U.S. REGULATORY CLAUSES

[NigelHolt]

Dear Fellow Bankers,

Credits from the U.S., and even the non-U.S. branches of some U.S. banks, contain U.S. ‘regulatory’ clauses. I quote an example below from a freely negotiable credit for over USD2M we were very recently asked to advise in favour of an account holding customer:

“THIRD PARTY SHIPPER/DOCUMENTS ARE PERMITTED PROVIDED THAT SUCH PARTY IS NOT ANY PERSON WITH WHOM U.S. PERSONS ARE PROHIBITED FROM DOING BUSINESS UNDER U.S. FOREIGN ASSETS CONTROL REGULATIONS OR OTHER APPLICABLE U.S. LAWS AND REGULATIONS. IN THE EVENT THAT DOCUMENTS ARE PRESENTED TO US CONTAINING A PARTY WITH WHOM WE ARE PROHIBITED FROM DOING BUSINESS AS STATED ABOVE, THEN WE SHALL NOT BE IN A POSITION TO HONOUR SUCH PRESENTATION.”

As we haven’t the faintest idea if any particular party is one with whom U.S. persons are prohibited from doing business -under U.S. foreign assets control regulations or other applicable U.S. laws and regulations- our policy is to refuse to carry out a nominated bank role where a credit contains a U.S. ‘regulatory’ clause and only to handle any documents presented on an ‘approval basis’.

A few questions please, to which I’d be grateful for replies:

1. To non-U.S. bankers: Do you take our approach? If not, how do you get around the problem of identifying if a party is a 'prohibited person'?

2. U.S. bankers: What checks do you carry out regarding ‘prohibited persons’ when you receive a set of documents and what databases do you use? Is this information available somewhere on the internet?

Look forward to receiving all your replies, particularly from those U.S. bankers that seem to have recently joined the forum.

Hope you all have a good weekend. I don’t think I will, the Bees are playing Bristol.

[edited 2/19/2005 10:23:29 AM]

[larryBacon]

Bravo Jeremy !

I would take the same approach as you in refusing these LC's. There are hidden dangers also involved for the Nominated Bank. Let's say that the Nominated Bank Checks out the OFAC status and is satisfied with it. They then send it to the (US) Issuing Bank, who also check it. It can happen that, in the interim, OFAC has blocked the party/ies involved. This can mean that the Nominated Bank has paid out based on current information, but the Issuing Bank refuses reimbursement based on current (slightly later) information and subject to US laws.

FYI check out the following website :
http://www.treas.gov/offices/enforcemen ... utomation/

I would be interested in knowing if the LC you mention is claimed to be Irrevocable or not. If it claims to be Irrevocable, the statement quoted reverses that.

Regards

Laurence
[edited 2/19/2005 11:56:38 PM]

[PradeepT_old]

Dear Jeremy/Lawrence,

Indeed the query raised is quite thought provoking and I have been wondering as to why should they be talking of only the third party shippers/documents. Aren’t the US banks obliged not to deal with any party, whether the third or first for that matter, listed in OFAC alert. I am sure that before opening the LCs, the US banks do checks on the beneficiary (first party) to ensure that his name does not appear on the OFAC list. But what happens if at the time of LC issuance, the beneficiary was acceptable (and so is the case at the time of negotiation), by the time the documents reach the Issuing Bank, the beneficiary has been placed on the OFAC list ? This jeopardises the interests of the Negotiating Bank. I, for one, would certainly not like to play Nominated Bank in case of LCs bearing US regulatory clauses. But I am more concerned with the second situation above. Although hypothetical, the risk for unforeseen rejection by the Issuing Bank remains open to the Nominated/Negotiating Banks due to above US regulations whether or not stated in the LC by way of a clause. Could some “US” banker address this “non-US” concern ?

Regards,

Pradeep

[VinodR]

Jeremy,
We have a similar policy as yours in such cases. However in respect of transferable credits carrying similar restrictions with regard to the transfer party, we seek prior approval of the issuing bank on the acceptability of the transferee.
regars Khalid

[AlbertB]

Dear All:

In addition to the "OFAC" website provided by Laurence, your should also check the following : www.bxa.doc.gov/default.shtm

U.S. banks are required to check all "parties" contained in the document presented for compliance (documentary cerdit/collection) including "third party" issuer, insurance/shipping agent, carrier/vessel, etc. To insert that so-called "regulatory clause" is to avoid getting in the middle when such party (or parties) show up in the finding and documents presented are in compliance with the credit. Issuing/Confirming bank must report any such finding to the Treasurer Department (or the appropriate Government agent) and handling of the presentation will be instructed.

Regards,
Albert

[LisaVC]

As a U.S. banker in the Compliance area of our Trade Operations, I'll tackle this one. We put similar clauses on all of our L/Cs as well. It is basically a warning that our local law will override UCP if the local law is violated (obviously this is true all over the world, not just in the U.S.). And non-U.S. banks can refuse to advise, confirm, negotiate L/Cs with these clauses as it is their right. HOWEVER, it doesn't matter whether the clause is in there or not. It still applies. If we receive ANY document (whether required or not under the credit with apologies to UCP sub-article 13(a)) and it contains the name of a prohibited entity, vessel and/or country, we are prohibited by our government from honoring the documents.

And yes, it is perfectly possible that when the credit was issued, the beneficiary was "acceptable", but some time later, the beneficiary is put on the list(s) (yes, there is more than one!). I cannot give you an easy solution to that. We have automated databases for incoming and outgoing messages, and for documents, our examiners plug every single name they encounter into a database that we receive from Thompson Financial with updates almost every third day at this point. Years ago, we have manual lists they we checked for everything and those were updated perhaps quarterly. However, since September 11, 2001, these frequency of these updates have exploded. I appreciate your position. It's hard enough for us to keep up with all of this and we're required to do so by law. I can't imagine what it's like to try to do it in another country (though all U.S. "persons" located in another countries are bound by these laws as well, including all foreign branches of U.S. banks). So, as I see it, you have two choices:
1) you can look on the published databases yourself since they are on the Internet;
or
2) you can send a message to the U.S. bank with a list of the persons, and we will check the names ourselves and reply back to you whether they are acceptable or not.

Neither choice protects you in the event that an entity winds up on one of these lists between the time you check and the time we receive the documents.

I would be interested in knowing if other countries have any prohibited entity lists like ours.

Lisa

[PradeepT_old]

Thanks Lisa,

You reinforce my long held view that as a prudent banker, it would be wise to retain a recourse on the beneficiary before you negotiate the documents. And if you were the confirming bank, this is a conscious decision and a risk that you already took while confirming the LC. From the Compliance angle, the whole problem boils down to simple diligence that the banks must observe, KYC and now KYCC, i.e., "Know Your Customer" and Know Your Customer's Customer"

Regards,

Pradeep

[NigelHolt]

Thanks to all those of you who have made contributions to this ‘thread’, particularly Albert & Lisa for the U.S. input. It confirms what I thought- acting as a nominated bank under a credit containing such a provision is potentially fraught with danger.

I agree with Laurence’s apparent sentiment that these credits, which are stated to be ‘irrevocable’ (& I accept that they are within the narrow sense of sub-Art9d(i)), do not actually provide the ‘definite undertaking’ referred to in sub-Art 9a and do not accord with sub-Art 10d, 14a(i) and 14b and no doubt other articles as well. (Incidentally, we do not refuse to advise them, merely to carry out any nominated bank role.)

‘Interestingly’, Lisa, I believe it does matter whether the clause is in the credit or not. Based on the Power Curber International v National Bank of Kuwait case* I believe that if the clause were absent and a U.S. issuing bank refused to pay because a party mentioned in a document was on one of the U.S. ‘blacklists’ and that U.S. bank had an office in the U.K. it is distinctly possible a U.K. court would order the U.K. office of the U.S. issuing bank to settle the U.S. issuing bank’s obligations (if sued by the injured party in the U.K.). The U.K. office would have no choice but to do so –even if it meant breaking U.S. law- as otherwise it would be in contempt of court. I would not be surprised if this were the case in other, e.g. E.U., jurisdictions. However, with the clause present I imagine the U.K. courts would take the view the beneficiary / nominated bank was on notice of the risk of non-settlement and therefore accepted this risk.

Pradeep, I do not see how ‘kyc’ or ‘kycc’ could automatically help as, setting aside the fact the beneficiary may not be an a/c holding customer and thus one not be in a position to conduct ‘kyc’ on the beneficiary, it might be the insurance co, carrier or inspection co that is on one of the U.S. ‘blacklists’.

Lastly, Lisa, I do not work in the ‘compliance’ field and therefore cannot talk authoritatively regarding the U.K. approach towards credits and official ‘blacklists’. Talking to my operational colleagues, we run the names of applicants / beneficiaries through a U.K. government ‘blacklist’ at the time of issuing / advising but apparently take no such action at the time of presentation of documents.

* The English courts ordered NBK London to honour the obligations of NBK Kuwait where NBK Kuwait had been ordered by the Kuwaiti courts not to pay under a credit even though NBK London had absolutely no role whatsoever in the credit (it was advised through a U.S. [!] bank in favour of a U.S. [!] beneficiary).



[edited 2/28/2005 1:28:03 PM]

[PradeepT_old]

Hi Jeremy,

You have cited an interesting case. Just out of curiosity, did NBK eventually pay up or went for an appeal ?

Regards,

Pradeep

[KimChristensen]

Dear Jeremy,

Once again you have raised a very relevant matter – and have really good and sharp points. It is very helpful and truly appreciated.

Thanks
Kim