ICC Digital Library Forum

I was on a business trip to a country with immense foreign exchange risk.

Over there, I met with Citibank and Stand Chartered Grindlays Bank.

Both, Standard Chartered Bank and Citibank have branch operations in the country (not a separate legal entity) and they claim that LC's issued by them effectively put their respective head offices at risk incase there is a moratorium or foreign exchange crisis in the country. In other words, if thebranch operations do not pay, then their head office will pay.

If above is accurate, it effectively is mitigating the risks associated with the country. If this is correct, then why will any one get SCB/Citibank LC Confirmed overseas? The banks claim that such confirmation is waste of money.

While both banks want to convince us about the above, they do not agree (or want) to get a legal opinion or a letter from their headoffice in this matter.

Do you know of any case law to support their claim or do you have any thoughts on the same?

Thanks

In Article 2 of the UCP 500, branches of a bank in the same country are considered as the same bank. A branch in a different country is considered another bank.

Please note that as Article 2 of UCP 500 says, it is "for the purpose of these Articles only". It does not apply to law, that overrides the UCP.

Under the law, a bank may be and may be not the same legal entity, all depending on how it is registered or incorporated in that country.

Before initiating litigation, we must first find out from the registration to ascertain this fact. Otherwise suing the wrong bank may not only waste our time and money but it may also be subject to counter-claims.

For example, before 1 July 1997, Hong Kong was under British rule. Despite of this, in China trade, if an LC issued by a bank in China was dishonoured, the negotiating bank might sue the issuing bank's branch in Hong Kong.

After 1 July 1997 Hong Kong is part of China, under "one country, two systems".

In recent years, banks in China are reformed to achieve better controls. Now, branches in towns are not authorised to issue LC. For example, for Bank of China, only the branch in Guangzhou or maybe Shenzhen, in the Guangdong Province, is authorised to issue LC. This is a marked improvement for better control. This is also part of the many reforms to prepare China WTO ready.

We should not look at China based on our impression made in the past. We should give China time to improve her financial system.

I am from www.tolee.com

[edited 12/2/01 10:42:07 PM]

If we are talking about a country with a very high foreign exchange risk, there is more to consider than whether the head office will pay by default.
Without knowing the country involved, one must consider all possibilities, including nationalisation of the banks, an official or unofficial freeze on foreign currency movements and other tactics designed to slow payments of hard currency debts.
Even at its simplest, a credit confirmed in the beneficiary's country will be paid on presentation of compliant documents there as opposed to the delay and possible dispute with the issuing bank. This "comfort factor" alone can be sufficient reason for choosing confirmation.

laurence_aj@hotmail.com