Article

Canada

Recently, it has been observed that some banks are using sanction clauses in their import letters of credit, which has become a problematic issue for the counter-party bank (i.e., negotiating/ discounting, confirming bank) involved in international trade.

Below are two examples of common forms of the sanction clauses being used in trade transactions:

• "All parties to this transaction are advised that the U.S. and other government and/or regulatory authorities impose specific sanctions against certain countries, entities and individuals. Banks may be unable to process a transaction that involves a breach of sanctions, and authorities may require disclosure of information. The issuing bank is not liable if it, or any other person, fails or delays to perform the transaction, or discloses information as a result of actual or apparent breach of such sanctions."

• "Pursuant to the UN's resolutions/ United States' sanctions and the relevant laws and regulations applicable to us, we shall not handle or deal with any documents, shipment, goods, payments and/or transactions that may relate, directly or indirectly, to any sanctioned countries, designated persons or organizations. Accordingly, any presentation that may violate this condition may be rejected without any liability on our part."

These types of sanction clauses are open-ended inasmuch as, at the time of discount, the negotiating bank would be unable to verify drawings against sanctions imposed by unknown "other government and/or regulatory authorities". If such transactions are discounted without recourse to the beneficiaries, they would expose the negotiating bank to the risk of non-acceptance of the drawings for any reason associated with any sanction imposed by any government or any regulatory authority, as invoked by the issuing banks at their discretion. In case the drawings are refused by issuing banks for the foregoing reasons, the negotiating bank would have no recourse whatsoever to the issuing bank, because the sanction clause was a condition of the L/C, and the negotiating bank would not have been in compliance with it.

The concern here is that the open-ended nature of the wording could permit spurious use by the issuing banks trying to avoid honouring their commitments.

Some banks screen each transaction via World-Check for sanctions imposed by the US, EU and the UN. However, World-Check does not cover sanctions imposed by every country worldwide.

Sanction clauses in L/Cs vary considerably in scope. When they simply inform the parties that the issuing bank is subject to sanctions imposed by its home country or the country of the currency of the transaction, they are generally unobjectionable because, with or without a sanction clause in its L/C, the issuing bank would be bound by its mandatory laws, which include the laws of its own country and the laws of the currency of the transaction, as stated by the ICC Banking Commission in Opinion TA 752rev3.

In its Guidance Paper of 26 March 2010, the ICC Banking Commission recommended that "banks refrain from including such clauses that bring into question the bank's commitment or the irrevocable nature of a transaction", and the ICC Banking Commission reaffirmed this when it issued Opinion TA 752 rev3. However, despite the Guidance Paper, the sanctions clauses continue unabated. n

Shahed Aziz (CDCS, CITP) Senior Manager, Risk Management Scotia Bank, Toronto. E-mail: shahed.aziz@scotiabank.com

Russian Federation

Sub-article 33 (d) (ii) of URDG 758 requires, as one of the mandatory conditions of a transfer of a guarantee, that a transferor provide "a signed statement to the guarantor that the transferee has acquired the transferor's rights and obligations in the underlying relationship".

The concept of the transfer of a guarantee introduced in URDG 758 (similar to the transfer of a documentary credit) replaced the language of article 4 of URDG 458 and, in particular, the possibility of an assignment of the beneficiary's right to make a demand under a guarantee. In its explanatory note to the first draft of URDG 758 (ICC document 470-1101), the ICC Task Force on Guarantees said: "... the transfer of a demand guarantee in isolation, without the transferring of the underlying contract, has lent itself in the past to frauds and other criminal purposes." This needs no comment.

However, in forfaiting operations based on the transfer of a payment claim, a buyer of the claim and the credit support documents can in no case acquire the obligations of an initial seller in the underlying relationship. In forfaiting techniques applicable to financing exporters who have granted a commercial credit to importers, payment claims (importers' payment obligations) are usually secured by bank guarantees ("credit support documents" (Article 2 of the Uniform Rules for Forfaiting (URF 800)). All rights under such guarantees are to be transferred to the buyer of the payment claim, which may be a forfaiting company or a bank. A mere assignment of proceeds under the guarantee is not sufficient for forfaiting transactions. It's no secret that, in the primary or secondary market, in most cases the buyer is more interested in the guarantee than in the payment claim if he is entitled to make a presentation under the guarantee himself. Does this mean that the transferable payment guarantee subject to the URDG 758 cannot serve as a "credit support document" of the forfaiting facility?

In my opinion, the answer is no. If the exporter, as a transferor under the guarantee and also as an "initial seller" (Article 2 of the URF 800), has already effected a delivery (deliveries) under the underlying contract, he is capable of providing to the guarantor the document required by sub-article 33 (d) (ii) of URDG 758. There is no attempt to deceive the guarantor - in fact, a transferee, being a purchaser of the payment claim, acquires only the exporter's rights in the underlying relationship, since the exporter's obligations are already fulfilled.

Different adjustments and variations are possible depending on the terms and conditions of issuance of the payment claim. For example, the exporter may provide the purchaser of the payment claim with the importer's certificate of receipt and acceptance of a delivery (deliveries). Or it may incur a separate undertaking toward the purchaser of the payment claim in respect of all the importer's claims related to the delivery.

As far as a guarantor is concerned, he has the liberty to proceed to a transfer "to the extent and in the manner expressly consented to" by him (sub-article 33 (b) of URDG 758). At the same time, the guarantor is usually informed by the applicant that a particular reason for the issuance of a transferable payment guarantee consists of forfaiting the payment claims. Moreover, the statement that the transferee has acquired the transferor's rights and obligations in the underlying relationship may sometimes alert a guarantor not willing to make a transfer.

The above-mentioned statement also imposes a limitation on the use of transferable payment guarantees subject to URDG 758 in forfaiting transactions with payment claims issued before fulfilment of the contract obligations by the exporter (this almost-forgotten practice gives the exporter assurance of pre-shipment financing).

According to sub-article 33 (a) of URDG 758, a guarantee may be transferred more than once for the full amount available at the time of transfer. For forfaiting purposes, this provision permits a "chain" of transfers of payment claims and, consequently, of related guarantees, if the underlying contract authorizes partial deliveries or deliveries by instalments. On the other hand, the forfaiting agreement in this case should indicate multiple availability dates.

The wording of sub-article 33 (c) of URDG 758 permits subsequent transfers of a guarantee. This faculty of a "vertical transfer" is important in secondary market forfaiting transactions, although presentation to the guarantor of the statement required by sub-article 33 (d) (ii) may create problems if both existing and new beneficiaries are not parties to the underlying contract.

Despite the increasing utilization by banks of URDG 758, as well as of the model forms of guarantees, the three-year period required by the rules is rather a short time to provide any estimation of the acceptability of URDG transferable guarantees as credit support documents by players in forfaiting markets. In any case, further promotion of the rules, accompanied by a study of the practical aspects of their role in export financing, should be undertaken. n

G. Kobakhidzé Directeur de la Gestion Opérationnelle VTB Bank (France) SA, Paris E-mail: kobakhidze@vtb-bank-france.fr

South Korea

In litigation dealing with letters of credit, bank guarantees and standbys, lawyers speak of the independence principle that should apply to these instruments. There is an impression that some vital principle essential to letter of credit operations and other matters must bow before the principle.

For bankers, this simply refers to the fact that they are not involved in the underlying transaction from which the letter of credit originates. And without really thinking about the independence principle, bankers simply make payment when documents complying with the terms and conditions of the credit are presented.

However, there are situations in which the applicant alleges that there has been fraud, abuse of right or another injustice caused by the beneficiary. But these allegations do not allow the issuing bank to stop payment on the presented documents. When the applicant applies to the local court for an injunction based on these grounds, the court either issues an injunction or dismisses the injunction application. And the issuing bank simply follows the decision of the local court.

My job involves claiming the proceeds of credits which have been stopped by local courts overseas. I usually go overseas and nominate a local lawyer to raise the matter with the local court and to seek the withdrawal of the relevant injunction. In most cases, I have been successful and have returned with the money.

I used to resent interference by the courts on letters of credit, bank guarantees and standbys. Why not leave the banks to do their business calmly and efficiently?

At times we claim payment on behalf of our customers or receive claims for payment from beneficiaries under bank guarantees or standbys issued by our bank. These claims are usually paid without much fanfare by issuing banks here and abroad.

But sometimes we find that the applicant here and abroad has applied to a local court for an injunction. Now and then, the local court grants the injunction and forbids the issuing bank to make payment. We can surmise that the court has found that the claim under the letter of credit or bank guarantee has either involved fraud or an abuse of rights, etc.

Would the absence of injunctions from the courts be the best of w orlds for the letter of credit and bank guarantee? Although issuing banks are obligated to make immediate payment on presentation of compliant documents, the applicant can appeal to the courts if he feels the claim is not justified. The court will decide whether there is merit in the applicant's allegations and, if so, decide the injunction to be applied.

The independence principle and the injunctions of the court serve both the letter of credit and bank guarantee community by allowing proper claims and by putting a brake on claims that do not have a basis in law or fair dealing. n

Chang-Soon Thomas Song Attorney at Law (Arizona) First Expert, International Dispute Resolution (Letters of Credit), Trade and Services Division Korea Exchange Bank, Seoul
E-mails: thomas@keb.co.kr and Thomas.Song@azbar.org

P.S. It is with deep regret that I learned that DCInsight will stop publishing after this issue. DCInsight has served the international banking community well over the years, and I thank the magazine and its editor for their long service.

Spain

In the last issue of DCInsight, Phan Thi Thanh Nhan wrote about the use of L/Cs in Vietnam. Reading her interesting article, I decided to analyze how L/Cs are used in other parts of the world as well.

L/Cs have been one of the most popular methods of payment for centuries. The first UCP in 1933 was Publication No. 82. Now, after several more revisions, we have UCP 600.

Is the use of documentary credits increasing or decreasing (see the lead article in this issue)? Perhaps it is decreasing somewhat, but it remains quite popular. But where are documentary credits mostly used?

Consider the number of MT 700 messages over the last 18 months.

During that period, in Asia the five most active economies were:

In the Middle East the messages broke down as follows:

In Oceania, the two most important countries were:

In North America the breakdown was as follows:

In Central and South America the five most active countries were as follows:

In Europe and the Eurozone the five most active countries were:

In non-euro Europe the five most active countries were:

With regard to other methods of payment, in the same period of time, as per SWIFT statistics, at the top were bank transfers, i.e., MT 103 messages with 405,7 million transfers; collections MT 400 messages with 4,8 million; and finally, cheques controlled through SWIFT MT 110 messages with 3,8 million units.

The good old documentary credit is not doing too badly, it seems.

Xavier Fornt
Professor for International Trade
ESCI High School
Barcelona
E-mail: xavier.fornt@prof.esci.upf.edu