Recently we have come across credits which stipulate "credit report on the standing of the beneficiary" as part of the documents required under the credit.
The bene's bank which also happens to be the nominated bank under the credit issues a the certificate confirming the excellent credit standing of the bene; without indicating that the certicate has been issued at the request of the customer without any responsibility or engagement on the part of the bank or any of its officials.
My question is that having issued such a certificate (which form part of the documents under the credit) does the bank runs the risk of losing the protection afforded under Art 15 if there is a fraud on the part of the bene.
regards,
Khalid Iftikhar, Standard Chartered Bank
Disclaimer on the standing of parties.
Disclaimer on the standing of parties.
Dear Khalid,
Long time no see after the Dubai workshops!
IMPROPER WAY TO AVOID FRAUDULENT DRAWING
We guess that the requirement in a DC for a certificate issued by the nominated bank (that happens to be also the beneficiary's banker) certifying the sound financial standing of the beneficiary, is to avoid fraudulent drawing.
A STUPID AND RISKY VENTURE
The nominated bank, to protect itself, issues such a certificate upon request of the beneficiary against an idemnity that it issues the certificate without any responsibility and liability on its part and all its losses would be indemnified by the beneficiary. This appears to the nominated bank to be a smart arrangement. In fact, it is a stupid and risky venture.
SIMPLE COMMON SENSE APPROACH
If the beneficiary is in fact not financially sound, then the indemnity given by it is useless. And the nominated bank has to take all the undesirable consequences by itself. This is only simple common sense.
LEGAL CONSEQUENCES FOR ABUSE OF UCP 500 DISCLAIMER ARTICLES
Such indemnity arrangement is unknown to the other parties. The certificate may mislead the other parties to believe and act upon as if the beneficiary is of sound financial condition. The nominated bank may be held responsible in certain legislations and the UCP 500 disclaimer Articles are not going to protect it as law overrides the UCP 500. Also the disclaimer Articles in UCP 500 are not intended to be abused in such a way.
NOT ACTING IN GOOD FAITH
Can the nominated bank say to the Judge that it has acted in good faith?
OUR DISCLAIMERS
The opinions given above are exclusively for discussion purpose and parties should not rely or act upon such opinions. They should consult an expert and/or a lawyer before doing so.
http://www.tolee.com
[edited 11/22/01 5:14:16 PM]
Long time no see after the Dubai workshops!
IMPROPER WAY TO AVOID FRAUDULENT DRAWING
We guess that the requirement in a DC for a certificate issued by the nominated bank (that happens to be also the beneficiary's banker) certifying the sound financial standing of the beneficiary, is to avoid fraudulent drawing.
A STUPID AND RISKY VENTURE
The nominated bank, to protect itself, issues such a certificate upon request of the beneficiary against an idemnity that it issues the certificate without any responsibility and liability on its part and all its losses would be indemnified by the beneficiary. This appears to the nominated bank to be a smart arrangement. In fact, it is a stupid and risky venture.
SIMPLE COMMON SENSE APPROACH
If the beneficiary is in fact not financially sound, then the indemnity given by it is useless. And the nominated bank has to take all the undesirable consequences by itself. This is only simple common sense.
LEGAL CONSEQUENCES FOR ABUSE OF UCP 500 DISCLAIMER ARTICLES
Such indemnity arrangement is unknown to the other parties. The certificate may mislead the other parties to believe and act upon as if the beneficiary is of sound financial condition. The nominated bank may be held responsible in certain legislations and the UCP 500 disclaimer Articles are not going to protect it as law overrides the UCP 500. Also the disclaimer Articles in UCP 500 are not intended to be abused in such a way.
NOT ACTING IN GOOD FAITH
Can the nominated bank say to the Judge that it has acted in good faith?
OUR DISCLAIMERS
The opinions given above are exclusively for discussion purpose and parties should not rely or act upon such opinions. They should consult an expert and/or a lawyer before doing so.
http://www.tolee.com
[edited 11/22/01 5:14:16 PM]
Disclaimer on the standing of parties.
I would observe that:
1. You have not stated what the credit stipulated that the status report must say.
2. That when acting as nominated bank a bank is not required, under UCP500, to take into account the beneficiary’s standing / record.
Therefore, I personally, and without any responsibility/liability, could only conceive of a bank becoming liable for fraudulent documents in the situation you describe if the credit stipulated what the status report had to say and the nominated bank issued a status report to meet the credit terms that it knew to be untrue, and that this could be demonstrated in court.
[edited 11/22/01 5:52:38 PM]
1. You have not stated what the credit stipulated that the status report must say.
2. That when acting as nominated bank a bank is not required, under UCP500, to take into account the beneficiary’s standing / record.
Therefore, I personally, and without any responsibility/liability, could only conceive of a bank becoming liable for fraudulent documents in the situation you describe if the credit stipulated what the status report had to say and the nominated bank issued a status report to meet the credit terms that it knew to be untrue, and that this could be demonstrated in court.
[edited 11/22/01 5:52:38 PM]
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AbdulkaderBazara
- Posts: 256
- Joined: Fri Apr 05, 2019 5:15 pm
Disclaimer on the standing of parties.
Although no prudent bank will issue such certificate without putting a disclaimer clause, I don't see a reason why a bank will become liable for a fraudulent act by the beneficiary if in accordance to the banks record the beneficiary is a credit worthy and the bank is ignorant of the new and sudden act of the beneficiary to defraud the applicant.
I agree that the bank will go through unnecessary complication but would not agree that it will be implicated unless it is proven that the bank is aware of the beneficiary’s act of fraud or the bank was negligent in assessing the beneficiary's credit standing if the other party could later on, somehow, prove that the beneficiary has lost its reputation in the market which the bank should have been aware of.
[edited 11/23/01 12:28:31 AM]
I agree that the bank will go through unnecessary complication but would not agree that it will be implicated unless it is proven that the bank is aware of the beneficiary’s act of fraud or the bank was negligent in assessing the beneficiary's credit standing if the other party could later on, somehow, prove that the beneficiary has lost its reputation in the market which the bank should have been aware of.
[edited 11/23/01 12:28:31 AM]
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hatemshehab
- Posts: 220
- Joined: Fri Apr 05, 2019 5:19 pm
Disclaimer on the standing of parties.
Based on the same analogy of Mr. Lee’s interpretation just imagine if the carrier issues a clean bill lading against an indemnity issued by the shipper knowing that the goods are defected, will this action give protection in the court of law against the shipper by virtue of the indemnity?
Disclaimer on the standing of parties.
Hatem,
I agree that, at least under English law, a shipping co that acted as you’ve outlined would not be able to enforce the indemnity. However, based on UK banking practice, I would not anticipate that a bank would require an indemnity before issuing a status report. Also, if it did require an indemnity I would anticipate that this would not be to cover it making statements it knows to be untrue or that it makes negligently or recklessly.
Jeremy.
I agree that, at least under English law, a shipping co that acted as you’ve outlined would not be able to enforce the indemnity. However, based on UK banking practice, I would not anticipate that a bank would require an indemnity before issuing a status report. Also, if it did require an indemnity I would anticipate that this would not be to cover it making statements it knows to be untrue or that it makes negligently or recklessly.
Jeremy.
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larryBacon
- Posts: 689
- Joined: Fri Apr 05, 2019 5:26 pm
Disclaimer on the standing of parties.
This question concerns fraud on the part of the bene. If the bene, through fraud, caused the carrier to issue a B/L for non-existent goods, would the carrier be held responsible ? If the carrier could demonstrate the source of the fraud, the carrier's prior lack of knowledge of the fraud and the fact that there was no collusion, there would be no case to answer.
Similarly, if a bank issues a credit report, without collusion or fraud on its part, should it be held responsible if material facts were witheld from the bank which would alter this report ? I think not. One must also bear in mind that a bank issuing such a report, apart from the usual disclaimer, does so based on observations at a single moment in time. It does not necessarily follow that such a report is accurate five minutes after it is issued.
Similarly, if a bank issues a credit report, without collusion or fraud on its part, should it be held responsible if material facts were witheld from the bank which would alter this report ? I think not. One must also bear in mind that a bank issuing such a report, apart from the usual disclaimer, does so based on observations at a single moment in time. It does not necessarily follow that such a report is accurate five minutes after it is issued.
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hatemshehab
- Posts: 220
- Joined: Fri Apr 05, 2019 5:19 pm
Disclaimer on the standing of parties.
The report on the financial standing of a given customer is a very critical one. It is not the outcome of “observations at a single moment in time” simply because it is a balance sheet. The report which spells out the credit worthiness of the customer, its financial standing and perhaps his business integrity is the outcome of an extensive credit analysis over a period of time where criterion put together are the components of this report. The report is based of certain credit criteria like the five Cs which takes into account the capital of the customer, the collaterals taken by the bank, the cause for which the customer enjoys certain credit facilities, the character of the customer and his businesses integrity, and finally the conditions of the overall economic performance and particularly the industry’s condition in which the customers operate.
Not only that, but also the report is a reflection of a thorough financial analysis made by professional bankers who are trained to detect the signs of any delinquency or default or the signs of strong financial performance with is an indication of repayment ability. In this process there might be hundreds of ratios applied to different financial statements provided by the customer, there are field visits, there are forecasted financial analysis and of course there is a span of time in which the customer has been dealing with this bank and this span of time is also analyzed, looked into and taken into consideration in the making of the report. The process of granting a customer new credit facilities are not a few minutes. It might take weeks or even months, therefore such a report is critical and should be treated as such.
NOTE: THERE ARE MORE THAN FIVE HUNDRED RATIOS USED IN FINANCIAL ANALYSIS.
Sometimes, In my training courses I compare this process with the process of checking document which often done single handedly to effect a payment of a 3 million worth L/C, however the same amount in credit department granted as a loan will involve at least many people starting from branch operation manager, branch manager, credit officer making the credit proposal to his manager, then credit manager, chief credit officer and finally perhaps the credit committee. Those people in credit have an ample opportunity to detect at every stage what might have gone wrong, what is missing, what sort of action is required, while on the other hand the poor document checker walking in the mine field has to decide “single handedly” whether The documents are compliant or not! Her lies the paradox.
The note that the report “does not necessarily follow that such it is accurate five minutes after it is issued” is not valid in light of the above analyses with due respect to Mr. Bacon. A lawyer may make use of so many things to defeat this statement if it is the position of the bank that made the report. First of all you have the credit file of the customer, the procedures and the actions taken by the credit risk department, the banks internal memos, the credit proposals on the customer can all be considered and studied to ascertain whether sign of default or delinquency have been observed or not. If so the credit report might be considered misleading and therefore the bank may be held liable by virtue of that report. You have the due diligence that the bank should observe when making such report. You cannot disown your baby after it’s borne.
While I am not trying to predict exactly the legal consequence of this report versus a potential fraud known or unknown to the bank because I am not lawyer, my intention is, form a banking experience, to show that this report may carry the bank to areas where not predicted by it if a well informed lawyer takes use of the above procedures/information in the court of law. Since we do not know the exact condition encompassing this particular case my comments should be construed as an illuminating ones rather than exclusive.
[edited 11/23/01 5:26:03 PM]
[edited 11/24/01 7:34:31 AM]
Not only that, but also the report is a reflection of a thorough financial analysis made by professional bankers who are trained to detect the signs of any delinquency or default or the signs of strong financial performance with is an indication of repayment ability. In this process there might be hundreds of ratios applied to different financial statements provided by the customer, there are field visits, there are forecasted financial analysis and of course there is a span of time in which the customer has been dealing with this bank and this span of time is also analyzed, looked into and taken into consideration in the making of the report. The process of granting a customer new credit facilities are not a few minutes. It might take weeks or even months, therefore such a report is critical and should be treated as such.
NOTE: THERE ARE MORE THAN FIVE HUNDRED RATIOS USED IN FINANCIAL ANALYSIS.
Sometimes, In my training courses I compare this process with the process of checking document which often done single handedly to effect a payment of a 3 million worth L/C, however the same amount in credit department granted as a loan will involve at least many people starting from branch operation manager, branch manager, credit officer making the credit proposal to his manager, then credit manager, chief credit officer and finally perhaps the credit committee. Those people in credit have an ample opportunity to detect at every stage what might have gone wrong, what is missing, what sort of action is required, while on the other hand the poor document checker walking in the mine field has to decide “single handedly” whether The documents are compliant or not! Her lies the paradox.
The note that the report “does not necessarily follow that such it is accurate five minutes after it is issued” is not valid in light of the above analyses with due respect to Mr. Bacon. A lawyer may make use of so many things to defeat this statement if it is the position of the bank that made the report. First of all you have the credit file of the customer, the procedures and the actions taken by the credit risk department, the banks internal memos, the credit proposals on the customer can all be considered and studied to ascertain whether sign of default or delinquency have been observed or not. If so the credit report might be considered misleading and therefore the bank may be held liable by virtue of that report. You have the due diligence that the bank should observe when making such report. You cannot disown your baby after it’s borne.
While I am not trying to predict exactly the legal consequence of this report versus a potential fraud known or unknown to the bank because I am not lawyer, my intention is, form a banking experience, to show that this report may carry the bank to areas where not predicted by it if a well informed lawyer takes use of the above procedures/information in the court of law. Since we do not know the exact condition encompassing this particular case my comments should be construed as an illuminating ones rather than exclusive.
[edited 11/23/01 5:26:03 PM]
[edited 11/24/01 7:34:31 AM]
Disclaimer on the standing of parties.
We agree fully with the enlightening analysis made by Hatem. We would like to add more here.
(1) A bank has not only a duty of care, but also due diligence. This is according to a document by ICC as well as in many legislations. People put their hard earned money to a bank in exchange of a piece of paper (deposit receipt). Therefore a bank must have due diligence.
(2) A bank is trusted and relied upon by its depositors and customers as well as members of the public. So it cannot issue a certificate of sound financial health to other parties as reference inforamtion and then denies any responsibility for such issue.
(3) As Hatem says, a banker should be able to use his own knowledge, experience, hundreds of ratios, observations, site vistits and other means to measure and evaluate the financial health of its customer. Hence if it says its customer is of sound financial health, like a medical doctor, it must take up a responsibility for such certification. Otherwise our health check up report would look like this:
"This is to certify that Mr. Aids is of good health without any responsibility and liability on my part as a medical doctor" Can a banker accept such a document?
A Chiense addage says: "Those who prefer to taste salted fish must not complain about the saltiness". In the Western world there is an equivalent: "Those who cannot stand the heat better leave the kitchen".
(4) There is no need and the bank should not ask for an indemnity for a financial health certificate. This is a task that the bank is ready, willing and able (to borrow the jargons of a fraudster) to do so.
AN AMUSING STORY OF A BANKER'S REFERENCE LETTER
To add some amusement to this boring subject, we would like to end with a story, with due respect for the banking profession, from a city that is known for execellent DC operation skills and knowledge.
A messenger working for the bills department of a bank had to resign due to tuberculosis as recommended by the medical doctor and asked for a reference letter. The letter says: "The health of Mr. Tom Burns appears to be quite good". However, we do not know whether an indemnity was requried or not for such issue.
http://www.tolee.com
[edited 11/23/01 6:19:22 PM]
(1) A bank has not only a duty of care, but also due diligence. This is according to a document by ICC as well as in many legislations. People put their hard earned money to a bank in exchange of a piece of paper (deposit receipt). Therefore a bank must have due diligence.
(2) A bank is trusted and relied upon by its depositors and customers as well as members of the public. So it cannot issue a certificate of sound financial health to other parties as reference inforamtion and then denies any responsibility for such issue.
(3) As Hatem says, a banker should be able to use his own knowledge, experience, hundreds of ratios, observations, site vistits and other means to measure and evaluate the financial health of its customer. Hence if it says its customer is of sound financial health, like a medical doctor, it must take up a responsibility for such certification. Otherwise our health check up report would look like this:
"This is to certify that Mr. Aids is of good health without any responsibility and liability on my part as a medical doctor" Can a banker accept such a document?
A Chiense addage says: "Those who prefer to taste salted fish must not complain about the saltiness". In the Western world there is an equivalent: "Those who cannot stand the heat better leave the kitchen".
(4) There is no need and the bank should not ask for an indemnity for a financial health certificate. This is a task that the bank is ready, willing and able (to borrow the jargons of a fraudster) to do so.
AN AMUSING STORY OF A BANKER'S REFERENCE LETTER
To add some amusement to this boring subject, we would like to end with a story, with due respect for the banking profession, from a city that is known for execellent DC operation skills and knowledge.
A messenger working for the bills department of a bank had to resign due to tuberculosis as recommended by the medical doctor and asked for a reference letter. The letter says: "The health of Mr. Tom Burns appears to be quite good". However, we do not know whether an indemnity was requried or not for such issue.
http://www.tolee.com
[edited 11/23/01 6:19:22 PM]
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larryBacon
- Posts: 689
- Joined: Fri Apr 05, 2019 5:26 pm
Disclaimer on the standing of parties.
I am sorry if I gave the impression that a bank report is not worthwhile. This was not my intention. A bank issues such a report based on all the information historically available to it at a moment in time. However, perhaps not all pertinent information will be available to the bank. This may not be disclosed to the bank for commercial or fraudulent reasons. The fraudulent reasons are obvious. The commercial reasons can be various, but may include a cash flow problem which the company sees as temporary, but the bank may not. For the purposes of this discussion, it does not matter which view is correct, merely that the bank may not have all the information and that some of the information which the bank uses as a basis of its report comes from the company in question. Therefore this company may manipulate the information to suit the circumstances.
My earlier analogy concerning a change after "five minutes" perhaps took too much poetic licence, but some businesses previously based in the twin towers in the WTC in New York may agree with me.
Bank reports are perhaps the best indicators we have got as to the financial standing of a company, but it is not a guarantee and it cannot predict the future.
My earlier analogy concerning a change after "five minutes" perhaps took too much poetic licence, but some businesses previously based in the twin towers in the WTC in New York may agree with me.
Bank reports are perhaps the best indicators we have got as to the financial standing of a company, but it is not a guarantee and it cannot predict the future.