Article

Russian Federation

The current revision of the ICC Uniform Rules on Demand Guarantees provides a good opportunity to verify if the respective provisions of national law are in line with the URDG and also whether they correspond to current internal and international practice.

In 2004, Russian guarantee practice was already described to DCInsight readers1. Although provisions on bank guarantees in the Civil Code of the Russian Federation were largely inspired by the URDG, some important provisions, such as the definition and practical meaning of a counter-guarantee (subarticle 2(c) of the URDG) or "extend or pay" concept (article 26 of the URDG), were omitted. On the other hand, some local Russian court decisions (happily, not a large number) may raise a question of the acceptability of a Russian bank guarantee subject to the URDG if its governing law and place of jurisdiction are absent or not clearly stipulated in the text of a guarantee.

Most local courts define a bank guarantee as a unilateral transaction2. Such a transaction is a "a written obligation to pay" (article 368 of the Civil Code) that should be concluded in written form and, unless otherwise provided, should be governed by the law of the place of business of the obligor (article 1217 of the Code).

According to article 2(d) of the URDG, a written form of a guarantee can include an "authenticated teletransmission". By contrast, the Russian Civil Code (article 434.2) limits utilization of electronic data processing:

- to the exchange of electronic communications between the contracting parties,

- to an electronically reproduced signature that is acceptable "if provided by a law, other legal acts, or by agreement of the parties" (article 160.2 of the Code).

In addition, an electronic message signed by an "electronically reproduced signature" is recognized to be an electronic document equal to a hand-made signature if a paper form of document is not stipulated or provided for in federal laws or other legal acts3.

The problem is that, if considered to be a financial undertaking, a bank guarantee as "a written obligation to pay" should, according to a Russian law "On accountancy", bear a signature of a chief accountant of a guarantor.

In one case4, the Federal Arbitration Court of the Moscow region assumed that a bank guarantee issued by means of telecommunication was not agreed by the parties (which, in my view, is not consistent with the idea of a bank guarantee as a unilateral act). Consequently, the court ruled that the legal requirements regarding an electronic reproduction of chief accountant's signature (for a bank guarantee as a financial undertaking) were not complied with and judged that the guarantee in question had no legal validity because it was issued by a SWIFT message!

In another case5, the Federal Arbitration Court for the East-Siberian region declined a plaintiff's (the guarantor's) demand to recognize the legal invalidity of its own guarantee not bearing a chief accountant's signature, having interpreted a bank guarantee as a civil law transaction that had to be signed by authorized representatives of a guarantor as follows from article 53 of the Civil Code.

Both of the above-mentioned cases relate to internal guarantee operations of Russian banks, which largely utilize the SWIFT telecommunication system, as well as the authorized persons' signature concept. These two decisions may illustrate a lack of uniform Russian court practice though, in my view, it is not a question of the law's insufficiency, but of the interpretation of different legal dispositions and acts.

Having in mind that these controversial legal decisions can create an obstacle to the normal development of Russian bank guaranties securing international transactions, it may be preferable to choose the rules of ICC Arbitration as a jurisdiction for guarantees subject to the URDG and governed by Russian law. The Supreme Arbitration Court of the Russian Federation has indicated that Russian arbitration courts may not consider a suit if a procedure of ad hoc international commercial arbitration was agreed between the parties6.

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

1. See "Bank Guarantees: Russian practice" by N. Rannikh, DCInsight, Volume 10, N°4, October-December 2004 .

2. Or "unilateral act" - see A User's Handbook to the URDG by G. Affaki, ICC Publication No. 631, p. 58.

3. See "A Federal law of information, informatisation and safeguard of information".

4. See Resolution of the Federal Arbitration Court for the Moscow region NKG-A40/13836-06 dated 5 February 2007.

5. See Resolution of the Federal Arbitration Court for the East-Siberian region NA33-1030/2005-FO02-1886/06-C2 dated 2 May 2006.

6. See Information Letter of Presidium of the Supreme Arbitration Court of the Russian Federation N° 58 dated 18 January 2001, p. 19.

Spain

There is no doubt that SWIFT is an important tool for transactions involving documentary credits and for many other bank transactions as well. SWIFT should remain just that: a tool. Sometimes, however, SWIFT takes too much of a leading role and that can cause problems when some rules are to be applied.

Take, for instance, a case in Spain, where a documentary credit issued under UCP 500 was considered by the ICC Banking Commission as Query TA 618. In this case, the enquiry concerned a documentary credit issued for EUR 34,034.91, which did not allow partial shipments and which asked for "Cunas de madera" (wooden cradles) without specifying the quantity.

In SWIFT field 39 referring to tolerance in amounts, the issuing institution inserted 00/00, meaning that the credit should be for exact amount issued. When the documents were presented for an amount of EUR 33,589.71, the issuing bank claimed the documents were not correct because field 39A did not allow for any tolerance.

The case was submitted to the ICC Banking Commission. Its Opinion was that a tolerance of 5 per cent should be applied, because SWIFT field 39 was just to express positive or negative tolerances. However, in SWIFT's practice, 00/00 does not mean there is no tolerance at all. The SWIFT Handbook says that the use of 00/00 in field 39 A has no effect on the amount that can be drawn under the credit.

It is obvious that the intention of the issuing bank was to issue a credit without tolerances and that SWIFT field 39 accepted the expression 00/00, making the confusion possible.

In order to prevent similar incidents from happening in the future, the Spanish group of SWIFT users is going to demand that from now on the SWIFT field 39 not accept expressions such as 0, 00, 00/00 or the like that might lead to confusion.

In this case, in the Banking Commission Opinion, it seems that SWIFT's "Users' Handbook" was considered to have the same force as the UCP.

Obviously, a credit can be issued in three different forms:

- allowing a positive tolerance,

- allowing a negative tolerance, or

- issued for an exact amount, without any tolerance.

Today it appears that SWIFT does not accept the third possibility, which will oblige us to exclude articles from the UCP. This is a dangerous precedent, because if we begin to modify articles, we will weaken the uniformity of the rules.

SWIFT, as noted, is an unavoidable tool for documentary credit transactions and should remain so. But formalities should never be considered to be as important as the contents of the UCP.

Xavier Fornt
International Advisor
Caixa Catalunya
E-mail: xavier.fornt@caixacatalunya.es

United Arab Emirates

Trade finance frauds are nothing new - ranging from presentations of fraudulent documents to spurious calls under demand guarantees and standbys. It is usually the innocent buyer who bears the grief when banks come looking for their money. But when both the buyer and seller are in cahoots, it is usually the banks that have to bear the brunt.

The essence of international trade, especially documentary credits, is its reliance on the presentation of a diversity of documentation. The primary risk surrounding trade finance activities is the ease with which seemingly legitimate transactions and related documents can be constructed to create a justifiable movement of goods/services between parties.

There is no disputing that letters of credit provide a lubricant to international trade and that world trade would greatly suffer without this arrangement. However, for the system to work, banks have to reassure themselves that the underlying cargoes actually exist. The importers depending on the regulatory or customs requirements in their country usually dictate the documentation required. This diversity of documentation presents the greatest element of risk to the banks, as they may not have expertise concerning many of these documents. This risk is compounded when parties to the underlying transactions join together to perpetrate fraud.

Another critical factor is the involvement of maritime finance, without which the letter of credit system would fail. Because of the time it takes for cargoes shipped from foreign ports to reach their destination, importers have to find a way of guaranteeing payment to exporters before the goods are received. The answer is a letter of credit - an instruction from the importer's bank to an overseas bank to pay the exporting company in advance against stipulated documents.

In fraudulent transactions, however, many of the cargoes are fictitious. Depending on the ingenuity and complexity of the fraud, they may be loaded for customs purposes only to be clandestinely removed before the ships leave port. In other cases, cargo may be of inferior quality or non-existent and, in a third variation, genuine cargoes may be diverted to destinations other than those on the export declaration.

Trade finance is also used for perpetrating other economic frauds, such as over- and under-invoicing, evasion of custom duties, etc, when documentation is required to comply with governmental requirements. The primary risk associated with such documentation is its use to facilitate non-existent commercial activities involving, at some stage, the movement of funds.

The cross-border activities associated with trade finance require banks to maintain correspondent banking relationships with other banks in many countries for the execution of various activities. The major concern with such an arrangement is that the correspondent often has no relationship with the underlying parties and is therefore not in a position to establish the bona fides of the parties or the underlying transaction.

The growing complexity of banking business suggests that more tailored guidance may be warranted in the area; but in reality the ability of a "there is no bank to assess substitute for this risk can vary considerably, experience, depending on, awareness and but not limited to, the size and com-due diligence" plexity of the products and services they offer, the underlying goods and the geographical location of the parties.

It is unrealistic to expect banks to familiarize themselves with all types of documentation they come across. At best, banks can be expected to create a risk control system that enables them to identify measure, monitor and control risks inherent in the products and services they offer. This means identifying certain transactions as high risk and paying particular attention to these transactions. More importantly, it is vital that banks encourage their personnel to acquire more information on the transactions they handle and the parties involved, and not to be afraid to ask questions if they see anything unusual.

In the end, there is no substitute for experience, awareness and due diligence. The best security that a bank can hope for is to invest in trade finance specialists who are trained to spot such risks early and who are able to reinforce the bank's due diligence practices. l

Khalid Iftikhar
Manager Trade Services
Standard Chartered Bank
Dubai
E-mail: webs@emirates.net.ae