The Emirates Bank International – Dubai opened a 180 day deferred payment LC for USD 851,700 to import 25,000kg of silver alloy and requested Credit Lyonnais (Suisse) S.A. to advise the LC to Beneficiary adding its confirmation. Credit Lyonnais confirmed the LC and advised same to Beneficiary. The LC did not specify that it was subject to UCP500. In fact it was silent as to governing rules.
Training Experts
A Trade Finance Real Life Fraud Case
“Trade Banking Corporation” (TBC) opened an irrevocable LC on behalf of their customers Gulf Foodstuffs Ltd. for the import of a shipment of rice from Jordan by truck. The LC was available by Negotiation for USD95,000- with the “Bank for Finance” (BF). TBC requested BF to add its confirmation to the LC which they did. The beneficiary, Farabi for Re-export Corporation shipped the cargo and presented the set of documents to Mr. Rami Ma’en at the BF. Rami checked the documents and decided they were presented in full compliance with the credit terms and conditions. BF thereafter paid the value of the documents and dispatched them to the TBC.
The TBC upon checking the documents found that although the truck consignment note was signed, it didn’t show the signature was that of the “carrier” i.e. the word “carrier” didn’t appear on the face of the truck consignment note to indicate the name of the transport company shipping the goods and as such they decided the documents were discrepant. Upon advising their customers “Gulf Foodstuffs LTD” the later refused to waive the discrepancy and halted reimbursement.
BF referred to Farabi for Re-export Corporation claiming a refund but they declined to refund them as payment was made without recourse. The bank asked the TBC to return the shipment back to Jordan and agreed to bear the cost of “Freight”.
The TBC returned the shipment and the documents to the BF who were unable to sell the shipment as they don’t own it. They referred to their client (Farabi for Re-export Corporation) for an ownership transfer in favour of the bank so that they can sell it, but the customer declined their request. The bank then sought legal action to claim title to the goods. The bank’s lawyers advised the legal procedures are quite lengthy and would take a long time to solve since the beneficiary is refusing to cooperate with the bank.
The bank’s auditor investigating the case visited the Customs Department where the shipment was placed and whilst checking the rice bags he noted the colour of one bag differs from that of the remaining bags. The different bag was labeled by a Chinese company and born an expiry 20Dec2005 i.e. before the date of issuance of the LC. The auditor then took a random sample of another 5 bags and sent them to the “Royal Scientific Association” for a chemical analysis to check whether the 6 bags contain the same rice. The Association confirmed all bags were of the same kind and were unfit for human consumption.
The bank brought up fraud charges against Farabi for Re-export Corporation and the police interrogation revealed that Farabi (the Exporter), Mr. Rami Ma’en (from the exporter’s bank) and Gulf Foodstuffs (the Importer) collaborated together to execute this fraudulent transaction.
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A Global View
The obligation of the confirming bank to the seller under a confirmed credit to pay against documents which appear on their face to be in accordance with its terms and conditions is subject to one established exception, that is to say, where the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue.
The fraud must be that of the beneficiary, but where it is, and the bank knows that the documents are forged or fraudulent, the bank is entitled to refuse payment if it finds out before payment, and to recover the money as paid under a mistake if it finds out after payment. The principle also applies to performance bonds.
The fraud must be clearly established, both as to the fact and as to the bank’s knowledge, and it would not normally be sufficient that this rests upon the uncorroborated statement of the customer. The court will generally expect the beneficiary to have been given an opportunity to answer the allegation of fraud and to have failed to provide any adequate answer in circumstances where one could be properly expected. The bank’s knowledge must be shown to exist prior to payment to the beneficiary.
The exception for fraud on the part of the beneficiary is a clear application of the maxim “fraud unravels all” and the courts will not allow their process to be used by a dishonest person to carry out a fraud.
Letters of Credit and Performance Bonds
A letter of credit is an undertaking by a bank to pay the beneficiary of the credit, or to accept and pay drafts drawn by the beneficiary, in accordance with the terms and conditions of the credit. A letter of credit may be addressed: (1) to banks generally, or to all banks within a specified country or territory; or (2) to one or more specified banks. All banks to whom a credit is addressed are known as nominated banks. The credit may contain an instruction to a bank either merely to advise the beneficiary of the credit, without any commitment, or to add its confirmatory undertaking to it, in which case the beneficiary has the promise of both banks. Where a credit is intended to facilitate trade, it is called a commercial letter of credit.
It is often made a condition of a mercantile contract that the buyer is to pay for goods by means of an irrevocable credit, and it is then the buyer’s duty to procure that his bank, known as the issuing bank, issues an irrevocable credit in favour of the seller by which the bank undertakes to the seller, either directly or through another bank in the seller’s country, to pay or accept drafts drawn upon him for the price of the goods, against the tender by the seller of the shipping documents.
Commercial letters of credit
Where buyer and seller are in different countries, the bank issuing the credit at the instance of a buyer does so usually through a bank in the other country; the authorisation of the issuing bank is addressed to the other bank and instructs it to advise the credit to the beneficiary with or without committing itself by acting as the agent of the issuing bank itself or by adding its confirmation. The bank issuing the credit is called the issuing bank; the second bank, which advises the beneficiary, is an advising, negotiating, confirming or paying bank according to the role it plays.
Commercial letters of credit may be of two types, namely revocable and irrevocable credits depending on the terms of the credit. If however, the text of the credit doesn’t specify the type of the credit, then it is automatically regarded as an irrevocable undertaking. Irrevocable credits may be confirmed or unconfirmed. Commercial credits may take several forms, but the more common are those by which a banker undertakes to pay against document of title to goods; or he may engage himself to negotiate drafts accompanied by such documents of title, or to accept drafts drawn under the credit. Credits create a binding contract to accept or pay bills on the specified conditions, enforceable against the bank by a beneficiary who has acted on the faith of it. Similarly, if the credit requests payments to be made or money advanced apart from acceptance of bills, and such payments or advances are made to the grantee on production of the letter, the bank becomes liable to the party making them. Where a credit issued pursuant to a CIF contract calls for a guarantee by the buyers through their bankers those documents will be taken up on first presentation, such a guarantee may be held to be exactly the same as a letter of credit and so have to be available within a reasonable time before the first date for shipment. Possession of the letter is not sufficient evidence that the person presenting it is the grantee. A credit may be a revolving credit, of which one type is that in which sums drawn may be added to the balance so as to keep the total amount available always up to the permitted figure.
Letters of Credit Law – Commercial Law
Commercial letters of credit are always subject to the local commercial law/letters of credit law or any other law of relevance such as the banking law. Although, commercial letters of credit almost invariably incorporate the Uniform Customs and Practice for Documentary Credits (UCP), which apply to all documentary credits – including, to the extent to which they may be applicable, standby letters of credit, where they are incorporated into the text of the credit; and they are binding on all parties unless otherwise expressly agreed – the local laws always prevail over any UCP or any other rules of practice.
Nowadays, countries all over the world are legislating modern laws specifically applicable to letters of credit of all types in order to protect their commercial and financial business. This is because the newly inaugurated UCP600 contains several technical mistakes and is inadequate to provide protection for the parties to the letters of credit.
Where a credit incorporates the UCP, it is wrong to approach the construction of the credit by looking at the document first without reference to the UCP; and, if there is ambiguity as to the meaning of its provisions, the ambiguity should, if possible be resolved in a way which will result in their reflecting the position under general maritime and commercial law.
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General Procedure Outlined
1. The applicant and beneficiary enter into a contractual relationship and agree to ship goods against documentary credit (Commercial Credit, Letter of credit) or secure a default situation by means of a standby letter of credit.
2. The applicant instructs its bankers to issue a letter of credit in favour of the beneficiary undertaking to pay an amount of money equal to the value of the LC issued plus charges upon presentation of documents which conform to the credit terms and conditions.
3. The issuer issues the credit and sends it to the beneficiary through an advising /nominated bank.
4. The advising bank (referred to by the nominated bank) either accepts its nomination by the issuer to act as the agent of the latter then advises the credit to the beneficiary (or pass over the original standby to the beneficiary). This means it agrees to pay the beneficiary the value drawn on the credit directly provided the documents presented are fully compliant with the credit stipulations, only to claim reimbursement from the issuing bank after payment.
Alternatively, it would deliver the credit to the beneficiary without any responsibility on its behalf, which means the beneficiary can then ship the goods and present the documents directly to the issuing bank or it can deliver the documents to the advising bank who in turn dispatches them to the issuing bank without any responsibility on its behalf.
5. The beneficiary ships the goods through a carrier and receives the shipping documents.
6. The beneficiary presents the shipping documents together with the other documents stipulated by the credit to the advising/nominated bank whilst ensuring that the terms and conditions of the credit are strictly complied with. This process of presentment of documents is called “drawing on the LC” i.e. presenting the stipulated documents exactly as demanded by the credit terms and conditions.
7. The nominated bank acting on its nomination checks the documents to ascertain whether or not the credit stipulations had been fulfilled. If so, it pays the credit value to the beneficiary [or undertakes to pay if the credit is available by any method other than sight payment or sight negotiation] and claims reimbursement from the issuing bank thereafter. Nevertheless, if the bank is merely acting as an advising bank, it will only dispatch documents to the issuing bank without any responsibility on its part.
There are four types of payment under a letter of credit, specifically: Sight Payment, Deferred Payment, Negotiation and Acceptance.
8. The nominated bank acting upon its nomination (Paying Bank, Accepting Bank or Negotiating Bank) now dispatches the documents to the issuer and claims reimbursement for the amount paid in 7 above either directly from the issuing bank or through a third bank normally referred to by the “Reimbursing Bank” .
9. The issuing bank checks the documents to determine that these comply with the credit terms and conditions and thereafter reimburse the nominated bank acting upon its nomination (or approve the already made reimbursement) if no discrepancy is found.
10. Issuer debits the applicant’s account in settlement of the already honoured reimbursement claim of the paying/accepting/negotiating bank and delivers the documents to the applicant thereafter.
11. Applicant receives the documents and uses them to clear the goods from the custom department.
The above process is generally stated to simplify understanding the trade cycle and roles/responsibilities of the parties to the letter of credit transaction in the simplest wording.
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Islamic Banking Trade Finance
Mature as they are, conventional trade finance vehicles in most of the world remain locked into documentary credits, collections and open account transactions. However, the social culture of the Gulf countries has led to the evolution of a new Islamic trade finance.
Once again, the operational risk management in trade finance is a complex issue that requires specialized knowledge not only of trade finance rules of practice, but also of various aspects related to the transaction itself whether it is under conventional or Islamic banking trade finance. But since we are discussing trade finance in the Islamic context, this article will focus on Islamic trade finance.
Islamic Banking is a financial field based on Islamic legal concepts (Shari’a). The term, evolved since the first decades of Islam, depends on risk-sharing as a prerequisite to initiating the credit facility whilst prohibiting financing based on a fixed pre-determined return.
In the credit side of Islamic Banking, the principles of risk and reward were formulated into a new bond of partnership between the parties to the banking contract as opposed to the debtor – creditor relationship in traditional banking. In simple words, the bank enters into a partnership with its customers; its revenue is proportional to its shares. Conversely, the bank receives no profits if the deal it is financing doesn’t generate any. Distinctively unique, Islamic Banking is a very popular method in countries like Saudi Arabia. Some Saudi Banks, like Al Ahli are even planning to completely turn into Islamic Banking. Whilst Al Rajihi Group is another important bank that focuses on introducing Islamic banking trade finance around the ME, the Islamic Development Bank, or IDB, continues to expand its operations within Saudi Arabia and it is currently setting up a new trade finance corporation in Jeddah with a staggering capital of $3 billion. The IDB celebrated its 30th anniversary in January with a gala invitation-only dinner at the St. James Palace in London hosted by Prince Charles. Of course their mission is a tough one especially that they have to compete against the world’s trade finance giants such as the HSBC, CitiBank, ABN Amro Bank and the Standard Chartered who operate aggressively in Saudi Arabia and other Gulf countries. As a highly profitable domain, and a fairly secured one as local and regional competition does not exist, Islamic banking remains an attractive pursuit for global banks. It is a rich source of low cost deposits and the perfect method to boost ROAA and ROE ratios for based on the Sharia’s principles, Muslim depositors do not accept credit interest on their deposits. This also explains the reason behind vigorously promoting the concepts of Islamic banking by western banks, journalists and politicians.
The total assets of Islamic banks that confront to the Sharia’s requirements has recorded a staggering $400 billion, according to Standard & Poor’s Ratings Services.
In financing trade, Islamic banking is mainly based on two major principles i.e. musharakah and mudarabah. The dictionary meaning of the Arabic word Musharakah is partnership or contribution in a venture where both the buyer and the bank put up capital. The dictionary meaning of the Arabic word Mudarabah is plunge and it is a technical term used to describe the situation where the bank provides the technical skills and management needed to conclude the transaction accurately whilst the customer provides the investment.
The market for listed Sukuk is approximately equal to 9.5 Billion Dollars of which over 5 Billions Dollars are actually rated by the Standard & Poor. In view of the changing social and economic environment in the gulf, it would be extremely difficult to anticipate the rates at which the market would grow during the next decade.
Illustrating the interest of the European banks in Islamic Trade Finance as a profitable domain of banking, Britain has established it first fully conforming Shariah bank back in August 2004 under the name of the Islamic Bank of Britain. It is based in Birmingham where the largest Muslim population is situated. It has several branches, including four in London and it offers traditional and Islamic banking products at the same time, including savings accounts, term deposits, personal finance, home mortgages and business banking. Its shareholders comprise leading Islamic banks, including Qatar International Islamic Bank.
The leading centers of Islamic banking in the world are Riyadh and Kuala Lumpur are liaising with each other to unite their principals and possibly procedures so that they strengthen the development of Islamic banking around Asia and Africa including the Gulf.
Several Arabian Islamic banks based in the Gulf have recently expanded their networks to include Malaysia, Thailand, Philippines, China and India.
In essence, the Islamic banking trade finance services are traditional banking products redesigned in a way to conform with the rules and principles of the Sharia. Murabaha is the most commonly used form of Islamic trade financing, which as explained earlier, is a form of partnership where the bank pays in full or part the value of the goods for its customer who in turn agree to share the profits generated from sales with the financier, in simpler words, the bank purchases the goods and the borrower sells them. Of course the bank would allow the borrower a grace period adequate for the borrower to sell the goods and repay the bank’s dues which obviously do not include interest on the loan as interest is totally forbidden in Islamic Banking.
Islamic banking is mainly based on profit- and loss-sharing partnerships; the essence of musharakah and mudarabah, to finance trade. Under musharakah, the bank pays part of the capital. One partner buys out the other partner’s share over time. Under Mudarabah the client provides the capital and the bank contributes the skill and efforts to make the transaction a success. The distinctive feature of these types of financing is that the financier becomes a trader as well and takes possession of goods, something that traditional bankers prefer not to do.
The first global bank to introduce Islamic Banking trade services was the HSBC Bank Middle East back in 1998 when it launched a series of murabahah products, branded as HSBC Amanah, replicating all conventional services.
Whilst Riyad Bank continues to lag behind with its never ending operational problems, Citi Financial Group (Samba), another major player in the Islamic banking market in Saudi Arabia, has a top-three market share in the kingdom. They have three main trade operations centers, in Riyadh, Jeddah and Khobar. By offering both Islamic banking as well as conventional trade products, Samba Financial is able to meet the specific needs of its customers and offer them a wider choice. Local banks that have a deeper understanding of the sensitivities and requirements of their specific market claim to have an advantage over the international banks in introducing new Islamic financial products.
Al Rajhi Bank, also based in Riyadh, is the worlds largest and most respected Islamic bank. It has more than 500 in Saudi Arabia and it is the first Saudi bank to operate in Malaysia. The bank is expanding its network to include the Levant as well. From a similar article on Islamic Trade Finance, I quote the following paragraphs:
“Founded in 1970, Dubai Islamic Bank, based in the United Arab Emirates, is the first fully fledged Islamic bank. In December 2006 it launched Al Islami Land Trading Finance, a Shariah comforming structured finance service designed for Emirates national dealing with real estate. Dubai Islamic Bank has issued a $3.5 billion sukuk bond for the Nakheel Group (a governmental emirates organization). Sukuk are financial participation certificates that do not offer interest payment rather provides for paying a fixed return.
Islamic bonds recorded a volume of more than $7.3 billion in the year-to-date through December 19,2006, an increase of about 12% from the same period a year earlier, according to Dealogic. Abu Dhabi Islamic Bank’s $800 million sukuk, priced on November 30, 2006, through HSBC Amanah, was the third-largest Islamic bond on record. The issue was originally planned for $400 million to $500 million but was increased due to strong demand from investors, nearly 40% of whom were based in Europe.
Malaysian issuers dominated the Islamic bond market last year, with $5.6 billion of volume as of December 19, an increase of 31% from the same period of 2005, Dealogic says. CIMB Islamic, based in Kuala Lumpur, led the 2006 year-to-date bond volume and revenue rankings, according to Dealogic.
The Malaysian subsidiary of Bank of Tokyo-Mitsubishi UFJ, part of Mitsubishi UFJ Financial Group, is teaming up with CIMB to offer a range of financial services, possibly including sukuk for Japanese corporations. The strategic alliance covers broad collaboration, including conventional and Islamic investment banking and cash-management services.
Kuwait Finance House, one of the world’s largest Islamic banks, has recently launched a $200 million Islamic bond issue for a Chinese power company. It also is arranging financing for infrastructure projects in India, Indonesia and Pakistan.”
The modern conventional banking has developed over long historic periods of time as a consequence of changing social and economic needs of people. It is based on laws and rules of economics and finance where the management of value is in the heart of the decision on the sort of banking services to choose. For example interest rates on deposits are correlated to annual inflation rate which in turn is the result of interacting factors of production and market forces (demand and supply). Hence banking is an advanced science based on solid laws rather than theories. For Islamic banking to blossom solidly, there has to be a mechanism that takes into account all such factors and soundly convert the traditional interest rates into equivalent fixed fees to ensure that the value of the investment is maintained undiminished. Many Muslim bankers actually argue that the current principles of Sharia are not fixated and may change with the changing global financial environment. Hence an adoption of traditional banking principles by Islamic bank is not only possible, but is actually perceived by the majority of the Muslims in the Arab world.
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Operating Principles
A. Examination and rejection of documents
The issuing bank, the confirming bank, if any, or a nominated bank, must determine on the basis of the documents alone whether or not they appear on their face to be in compliance with the credit.
The issuing bank, the confirming bank, if any, or a nominated bank acting on its nomination, each have a certain time following the receipt of the documents, within which to determine compliance. In the event of refusal to honour or negotiate the issuing bank, the confirming bank, if any, or a nominated bank acting on its nomination must give the relevant notice to that effect by telecommunication or, if that is not possible, by other expeditious means within a certain time. The issuing bank or confirming bank, if any, is then entitled to claim from the remitting bank refund, with interest, of any reimbursement which may have been made to that bank. The disposal notice is not required to use a precise form of words; it suffices that it is made clear that the documents are not being accepted and state all the discrepancies that caused the rejection.
If the issuing bank or confirming bank fails to act in accordance with the provisions described above then it is precluded from claiming that the documents are not in compliance.
B. Forged documents
Banks assume no liability or responsibility for the accuracy, genuineness or falsification of any documents. Accordingly, a bank is entitled to reimbursement where it pays against an inaccurate or forged document which appears on its face to be in accordance with the terms and conditions of the credit. In the absence of fraud on the part of the beneficiary, the obligation to take up apparently conforming documents exists even where at the time of presentation the documents are known by the beneficiary or the bank to be inaccurate or forged. The beneficiary does not warrant to the paying bank the genuineness of third party documents tendered. If a banker has given his acceptance to a draft, he is liable to a holder in due course notwithstanding the subsequent discovery of fraud.
Outline
A case of Documents presented complying on their face with requirements of documentary credit but these Documents were in fact signed without authority.
Abstract
Where a bank was presented with documents which, on their face, complied with the requirements of a documentary credit but had in fact been signed without authority it was not open to argue that the bank was precluded from paying on that credit due to the documents being a nullity (“conflict”, a legal declaration that no presentation of documents or any other incident of relevance had ever come into being/null and void). To do so would be contrary to both principle and authority, and undermine the system of funding international trade by the means of documentary credits.
The Case
G (Exporter – Beneficiary) entered into a contract of sale, with B (Importer) as buyers, for a consignment of frozen Lamb meat. The payment was to be by documentary credit, expressed to be subject to the Uniform Customs and Practice for Documentary Credits, International Chamber of Commerce Publications 500 (UCP 500), issued by S, a bank in Syraqia, in favour of G at the request of F, a further bank, acting on the instructions of the claimant, M (Applicant). M was a finance company engaged by B for the purposes of the transaction. One of the documents to be presented under the credit was an inspection certificate to be signed by M. G received communication from B that one of G’s employees should sign the certificate on M’s behalf, and G understood that M had agreed to that. The documents under the credit were presented to S, which accepted them. They were also presented to F, which also accepted them. The documents were then presented to M, which argued that it had not issued the inspection certificates and accordingly should not be required to pay, and informed G and S that that was its case. On advice, S paid the total of the documents in accordance with the LC terms and sought reimbursement from F. M claimed that no valid certificates of inspection capable of satisfying the documentary credit had been issued. S sought legal action against F in respect of the monies owing under the documentary credit, and F sought legal action against M if it were to be found liable to S. M then applied to add a further claim, claiming a breach of trust and confidentiality on G’s part in the event it was found liable to F. The judge found that the inspection certificate had been signed without M’s authority, but that G had not been fraudulent and was accordingly entitled to payment by S, which was then entitled to payment by F which was in turn entitled to reimbursement from M. The judge rejected a contention by M that S was entitled to refuse payment to G where G had not been fraudulent but where both S and G had, prior to payment, been made aware that the certificate had not been signed or authorised by M and as such was void. The judge further rejected M’s application to add a further claim. M and F appealed on the ground that the judge had been incorrect in his understanding and application of the law so far as the fraud exception had been concerned. M also appealed on the ground that the judge had been wrong in rejecting its application to add a further claim.
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A case that discusses the suitability of the UCP600 for regions that do not have effective letters of credit laws.
UCP600 in Theory and Practice
There is absolutely no doubt that the problems faced by many regional and local commercial banks in the Middle East, were primarily emanated from their trade services operations. Many argue it is to be blamed on the ICC who have completely failed to inaugurate sound rules, reflective of actual regional market practices that would secure the transactions of documentary credits. It all started back in 1993 when they erroneously introduced the official Arabic version of the UCP500, then they drafted an inaccurate unwarranted UCP600 and now they’ve done it again, the official Arabic version of the UCP600 is erroneous.
Their apparent negligence has caused commercial banks severe financial losses that eventually led to the collapse of many financial institutions and strongly contributed to the deterioration of our economies; yes economics is directly correlated to trade. I find it very odd that the national banks of the Arabia are not legally pursuing the ICC for all the damages incurred as a result of its wrongful acts and omissions; this is a direct and straight forward case of tort.
The ICC, knowing that they were being trusted, that their skills were being relied upon and that their judgment is somehow referenced authoritatively, must be held responsible for all the errors and mistakes contained in the UCP600 and any other rules of practice sanctioned by them, especially that they themselves, together with the “Institute of International Banking Law and Practice – IIBLP” are promoting the erroneous rules by offering technical training and arbitration services based on said rules in return of considerable consideration (Financial Profit). Hence they have the full intention to create legal relationships with the region’s commercial entities and individuals of concern. Damages, therefore, can be estimated based on the actual cumulative loss incurred in the numerous trade finance cases that took place since the introduction of the erroneous Arabic translation of the UCP500 up to date. The gulf countries must take this view very seriously as their national banks have truly incurred huge financial losses especially in LCs pertained to the import of heavy machinery, construction instruments and oil where the value of each LC exceeded USD10 MIO.
It is truly low the ICC knew the official Arabic version contained fatal errors and yet they declined warning the banks, academics and professionals of the consequences of continuing with their use, simply to evade the responsibility that arises from their negligence and to try to preserve their image and public perception. They were under a legal liability to notify the people but they unethically refused to do so, hence, it is only fair to pursue them legally.
I recall in several instances the international trade finance community announced that there have been no significant changes in the actual practice of international banks with regards to letters of credit operations. It is for this specific reason that one eminent Professor of Law from the ICC itself issued a position paper clearly indicating that the UCP500 must not be revised since it perfectly reflects the international standard banking practice pertained to letters of credit. The meeting that took place in Indea in 2003 by the ICC national committees where they declared that the revision is unwarranted also backs this opinion up. It was obvious that the ICC revised the rules to escape liability for the errors contained in the ICC’s official Arabic version of the UCP500 which automatically became void upon the introduction of the UCP600. Further, the ICC made profits from selling books, training services, advisory services and arbitration services. Nevertheless, the overall outcome was not in their favour, as they have not only lost their reputation, but also a considerable proportion of their market share.
It is for the above mentioned reasons that some banks around the world continue to use the UCP500 as the formal rules which govern letters of credit transactions. In many continents, however, the commercial law, law of contract and tort of negligence prevail. Here, the UCP does not have any role in regulating letters of credit transactions; their healthy legal systems and sound commercial legislations provide more than adequate protection for all the parties of the letter of credit transaction including those residing overseas.
The UCP600 came as a major disappointment to the banking communities around the world for a host of reasons which we will come to discover later when we address each of the mistakes contained therein separately. For now, I will only highlight the major differences between the UCP500 and UCP600 as a general indicator of the similarity of the two versions and to stress that the later revision was truly an unwarranted pathetic rip-off.
A. The new definition of the term ‘Negotiation’ represents one grave error in drafting the rules and ads to the ambiguity of the term’s practical application.
B. “Compliance” was simply rephrased to become “Complying Presentation” but with the same meaning and application.
C. “Preclusion phrase”. Sub-Article 16 (f) has only precluded the issuing bank and the confirming bank, but not a nominated bank acting upon its nomination. It is useful to read this case on link The Case of Bank Azaro .
D. Discrepant documents, notices of discrepancies and waiver of discrepancies were redrafted but still with the same meaning and application.
E. “On their face” and “reasonable time” had been deleted and replaced with “presentation” and “5 banking days” which may further hinder the smooth execution of LC transactions i.e. the original rules were worsened.
F. Discount of documents accepted by the nominated bank: This is a direct credit service that need not be regulated by the UCP due to the risk and complexity of extending it. If discounting is to be addressed by the UCP, the relative rule must be complete and adequate rather than drafting a simple description of a service. If this shallow inadequate rule is acceptable, why not also regulate other credit facilities banks normally grant, for instance lets have a rule on packaging loans, and another rule for import loans and one for export loans then we can have a rule for setting import/export limits and percentages of marginal deposits and one for handling securities …etc. They may as well regulate credit analysis and have a view on lunch hours. How ridiculous can they become? Discounting is a serious and risky service that may cause huge losses if it was extended without proper care and knowledge. An automatic authorization of a nominated bank acting upon its nomination to discount documents that are found compliant could turn to be much riskier that the ICC has thought and may well cause the issuing banks severe financial losses; this is a total shift of risk from the nominated bank to the issuing bank that would cause the issuing banks devastating losses especially in cases of fraud, money laundering and organized commercial crimes.
G. The new term “Honour” does not reflect any new practices, it is merely a simple description of the traditional responsibility previously contained in the UCP500 under the terms payment, acceptance or deferred payment undertaking. Once again, this is only a change of wording not a change of practice.
H. Handling of amendments remained identical to that under the previous version although the wordings differed.
I. The addresses of the beneficiary and applicant may now vary from those stated in the credit. This is clearly an irrelevant and immaterial change that has never before caused a problem to the parties of the documentary credits.
J. Standard for examination of documents, here again no significant material change has really took place in the market, there was only a slight change in wording.
K. The simple elementary language in which the rules were written only rediculates the profession and professionals of trade finance. It clearly undermines the intelligence of the readers.
From past experience, the ICC’s rules of practice had negatively contributed to the performance of our banks. There are numerous reasons that make our financial institutions seriously consider not relying on these rules: the sever losses they suffered as a result of the inadequacy of the rules is one example. The regions commercial, banking and civil laws can actually provide perfect protection for banks and other parties to the LC transactions whether conducted locally or globally. Arab Banks can even legislate one unified regional law suitable for their own environment rather than depending on rules that can only serve to destroy the banks’ competency and efficiency.
Yacoub E. Sifri, AR LSE CDCS
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On one side is Jose Sarney, the ageing president of the Senate and former President of Brazil, who is mired in corruption allegations and clinging on to power. On the other is a rapidly growing campaign to oust him run by young, educated Brazilians using the internet to mobilise support.
Critics say that Mr Sarney is a symbol of an outdated, corrupt and autocratic system that modern Brazilians are trying to leave behind.
On Saturday, thousands of Brazilians demonstrated against Mr Sarney in co-ordinated protests in 13 cities across the country. In Sao Paulo, 1,000 demonstrators wore red noses and stopped traffic. “It is shameful what is happening in Brazil,” said Marcelo Pizani, a motoring journalist and Sao Paulo organiser of the Fora Sarney — “Sarney Out” — campaign. “This revolt is coming from the people.”The protesters are increasingly using irony as a weapon. Another arm of the campaign is Rir Para Nao Chorar (Laugh Not To Cry).
“The clown’s nose is a legitimate symbol of society’s defence and integrity,”said Fernanda Suplicy, an organiser who claims that 50,000 red noses have been distributed on Sao Paulo’s streets.
The conservative Estado de Sao Paulo newspaper has led the allegations against Mr Sarney. The senator’s critics say he is a living example of late 19th-century Brazil’s system of coronelismo (literally, “colonelism”), when power was concentrated in the hands of landowners, or coronels, who ran everything. Estado has alleged that up to 500,000 reals (Pounds 163,000) of the R1.3 million that a foundation bearing Mr Sarney’s name received from the state oil giant Petrobras was diverted to front companies and Mr Sarney’s family. His son Fernando is being investigated for alleged financial crimes including money laundering. New claims emerge every week and Mr Sarney denies them all. “It is a cam- paigby the Estado de Sao Paulo, which has a political position against mine, which is to support President Lula [da Silva],” he said. Another allegation concerns 663 secret decisions or “secret Acts” that the Brazilian Senate passed between 1995 and this year, up to 10 per cent of which Estado says benefited Mr Sarney’s family or allies.
Mr Sarney says that until June, he did not know the “secret Acts” existed. He defended himself in an impassioned and lengthy speech to the Senate on August 5. He denied knowing Rodrigo Cruz, the beneficiary of a Senate job. Newspapers then published pictures of Mr Sarney at Mr Cruz’s wedding, next to the happy couple.
President Lula continues to support Mr Sarney because the senator’s party, the PMDB, or Democratic Movement Party, is the key to Mr Lula’s plans to have Dilma Roussef, his designated successor, elected in presidential elections next year.
The Senate ethics commission has decided to do nothing about many of the allegations against Mr Sarney. But campaigners plan to demonstrate every Saturday until he leaves office. Mr Pizani said: “Change will only happen when this old class dies.”
Marcelo Pizani: “This revolt is coming from the people”
Credit: Dom Phillips Sao Paulo
Money laundering is a term used to describe the process of injecting, through the global banking system, into the world’s economies dirty money generated from fatal crimes such as drugs, prostitution, child abuse, fraud … etc, for the mere purpose of legitimizing such money so that it can be safely used as a medium of exchange (to purchase assets) and as a store of wealth (saved in a banking account) by the launderers themselves.
The Middle East is that part of the world in which organized crime is persistently active in laundering dirty money. This is because in the western world governments are effectively placing stricter controls to monitor the soundness of their banking transactions, in the ME however, neither the governments nor Arab banks’ managements are able to eradicate it or even reduce it. There are three main reasons for that:
1- Lack of qualified technical experts: Once again, despite the huge amounts the governments and banks have been spending to eliminate money laundering, they have failed to do so. The formal controls placed by financial institutions and authorities alike are totally directed towards monitoring and controlling the transactions pertained to the traditional banking services such as remittances, deposits, foreign exchange …etc, whilst the more complex banking domains like documentary credits, letters of guarantees, real estate financing, securities … etc, remain the devious free vehicles used to inject huge amounts of dirty money into the various economies of the world. Unfortunately, the complex expertise needed to fully control the operations of these rather technical domains remain scarce.
During the past seven years or so, local and regional banks have invested heavily on improving the control of their services by reorganizing their operations. Further, they spent large amounts on providing specialized technical training for their staff. In doing so, they have depended on several formal bodies and references such as the ICC in Paris, the IIBLP in America, The Union of Arab Banks in Beirut and other consulting firms. Nevertheless, the banks’ financial results have been deteriorating significantly indicating that the previous amounts spent on progressing the region’s financial systems and cadres did not yield the sought results. To the contrary, the sudden unplanned changes in operations were an obstacle that created more confusion and a barrier which caused many severe problems; problems that arose from both the erroneous formal references provided, or the inability to effectively convey the technical knowledge needed for sound practice and also needed to operate the new automated systems converted to, these systems which remain idle or partially utilized.
2. Governmental Corruption: Financial authorities and banks of the region have been involved, either intentionally or innocently, in executing large transactions that result in transferring crime money within the world’s economies. Sadly speaking, there are influential governmental figures, constantly covering for the execution of these illegal transactions and thus making it possible for launderers to continue their illegal activities. In one country in the Levant , the head of the money laundering department of the central bank is the chairman of a commercial bogus bank apparently involved in executing large transactions of questionable nature. This person have family ties with a chairman of another bank also known of executing questionable transactions of this type. The Governor of the Central Bank in the same country is another close friend of the two chairmen and the dilemma continues. Their brothers, sisters, daughters, sons and close relatives are appointed in major positions with unlimited influence on the recruitment process within the financial systems; a very closely related and organized net of collaborators, I would say.
They are aware of the nature of the criminal activities that generated the money being laundered but they are willing to overlook the devastating facts as long as the crimes are not committed inside the borders but else where. In some Levant countries, the laundering is even sanctioned by officials much higher than central bank governors and chairmen of financial institutions.
In the ME, we seldom hear about legal actions or punishments against these highly ranked officials, they are in fact protected by the regimes themselves. The official stand of the government is “we are against it, we maintain our ethics and morality”, but the real situation is let the money flow into the country regardless of its source. In essence, the people are being driven down to the lowest levels of poverty and ethical standards whilst the regimes dominate vast resources. It is only fair to say that unless there is a radical change in the governing regimes of the region, drug dealers, murderers, fraudsters and thugs will continue to prevail.
The west is supporting regimes that they consider democratic and fit to maintain human dignity and preserve western ideals. However, many of these regimes are unqualified and have totally failed to protect the people from poverty and crime, therefore, human dignity is deteriorating and drugs, prostitution and other violent crime rates are increasing.
3. Adopting a primitive rather than strategic approach in addressing money Laundering issues. The formal authorities depend on individuals who no matter how qualified, can’t maintain constant and effective control of operations in eradicating money laundering. An effectively functioning operational system is what needed to maintain such controls.
Unfortunately, politics plays a major role in creating an environment conducive to flourishing organized crime and money laundering. The regimes in the Levant are collectively concerned about their continuity and because of their inability to sustain economies capable of supporting their people they accept financial resources of all types regardless of their legitimacy: they even accept funds generated from fatal crimes like drugs and prostitution. It is absolutely ridiculous to attribute the economic recession of the Levant to the global financial turmoil; the crises of the west are slightly correlated to our reality. Our economies are collapsing mainly because of our inability to combat fraud, organized commercial crimes and corruption effectively. Since the 1990′s, the official Arabic version of the UCP was erroneous, the UCP600 itself is erroneous and now the official Arabic version of the UCP600 is erroneous. This has caused severe losses to Arab banks and yet the officials are motionless in remedying the situation.
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