Note: An assistant vice-president of the issuer and officers of the applicant and the beneficiary were charged by the Hong Kong Special Administrative Region with criminal conspiracy in arranging for the issuance of eleven LCs from Bank of America (Asia) on the basis of non-existent or bogus transactions. Some of the defendants applied for the LCs which required presentations of commercial invoices and cargo receipts. These documents were presented by other defendants. The issuer paid and created corresponding loans to the applicant for 90 days. The loans were repaid and the bank suffered no loss. The District Court, Duggan, Deputy Judge, found the defendants guilty of obtaining funds from the bank "on the basis of bogus transactions for the sale and purchase of the goods..." The applicable ordinance involved theft of "valuable securities," defining a "valuable security" as "any document creating, transferring, surrendering, or releasing any right to, in or over property, or authorizing the payment of money or delivery of any property, or evidencing the creation, transfer, surrender or release of any such right, or the payment of money or delivery of any property, or the satisfaction of any obligation." The Defendants appealed, and the Court of Appeal, Wong., J, denied the appeal. In a concurring opinion , Keith, J., rejected the Defendants' argument. He stated, "the draft demanding payment has no independent status or existence and it is only an off-spring born out of the letter of credit. It is true that the bank's obligation to pay does not crystallise until the draft demanding payment has been presented and accepted. But this does not mean that the obligation to pay was not created by the letter of credit. The draft demanding payment is only one of the conditions subsequent to be fulfilled before the bank pays out the money." The Defendants questioned whether the statutory term "a valuable security" encompassed a letter of credit. The trial court overruled their objection relying on R v. Benstead & Taylor (1982) 75 Cr.App.R.276, which stated "the obligation of the bank created a corresponding right in the beneficiary to enforce payment...on presentation of specified documents. That was a chose in action and so a right in property. The fact that the payment was conditional on the presentation of documents did not affect the existence of the right which was created by the irrevocable letter of credit and evidenced by it. In our judgment, therefore, the letter of credit was a valuable security within the meaning of section 20(2) of the Theft Act...'". Defendants' counsel argued that "[n]o right was created, transferred, surrendered or released by the letters of credit," and that the LC "[w]as the presentation of the draft demanding payment that did and the letter of credit was simply the mechanism.51 2001 LC CASE SUMMARIES pursuant to which the draft was created." Defendants' counsel also argued that if any right is created by the LC, it is not a right "to, in or over property" as required by the criminal statute since there was no existing property. Wong, J, rejected this argument as "far too general and far too wide a proposition" that "ignored a number of practical considerations." He stated that "a letter of credit is a special kind of contract which imposes an absolute obligation on the bank to pay the seller of goods. No bank would grant a letter of credit to an applicant without, prior to the issue of the letter of credit, the applicant having paid the full amount or provided sufficient security to the bank in satisfaction of the amount to be drawn on the letter of credit. This is accepted commercial and banking practice." Since credit or overdraft facilities were granted before the LCs were issued, the judge concluded that "the property was already in existence at the time of issue of the letters of credit." Distinguishing a LC from an "ordinary contract," he compared it to a cheque and stated "there are clearly distinctions between an ordinary contract in writing and a letter of credit" citing Jenkins, L.J. in Hamzeh Malas & Sons v British Imex Industries Ltd [19581 2 Q.B.


The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.