Article


by Michael Rowe

In-house lawyers in major banks are coming to grips with a wide and growing range of complex trade finance-related issues. These include the expansion of regulatory and compliance requirements often linked to government concerns over terrorism, organized crime and money laundering and changes in the structuring of deals resulting from the on-going evolution of many trade finance operations.

Lawyers working in banks are also increasingly called on to advise on developments in international trade law and practice, such as the introduction by ICC of its new rules for documentary credits, UCP 600, and work by UN agencies including UNCITRAL.

Bank legal departments handling trade finance issues report a recent surge in questions relating to combating corruption, understanding embargoes and environmental due diligence. One particular trend is a move in some cases towards exercising pressure and leverage on banks as a means of securing a de facto embargo against a particular country as an easier alternative to taking steps to obtain international action. In some instances, a single country may persuade others to isolate particular banks simply by labelling them as money laundering concerns and denying them access to its financial system.

Corruption conundrums

"Some export credits agencies (ECAs) have started asking banks for a statement that none of their branches or affiliates is the subject of an investigation involving an allegation of corruption," says Georges Affaki, global head of Legal Affairs at BNP Paribas ECEP (energy, commodities, export, project) in Paris. "The idea behind this type of request is laudable, but it is totally impracticable to expect major banks with a global presence to provide the assurance required immediately and in unqualified terms." Affaki noted that banks in this situation may have 100 branches and affiliates around the world, and it is virtually impossible to have real-time knowledge of every single detail of the precise situation in every one of these. Moreover, in some countries the language used in both civil and criminal investigations is imprecise, and one may have to wait several years to know whether or not specific charges will be brought.

In-house bank lawyers handling trade and project finance are also likely to be increasingly involved in regulations and policies concerning the environment, which now play an important role in financing decisions. The fact that environmental standards change rapidly and that change is often triggered by political considerations render the legal work more complicated. For that reason, banks often use specialized environment consultants in these cases.

Moving fast

Rapid change in the nature of trade finance work itself is also an important factor affecting bank lawyers' trade finance work. For example, until recently large syndicated trade finance deals bringing in several lending banks almost always included complex structuring arrangements that would seek to ring fence the financing provided and tie it to specific assets involved in the deal. Now there is more of a tendency to treat many syndicated deals like this as if they were near investment grade.

Factors powering this trend include the growing strength of producers linked to high commodity prices and the ready availability of finance in many producing countries. "The business is fast moving, and we have to be very flexible with documentary requirements," explains Sean Edwards, European Legal Counsel at Sumitomo Mitsui Banking Corporation in London.

Against the above background, lending margins have shrunk. As a result, bankers are looking for new markets and different types of operations suitable for structured finance arrangements. The reason: margins are generally higher. This, in its turn, means that bank lawyers have to adapt documentation to the new situation and examine laws with which they are less familiar. Sean Edwards says that Africa is particularly promising for this type of business. He adds that novel structuring procedures now being tested in Africa include taking security over rights to aircraft landing fees and over revenue streams of smaller telecoms operators.

Developing lawyers

A related issue of great importance concerns laws in emerging markets such as China, Nigeria and Russia, particularly those linked to commodities and energy deals. "Project and commodity finance are often considered to involve innovative structures, and there is not always a very strong and definite local legal tradition and culture in these respects," Georges Affaki says. This places a premium on features such as obtaining the best local legal advice, building relationships of confidence with local regulators and fostering the development of international rule-making in fora such as the UN (UNCITRAL and UNIDROIT, for instance) and the International Chamber of Commerce.

"Sometimes we find that local lawyers are too easily influenced by their conception of what they think we want to hear, and too ready to give easy answers," says Affaki. "On occasion, we have to challenge them, make them state expressly the specific legal grounds on which they are relying and, when necessary, require them to produce the full texts of the relevant local laws."

Sean Edwards reinforces these points. "One of the biggest challenges currently facing us is making certain that security over commodities in regions such as Eastern Europe and Latin America is legally enforceable and meaningful," he says. In many cases, theoretically adequate legislation has now been introduced, often with the assistance of institutions such as the World Bank, legal consultants and the help of model laws drawn up by UN agencies.

However, local courts characteristically lack expertise in applying these new provisions, and they may be interpreted differently from one place to another. There may also be great political and socioeconomic pressures brought to bear. For example, enforcing a foreign company's security rights against a local business could force the business concerned into bankruptcy, with the consequent loss of hundreds or even thousands of jobs. In this situation, it can be difficult to persuade people that the general long-term economic benefits that may be gained by applying the law vigorously may far outweigh the short-term and very specific pain of local unemployment and its effects on living standards.

UCP 600 questions

Trade finance-oriented bank lawyers now have to consider the ramifications for their banks of the introduction of UCP 600. Many are now seeing the new documentary credits rules for the first time, since distribution of draft texts during the revision process was restricted to ICC circles. Over the coming months, it remains to be seen what questions and comments on the new rules will emerge from bank lawyers.

Initial reactions appear largely favourable. Lawyers appreciate the fact that the new UCP kick off with a comprehensive set of definitions, since they are used to that approach in the documents they draft and in the legal texts they read. There is also some satisfaction with the new specification of a maximum five-day period for examining documents, since this is felt to remove uncertainty. Lawyers approve of the overall drafting, which is felt to be clearer than in previous versions of UCP.

One specific provision is likely to attract considerable attention. This is sub-article 12(b), which says that by nominating a bank to accept a draft or incur a deferred payment undertaking, the issuing bank authorizes the nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by the nominated bank. ICC's decision to include it was taken following conflicting court decisions in different countries as to whether or not the issuing bank was obliged to reimburse a bank that made a pre-payment before maturity in cases where fraud was discovered after prepayment and before the maturity date.

The main question arising in this connection is whether sub-article 12(b) clearly places the fraud risk on the credit applicant. Initial reaction from bank lawyers appears to vary. Some feel that 12(b) definitely has this effect. Others query whether the risk may be shifted to the issuing bank and claim the issuing bank may not be entitled to reimbursement from the applicant.

Not all major banks employ in-house lawyers to handle trade finance. Deutsche Bank, for instance, relies exclusively on outside counsel. Even banks with in-house legal teams also use outside law firms, in some cases for particularly complex drafting when several banks are involved and in cases where litigation is involved. However, a number of banks are enlarging their trade finance legal teams to deal with growing demand and complexity. This trend may be set to continue.

Michael Rowe is a freelance journalist and the Technical Editor of DCInsight based in France. His email is microw@club-internet.fr