhida practice issues controversial? What
■■■ 41 LC STATISTICS: guidance is currently available? Will US Branches of Non-US Banks (1Q18) issuance of additional guidance provide ■■■ 44 SCAM SURVEY adequate relief and remedy? Or are more drastic measures needed to confront the lingering hardships facing documentary credit practice?
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 Hasan Apaydin (Turkey) Internal Audit the publishers of DCW, its Editorial Alinma Bank (Saudi Arabia) Board, Editorial Advisory Board, or the Michael Evan Avidon, Partner Moses & Singer LLP (NY) David Meynell organizations with which they are Owner, TradeLC Advisory associated. Authors, editors, members of Buddy Baker DCW’s Editorial Board and Editorial VP, Investment Banking Division Neal Millard Goldman, Sachs & Co. (Chicago) Musick, Peeler & Garrett LLP Advisory Board, and the institutions with Adjunct Professor, USC Law School which they are associated often are James G. Barnes* Baker McKenzie (Chicago) K. Nizardeen actively involved in the field as lawyers, Head of Trade Finance & advisers, parties, consultants, or expert Abdulkader Bazara Corporate Operations witnesses in many of the matters Trade Finance Structuring Head Emirates Islamic Bank (Dubai, UAE) Abu Dhabi Islamic Bank (Abu Dhabi) addressed in DCW. The publication often Vincent O’Brien, Technical Trade Advisor reflects and sometimes adopts their Jack Chan China Systems Corporation views. Notwithstanding positions SVP and Senior Trade Technical Advisor (Hong Kong) Janis S. Penton, Assistant General Counsel expressed in DCW, every effort will be MUFG Union Bank, N.A. made to publish differing viewpoints and Dr. Alan Davidson, Senior Lecturer Kim Sindberg contributions expressing such views are TC Beirne School of Law University of Queensland (Australia) Executive Adviser welcomed. Nordea Trade Finance (Denmark) Roger D. Fayers, LLB Donald R. Smith* The support of the Journal of Barrister (UK); Department of Trade & Industry, Soliciter’s Department President, International Commercial Law (retired) Global Trade Advisory, Ltd. is gratefully acknowledged. Clyde Fletcher, Documentation Manager Soh Chee Seng, Technical Consultant, Fonterra Limited Trade Finance Issues, the Association Documentary Credit World of Banks in Singapore (Singapore) 20203 Goshen Road., No. 343 Xiang Gao Dean and Professor of Law Chang-Soon Thomas Song, First Expert, Gaithersburg, MD 20879 USA China University of Political Science Trade and Services Department, KEB Hana Bank (Seoul) phone: +1-301-330-1970 & Law (Beijing) fax: +1-301-926-1265 Paula Greaves Lorna K. Strong Deputy General Counsel e-mail: [email protected] SVP & Global Trade Operations Procedures & Technical Consultant HSBC Global Trade & Receivables website: www.doccreditworld.com Bank of America Merrill Lynch (Seattle) Finance (London)
Founder A.T.M. Nesarul Hoque Hugo Verschoren Consultant Professor James E. Byrne Vice President, Mutual Trust Bank (Bangladesh) goVer Trade Technologies Belgium Contributing Editors Professor Katsuto Iida (retired, Tezukayama University, Jun Xu Vincent Maulella 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 Justin B. Berger Law Firm (China) Emeritus Board Members
Scam Survey Editor Carter Klein, Partner DCW is grateful to prior members of Jacob A. Manning Jenner & Block (Chicago) its Board and appreciates their past service. Emeritus Board Members are Designers Michelle Kelly-Louw recognized on the DCW website at: Professor in Banking Law Mario Escalera, Christopher V. Sandler University of South Africa www.doccreditworld.com Student Research Associates *Denotes Editorial Board member Anthony R. Bjelke Published by Documentary Credit World, Inc. ISSN 1520-0221. Copyright © 2018 by Documentary Credit World, Inc. Victoria L. Glover All rights reserved. No part of this journal may be reproduced in any form, including microfilm, xerography or Michelle M. Yearick 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 ■ September 2018 UPDAUPDAUPDATESTESTES
Antiboycott Regulations Still in Play lthough US antiboycott regulations date back more than 40 years, they still need to be heeded. Antiboycott A regulations put into place in the 1970s prohibit US entities from complying with certain requirements of unsanctioned boycotts. Furthermore, regulations require that US persons receiving boycott requests report them to the US Commerce Department’s Bureau of Industry and Security (US BIS).
Violations still occur. For instance, a US company is in breach of US antiboycott regulations if it responds to an overseas importer’s request to provide a written statement that it has no business ties to Israel. According to a recent article by Chris Gillis of American Shipper, eight companies and at least one freight forwarder were charged for failure to comply with US antiboycott regulations in 2017.
“Freight forwarders come into contact with these potential issues when dealing with orders that are generally destined to the Middle East region and a majority of the time we see requests or potential requests when letters of credit are being used in the transaction,” said Michael Ford, chief compliance officer at BDP International, as quoted in Gillis’ article.
With one exception, civil penalty amounts assessed in 2017 for antiboycott violations were less than USD 100,000. While some companies may consider such penalties as simply a cost of doing business, avoidance of a potential reputational risk tends to enough motivation for companies to conform. Gillis reports that BIS believes the negative publicity from posting the settlements on its website is usually enough to encourage most companies to stay compliant.
BIS also publishes its warning letters to companies with alleged antiboycott violations. Gillis adds that these types of warning letters are the only ones that BIS makes public. In September 2017, Phillips Specialty Products Inc. received a warning letter that described BIS’ discovery of the company’s use of a shipping certificate affixed to a letter of credit stating: “We hereby state that the carrying vessel is allowed to enter Libyan ports.”
Text of this warning letter is available on the BIS website. The site also offers compliance information and resources, including training seminars.
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DLT and Trade’s New Age present-day USD 1.5 trillion global trade finance gap projected to widen to USD 2.4 trillion by 2025 can be narrowed by USD 1.1 trillion through use of blockchain and other A distributed ledger technology (DLT), according to a recent White Paper released by the World Economic Forum and Bain & Company.
Titled “Trade Tech – A New Age for Trade and Supply Chain Finance”, the report’s modeling suggests that DLT can facilitate some USD 1.1 trillion in new trade volume globally. Additionally, the report contends that a large segment of today’s traditional documentary trade will be transformed by DLT. The report expects some 40% of traditional documentary trade (USD 0.9tr) will seize efficiencies by shifting to DLT by 2025. Another 20% will gravitate to open account due to “greater trust and visibility” while 40% of documentary trade will remain traditional. SMEs and Asian-based traders who rely on LCs (when able to use them) stand to gain the most from the digitalization of trade.
Interestingly, the report also exhorts governments at all levels to pick up the pace in adopting digital technology for trade processes. For instance, the report says EU countries and government departments “have yet to harmonize their documents” and need to better embrace DLT in shaping regulatory considerations. “With some governments already starting to make these moves, the laggards will become increasingly disadvantaged.”
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Special Purpose Vehicle to Drive Trade with Iran? ver since the United States announced its exit from the 2015 Joint Comprehensive Plan of Action (JCPOA) in May 2018, remaining parties to the deal have been exploring options to E successfully transact with Iran while avoiding US sanctions. In a 24 September 2018 statement, JCPOA partners France, Britain, Germany, Russia, and China announced their intention of creating a “special purpose vehicle” (SPV) that aims to “assist and reassure economic operators pursuing legitimate business with Iran”.
Speaking before the UN General Assembly, European Union High Representative for Foreign Affairs Federica Mogherini elaborated on the EU’s role in the process. “This will mean that EU member states will set up a legal entity to facilitate legitimate financial transactions with Iran and this will allow European companies to continue to trade with Iran in accordance with European Union law and could be open to other partners in the world”, said Mogherini.
Although specifics of how the SPV would function are still to be determined, some pundits are envisioning it as a type of barter arrangement and operating independent of banks. According to reporting in The Guardian: “Versions of the SPV floated by thinktanks suggest it could underpin a sophisticated barter system that can avoid US Treasury sanctions. For example, Iran could ship crude oil to a French firm, accumulating credit that could then be used to pay an Italian manufacturer for goods shipped the other way, without any funds traversing through Iranian hands or the banking system.”
CNBC reports the sense among analysts is that the SPV, however structured, is unlikely to shield participating companies from US secondary sanctions.
Banks and Traders Band Together to Launch Komgo consortium of global banks and trading companies have announced their intention to create a blockchain-based platform for commodities trade financing. The platform, projected to go A live in late 2018, will be developed in partnership with tech company ConsenSys and administered by Komgo SA, an entity based in Switzerland.
Komgo founders include ABN AMRO, BNP Paribas, Citi, Crédit Agricole Group, Gunvor, ING, Koch Supply & Trading, Macquarie, Mercuria, MUFG Bank, Natixis, Rabobank, Shell, SGS, and Societe Generale.
According to a 19 September 2018 news release, the platform will debut in the energy industry. Initial trades will involve crude cargoes in the North Sea. In early 2019, Komgo anticipates expanding use of the platform to the agricultural and metals sectors.
Komgo also plans to roll out a decentralized KYC system and a digital letters of credit processor by year-end 2018. As described in the news release: “The first one will standardize and facilitate KYC process without using a central database: the exchange of documents will be executed in an encrypted way over the blockchain on a need to know basis. The second product will be digital letters of credit, allowing commodity houses or other platforms to submit digital trade data and documents to komgo SA customer banks of their choice.”
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DOMESTIC CORRESPONDENT REPORTTT::: Turkey TURKEYTURKEYTURKEY
Although the current preponderance of Turkish businesses in Sept 2018 debt seems to be the biggest source of apprehension among non-Turkish banks due to the sharp increase in foreign exchange, precautions are being taken by the government and especially Central Bank of the Republic of Turkey. For purposes of boosting the effectiveness of managing liquidity of Turkish lira and foreign exchange, a swap market in Turkish lira against foreign exchange within the Central Bank has been launched. Those treasury product transactions will be conducted by banks authorized to take action in foreign exchange and cash markets within their limits through a bidding process. Additionally, in order to bolster deposit accounts denominated in Turkish lira, tax discounts have been granted whereas tax supplements have been assessed on foreign currency accounts. Aspects of the Turkish banking sector are performing well and by the end of 2018 loans are expected to increase 15-16 percent.
As per data from The Banks Association of Turkey, the balance sheet size of the Turkish banking sector has reached TRY 3.7 trillion (USD 556 billion), 64 percent of which is comprised of loans given to businesses. On the other hand, non-performing loans account for just 3 percent.
No extraordinary financial issues exist today with regard to the Turkish banking sector. Inflation of the Turkish currency in recent months is a temporary circumstance and it is even out of question to call it a crisis. And thanks to a recent intervention by the Central Bank to increase interest rates, the value of foreign currencies against the Turkish Lira is likely to decrease. This demonstrates a very hopeful near future and a strong sign for rapid recovery from recession.
As regards trade finance instruments including letters of credits and guarantees, there seems to be no decline in demand for them. One banker familiar with the market has recently seen many applications for documentary credits from importers in respect of importation of goods and bid bond/performance bond/advance payment guarantee requests in respect of construction projects to be commenced in the Middle East and North Africa by Turkish entrepreneurs.
Given its strategic location between Europe and Asia and with the silk road trade volume expected to multiply, the Turkish economy will grow more.
Against this backdrop, some banks in Turkey are studying the viability of blockchain technology for trade finance transactions and international payments. Additionally, banks will have to concentrate more on compliance issues for their transactions as a result of Iranian sanctions and other sanctions becoming increasingly severe day by day.
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Nepal’s Supreme Court Decides against Local Banks in Guarantees Case wo Nepali banks lost their appeal to the Supreme Court of Nepal of a 2015 appellate court decision ordering the banks to pay NPR 1.73 billion (USD 14.9m) under local guarantees T they had issued in favor of a Nepali Government agency. On 17 September 2018, according to The Kathmandu Post, the Supreme Court of Nepal “scrapped two separate writs” filed by Bank of Kathmandu and Himalayan Bank (Local Banks) in May 2015 demanding that Nepal Rastra Bank, the country’s central bank where they had deposited the amount of the guarantees, refrain from transferring the funds into an account controlled by the Nepali Government’s Melamchi Water Supply Development Board.
According to details contained in The Kathmandu Post article, China Railway 15 Bureau Group (Contractor/Principal) contracted with Melamchi Water Supply Development Board (Government Agency/Local Beneficiary) for Melamchi Drinking Water Project construction work, causing Himalayan Bank to issue a USD 6.65m performance guarantee and Bank of Kathmandu to issue advance payment guarantees of USD 6.62m and GBP 1.4m. Reimbursement of the three guarantees (Local Guarantees) was backed by a counter guarantee issued by China Construction Bank (Counter Guarantor).
In September 2012, Government Agency/Local Beneficiary terminated its contract with Contractor/Principal due to poor performance in executing the project. Government Agency/Local Beneficiary then sought payment on the guarantees. Alleging fraud, Contractor/Principal successfully sued Government Agency/Local Beneficiary in China. China’s Zhengzhou Intermediate People’s Court also enjoined Counter Guarantor from releasing payment to Local Banks.
Subsequently on 19 April 2015, Nepal’s Patan Appellate Court ordered Local Banks to pay the amount of the guarantees. Local Banks appealed to the Supreme Court of Nepal. “The banks were of the view that since [Counter Guarantor] failed to release the counter guarantee amount, domestic banks should not be forced to pay the guarantee amount to [Government Agency/Local Beneficiary] as well”, according to The Kathmandu Post.
“This is a rare example where a counter guarantee has been denied, according to the Nepali banks. The two Nepali banks have appealed to the higher court in China to appeal the verdict,” the article reports, adding that the banks are treating their experience as “a learning curve … about the international guarantee system.”
Himalayan Bank CEO Ashoke Rana told The Kathmandu Post that they have been issuing bank guarantees of over USD 1m to foreign companies “on the condition that any future dispute settlement be made in Nepali court”. Rana added that the two banks approached the Nepal Bankers’ Association about supporting such choice of forum provision, but failed to receive endorsement from the association.
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Pilot Test of Fully Digitized “Smart Guarantee” Underway tandard Chartered, in concert with Siemens Financial Services and digital trade provider TradeIX, is developing a blockchain-based “smart guarantee”. As described in a Standard S Chartered release, the solution aims to digitize Siemens’ “guarantee process for customers with large transaction volumes in the future, spanning issuance, amendments and claims, eliminating the multiple touch-points and inefficiencies” of today’s paper-intensive bank guarantees. A pilot study initiated in March 2018 is projected for completion by year-end 2018.
International Updates CANADA: Export Development Canada (EDC) has increased its global guarantee facility for Canadian Solar Inc. According to the Ontario-based solar power company, EDC will provide performance security guarantees for up to USD 125m to cover the credit exposure of Royal Bank of Canada and China Construction Bank on LCs and guarantees issued on its behalf.
INDIA: Debt-plagued Infrastructure Financing and Leasing Services Ltd (IL&FS) revealed on 21 Sept 2018 that it was unable to service its obligation towards an LC to IDBI Bank Ltd. According to Business Standard, this raises concerns about the possibility of further defaults hitting mutual funds with exposure to IL&FS and its group companies.
LIBYA: Economic reforms which took effect 13 Sept 2018 include provisions that prohibit the opening of LCs by state entities for importation of products already imported by the private sector. According to Libya Herald, exceptions will be granted for certain as-yet-undetermined goods deemed “essential and strategic”.
NIGERIA: In a move aimed at easing pressure of Nigeria’s foreign exchange market and facilitating Nigeria/China trade transactions, the Central Bank of Nigeria (CBN) provided CNY 58.40m (USD 8.5m) to customers seeking foreign exchange in the agricultural and raw material sector. According to the Nigerian Tribune, a CBN official said the Chinese Yuan was made available only to customers with CNY-denominated LCs for agriculture, raw materials, or machinery.
PAKISTAN: Addressing a group of leading value-added textile exporters, Abdul Razak Dawood, Pakistan Prime Minister’s Adviser on Commerce & Textile, said he will recommend the State Bank of Pakistan allow facility for exporters’ Authorized Dealer to make import advance payments against LCs up to 100% of goods value and up to USD 10,000 per invoice for the import of all eligible items without requiring an LC or Bank Guarantee from suppliers abroad.
ZAMBIA: The country’s foreign exchange reserves have reportedly dipped under USD 300m, the lowest level ever. “What has been happening is that the country has been importing fuel using LCs … but now lenders have no more confidence in the Zambian economy and they can no longer offer Zambia credits on importation of fuel”, according to unnamed sources quoted by the Zambian Watchdog website. ■
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Café Can Cun Co Inc. v. Halcor Development Corp. 2018 ABQB 303 [Can.] by Jason DESROCHES*
Topics: Fraud, Standard of; Injunction; Independence Principle
Type of Lawsuit: Applicant sued Issuer and Beneficiary to enjoin honour of letter of credit.
Parties: Plaintiff/Applicant/Lessee– Café Can Cun Co Inc. (Counsel: Ms. A. Laurent)
Defendant/Beneficiary/Landlord– Halcor Development Corporation (Counsel: Mr. M. Amery)
Respondent/Issuer– Bank of Montreal
Underlying Transaction: Lease for commercial space.
LC: Standby LC for an original amount of CAD 100,000. Amount drawn was CAD 80,000. Silent as to governing rules.
Decision: The Alberta Court of Queen’s Bench, Slawinsky, J., found for Lessor and Issuer in denying Applicant’s interlocutory injunctive relief.
Rationale: Conduct of the beneficiary, which raises issues of interpretation of the terms of the underlying contract, is a matter to be resolved at trial and does not justify enjoining issuer.
Factual Summary: To assure performance of its obligations pursuant to a commercial lease, Applicant/Lessee obtained a standby letter of credit in favour of Beneficiary/ Landlord in April 2015. As per the terms of the lease, the LC, which was issued for a five-year term, was to be reduced by CAD 20,000 on
* Jason Desroches is Chief Legal Counsel at National Bank of Canada for international banking and trade services.
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an annual basis on the condition that Applicant/Lessee was not in default at the time of reduction. A first reduction was granted in 2016 however no further reduction was consented to by Beneficiary/ Landlord despite the request of Applicant/Lessee and the fact that Applicant/Lessee had not been notified of any default under the lease.
Following subsequent disputes and events in connection with the lease, Applicant/Lessee notified Beneficiary/Landlord of its termination of the lease in July 2017. Considering the termination to be invalid, Beneficiary/Landlord in turn gave Applicant/Lessee notice of termination and notice of default and attempted to draw CAD 80,000 under the LC for unpaid rent and additional anticipated losses.
Legal Analysis: 1. Injunction; Standard; Fraud: Applicant/Lessee alleged a fraudulent drawing claiming that: i) the LC should have been reduced to CAD 60,000 in accordance with the terms of the lease; that ii) Beneficiary/Landlord’s attempt to draw on the LC was made in the absence of default; and that iii), if there was default, Beneficiary/Landlord should have provided notice of default and the opportunity to remedy the default prior to drawing. The Judge applied the three-part test for interlocutory injunctive relief in connection with a documentary letter of credit as confirmed in the Fiberex Technologies Inc. v. Bank of Montreal1 decision, requiring: “prima facie case of fraud”, “irreparable harm to the Applicant if the injunction is granted”, and a “finding that the balance of convenience favors the granting of the injunction”.
In analyzing the first part of the tripartite test, the Judge referred to various authorities, including the Fiberex decision, characterizing fraud as being “something in the nature of dishonesty, impropriety or deceit, or being morally wrong, clearly untrue or false, or utterly without justification” and a prima facie case as meaning “a strong case with a high, although not absolutely assured, likelihood of success based on the material presented before the Court”. Considering that many of the issues raised between Beneficiary/Landlord and Applicant/Lessee regarding the interpretation of the lease and the requirement to reduce the Letter of Credit were legitimate, debatable, and better suited for resolution at trial, the Judge found that Applicant/Lessee failed to establish a strong prima facie case of fraud.
The Judge continued her assessment in the event her analysis of the first branch of the test was wrong. Observing that Applicant/Lessee refused to provide any information regarding its financial situation and presented no evidence that the Beneficiary/Landlord’s financial situation would prevent recovery of the funds if a trial judge were to conclude that Beneficiary/Landlord’s claim was unjustified, the Judge found that Applicant/Lessee failed to establish that it would suffer irreparable harm if the injunction were not granted.
Comment: Considering the significant issues yet to be resolved, the costs of the application were deferred to determination of underlying dispute at trial. ■
1. Fiberex Technologies v. Bank of Montreal, [2015] A.J. No. 853; 2015 ABQB 496 [Can.], abstracted at 2016 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW & PRACTICE 362.
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Ottoway Engineering Pty Ltd. v. Westpac Banking Corp. [No. 3] [2017] FCA 39; [2017] FCA 1500 [Australia]
Prior History: Ottoway Eng’g Pty Ltd. v. Westpac Banking Corp., 2016 WL 3125883, [2016] FCA 365 [Australia], noted in 2017 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW & PRACTICE at 587.
Topics: Demand Guarantee, Unconscionability; Independence
Type of Lawsuit: Subcontractor/Applicant sued to enjoin Lender/Beneficiary from receiving payment on guarantee.
Parties: Subcontractor/Applicant – Ottoway Engineering Party Limited (Counsel: Mr. M Livsey QC with Mr. N Floreani)
Lender/Beneficiary – Westpac Banking Corporation (Counsel: Mr. B Roberts SC)
Guarantor – National Australia Bank Limited
Contractor– Bluenergy CMC Party Limited Underlying Transaction: Mechanical and piping installation work on two dewatering buildings.
Bank Guarantee: AUD 1,000,000 bank guarantee to secure advance payment on a subcontract.
Decision: The Federal Court, Besanko, J., granted an interlocutory injunction at the request of Subcontractor/Applicant. On application for a final order, the court lifted the injunction, but limited the amount Lender/Beneficiary could draw to the amount owed under the Bill Facility.
Rationale: The instrument was a performance bond or demand guarantee, not a contract of suretyship because the obligation on the Guarantor was a primary obligation. A performance bond or demand guarantee operates independently of the underlying contract, and Lender/Beneficiary was not obligated to act with regard to the underlying subcontract in drawing on the bank guarantee.
Factual Summary: Subcontractor/Applicant contracted with Contractor to perform mechanical and piping installation work on two dewatering buildings for AUD 17,350,000. The parties entered into an Advance Payment Agreement and Contractor advanced AUD 1,735,000 to Subcontractor/Applicant. In exchange, Subcontractor/Applicant agreed to a ten percent monthly deduction in payments from Contractor.
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In order to make the advance payment, Contractor applied for and received a loan under a Bill Facility from Lender/Beneficiary in the amount of AUD 1,735,000. Pursuant to the Advance Payment Agreement, Subcontractor/Applicant obtained a bank guarantee from Guarantor in favor of Lender/ Beneficiary in the amount of AUD 1,735,000. The bank guarantee was later replaced by a bank guarantee of AUD 1,000,000.
The terms of the bank guarantee provided, “[i]n consideration of the [Lender/Beneficiary] agreeing at the request of [Subcontractor/Applicant] and [Guarantor] to accept this guarantee in connection with the agreement, the [Guarantor] undertakes to pay the [Lender/Beneficiary] an amount or amounts not exceeding the Amount in total.” The Agreement specified that the bank guarantee was to secure the lending obligations of Contractor to Lender/Beneficiary. Pursuant to the bank guarantee, Lender/Beneficiary has a right to payment upon written demand without reference to the customer, despite any notice by Subcontractor/Applicant and irrespective of the performance or non-performance of Subcontractor/Applicant or Lender/Beneficiary. Furthermore, the Guarantor is not obligated to inquire as to the performance or non-performance of either Subcontractor/ Applicant or Lender/Beneficiary, nor must Guarantor inquire as to the correctness or validity of an unconditional written demand made by Lender/Beneficiary under the bank guarantee.
Following the liquidation of Contractor, Lender/Beneficiary drew on the bank guarantee. Subcontractor/Applicant sought an injunction restraining Lender/Beneficiary from making a demand. The Federal Court of Australia, Besanko, J., granted Subcontractor/Applicant an interlocutory injunction. Upon application by Subcontractor/Applicant for a final order, Besanko, J., ruled Lender/Beneficiary may enforce the bank guarantee only to the extent of the amount outstanding under the Bill Facility.
Legal Analysis: Subcontractor/Applicant argued the bank guarantee was a performance bond or demand guarantee which secured Contractor’s obligations under the Advance Payment Agreement. Subcontractor/Applicant argued that the purpose of the bank guarantee was to assure its performance of the installation, and that upon its completion, the bank guarantee was “null and void”. Because Subcontractor/Applicant performed its obligations, it claimed it was unconscionable for Lender/Beneficiary to draw on the bank guarantee. Subcontractor/Applicant also claimed Lender/Beneficiary acted unconscionably by twice extending the Bill Facility. In the alternative, Subcontractor/Applicant argued that if the bank guarantee secured Contractor’s obligations to Lender/Beneficiary, then the bank guarantee was a contract of suretyship and Subcontractor/ Applicant’s obligations under the bank guarantee were discharged by Lender/Beneficiary’s conduct in extending the time for repayment of the Bill Facility without reference to Subcontractor/ Applicant. Subcontractor/Applicant amended its complaint to add a claim of fraud against Contractor because Contractor did not repay the Bill Facility in circumstances where Subcontractor/ Applicant had repaid the advance payment to Contractor.
1. Proper Construction of the Bank Guarantee: The Judge noted that the document’s title “Bank Guarantee” is of little significance because titles can be misleading, and the language of the document itself determines the nature of the document. (case summary continued on page 15)
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Text of Bank Guarantee:
National Australia Bank Limited (“Bank”) ABN 12 004 044 937 Bank Guarantee
Guarantee No : 24705739 Ref :852967227 - 860556674 To: WESTPAC BANKING CORPORATION A.C.N./A.R.B.N./ABN 33 007 457 141 (The Beneficiary)
For: OTTOWAY ENGINEERING PTY LTD A.C.N./A.R.B.N./ABN 125531428 (The Customer)
Agreement: PROJECT MOBILIZATION COST PLANT, EQUIPMENT’S AND RECOURSE FOR CONTRACT BETWEEN OTTOWAY ENGINEERING PTY LTD ABN 70 125 531 428 AND BLUENERGY CMC PTY LTD ABN 33 160 063 187 EXECUTED ON THE 21ST OF AUGUST 2014 FOR THE PROVISION OF MECHANICAL & PIPING INSTALLATION & COMMISSIONING WORKS RELATING TO DEWATERING BUILDINGS 313 AND 314 CONVEYOR REPAIRS. THIS BANK GUARANTEE ISSUED TO SECURE THE LENDING OBLIGATIONS OF BLUENERGY CMC PTY LTD TO WESTPAC BANKING CORPORATION Amount: 1,000,000 Currency of AUSTRALIAN DOLLARS Amount in words: ONE MILLION DOLLARS 1. In consideration of the Beneficiary agreeing at the request of the Customer and the Bank to accept this guarantee in connection with the agreement, the Bank undertakes to pay the Beneficiary an amount or amounts not exceeding the Amount in total. 2. Payment of the Amount or any part or parts of the Amount will be made by the Bank to the Beneficiary: a) upon the Bank receiving at any NAB branch located within Australia while this guarantee remains in force an unconditional written demand from the Beneficiary accompanied by this guarantee; and b) without reference to the Customer; and c) despite any notice given to the Bank by the Customer not to pay the Beneficiary any moneys payable under this guarantee; and
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d) irrespective of the performance or non-performance by the Customer or the Beneficiary of the Agreement in any respect; and e) with no obligation on the Bank to enquire as to the performance or non-performance of the Agreement in any respect by the customer or the Beneficiary; and f) with no obligation on the bank to enquire as to the correctness or validity of any demand pursuant to sub-clause 2(a) of this clause. g) at the Bank’s election in cash, bank cheque or funds transfer into the Beneficiary’s nominated account. 3. Where a demand and payment is made pursuant to clause 2, for a sum that is less than the Amount, the Bank will issue to the Beneficiary a replacement guarantee for the balance of the Amount then remaining, after such part payment or payments. 4. The Bank’s liability under this guarantee is not affected or discharged in any way by any variation of the Agreement or by any extension of time or other forbearance on the part of the Beneficiary or the Customer to the other. 5. The Bank may terminate this guarantee at any time upon payment to the Beneficiary of the Amount or the balance of the Amount remaining after any part payment of the amount, or such lesser amount as the Beneficiary requires. 6. If two or more persons are named as the Beneficiary, this guarantee takes effect for the benefit of them jointly and a demand under this guarantee by any one or more of them is deemed to be a demand by both or all of them jointly. Payment by the Bank under this guarantee to any one or more of them discharges this guarantee to the extent of the amount so paid. 7. The benefit of this guarantee is not assignable by the Beneficiary. 8. This guarantee continues in force until the earliest of the following occurs: a) this guarantee is returned to the Bank at any NAB branch located within Australia (other than for a payment in accordance with clause 2(a)); b) notification in writing has been received by the Bank at any NAB branch located within Australia from the Beneficiary that this guarantee is no longer required; c) payment is made under clause 2 or 5 to the Beneficiary by the Bank of the whole of the Amount or the balance of the Amount remaining after any part payment or payments of the Amount, or such lesser amount as the Beneficiary requires; d) the close of business on the Termination Date (if any). 9. In the events of clause 8(b), (c) & (d), the Beneficiary must return this guarantee to the Bank at any NAB branch located within Australia. 10. This guarantee is governed by and is to be construed in accordance with the laws of the place where it is executed by the Bank.
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(case summary continued from page 12) The Judge noted the difference between a suretyship and a demand guarantee is that “the liability of a surety is secondary, whereas the liability of the issuer of a demand guarantee is primary.” (citing Paget’s Law of Banking (Malek A and Odgers J) (14th ed, LexisNexis, 2014). Additionally, the essential principle underlying demand guarantees is that each contract is autonomous. The Judge found the decisive factor was whether the obligation was a primary obligation or a secondary obligation. Here, the Judge found the obligation was primary because the obligation on the Guarantor was to pay Lender/Beneficiary upon Guarantor receiving at any of its branches an unconditional written demand accompanied by the bank guarantee. The Judge concluded the bank guarantee was a performance bond or demand guarantee, not a suretyship contract.
Lender/Beneficiary argued that because Guarantor’s obligation to pay is independent of the underlying subcontract, the bank guarantee is a performance bond or demand guarantee. The Judge agreed, noting the principle of autonomy “require[s] that the obligations of the issuer are not determined by reference to the underlying contract.” The Judge agreed the bank guarantee was separate from the circumstances and commercial purpose of the underlying subcontract.
The Judge further ruled that it would be unconscionable for Lender/Beneficiary to draw on the bank guarantee beyond the amount owed under the Bill Facility because the facts clearly show that Lender/Beneficiary believed the bank guarantee was provided in connection with the Bill Facility. Lender/Beneficiary argued the bank guarantee should not be limited to the amount owed under the Bill Facility because Subcontractor/Applicant’s repayment obligation was secured under the Advance Payment Agreement. Using the principle of autonomy and the fact that Lender/Beneficiary was not a party to the Advance Payment Agreement or any agreement with Subcontractor/Applicant, the Judge rejected Lender/Beneficiary’s argument.
2. Unconscionability: Subcontractor/Applicant’s primary argument was that Lender/Beneficiary engaged in unconscionable conduct under section 20(1) of the Australian Consumer Law (ACL) in calling on the bank guarantee because 1) Subcontractor/Applicant’s work on the project was completed and 2) Lender/Beneficiary twice extended the Bill Facility with knowledge Contractor was unable to pay the Bill Facility. Subcontractor/Applicant claims a type of unconscionable conduct where the assertion or reliance on a legal right is unconscionable. Lender/Beneficiary responds that type of unconscionability Subcontractor/Applicant claims is not cognizable within section 20(1). The Judge ultimately agreed with Lender/Beneficiary and held a narrow view of the scope of unconscionable conduct within section 20(1) of the ACL in cases involving performance bonds or demand guarantees because of the nature of those instruments.
Regarding Subcontractor/Applicant’s completion of the work, the Judge rejected Subcontractor/ Applicant’s argument, noting that disputes are common in the construction industry, and Lender/ Beneficiary was under no obligation to investigate the dispute between Contractor and Subcontractor/Applicant. The Judge also noted that the bank guarantee was to secure Lender/ Beneficiary’s advance to Contractor under the Bill Facility, not Subcontractor/Applicant’s obligation to repay the advance payment.
Subcontractor/Applicant made several factual assertions regarding Lender/Beneficiary’s knowledge of the underlying dispute between Contractor and Subcontractor/Applicant and Lender/
September 2018 ■ Documentary Credit World 15 LITIGALITIGALITIGATION DIGESTDIGESTTION
Beneficiary’s knowledge of Contractor’s liquidation. Subcontractor/Applicant alleges that with this knowledge, it was unconscionable for Lender/Beneficiary to extend the Bill Facility to Contractor then call on the bank guarantee.
Lender/Beneficiary possessed a performance bond or demand guarantee issued by Guarantor. The Judge noted that even if Lender/Beneficiary relied on the bank guarantee in extending the Bill Facility to Contractor, it was entitled to do so. Lender/Beneficiary owed no duty to Subcontractor/ Applicant, and the Judge did not find any unconscionable conduct in granting Contractor extra time to repay the Bill Facility. The Judge held that Lender/Beneficiary’s conduct would only be unconscionable if it had an obligation to make further inquiry regarding what was going on with Contractor. The Judge ultimately found Lender/Beneficiary was under no such obligation.
3. Fraud: Subcontractor/Applicant also made a claim of fraud against Contractor for failing to repay the Bill Facility to Lender/Beneficiary in circumstances where Subcontractor/Applicant had repaid the advance payment to Contractor. Subcontractor/Applicant argued that to allow Lender/ Beneficiary to call on the bank guarantee furthers Contractor’s fraud. The Judge ruled that Lender/ Beneficiary cannot be liable for fraud for the same reasons that there was no unconscionability.
Comment: The analysis in this case reveals the poverty of notions such as “primary”, “secondary”, and “unconditional” (as well as names given to the undertaking) in determining whether the undertaking is independent. ■ [MMY]
Power Rental Asset Co Two, LLC v. Forge Group Power Pty LTD No. 17-cv-03621-RS, 2017 WL 2806715 (N.D. Cal. June 29, 2017) [USA]
Topics: Injunction; Fraud; Likelihood of Success; US UCC § 5-109
Note: Forge Group Power Pty. Ltd (Lessee/Beneficiary) leased a power station in Australia that included four GE turbines from a company related to Power Rental Asset Co Two, LLC (Lessor/ Applicant). After Lessee/Beneficiary entered bankruptcy proceedings in Australia, a dispute arose between the parties over who had a “superior right” to the turbines. An “Interim Arrangement Deed” was drawn up by the parties in which they agreed to allow Lessor/Applicant to re-lease the property to a third party in exchange for a USD 44 Million “letter of credit” (LC) which was opened in favor of Lessee/Beneficiary by Bank of America (Issuer) in California.
The Deed stated: “[Lessee/Beneficiary] may make demand under the Bond and is entitled to receive . . . the proceeds of the Bond if. . . (A) a finding or determination is made in the Australian Proceeding to the substantive effect that any of [Lessee/Beneficiary] or the Receivers have a superior right or title to, or interest in, the Turbines than that (if any) of [Lessor/Applicant];
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(B) any period within which any party to the Australian Proceeding may appeal from a final or summary judgement or order in the Australian Proceeding to the effect referred to in [section (A)] has expired without any party having initiated any such appeal in that period; and (C) [Lessee/Beneficiary] has provided to the [Lessor/Applicant] five Business Days’ notice in writing of its intention to make demand under the Bond.”
In the Australian Bankruptcy Proceedings, the Supreme Court of New South Wales determined that Lessee/Beneficiary had a superior interest in the turbines. Lessor/Applicant appealed to the Supreme Court of South Wales, which affirmed the trial court’s decision. Lessor/Applicant then appealed to the High Court of Australia, which declined to hear the appeal on the merits.
When Lessee/Beneficiary informed Lessor/Applicant that it would draw on the LC, Lessor/ Applicant sued Lessee/Beneficiary in California state court. The case was removed to the U.S. federal courts, where the United States District Court for the Northern District of California, Seeborg, J., denied the application for an injunction.
Lessor/Applicant claimed that a natural reading of subsection (B) of the deed suggests that if any appeal was filed in the Australian Proceeding, Lessee/Beneficiary would be unable to draw on the standby. The Judge rejected this argument, observing that the balance of equities did not tip in favor of Lessor/Applicant and that there was no evidence of the likelihood of success on the merits.
The Judge noted Lessor/Applicant’s argument that a literal reading of Clause B of the Deed would prevent a drawing, but stated that it “may be correct that a literal, hyper-technical, reading of the language of condition (B) suggests that the mere fact a timely appeal is ever filed precludes satisfaction of the condition.” Instead, the Judge accepted Lessee/Beneficiary’s argument that “Australian law, like the law here, does not permit such a reading, given the resulting absurdity. Were [Lessor/Applicant] allowed to foreclose recovery permanently under the letter of credit merely by filing an appeal, the very posting of the letter of credit would be rendered meaningless.”
The “Interim Arrangement Deed” entitled the bank undertaking a “bond.” The opinion substitutes “letter of credit,” which is proper under U.S. law. U.S. Section 5-102 (a) (10) “letter of credit” defines a letter of credit, and the “bond” falls within this definition. Because the undertaking operates to assure payment of an obligation and not a contemporaneous sale of goods, this summary defines it as a standby letter of credit, although there is no legal difference between a standby or commercial letter of credit, or an independent guarantee/“bond” for that matter. ■ [ARB/VLG]
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.
September 2018 ■ Documentary Credit World 17 FEAFEAFEATURETURETURE
AVAILABILITY AND REQUIREMENTS FOR DRAFTS UNDER UCP600 by Zahoor N. DATTU*
Way back in 2002, I wrote an article providing an operational guide on availability of documentary credits, the role of the nominated bank, and the requirement for presentation of drafts. That article, based on UCP500, included a table setting out the various forms of availability and the respective requirements for drafts to be presented by the beneficiary.
At that time, UCP500 was very helpful for my article as the text of UCP500 was clear and precise on how availability worked and defined in precise terms the nature of a nominated bank. The self-explanatory clear wording of UCP500 Article 10(b)(i) (Types of Credit) states, in part: “Unless the Credit stipulates that it is available only with the Issuing Bank, all Credits must nominate the bank (the ‘Nominated Bank’) which is authorised to pay, to incur a deferred payment undertaking, to accept Draft(s) or to negotiate.”
It is unfortunate that UCP600 lacks such precision in defining a nominated bank and contains vague wording. UCP600 Article 2 ¶ 12 (Definitions) states, in part: “Nominated Bank means the bank with which the credit is available … .”
My last summary of the need for drafts was based on UCP500.
As this fairly straightforward topic is again getting lots of attention and I see it is on the agenda for the forthcoming Technical Meeting of the ICC Banking Commission in Tbilisi on 17 October 2018, I return to focus on the topic, but this time through the UCP600 lens.
I offer my updated operational guide on the requirements for drafts to be presented by the beneficiary depending on the forms of availability set out in UCP600.
As I received a great deal of positive feedback to my article and table back in 2002, I thought it would be a good idea to update my simple guidance for UCP600. ■
* Zahoor Dattu is Coordinator, Banking Commission, ICC United Arab Emirates and Principal Consultant, Bastaki Management Consultancy, Dubai, United Arab Emirates.
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Operational Guide on the Requirements for Drafts
AVAILABILITY OF DRAFTS REQUIRED COMMENT DOCUMENTARY CREDIT UNDER UCP 600 Available by Draft not required Draft plays no real role in a Sight Payment credit available by sight payment with an issuing or nominated bank. Available by Deferred Payment Draft not required Draft not required Available by Draft required to be drawn Drawee will be a bank Acceptance on drawee bank under a credit available by acceptance Available by Drafts may be required As drafts are optional it is Negotiation depending on whether the for the issuing bank to issuing bank made the decide whether or not to credit available against call for drafts when it issues documents alone or against the letter of credit. documents and a draft.
Additional Source on This Topic:
THE COMPARISON OF UCP600 & UCP500 by Professor James E. Byrne, (IIBLP, 2007), p. 38-39. [Context, comments, and advice on UCP600 Article 2 (Definitions) ¶ 12 “Nominated Bank” and UCP500 Article 10(b)(i) (Types of Credit)]
September 2018 ■ Documentary Credit World 19 FEAFEAFEATURETURETURE
NEGOTIANEGOTIANEGOTIATION: A COMMON UNDERSTANDING STILL ELUDES US
by SOH Chin Aik*
UCP600 Article 2 ¶ 11 (Definitions) states: “Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.” This wording was intended to add clarity to the UCP500 definition of negotiation regarding the concept of “giving of value”.
After more than a decade since adoption of UCP600, do we have a common understanding of the concept and negotiation in practice? A quick survey has been carried out to gauge the practice and the understanding of trade practitioners among the major trade finance banks in Singapore. The questions posed in the survey:
1) Do you certify that you have negotiated on the covering schedule even though you do not advance the proceeds to the beneficiary?
2) If you do not advance, do you issue a letter to the beneficiary that you agree to advance on or before the date of receipt of reimbursement from the issuing/reimbursing bank?
3) When do you pay the beneficiary if you do not advance or agree to advance?
i ) Do you pay only upon receipt of funds strictly from issuing bank?
ii) Or do you also pay upon receipt of funds from reimbursing bank (if nominated in the Credit)?
* Soh Chin Aik is Executive Director and Senior Trade Advisor. He spent 45 years in trade and structured trade finance origination, forfaiting and distribution, trade operations, credit & marketing, syndication, and credit insurance. He set up the middle office for the Bank’s structured trade and commodity finance for the last 16 years and has pioneered some of the innovative techniques for risk controls. He will move on from January 2019 to offer training and consultancy service on trade and structured commodity financing matters. He welcomes any comments and feedback to the survey at [email protected]
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Survey Findings:
a) There are quite a number of the major trade finance banks who adopt the practice of certifying on the covering schedule that they have negotiated a complying presentation even though they have not advanced the proceeds to the beneficiary. However, this is a significant improvement over the last decade when practically all the nominated banks had invariably certified that they negotiated even though they had not advanced the proceeds.
b) Within the banks concerned, whether they certify that they have negotiated or not, it may differ if the transaction relates to traditional trade finance or structured trade finance. In the case of traditional trade finance, these banks concerned are likely to certify that they have negotiated even though they have not advanced in the mistaken belief that they can therefore claim reimbursement from the reimbursing bank and eliminate documentary risks, prior to the taking up of documents by the issuing bank. Unlike structured trade transactions, banks would have advanced the proceeds when they certify that they have negotiated.
c) In all these banks, none of them except where the writer has instituted the practice in his bank, are prepared or willing to issue a letter to the beneficiary agreeing to advance the proceeds upon its request, on or before the banking day on which reimbursement is due to the nominated bank.
The writer is of the view that there is a disparate understanding and in practice of what constitutes a negotiation. Whether or not the nominated bank did negotiate is a question of fact and this will become known in the process of discovery when there is litigation which is an undesirable outcome. Unless the nominated bank has indeed negotiated under the Credit, it is not entitled to claim reimbursement from the reimbursing bank as there is no negotiation. In such cases, the nominated bank should strictly present the documents to the issuing bank for reimbursement even though the reimbursing bank has been nominated in the Credit.
The writer recommends that banks review their policies to align their understanding and practice to UCP600. There are legal merits for nominated banks to establish their rights as negotiating banks (save for the documentary risks) where the fraud exception rule will not be applicable and protect themselves against the liquidation or insolvency of the beneficiary whereby they are legally entitled to the proceeds. ■
Additional Sources on This Topic:
UCP600: AN ANALYTICAL COMMENTARY by Professor James E. Byrne with V. Maulella, C.S. Soh, A. Zelenov (IIBLP, 2010), p. 150. [Introduction, Use of the Term, Related Issues, Miscellaneous Issues, and References on UCP600 Article 2 (Definitions) ¶ 11 “Negotiation”]
UCP600: AN ANALYTICAL COMMENTARY – 2018 SUPPLEMENT by Professor James E. Byrne with M. Kozakowski, J. Berger (IIBLP, 2018), p. 18. [Introduction, Use of the Term, and References on UCP600 Article 2 (Definitions) ¶ 11 “Negotiation”]
September 2018 ■ Documentary Credit World 21 FEAFEAFEATURETURETURE
THE FUTURE OF COMMERCIAL CREDITS AND THE UCP GOVERNING RULES by the BNP Paribas Trade Expertise Desk*
“No future”. These words were “the battle cry” of the punk-generation in the 1970s. Might this slogan be the same ‘mane thekel’ — the foreboding of our doom — written on the wall for our own dearest Documentary Credit? It is not the first time that Letters of Credit are declared obsolete and “dead soon” in an ever-changing world. Meanwhile. however, the seventies generation is still alive and kicking. Likewise, it is quite comforting to know we can apply the same to our own bank instrument.
It is a well-established fact that trade in general remains one of the lifelines for any country and its survival. Whereas the context of trade and trade finance in which the documentary credit operates is prone to profound and radical changes lately, the documentary credit is still amongst the most expedient enablers in the trade (finance) scope. Notwithstanding change has become pervasive in any human activity nowadays, the basic characteristics of the Letter of Credit still stand.
An LC can still fulfil its typical role in the current environment, namely offer an inherent security for both commercial parties, linked to the documents. Or should we say to the compliance of the required documents. As such, a buyer can be sure of adequate documentation related to the goods or services purchased. At the same time, the seller can obtain financial security.
Of course, one might question the definition of a document nowadays. Documents are no longer carved in stone, nor are they written on parchment or sheepskin. It comes to mind that the carrier for a document is paper. But this is no longer a certainty. A Letter of Credit is conveyed by electronic means; and in future documents will be drafted (or are already drafted) electronically, up to their fully digital representation. How to cope with such a drastic evolution within the handling of documentary credits? This is an issue that will have to be addressed soon.
Another important role of a documentary credit is its capacity to solve the financing needs of both supplier and buyer. Both parties have conflicting interests in that a buyer wants to pay as late as possible; whereas a seller would like to avoid treasury constraints by being paid as quickly as possible. Letters of Credit have proven to be a powerful means to offer financing of trade transactions. And this will not be substantially different in an electronic/digital environment. Credit remains the grease in the supply chain in the sense that it smoothens processing transactions by overcoming the hurdles caused by lack of funds, requirements for payment certainty, etc.
* The BNP Paribas Trade Expertise Desk in Brussels consists of expert teams offering expert advice within the bank regarding international trade, focussing on trade related documentary business and bank guarantees. Members of the Guarantees Desk: Chantal Carpaij, Jean Minne, Thierry De Saeger. Members of the Documentary Desk: Patrick Vanbavinckhove, Didier Maeter, Gauthier Bernard. Head of the TED: Eddy De Coster.
22 Documentary Credit World ■ September 2018 FEAFEAFEATURETURETURE
All of this does not only mean that documentary credits as instruments of security and financing are essential, but a comprehensive and uniform (no pun intended) set of rules are indispensable in the successful application of the documentary credit activity. Being able to rely on the same rules and interpretations with regard to documentary credits, everywhere and at the same time, will prove to be one of the key strengths going forward, even in a digital world.
Consequently, the product as well as the related rules and regulations have to evolve with changing circumstances and adapt to the digital, probably web-based, environment. The changed context is digital, fast, cheap, imminently, and inherently transformational. This is the challenge to be dealt with: How to cope with digital instruments, constant change, and uniform regulation to keep the Letter of Credit alive? We cannot escape the storm of change coming towards us and will have to review our activity and its applicable rules … in time. This means, the industry then should anticipate that within a few years we all have to begin adapting the rules to these radical changes in order to overcome being declared obsolete (again). We’re afraid it will be a bare necessity. ■
Additional Sources on This Topic:
“Decision of the ICC in respect of a revision of UCP 600 following a comprehensive consultation”, International Chamber of Commerce (15 June 2017), Document 470/1272. [Background, Results of the Consultation, and Executive Committee Decision on future of UCP.]
“UCP 600: The Next Steps” by David Meynell (DCW, May 2017), p. 14. [Key Points, Analysis, and Decision regarding future of UCP.]
September 2018 ■ Documentary Credit World 23 FEAFEAFEATURETURETURE
DISCREPDISCREPDISCREPANCY RARAANCY TES: WHY ARE THEY STILL SO HIGH?
by A.T.M. Nesarul HOQUE*
Following adoption of UCP600 in 2006 and prior to UCP600’s entry into force as of 1 July 2007, the ICC Banking Commission updated the International Standard Banking Practices (ISBP) in April 2007. On its release, the ISBP (2007) booklet referenced that “figures show that more than 50% of credits are rejected for discrepancies on first presentation”. Some ten years later, ICC’s 2016 Rethinking Trade & Finance report revealed that 66% of respondents indicated that they had experienced no change in their overall refusal rate of documents on first presentation. This topic has been discussed on a number of occasions at various industry events, including the recent IIBLP 2018 Annual LC Survey conference in Singapore. It seems to me that the situation has not improved. The questions remain: Why are discrepancy rates still so high? What is the main cause? Is there a possible remedy?
Critically looking into the nature of discrepancies in documentary credit operations, we can observe there are three categories: (a) Unavoidable discrepancies generally related to non-fulfilment of events such as shipment, expiry date, etc; (b) Avoidable discrepancies arising from poor preparation and presentation of documents; and (c) Spurious (unfounded) discrepancies. I will focus on these latter two categories. In my overall observation dealing with documentary credits for more than a decade, presentations received from big corporates typically comply but presentations made by SMEs are not complying in general. Most SMEs start to perform under documentary credits as soon as they receive export documentary credits without carefully looking into the documentary conditions and how they are to comply with those conditions. I believe this is primarily due to a lack of knowledge of SME employees regarding how to make a complying presentation under any documentary credit subject to UCP600. In these circumstances, practical, effective training is of paramount importance.
In addition, export activities of SMEs in some countries have unique terms & conditions, including modification and exclusion of UCP600 provisions, based on their local laws and regulations. In order to avoid discrepancies, SMEs can consider the following important steps:
• Step: 1 Place emphasis on country wise uniformity of documentary credit terms & conditions.
* A.T.M. Nesarul Hoque is Vice President at Mutual Trust Bank Limited in Dhaka, Bangladesh. A CDCS specialist, member of ICC DOCDEX and DCW Editorial Advisory Board member, Mr. Hoque has written extensively on matters pertaining to LC practice and the UCP rules. He may be contacted at: [email protected]
24 Documentary Credit World ■ September 2018 FEAFEAFEATURETURETURE
• Step: 2 Prepare country wise complying documents and avoid insertion of excessive data not required by the credit. • Step: 3 Finalize documents by reviewing that data has been inserted into the documents to meet the credit requirements and make presentation before the last date for presentation and/or expiry date of the credit.
The most unfortunate and annoying trend is when spurious (unfounded) discrepancies are cited by document examiners. This particular trend makes both SMEs and big corporates unhappy and damages the reputation of the documentary credit as the most reliable trade payment method. Document examiners often fail to understand that the documentary credit is a trade facilitation vehicle and their job is not to hinder that process. In May 2016, the Executive Committee of the ICC Banking Commission released a paper on “Notes on The Principle of Strict Compliance”. This paper opened up the issue without setting out any steps to remedy the situation. From my perspective, UCP600 Article 14(d) is one of the most misunderstood articles within the banking community creating fertile territory for spurious (unfounded) discrepancies. Document checkers often examine data on a document in isolation and compare it with data elsewhere in the document, any other stipulated document, and the credit without considering the data “in context.” Analyzing of various ICC official opinions and DOCDEX decisions seem to me very much specific query oriented without giving any general idea how data on a document is actually conflicted “in context”. The ICC Banking Commission should provide a direction on how data should be read “in context”.
This definite approach on a “data conflict test” may help to reduce spurious (unfounded) discrepancies. In other words, documentary credit practitioners need definite direction of “in context” as to testing for data conflict.
In due course a fast track revision of the UCP600 rules by streamlining how documentary credits are made available and following the direction of ISP98 Rule 4.03 (Examination for Inconsistency) in dealing with conflict or inconsistency would have an immediate and dramatic impact by reducing the instances of discrepancies in presentations under documentary credits. ■
Additional Sources on This Topic:
“Notes on the Principle of Strict Compliance”, Issues Paper prepared by the Executive Committee of the ICC Banking Commission (24 May 2016), Document 470/1261. [Relevant ICC Rules and Practices, DOCDEX Decisions and ICC Official Opinions, Legal Perspective: Interpretation in the Courts, Expert Perspective: Reference Books, Is There a Defined Approach?]
“Strict Compliance: How Strict is Strict?, DCW, Nov/Dec 2016, p. 20. [Results, Comments, and Background on series of questions developed by Carter Klein and asked of trade finance specialists around the world.]
September 2018 ■ Documentary Credit World 25 SUBSCRIPTION ORDER FORM
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26 Documentary Credit World ■ September 2018 ARTICLES
THE DIGITDIGITTHE ALISAALISAALISATION OF TRANSFERABLE DOCUMENTS AND INSTRUMENTS IN INTERNAINTERNAIN TIONAL TRADE by Dr. Alan DAVIDSON*
The Supplement to the Uniform Customs and Practice for Documentary Credits for Electronic Presentation (eUCP) is currently under review by the International Chamber of Commerce (ICC). The use of electronic documents and instruments results in great efficiencies potentially shortening the time and cost for letter of credit, guarantee, and bond transactions. This paper discusses the introduction of the UNCITRAL Model Law of Electronic Transferable Records (Model Law).1 The Model Law was completed by Working Group IV of UNCITRAL in 2016 and formally approved by UNCITRAL in July 2017. Several UN member states are reviewing and contemplating its adoption in domestic and international law.
The Model Law aims to enable the legal use of electronic transferable records (ETRs) domestically and internationally. The Model Law is intended to apply to ETRs that are functionally equivalent to transferable documents or instruments, including bills of lading, bills of exchange, promissory notes, and warehouse receipts. Their availability in electronic form will improve speed and security and will facilitate “smart contracts”.
ETRs are relevant for businesses such as transport, logistics, and finance and for developing countries interested in establishing markets for electronic warehouse receipts to facilitate
* Dr. Alan Davidson, Academic, TC Beirne School of Law, University of Queensland, Solicitor and Barrister. He is a member of the DCW Editorial Advisory Board.
1. Dr. Alan Davidson has been an active delegate to all sessions of Working Group IV (Electronic Commerce) UNCITRAL since 2014.
September 2018 ■ Documentary Credit World 27 ARARARTICLESTICLESTICLES
farmers’ access to credit. ETRs are fundamental to a paperless trade environment, to assist in facilitating trade.
The Model Law builds on the principles of non-discrimination against the use of electronic means, functional equivalence and technological neutrality and may therefore accommodate the use of all technologies and of all models, such as registries, tokens, and distributed ledgers (blockchain).
Control of the ETR represents the functional equivalent of the possession requirement of the transferrable instrument. Control is established with respect to an ETR if a reliable method is used to: (a) establish exclusive control of that electronic transferable record by a person; and (b) identify that person as the person in control.
In 1996 the UNCITRAL released what is now the most popular model for consumer and commercial protection in an electronic environment. The UNCITRAL Model Law on Electronic Commerce (ML-EC)2 provides member states with a template of internationally acceptable and robust rules that removes legal obstacles and creates a more secure legal environment for electronic commerce. The ML-EC has gained significant international acceptance, being incorporated into legislation by more than 150 jurisdictions.3 It incorporates the fundamental principles of functional equivalence and non-discrimination. That is, where the electronic form is functionally equivalent to the traditional form, it should be treated equally by the law and the law should not discriminate because of form. These principles permeate virtually all legislation based on the ML-EC. An additional principle underlying the ML-EC is that of technological neutrality. The term was chosen in response to the recognition that technology is constantly developing.
The ML-EC represented a significant step forward in relation to the regulation of electronic commerce and largely achieved its objectives of removing legal obstacles, promoting certainty, providing a more secure legal electronic commerce environment, and being “of use to individual users of electronic commerce in the drafting of some of the contractual solutions that might be needed to overcome the legal obstacles”.4 Notwithstanding this global success and adoption, a review was necessary and in 2005 the United Nations released the UN Convention on the Use of Electronic Communications in International Contracts (Electronic Communications Convention).5 The Electronic Communications Convention intended to assure commercial parties and financial institutions internationally that contracts negotiated electronically are as valid and enforceable as traditional paper-based transactions. The provisions build on and improve both the ML-EC and the UNCITRAL Model Law on Electronic Signatures (2001).6
2. Available at: www.uncitral.org/uncitral/en/uncitral_texts/electronic_commerce/1996Model.html
3. See Status - UNCITRAL Model Law on Electronic Commerce (1996) www.uncitral.org/uncitral/en/uncitral_texts/ electronic_commerce/1996Model_status.html
4. Guide to Enactment of the UNCITRAL Model Law on Electronic Commerce (1996), paragraph 2.
5. Available at: www.uncitral.org/uncitral/en/uncitral_texts/electronic_commerce/2005Convention.html
6. Available at: www.uncitral.org/uncitral/en/uncitral_texts/electronic_commerce/2001Model_signatures.html
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The ML-EC and the Electronic Communications Convention were not intended to apply to negotiable instruments, documents of title, and similar documents. Article 2(2) of the Electronic Communications Convention specifies certain exclusions:
2. This Convention does not apply to bills of exchange, promissory notes, consignment notes, bills of lading, warehouse receipts or any transferable document or instrument that entitles the bearer or beneficiary to claim the delivery of goods or the payment of a sum of money.7
The reason for the deliberate exclusion was concern of the potential consequences of unauthorised duplication of documents of title and negotiable instruments. Additionally any transferable instrument that entitles the bearer or beneficiary to claim the delivery of goods or the payment of a sum of money makes it necessary to develop mechanisms to ensure the “singularity” of those instruments.
Objective The objective of the Model Law8 is to facilitate the legal use of ETRs, domestically and internationally. It applies to ETRs that are functionally equivalent to transferable documents or instruments. Transferable documents or instruments are defined as:
Article 2 “Transferable document or instrument” means a document or instrument issued on paper that entitles the holder to claim the performance of the obligation indicated in the document or instrument and to transfer the right to performance of the obligation indicated in the document or instrument through the transfer of that document or instrument.
Transferable documents or instruments typically include bills of lading, bills of exchange, promissory notes, consignment notes, and warehouse receipts. In other words, the Model Law covers the instruments excluded by the Electronic Communications Convention. The definition would also cover obligations owed to beneficiaries under commercial and standby letters of credit and independent guarantees.9
These transferable documents and instruments are important and vital to international trade, in particular in the financing of international trade. UNCITRAL, in making the Model Law available, intends to provide a platform for the harmonisation, certainty, and commercial predictability in the extended use of electronic commerce. For example, transactions can proceed with greater efficiency, speed, and security. Commercial parties adopting the use of smart contracts can take comfort in this potential regulation. A smart contract permits the use of automation, in a commercial world where computer systems are effectively trusted with greater autonomy through artificial intelligence
7. Note that this definition could well extend to exclude payment instruments such as Letters of Credit and Bank Payment Obligations.
8. Available at: www.uncitral.org/pdf/english/texts/electcom/MLETR_ebook.pdf
9. The Model Law would deal with the issuance, transfer, and amendment of letters of credit and independent guarantees. It would not deal with the presentation of documents by the beneficiary. However, the eUCP is intended for electronic presentation.
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platforms and the expanding use of distributed ledger technology. The principle of technological neutrality entails adopting a system-neutral approach, enabling use of various models whether based on registry, token, distributed ledger, or other technology.
To form a smart contract using distributed ledger technology, typically called blockchain,10 parties encrypt a message or messages, forming a block of data, using precise and predetermined protocols, that then “informs” all the nodes on the network of the block. The nodes validate the transaction by rigorously verifying the identities and then records on the ledger the acceptance of the block. This process is shared amongst the nodes. In due course, an additional encrypted block of data is typically added with the same level of rigor forming a chain, or adding to the ledger. All nodes continue verification and authentication with each submission. The integrity of the ledger is said to be immutable.11 The smart contract can be self-executing. This example belies the underlying complexity.
Using a registry, token, distributed ledger, or other functionally equivalent technology, risk becomes more than acceptable for commercial parties in dealings that involve significant value, transfer, obligations, and title. ETRs are especially useful for international trade, such as transport, logistics, and of course finance, popularly referred to as “fintech”. Developing countries can utilise such a system to assist with the incorporation of electronic warehouse receipts. Most significantly ETRs ought to be fundamental in the world of electronic commerce and contribute to trade facilitation.
Use The Model Law acclimates various forms of technology including registries, tokens, and distributed ledgers. Articles 8 and 9 provide for functional equivalence of electronic writing and electronic signatures. The key provision is Article 10. Where the law requires a transferable document or instrument, that requirement is met by an electronic record where two conditions are met. First, the electronic record contains the information required to be contained in the corresponding transferable document or instrument. Second, a reliable method is used to identify that electronic record as the electronic transferable record, to render that electronic record capable of being subject to control from its creation until it ceases to have any effect or validity, and to retain the integrity of that electronic record.
The first condition recognises the necessity to comply with applicable substantive law for the transferable document or instrument. The second condition introduces elements of identity, control, and integrity of the electronic transferable record. Sub-Article 10(2) provides that the criterion for assessing integrity shall be:
whether information contained in the electronic transferable record, including any authorized change that arises from its creation until it ceases to have any effect or validity, has remained
10. The expression originates from the seminal article by Satoshi Nakamoto where the expression used is a “chain of blocks”; Satoshi Nakamoto “Bitcoin: A Peer-to-Peer Electronic Cash System” https://bitcoin.org/bitcoin.pdf
11. For example see: Christopher Millard, “Blockchain and law: Incompatible codes?“ (2018) 34 Computer Law & Security Review, 843.
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complete and unaltered apart from any change which arises in the normal course of communication, storage and display.
Identity The latest technologies available to commercial parties provide solutions in a modern commercial context to eliminate or minimise the risk of duplication of the electronic record. The Explanatory Note to the Model Law uses expressions such as “uniqueness” and “singularity”.12 Uniqueness is a relative notion. The functionality should be to provide an ETR that has an absolute guarantee of non-replicability. The use of the expressions of identity and integrity reflect this notion. Of course, in the paper-based world, such a guarantee is not required, where forgery and fraud remain ever present. However the original paper-based document or instrument, may be said to be unique. Centuries of commercial practice have permitted sophisticated trade parties to weigh and balance the underlying risks and take appropriate, if not full-proof actions. Indeed, electronic commerce will, in many circumstances, reduce commercial and instrument risk that has been part of the use of paper-based documents. Among the definitions contained in Article 2 of the Model Law:
“Electronic record” means information generated, communicated, received or stored by electronic means, including, where appropriate, all information logically associated with or otherwise linked together so as to become part of the record, whether generated contemporaneously or not;
“Electronic transferable record” is an electronic record that complies with the requirements of article 10;
Control – exclusive control – transfer of control In the paper-based world, possession, including constructive possession, of the transferable document or instrument typically has associated with it the attachment of specific rights, value, and ownership. The concept of control is intended by the Working Group to be the electronic functional equivalent of possession. Indeed, the requirement must be exclusive control.
The first part of Article 11 (Control) provides for concepts of “exclusive control” and to “identify” the person in control. Sub-article 11(1) states: “Where the law requires or permits the possession of a transferable document or instrument, that requirement is met with respect to an electronic transferable record if a reliable method is used [t]o establish exclusive control of that electronic transferable record by a person and [t]o identify that person as the person in control.”
Sub-article 11(2) provides for the functional equivalence of transfer of the document or instrument. In the paper-based world, this typically occurs by simple delivery or endorsement and delivery, and thus is the transfer of possession. Sub-article 11(2) states: “Where the law requires or permits transfer of possession of a transferable document or instrument, that requirement is met with respect to an electronic transferable record through the transfer of control over the electronic transferable record.” This will be reliant on the technology used, but must simultaneously comply with the “exclusive control” and identity features.
12. Explanatory Note to the UNCITRAL Model Law on Electronic Transferable Records, paragraphs 81-85, 94-96 and 112.
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Reliable Method The Model Law uses the expression reliable method in several key provisions to establish the standard in electronic forms for functional equivalence. The expression “reliable method” is the standard used in Article 10 (Transferable documents or instruments), Article 11 (Control), Article 9(Signature), Article 13 (Indication of time and place in electronic transferable records), Article 16 (Amendment), Article 17 (Replacement of a transferable document or instrument with an electronic transferable record), and Article 18 (Replacement of an electronic transferable record with a transferable document or instrument). Article 12 (General reliability standard) provides that for purposes of these provisions:
[T]he method referred to shall be: (a) As reliable as appropriate for the fulfilment of the function for which the method is being used, in the light of all relevant circumstances, which may include: (i) Any operational rules relevant to the assessment of reliability; (ii) The assurance of data integrity; (iii) The ability to prevent unauthorized access to and use of the system; (iv) The security of hardware and software; (v) The regularity and extent of audit by an independent body; (vi) The existence of a declaration by a supervisory body, an accreditation body or a voluntary scheme regarding the reliability of the method; (vii)Any applicable industry standard; or (b) Proven in fact to have fulfilled the function by itself or together with further evidence.
Transferable documents and instruments are typically those that carry some form of property rights that can be transferred such as by delivery or endorsement and delivery. Typically these instruments transfer significant value or property rights. Traders will initially be circumspect with their own property and the property of clients. For the Model Law to be worthwhile, a few member states need to be pioneers and make available and embrace the new Model Law. The nature of electronic duplication is that copies are made digitally, with indistinguishable copies. The Model Law does not abandon the idea of a central registry for its purposes, even though experimentation with centralised registries has had mixed support. Blockchain is recognised, but so too are other technologies in addition to the possibility of future technologies which commercial parties may incorporate.
Summary The Working Group barely discussed the technology involved. The delegates and observers were after all, mostly lawyers. There was an underlying and unspoken assurance that experts regarded the technical problems of originality and duplication resolved. The Explanatory Note confirms this understanding. Indeed, it specifically mentions the use of a registry which could be centralised, decentralised, or in fact distributed – such as blockchain. Distributed ledger technology is specifically
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mentioned, although no attempt is made to explain how, where, or when it should or could be utilised. The blockchain forms a ledger, available and immutable, added to by stringent crypto- methods. It will be up to merchants and financiers to implement in due course. The future is waiting.
In a similar approach, the same technology can be used for many variants of smart contracts. Blockchains can passively and faithfully store records and information; and it can be an active engaged device facilitating transactions. For example, a smart contract is an agreement or part of an agreement converted into code. This can apply to self-executing and self-enforcing contracts. The instruments may be letters of credit, independent guarantees, bills of exchange, promissory notes, and so forth.
The universal implementation of the Model Law will enhance international and domestic trade, providing greater ease and incorporation of electronic instruments and communications. It will facilitate innovation and design providing clarity and certainty regarding the use of ETRs including bills of lading, bills of exchange, promissory notes, and warehouse receipts. Such implementation would improve speed and security and will facilitate “smart contracts”. This will encourage businesses and enterprises such as transport and logistics, and the financial aspects of such endeavours. ETRs are fundamental to the future of the trade environment and for facilitating trade.■
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CAN A BANK BOTH ISSUE AND NEGOTIATE AN LC?LC?TE CHINESE COURT AFFIRMS SHOCKING DECISION
by YAN Zhida*
In March 2014, Company A purchased 2,000 tons of manganese silicon alloy from Company B at CNY 6,625 per ton for a total value of CNY 13,250,000 (USD 2.1 million) according to the contract between the two companies.
At the request of Company A (Applicant) in May 2014, Bank J (Bank) issued a negotiable domestic LC in favor of Company B (Beneficiary). The LC stated the same goods, quantity, price, and total value as stipulated in the contract and the LC required only two documents — invoice and cargo receipt — to be presented. Bank and Applicant agreed that the LC would be issued based on 25% amount to be cash deposit as collateral and the remaining balance guaranteed by an iron and steel company.
The LC was subject to the Measures for Settlement of Domestic Letters of Credit (Settlement Methods). Released by the People’s Bank of China in 1997,1 the Settlement Methods reflect basic concepts such as the independence principle, LC issuance and negotiation, definitions of issuing bank and negotiating bank and their liabilities, and the right of recourse of issuing bank and negotiating bank as contained in UCP600 or ICC Opinions.
On 5 June 2014, Beneficiary presented complying documents to Issuing Bank for negotiation. A Domestic LC Negotiation Agreement with Interest on Buyer’s account (the three-party agreement) was made among Applicant, Beneficiary, and Bank which stated that if the negotiated funds could not be repaid on the due date, Bank has a right of recourse against both Applicant and Beneficiary based on the Negotiable Instruments Law of the People’s Republic of China.
After collecting relative interest from Applicant, Bank negotiated the documents and paid CNY 13,250,000 to Beneficiary. But on the due date, Applicant did not return the funds negotiated and the iron and steel company (Warrantor) failed to carry out its guarantee responsibility. Bank then deducted Applicant’s cash deposit of CNY 3,312,500 but was unable to recover the remaining balance of CNY 9,937,500.
* Yan Zhida is a DOCDEX expert of ICC, an LC and guarantee expert of ICC China, and head of the expert group in the Bills Center of China Merchants Bank, head office. His e-mail is [email protected]
1. Updated by the People’s Bank of China and the China Banking Regulatory Commission in 2016.
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Bank had recourse against Beneficiary according to the three-party agreement. Beneficiary refused to refund, arguing it had supplied the goods and presented complying documents called for by the LC, thus it had the right to possess consideration and it was Bank’s responsibility to honour.
Several months passed and the dispute remained unsettled. In May 2015, Bank initiated a lawsuit against Applicant, Beneficiary, and Warrantor in the Harbin Intermediate People’s Court (Intermediate Court),2 seeking the remaining negotiated amount of CNY 9,937,500 plus interest.
The Intermediate Court This case ... will inevitably have a tremendous considered that since the three- party agreement stipulated if impact on traditionally held views and banking the negotiated amount could practice concerning LCs in China. not be collected, Bank had a right of recourse to Applicant and Beneficiary. Bank’s claim that Beneficiary must repay the loan principal and relative interest conformed with law and should be supported. Hence the Intermediate Court decided that Beneficiary should be held liable as to the outstanding loan principal with interest.
Beneficiary appealed the Intermediate Court decision to the Heilongjiang Province Higher People’s Court (High Court).3 The High Court rejected Beneficiary’s appeal and affirmed the first instance judgment, creating a judicial precedent regarding a self-issued, self-negotiated LC event.
Clearly an LC issued and negotiated by the same bank clashes with basic LC principles, but it has become somewhat common nowadays in China especially with respect to domestic LCs or cross- border LCs between offshore and onshore companies. These LC types place greater emphasis on financing than settlement to some extent.
This case and others have ignited great controversies among banks and will inevitably have a tremendous impact on traditionally held views and banking practice concerning LCs in China.
Arguments about Nature of Case and Intermediate Court Decision Beneficiary contended that the case should be treated as a typical LC negotiating dispute. The meaning of negotiation and a negotiating bank’s right to recourse should be interpreted according to the Settlement Methods and UCP600. According to common sense and the definition of negotiation contained in the two sets of rules, there must be two different banks for negotiation: one being the issuing bank and the other being the negotiating bank. Since the issuing bank and the negotiating bank in this case is the same entity, Bank’s right to recourse granted by the three-party agreement should be deemed invalid.
2. China Construction Bank Co. Ltd. Harbin Development Zone Sub-Branch v. Tianjin Jinsheng Metallurgic Product Co. Ltd., (2015) Ha Min San Shang Chu No. 91 of the Harbin Intermediate People’s Court [CHINA].
3. China Construction Bank Co. Ltd Harbin Development Zone Sub-Branch v. Tianjin Jinsheng Metallurgic Product Co. Ltd. (2016) Hei Min Zhong No.572 of the Heilongjiang Province Higher People’s Court [CHINA].
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But Bank countered that this case should be viewed as a financing dispute solely related to borrowing and lending. If the borrower could not return the money, the lending bank had a right of recourse to both the borrower and the warrantor.
However the Intermediate Court took the view that it was neither a negotiating dispute nor a financing dispute, but an LC dispute. In this case, Bank was not only an issuing bank but also a negotiating bank. The three-party agreement made it clear that if the negotiating funds could not be repaid, Bank had the right of recourse to both Applicant and Beneficiary. Hence it was not hard to see that this arrangement differed from the standard expectations regarding LC negotiation.
The Intermediate Court decided that Beneficiary’s position that Bank had no right of recourse to the negotiated funds was not valid. Beneficiary should bear liability of repayment. Beneficiary appealed to the High Court.
Central Issues Debated in Second Instance and High Court Judgment During the second instance several central issues, including the nature of the case, were debated.
Legal Nature of the Case The High Court put forward the view that an LC, being a payment method, also had a financial function. According to the Rules of the Supreme People’s Court of the PRC Concerning Several Issues in Hearing Letter of Credit Cases, LC disputes referred to “cases arising out of issuance, advising, amendment, revocation, confirmation, negotiation and reimbursement of Credits.”4 The High Court affirmed the Intermediate Court’s finding that Bank was the issuing bank and acted as the negotiating bank. Bank filed suit against Applicant and Beneficiary for repayment of the advance funds in view of the three-party agreement. Although it was not a typical dispute of LC issuing, LC negotiating or LC financing independently, the court of first instance was correct in considering the nature of the case to be an LC dispute. Bank’s right of recourse could not be negated based on negotiation as defined in the Settlement Methods.
Whether LC Dispute Subject to “Negotiable Instruments Law” Makes the Three-Party Agreement Invalid Citing wording in the three-party agreement stating “[Bank] has the right of recourse against both [Applicant] and [Beneficiary] by the Negotiable Instruments Law …”, Beneficiary insisted that the so-called right of recourse was under negotiable instruments law rather than under UCP600 or the Settlement Methods. Therefore it should be deemed the right of recourse of a draft, a promissory note, or a cheque holder to the drawer, the endorser or the other obligors, instead of that in LC transactions. So the stipulation about a right of recourse in the three-party agreement was non- binding and should be considered null and void.
The High Court disagreed. It took the view that negotiable instruments law referred to law about drafts, promissory notes, or cheques and did not comprise UCP or the Settlement Methods. But it was precisely because of that that negotiable instruments law should be interpreted as legal
4. Article 1 (Scope of Rules) of Rules of the Supreme People’s Court of the PRC Concerning Several Issues in Hearing Letter of Credit Cases (2005).
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regulations inclusive of the Settlement Methods. Beneficiary’s argument to define the right of recourse strictly within the limits of negotiable instruments law was illogical and unacceptable.
Whether Bank’s Identity as Issuing Bank and Negotiating Bank Impacts Right of Recourse With regard to this question, Beneficiary maintained its position that the issuing bank and the negotiating bank must be two different parties by referencing the following articles:
The Settlement Methods (1997) Article 13 (Obligations of an Issuing Bank) states: “After a L/C has been opened and specified documents in compliance with the terms and conditions under the L/C have been submitted to an issuing bank, the issuing bank shall perform the following obligations: (1) immediate payment shall be made for a L/C of payment at sight; (2) in the case of a deferred payment L/C, payment shall be made on the due date as indicated on the L/C; (3) in the case of a negotiation L/C, payment shall be made to the negotiable bank on the due date as indicated on the L/C.”
UCP600 Article 2 ¶ 11 (Definitions) states, in part: “Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation … .”
Beneficiary reiterated that Bank negotiated documents under an LC issued by itself in which it was the payer/drawee. This not only breached the fundamental tenets of negotiation but resulted in confusion about issuing bank and negotiating bank identity. As both issuing bank and negotiating bank, Bank’s assertion that it had a right of recourse to Beneficiary carried no weight.
The High Court agreed with the Intermediate Court’s position that Bank’s identity status was unique. Bank’s right of recourse based on the three-party agreement should be supported.
To Which Party Should the Negotiating Bank Claim Recourse Beneficiary maintained that since the case was an LC dispute, the concept of negotiation should be interpreted only in line with the Settlement Methods and UCP600.
The Settlement Methods (1997) Article 24 (Exercise of the Right of Recourse) states: “After negotiation of a L/C, the negotiation bank shall be entitled to recourse against the beneficiary. Where payment is not received on the due date, the negotiation bank may recover the amount of negotiation from the account of the beneficiary.”
The Settlement Methods (1997) Article 30 states: “An issuing bank shall not be entitled to recourse against a negotiation bank or a beneficiary upon payment.”
UCP600 Article 7 (Issuing Bank Undertaking) states, in part: “Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour … .”
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With reference to these provisions, Bank had no right of recourse to Beneficiary because it was the issuing bank as well. Accordingly, even if Bank had the right of recourse it should first reimburse itself. Only under the premise that the issuing bank failed to reimburse itself could it actualize the right to the beneficiary. But in this case this possibility seems unlikely.
The High Court held the opposite view, insisting that if Bank acted as the issuing bank, it had no right of recourse to Beneficiary, but if it acted as the negotiating bank, it had a legal right of recourse to Beneficiary once the negotiated funds could not be collected on due date according to the three- party agreement.
Although terms in the three-party agreement did not completely comply with the Settlement Methods or UCP600 in the matter of negotiation and recourse, the agreement could otherwise be considered specific. Furthermore, the agreement’s wording did not conflict with mandatory provisions of law or administration regulations and should be viewed as a legally binding commitment on all relevant parties. Beneficiary’s assertion that Bank, as the negotiating bank, should first exercise the right of recourse to itself was logically wrong and could not be supported.
On 20 December 2016, the High Court rejected Beneficiary’s appeal and affirmed the judgment of the court of first instance.
Contradictions Appearing in the Court Decisions It is not clear whether this use of an LC was to support an actual commercial trade between two companies. Or perhaps it was only a kind of financing arrangement, in which Beneficiary borrowed a sum of money from Bank by means of the LC negotiation through use of old invoices and cargo receipts from past trade.
In either event, both courts treated the case as an LC dispute. Thus the case should have been determined on the basis of the Settlement Methods, UCP principles, and standard banking practice. Unfortunately, the courts considered other factors and thereby ignored the following contradictions when rendering their judgments.
1. The courts took the view that a bank can be both issuing bank and negotiating bank. That a bank can negotiate an LC issued by itself is contradictory to the fundamental principles of UCP and the Settlement Methods which expressly define that an issuing bank and a negotiating bank must be two independent parties. Undoubtedly a bank can never negotiate an LC that it issued.
2. The determination that Bank has a right of recourse to Beneficiary is contradictory to the fundamental LC principle that an issuing bank’s payment is final without recourse to the beneficiary. Even if a negotiating bank reserves the right of recourse it only could exercise that right if it had not been reimbursed by the issuing bank. In this case that precondition did not and could not ever exist.
3. The idea that a bank could self-issue and self-negotiate with a right of recourse is contradictory to the legal concept of “debt confusions”. This concept means that if the debtor and the creditor would be the same party, then the debt would dissolve.
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In this case, Bank’s credit and debt originates from Beneficiary. Its debt derived from its payment obligation under the LC after presentation of complying documents, while its credit derived from its right of recourse after negotiation. Both the debt and the credit are based on the same LC transaction and refer to the same party. It can then be inferred that the debt relationship between Bank and Beneficiary has dissolved. It follows that Bank is dispossessed of its right of recourse for the negotiation.
4. The courts’ judgments caused contradictions between Bank’s rights and obligations because they only referred to Bank’s rights of recourse but failed to address its payment obligation following presentation of credit- complying documents.
The courts ignored that an issuing bank’s payment undertaking is a more common LC obligation than the negotiating bank’s right of recourse. As a result the beneficiary who had supplied goods in good faith under the LC suffered the loss of both funds and goods. The applicant who put down a small cash deposit received all the contracted goods. The issuing bank who should have fulfilled its payment undertaking retained its right of recourse but discharged its liability.
From this point of view, the self-issued, self-negotiated LC itself and the courts’ decisions that Bank had a right of recourse are not only flawed but seriously violate traditional documentary credit principles. ■
September 2018 ■ Documentary Credit World 39 Trade Based Financial Crime Compliance
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• Introduction to Trade Based Financial Crime Compliance • Financial Crime Regulation • The Compliance Programme • Exercising Due Diligence • Indicators of Trade Based Softbound eBook Financial Crimes • Combating Financial Crimes • Anti Money Laundering • Counter Terrorism Financing • Sanctions • Weapons of Mass Destruction • Anti Bribery • Commercial Fraud Hardbound • Anti Boycott
Trade Based Financial Crime Compliance is the coursebook for the Certificate in Trade Finance Order today at Compliance, offered by the London Institute of Banking & Finance. It serves as a standalone Shop.iiblp.org/tbfcc educational and training volume. 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 reflect net after subtracting respective amounts conveyed to others. Net LCs reflect totals for Net Standby LCs and Commercial & Similar LCs. Note: Numbers are in US$ 1,000s. 1ST 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 17,211,158 1,656,734 18,528,402 62,239 18,590,641 2. BANK TOK-MIT UFJ NY BR NEW YORK NY 20,171,729 5,156,053 13,944,350 4,466,954 18,411,304 3. DEUTSCHE BK AG NY BR NEW YORK NY 11,612,877 1,200,467 12,213,372 223,122 12,436,494 4. ROYAL BK CAN 3 WRLD FNCL BR NEW YORK NY 11,288,309 1,310,034 11,638,284 0 11,638,284 5. BANK OF NOVA SCOTIA NY AGY NEW YORK NY 6,877,332 2,750,228 9,602,015 3,030 9,605,045 6. MIZUHO BK NEW YORK BR NEW YORK NY 13,153,704 3,988,239 8,710,192 41,990 8,752,182 7. BNP PARIBAS EQUITABLE TWR BR NEW YORK NY 8,291,007 1,065,089 7,219,493 160,741 7,380,234 8. CREDIT AGRICOLE CORP NY BR NEW YORK NY 7,179,733 4,263,564 6,703,013 299,311 7,002,324 9. LANDESBANK HESSN-THRN NY BR NEW YORK NY 4,680,039 2,290,712 6,970,751 0 6,970,751 10. STANDARD CHARTERED BK NY BR NEW YORK NY 3,646,467 2,705,091 6,295,989 117,699 6,413,688 11. CREDIT SUISSE NY BR NEW YORK NY 948,795 5,610,110 6,296,141 0 6,296,141 12. UBS AG STAMFORD BR STAMFORD CT 6,300,178 790,188 5,108,400 0 5,108,400 13. RABOBANK NEDERLAND NY BR NEW YORK NY 4,599,169 174,287 4,208,347 143,995 4,352,342 14. INTESA SANPAOLO SPA NY BR NEW YORK NY 2,794,427 223,386 2,862,075 922,897 3,784,972 15. SOCIETE GENERALE NY BR NEW YORK NY 1,758,886 1,819,984 3,559,137 148,054 3,707,191 16. LLOYDS TSB BK PLC NY BR NEW YORK NY 2,199,180 1,477,867 3,677,047 1,221 3,678,268 17. BAYERISCHE LANDESBANK NY BR NEW YORK NY 631,081 2,891,416 3,522,497 0 3,522,497 18. BANK OF MONTREAL CHICAGO BR CHICAGO IL 3,017,156 1,131,932 3,367,369 22,132 3,389,501 19. UNICREDIT BK NY BR NEW YORK NY 2,464,871 890,585 3,304,315 60,287 3,364,602 20. NATIXIS NY BR NEW YORK NY 2,680,753 460,625 2,929,811 118,985 3,048,796 21. AUSTRALIA & NEW ZEALAND NY BR NEW YORK NY 2,277,307 556,871 2,735,657 15,430 2,751,087 22. CANADIAN IMPERIAL BK NY BR NEW YORK NY 1,616,750 879,831 2,400,277 0 2,400,277 23. BANK OF NOVA SCOTIA HOU BR HOUSTON TX 2,254,397 823,750 2,367,189 4,263 2,371,452 24. BNP PARIBAS SF BR SAN FRAN. CA 4,058,275 44,049 2,295,957 346 2,296,303 25. BANK OF CHINA NY BR NEW YORK NY 1,616,326 578,324 2,194,262 14,802 2,209,064 26. NATIONAL AUSTRALIA BK NY BR NEW YORK NY 1,713,415 241,755 1,955,170 0 1,955,170 27. COMMERZBANK AG NY BR NEW YORK NY 1,463,870 399,624 1,863,494 19,539 1,883,033 28. CREDIT INDUS ET CMRL NY BR NEW YORK NY 1,390,597 455,948 1,846,545 0 1,846,545 29. BARCLAYS BK PLC SEVENTH AVE BR NEW YORK NY 1,244,029 543,967 1,787,996 0 1,787,996 30. LANDESBK BADEN WRTTMB NY BR NEW YORK NY 477,868 1,304,010 1,781,878 0 1,781,878 31. DNB BK ASA NY BR NEW YORK NY 1,545,041 160,963 1,691,111 0 1,691,111 32. SVENSKA HANDELS AB PUBL NY BR NEW YORK NY 1,386,055 161,170 1,547,225 89 1,547,314 33. NORDEA BANK AB PUBL NY BR NEW YORK NY 858,045 676,194 1,534,239 0 1,534,239 34. BANCO BILBAO VIZCAYA NY BR NEW YORK NY 709,686 572,639 1,281,851 63,541 1,345,392 35. ICICI BK NY BR NEW YORK NY 1,079,113 232,489 1,311,594 24,353 1,335,947 36. TORONTO-DOMINION BK NY BR NEW YORK NY 870,061 2,326,502 1,321,147 0 1,321,147 37. CHINA MERCHANTS BK CO NY BR NEW YORK NY 608 122,570 123,178 963,988 1,087,166 38. INDUSTRIAL & CB OF CHINA NY BR NEW YORK NY 668,635 71,866 740,501 69,651 810,152 39. STATE BK OF INDIA NY BR NEW YORK NY 756,125 12,311 768,436 987 769,423 40. COMMONWEALTH BK AUS NY BR NEW YORK NY 324,875 334,554 659,429 0 659,429 41. ARAB BKG CORP NY BR NEW YORK NY 221,813 26,455 248,268 409,957 658,225 42. NATIONAL BK KUWAIT SAK NY BR NEW YORK NY 759,471 26,302 586,000 703 586,703 43. BANCO SANTANDER SA NY BR NEW YORK NY 551,270 0 551,270 0 551,270 44. BANK TOK-MIT UFJ LA BR L. ANGELES CA 435,995 116,799 526,095 0 526,095 45. BNP PARIBAS CHICAGO BR CHICAGO IL 535,465 3,445 507,337 0 507,337
September 2018 ■ 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
46. SWEDBANK AB NY BR NEW YORK NY 292,675 130,847 423,522 0 423,522 47. DEXIA CREDIT LOCAL NY BR NEW YORK NY 476,566 0 409,975 0 409,975 48. KOREA DEVELOPMENT BK NY BR NEW YORK NY 416,142 6,504 387,128 1,161 388,289 49. RIYAD BK HOU AGY HOUSTON TX 369,216 4,091 373,307 0 373,307 50. MEGA INTL CMRL BK LA BR L. ANGELES CA 978 0 978 300,000 300,978 51. MEGA INTL CMRL BK CO NY BR NEW YORK NY 838 0 838 300,000 300,838 52. KBC BANK NV NY BR NEW YORK NY 292,326 2,930 295,256 0 295,256 53. UBS AG NY 787 7TH AVE WMA BR NEW YORK NY 92,360 181,808 274,168 0 274,168 54. AGRICULTURAL BK OF CHINA NY BR NEW YORK NY 6,973 265,182 272,155 0 272,155 55. BANCO LATINOAMERICNO NY AGY WHITE PLNS NY 0 29,835 29,835 241,944 271,779 56. DZ BK AG DEUTSCHE ZENTRA NY BRNEW YORK NY 227,221 6,130 233,351 0 233,351 57. KOOKMIN BK NY BR NEW YORK NY 203,628 10,000 213,628 3,920 217,548 58. MASHREQBANK PSC NY BR NEW YORK NY 25,145 250 25,395 176,205 201,600 59. SUMITOMO MITSUI TR BK NY BR NEW YORK NY 138,497 60,179 198,676 0 198,676 60. NATIONAL BK OF CANADA NY BR NEW YORK NY 62,443 126,969 187,550 0 187,550 61. NORDDEUTSCHE LNDSBNK NY BR NEW YORK NY 161,273 8,082 169,355 0 169,355 62. NATIONAL BK EGYPT NY BR NEW YORK NY 93,676 110 93,786 65,353 159,139 63. MITSUBISHI UFJ TR & BKG NY BR NEW YORK NY 40,988 101,955 142,943 0 142,943 64. BANK TOK-MIT UFJ CHICAGO BR CHICAGO IL 95,587 15,000 110,587 31,741 142,328 65. UNICREDIT NY BR NEW YORK NY 132,007 4,500 136,507 0 136,507 66. BANCO DE CREDITO E INV MIA BR MIAMI FL 21,884 101,761 123,645 3,559 127,204 67. MALAYAN BKG BERHAD NY BR NEW YORK NY 126,491 0 126,491 0 126,491 68. BANCO DEL ESTADO D CHILE NY BR NEW YORK NY 0 125,000 125,000 0 125,000 69. MIZUHO BK LOS ANGELES BR L. ANGELES CA 102,090 150 102,240 19,666 121,906 70. BANK HAPOALIM BM NY BR NEW YORK NY 94,412 1,247 95,659 21,284 116,943 71. BANCO BRADESCO SA NY BR NEW YORK NY 0 2,754 2,754 100,000 102,754 72. UNITED OVERSEAS BK NY AGY NEW YORK NY 100,088 2,130 102,218 0 102,218 73. ITAU CORPBANCA NY BR NEW YORK NY 0 98,461 98,461 0 98,461 74. ITAU UNIBANCO SA NY BR NEW YORK NY 0 92,299 92,299 0 92,299 75. MEGA INTL CMRL SILICON VALL BR SAN JOSE CA 81,657 0 81,657 0 81,657 76. ALLIED IRISH BKS NY BR NEW YORK NY 73,919 0 73,919 0 73,919 77. BANK OF BARODA NY BR NEW YORK NY 3,309 25,772 29,081 44,546 73,627 78. BANCO DE SABADELL SA MIAMI BR MIAMI FL 42,513 24,345 66,858 3,174 70,032 79. BANK OF CHINA LA BR L. ANGELES CA 60,496 0 60,496 0 60,496 80. WOORI BK NY AGY NEW YORK NY 45,348 8,952 54,300 1,191 55,491 81. UNITED OVERSEAS BK LA AGY L. ANGELES CA 53,129 0 53,129 2,107 55,236 82. BANCO DO BRASIL SA NY BR NEW YORK NY 50,637 2,172 52,809 0 52,809 83. BANK OF CHINA CHICAGO BR CHICAGO IL 49,922 0 49,922 2,786 52,708 84. TURKIYE VAKIFLAR BK NY BR NEW YORK NY 4,508 10,990 15,498 36,829 52,327 85. WESTPAC BKG CORP NY BR NEW YORK NY 0 50,000 50,000 0 50,000 86. GULF INTL BK NY BR NEW YORK NY 26,993 0 26,993 22,500 49,493 87. SHIZUOKA BK NY BR NEW YORK NY 47,519 0 47,519 0 47,519 88. SHINHAN BK NY BR NEW YORK NY 15,529 0 15,529 24,084 39,613 89. CHINA CONSTRUCTION BK NY BR NEW YORK NY 39,139 0 39,139 0 39,139 90. NATIONAL BK OF PAKISTAN NY BR NEW YORK NY 1,811 20,700 22,511 12,640 35,151 91. OVERSEA-CHINESE BKG LA AGY L. ANGELES CA 32,904 0 32,904 0 32,904 92. UBS AG MIAMI BR MIAMI FL 0 30,446 30,446 0 30,446 93. LAND BK OF TAIWAN LA BR L. ANGELES CA 30,089 0 30,089 0 30,089 94. CTBC BK CO NY BR NEW YORK NY 26,367 0 26,367 1,213 27,580 95. KEB HANA BK NY AGY NEW YORK NY 1,774 0 1,774 19,254 21,028
42 Documentary Credit World ■ September 2018 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
96. INDUSTRIAL BK OF KOREA NY BR NEW YORK NY 8,763 0 8,763 8,166 16,929 97. BANK OF EAST ASIA NY BR NEW YORK NY 14,613 0 14,613 0 14,613 98. UNITED BK AFRICA NY BR NEW YORK NY 0 13,979 13,979 356 14,335 99. BANCO DAVIVIENDA SA MIA BR MIAMI FL 0 14,039 14,039 0 14,039 100. BANK OF INDIA NY BR NEW YORK NY 10,710 0 10,710 2,908 13,618 101. SHANGHAI CMRL BK SF BR SAN FRAN. CA 5,650 0 5,650 7,344 12,994 102. ROYAL BK OF CANADA NY BR NEW YORK NY 12,327 0 12,327 0 12,327 103. WOORI BK LA BR L. ANGELES CA 8,815 1,999 10,814 1,377 12,191 104. BANCO NACION ARG NY BR NEW YORK NY 0 9,977 9,977 2,005 11,982 105. BANK OF E ASIA LA BR ALHAMBRA CA 11,200 590 11,790 0 11,790 106. CHIBA BK NY BR NEW YORK NY 11,155 0 11,155 0 11,155 107. BANCO DE CREDITO MIAMI AGY CRL GABLES FL 0 2,936 2,936 6,748 9,684 108. CHINA CITIC BK INTL NY BR NEW YORK NY 2,872 3,250 6,122 2,282 8,404 109. FEDERATION DES CAISSES FL BR HALLANDLE FL 7,178 0 7,178 0 7,178 110. BANCO POPULAR DE PR NY BR NEW YORK NY 6,985 0 6,985 0 6,985 111. SHANGHAI CMRL BK NY BR NEW YORK NY 397 5 402 6,546 6,948 112. HUA NAN CMRL BK LA BR L. ANGELES CA 6,406 0 6,406 0 6,406 113. OVERSEA-CHINES BKG CRP NY AGY NEW YORK NY 5,869 100 5,969 0 5,969 114. WING LUNG BK LA BR NWPRT BCH CA 5,250 0 5,250 0 5,250 115. BANCA MONTE DEI PASCHI NY BR NEW YORK NY 3,179 1,704 4,874 0 4,874 116. E SUN CMRL BK LOS ANGELES BR INDUSTRY CA 3,781 0 3,781 0 3,781 117. BANK HAPOALIM BM PLAZA BR NEW YORK NY 0 3,398 3,398 0 3,398 118. BANGKOK BK PUBLIC CO NY BR NEW YORK NY 3,387 0 3,387 0 3,387 119. BANCO INTERNACIONAL MIA AGY CRL GABLES FL 0 1,688 1,688 1,654 3,342 120. BANCO DE NACION ARG MIA AGY MIAMI FL 0 260 260 2,665 2,925 121. BANK OF TAIWAN LA BR L. ANGELES CA 2,655 0 2,655 0 2,655 122. ERSTE GROUP BK NY BR NEW YORK NY 2,310 0 2,310 0 2,310 123. BANCO PICHINCHA CA MIA AGY MIAMI FL 0 1,864 1,864 0 1,864 124. NORINCHUKIN BK NY BR NEW YORK NY 1,757 0 1,757 0 1,757 125. TAIWAN CO-OP BK LA BR L. ANGELES CA 1,590 0 1,590 0 1,590 126. BANK SINOPAC LA BR L. ANGELES CA 1,581 0 1,581 0 1,581 127. NONGHYUP BK NY BR NEW YORK NY 1,518 0 1,518 0 1,518 128. FIRST CMRL BK CO NY BR NEW YORK NY 1,500 0 1,500 0 1,500 129. BANK OF GUAM SAN FRAN BR SAN FRAN. CA 1,451 0 1,451 0 1,451 130. SHANGHAI CMRL BK LA BR ALHAMBRA CA 1,406 0 1,406 0 1,406 131. FIRST CMRL BK LA BR L. ANGELES CA 1,146 0 1,146 50 1,196 132. CHANG HWA CMRL BK LA BR L. ANGELES CA 1,158 0 1,158 0 1,158 133. CHANG HWA CMRL BK NY BR NEW YORK NY 1,052 0 1,052 0 1,052 134. TAIWAN CO-OP BK NY BR NEW YORK NY 1,052 0 1,052 0 1,052 135. STATE BANK INDIA CHICAGO BR CHICAGO IL 100 61 161 781 942 136. FIRST ABU DHABI BK USA N WA BR WASH. DC 0 0 0 838 838 137. TORONTO-DOMINON BK HOU AGY HOUSTON TX 0 427,918 0 793 793 138. LAND BK OF TAIWAN NY BR NEW YORK NY 743 0 743 0 743 139. BANK OF CMNTNS NY BR NEW YORK NY 615 0 615 0 615 140. BANK OF CMNTNS SF BR SAN FRAN. CA 0 562 562 0 562 141. CAIXA GERAL DE DEPOSITOS NY BR NEW YORK NY 301 207 508 0 508 142. TAIWAN BUS BK NY BR NEW YORK NY 414 0 414 0 414 143. TAIWAN BUS BK LA BR L. ANGELES CA 410 0 410 0 410 144. BANCO REPUBLICA ORIENTL NY BR NEW YORK NY 0 338 338 0 338 145. P T BK NEGARA INDO PER NY AGY NEW YORK NY 0 0 0 225 225
September 2018 ■ Documentary Credit World 43 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
146. CHINA CITIC BK INTL LA BR ALHAMBRA CA 200 0 200 0 200 147. PHILIPPINE NB LA BR L. ANGELES CA 150 0 150 0 150 148. BANCO DO BRASIL SA MIAMI BR MIAMI FL 0 120 120 0 120 149. GUNMA BANK NY BR NEW YORK NY 73 0 73 0 73 150. MEGA INTL CMRL BK CHICAGO BR CHICAGO IL 58 0 58 0 58 151. METROPOLITAN B&TC NY BR NEW YORK NY 0 0 0 49 49 152. BANK OF TAIWAN NY BR NEW YORK NY 1,664 0 0 0 0
TOTALS 164,736,451 54,565,525 181,204,598 9,860,250 191,064,848
SCAM SURVEY
India’s Largest Law Firm Investigated in PNB Fraud According to an NDTV report, India’s largest law firm, Cyril Amarchand Mangaldas (CAM), is under investigation for any role it may have played in the fraud discovered at the state-run Punjab National Bank earlier this year.
Investigators allege that in February 2018, after the fraud had been discovered, Nirav Modi’s representatives packed 50-60 cartons of documents at one of Modi’s offices in Mumbai and sent them to the law firm’s nearby offices. Later that month, according to the Central Bureau of Investigation’s court filings and witness testimony, police officers then seized the documents from CAM’s offices. CBI officers recovered over 24,000 pages of documents, including copies of financial statements of Modi’s firms and details of interbank fund transfers, according to the search list. Attorneys for the prosecution and CBI investigators have alleged that CAM possessed these documents detailing Modi’s dealings with PNB, although the firm was not actually representing Modi or his companies.
According to prosecutor K. Raghavacharyulu, “CAM was not their attorney in the PNB fraud case, 100 per cent sure … that’s why they could not cite attorney-client privilege.” Charging
44 Documentary Credit World ■ September 2018 SCAM SURVEY
documents in the case against Modi and others have alleged that “incriminating documents/articles relevant to the case” were concealed in the office of CAM. However, no charges have been brought against CAM and none of its attorneys have been named as witnesses in the case.
According to the prosecutor, police also have not interviewed any CAM officials, but NDTV reports that a decision has not been made whether to charge anyone from CAM or to name any representative as a witness. Raghavacharyulu has said prosecutors have not ruled out charges against CAM. (Source: NDTV)
Fallout from PNB Fraud Leads to Bankruptcy Filings in the United States Jacob Manning, According to reports, Bankruptcy Courts in the United States Scam Survey Editor are now dealing with fallout from the PNB fraud as US Jacob Manning, a Partner at the law subsidiaries of Indian companies heavily involved in the fraud firm of Dinsmore & Shohl, is a have filed for bankruptcy protection. Thus far, Bankruptcy Courts member of the Pennsylvania, Ohio, in the Southern District of New York and the District of Delaware and West Virginia Bars. His practice have received filings related to the PNB fraud. focuses on business and commercial litigation and appellate practice. Manning is also an Associate Fellow In New York, according to a report on DNA India, A. Jaffe and of the Institute of International Firestar Diamond, Inc. petitioned the Court for bankruptcy Banking Law & Practice. protection, citing the fraud as a major factor in their filing. PNB attorneys, however, sought a court-appointed examiner to determine whether the subsidiary companies were involved in the fraud. According to the DNA India report, the examiner has uncovered evidence early on that demonstrates that the subsidiaries were also involved in the scam.
More recently, Mehul Choksi’s company, Samuels Jewelers, another related company, has filed for bankruptcy in Delaware. Immediately thereafter, PNB again sought the appointment of an examiner to determine whether Samuels Jewelers – a subsidiary of Gitanjali Gems, which has been implicated in the fraud – was also involved. PNB attorneys argued, “The similarities between these cases – and the underlying fraud – underscores the compelling need for the appointment of an examiner in this case.”
Samuels Jewelers has already admitted that the fraud was a significant factor in its decision to file for bankruptcy. It also has admitted that several former officers and directors were implicated in the fraud, including Choksi, Nehal Modi (director and former CEO until 2015, and also the step-brother of Nirav Modi) and Sunil Varma (CFO and president until February 2018).
In the Samuels Jewelers case, the US Trustee Andrew R Vara has also separately moved for the appointment of an examiner stating, “The court should order the appointment of an examiner to investigate and report on the nature and extent of any involvement of the debtor (Samuels Jewelers) and any current or former officers and directors of the debtor in the alleged fraud involving Choksi,
September 2018 ■ Documentary Credit World 45 SCAM SURVEY
Modi, entities controlled by them, and Punjab National Bank. In addition, the examiner would investigate whether any current or former officer of the debtor participated in fraud or dishonesty in the management of the debtor. The examiner’s report would shed light on, inter alia, the question as to whether the debtor’s current management should be permitted to continue to operate the debtor.” A decision on the motions is expected soon.
At the same time, BDO India LLP, which PNB has hired to conduct a forensic investigation into the fraud, told the US Bankruptcy Court that there is evidence of Samuels Jewelers involvement in the fraud. According to BDO India, a series of transactions resulted in payments from Samuels Jewelers to repay fraudulent letters of undertaking or foreign letters of credit, which BDO India alleges demonstrates that the US company had some involvement in the fraud. (Source: DNA India)
India Investigating Another Fraud Involving Letters of Credit While India continues to investigate the PNB fraud, reports indicate that another fraud involving letters of credit has been discovered. According to a report in The Indian Express, the Enforcement Directorate recently conducted a series of raids in Tamil Nadu in connection with a fraud involving Indhumathi Refineries Private Limited (IRPL). The Enforcement Directorate believes losses from the fraud total INR 90 crore (USD 12.3 million).
According to the report, the raids were carried out at multiple offices of IRPL for a fraud perpetrated against the State Bank of India. Searches were conducted at Virudhunagar, Madurai, and Coimbatore as well as at premises associated with R. Shenbagan, who manages the company. Officials have said that a criminal case under the Prevention of Money Laundering Act (PMLA) has been filed.
According to investigators, IRPL used fake invoices and even fake firms to draw on as many as 46 letters of credit at State Bank of India’s branch in Chennai. Once the funds were obtained, IRPL is accused of diverting the funds away from the bank and to be used for its own benefit. Charges against R. Shenbagan and IRPL for fraud and money laundering are pending. (Source: The Indian Express)
46 Documentary Credit World ■ September 2018 IIBLP Events Return to NYC
Join IIBLP this October for the Standby & Guarantee Forum and LC Law Summit.
We look forward to carrying on Jim Byrne’s legacy by holding these two dynamic conferences with our panel of industry experts to spur top-notch discussions and debate among the bankers, lawyers, and other LC specialists who attend every year.
Register Today at shop.iiblp.org THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE 20405 Ryecroft Court • Montgomery Village, MD 20886 USA Phone: +1-301-869-9840 • Telefax: +1-301-926-1265 • www.iiblp.org REFERENCE MATERIALS The Institute offers the most comprehensive collection of reference materials in the industry. It also regularly conducts seminars on topical issues, general educational forums, and custom training for bankers, lawyers and corporate financiers. All of these products are designed to assist the letter of credit professional with the practical issues you face on a daily basis. Its newest and most popular reference materials include:
2018 SUPPLEMENT TO UCP600: TRADE BASED FINANCIAL AN A NALYTICAL COMMENTARY CRIME COMPLIANCE Drawing on recent ICC An in-depth look at how Opinions and judicial decisions, specialists can this Supplement updates monitor, detect, the industry’s definitive and prevent analysis of the UCP. instances of financial crime.
LC RULES & LAWS STANDBY AND DEMAND CRITICAL TEXTS FOR GUARANTEE PRACTICE: INDEPENDENT UNDERTAKINGS UNDERSTANDING UCP600, Revised 7th edition contains ISP98, & URDG758 everything you need: Your all-in- Feel you know two of these one reference guide for LCs and rule sets, but unsure about guarantees. the third? The world’s only comparison of all 3 will help! 2018 EDUCATIONAL CALENDAR Annual Survey of Letter of Credit Law & Practice AMERICAS: Charlotte – 15-16 March 2018 The World’s MIDDLE EAST: Dubai – 16 April 2018 Premiere LC Event of the Year! EUROPE: Antwerp – 19 April 2018 EUROPE: Stockholm – 23 April 2018 HONG KONG: 14 July 2018 SE ASIA: Singapore – 16-17 July 2018 CHINA: Shanghai – 21 July 2018 Guarantee & Standby Forum World’s Only Event MIDDLE EAST: Dubai – 17 April 2018 for Interactive Discussion EUROPE: Antwerp – 20 April 2018 of Guarantee & Standby Topics EUROPE: Stockholm – 24 April 2018 HONG KONG: 13 July 2018 SE ASIA: Singapore – 18 July 2018 CHINA: Shanghai – 22 July 2018 AMERICAS: New York – 25 October 2018 Letter of Credit Law Summit Full Day Focus on LC Practice, SE ASIA: Singapore – 19 July 2018 Forms, and Litigation Issues AMERICAS: New York – 26 October 2018 2018 events, dates, and locations are pending and will be announced. For the most current information, visit:www.iiblp.org For a complete list of resources available, please contact the Institute.
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48 Documentary Credit World ■ September 2018