Washington has sought to end the confusion surrounding the use of letters of credit (L/Cs) that US exporters of agricultural goods may use in trades with Cuba.

Last week the US Treasury Department issued new guidelines for payment for authorised sales of US agricultural exports to the country.

The new guidelines do not impact on L/C sales financed by a third-country financial institution.

Lingering confusion

Director of the US Treasury Department' Office of Foreign Assets Control (OFAC), Robert Werner explained last week to Congress that the new guidelines were issued in response to lingering confusion among US exporters about the payment process they should follow to stay within the law when selling agricultural products to Cuba.

Washington imposed an economic embargo on Cuba in 1963, prohibiting general trade between the two countries, but allowing the sale of certain agricultural commodities.

Third country L/Cs

Legal provisions say "that licensed agricultural sales [to Cuba] are authorised as long as they are financed by payment of cash in advance or through financing by a third-country financial institution," according to Werner.

"It is important to emphasise that financing through letters of credit, by a non-target [deemed by the US to be law-abiding] bank in a third country, has always been authorised under these provisions," since "letters of credit are a recognised method of payment in international trade, including agriculture," he said.

The treasury official added, "in terms of accommodating sales contracts, goods are often shipped before documents can be presented in letter-of-credit transactions; payment from a third-country bank may well be received after shipment."

Cash in advance

Werner attempted to clarify the meaning of the term 'payment of cash in advance', since the definition of this term appears to have been the root cause of confusion amongst exporters to Cuba.

The term is not defined under applicable US law, according to Werner who suggests that the commonly understood meaning of the term in the international trade finance community is that full payment for the goods is received by the exporter before the goods are shipped.

L/C survey

In 2003, Werner says OFAC surveyed US exporters to find out if they were complying with the legislation. The survey found that whilst most L/Cs complied with his definition of 'payment of cash in advance' provisions, some appeared to allow goods to be shipped to Cuba provided cash payment was received prior to delivery of title to the goods.

In 2004, OFAC's Compliance Division began to receive inquiries from US financial institutions seeking guidance on the question of whether goods could be shipped prior to receipt of payment. At that time OFAC could not provide a definitive answer to this question, so a consultation process lasting several months was begun.

Clarification

During this process, OFAC adopted a temporary policy of issuing specific licenses permitting cash payment against documents to exporters whose transactions occurred while guidance was pending.

On 22 February however OFAC finally clarified that the term 'payment of cash in advance' means cash paid prior to shipment of goods.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.