J. Sifri

Back in the year 1995, the HSBC Bank launched a new investment product they named the “Guaranteed Capital Investment Bonds”. (more…)

Fraud is the most destructive illegal act banks face. Not only does it constitute a direct cost to the bank, it also entails large expenses for legal pursuits, investigation fees and cost of executives’ time spent on handling fraudulent transactions. Furthermore, fraud has devastating negative effects, that can’t be expressed in terms of money, on the bank’s reputation, public trust and staff morale.

To stimulate trust and acceptance, fraudsters often seek to show reputable banks as parties to their fraudulent transactions. Additionally, they claim to be holders of high academic qualifications in disciplines like Law and Banking from globally respected universities. This kind of deceptive perceptions should always raise doubts and suspicions as to the legitimacy of the transaction in question. Care in such circumstances should be taken and the transaction must be thoroughly scrutinized.

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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.

A Global View

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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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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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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

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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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