Trends In International Litigation : International Business Lawyer & Attorney : Ed Joffe : Joffe & Joffe Law Firm : Miami, Florida Global Customs & Trade Issues

On March 26, 2010 the ICC Banking Commission Task Force on Anti-Money Laundering released guidelines on sanction clauses in trade related products, including letters of credit, documentary collections and guarantees.

The use of clauses related to sanctions in trade transactions has become a problematic issue for banks involved in international trade, and particularly in letters of credit. The ICC Commission on Banking Technique and Practice therefore has decided to draw the attention of the trade finance community to the use and impact of sanction clauses.

With these guidelines, ICC’s primary intention is to make practitioners aware of the need to be careful in their choice of counterparties or service suppliers and to emphasize that it is their responsibility to ensure that they do nothing that brings into question the irrevocable nature of the credit or guarantee, the certainty of payment, or the intent to honor obligations.

Banks have increasingly begun including sanction clauses in transactions because they are concerned about the implications of sanctions for their own obligations and trade related transactions. In letter of credit transactions, where sanction clauses give the issuer discretion whether or not to honor, they put in question the independent nature of the letter of credit and its irrevocability.
 

A copy of the guidelines is attached.

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 The Associated Press reported earlier today that,  in a letter written to Swizz parliamentarians,  UBS AG said that   the U.S. Internal Revenue Service has collected information on the cross-border activities of about 20 Swiss banks in the course of its amnesty program for American tax evaders.

The letter was written to urge the Swizz lawmakers to  approve a treaty between Switzerland and the United States on improving cooperation on tax evasion matters.

The Zurich-based bank wrote that "the risks for the Swiss financial center and the economy as a whole if parliament were to withhold its approval are very considerable."
 

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In Nareerux Import Co Ltd v Canadian Imperial Bank of Commerce , the Ontario Court of Appeal did not allow an issuer of a letter of credit to refuse payment based on the beneficiary's non-compliance with the letter of credit's terms and conditions when the issuing bank has knowingly contributed to, or acquiesced in, the circumstances that undermined the prospect of strict compliance.

Thai Fisheries Co Ltd accepted letters of credit from Canadian Imperial Bank of Commerce in order to ensure payment for shipments of large quantities of Thai shrimp to Douglas R Robertson International Inc in the United States. Ultimately, the shrimp was to be sold by Robertson to Sam's Club.

Thai Fisheries and the bank agreed to include the following provision in the letters of credit:
"Payment of drafts or drafts drawn hereunder will be effected when accompanied by required documents and after receipt from the applicant of a signed purchase order(s) issued by Sam's Club and related delivery receipt(s) showing container number(s), number of cartons and evidencing that goods have been received by Sam's Club Distribution Centre(s)."
 

Robertson failed to deliver the receipts from Sam's Club to the bank and as a result Thai Fisheries did not receive payment for substantial amounts of shrimp supplied. However, the proceeds of sale were used by Robertson to reduce his line of credit at the bank. The bank was informed that Robertson may have been withholding the required documents and that there would be no further shipments to Sam's Club. Thai Fisheries was not advised of this information for more than a year thereafter.

The appellate court refused to allow the bank to rely on the defense of non-compliance when its own conducgt contributed to the noncompliance. The appellate court noted that the bank was aware that no receipts were produced for US$6.9 million of shrimp delivered by Robertson to Sam's Club, and that shrimp was being sold to purchasers, other than Sam's Club, that should have been subject to the requirement of producing receipts. The bank failed to bring this information to Thai Fisheries' attention and continued to accept the proceeds of sale to reduce Robertson's line of credit. The court upheld the trial judge's decision and held that the bank's conduct was correctly characterized as a direct breach of the principle of autonomy underpinning letter of credit transactions and as a breach of the bank's implied duty of good faith.

In finding that the bank had breached the guiding principle of autonomy, the court held that:
"Letters of Credit by the issuer and its customer as a tap for payment, depending upon when the Bank and its client wanted to effect such payment - in order to better their own positions vis-à-vis each other as debtor and creditor - nullifies the entire autonomy principle and the independent role required of the Bank under the Letters of Credit."

The court also noted that the bank had violated its implied duty of good faith and and also had failed to give timely notice of its dishonor.

Practice pointer – The beneficiary should never had accepted a letter of credit where it did not control the ability to submit compliant documents.
 

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As Dennis Berman reported in the Wall Street Journal, the French appear to have bested Tim Geithner when the Federal Reserve agreed to the full payment demands of France's bank regulator and two of AIG's largest creditors, Société Générale SA and Calyon Securities, a unit of Crédit Agricole SA., as part of its bailout of American International Group Inc.

The French banks and the regulator, known as the Commission Bancaire,won the day by arguing that the bank executives could be criminally liable for accepting a discount on their contracts. While true in the abstract, "their argument was very overstated," said Pierre-Henri Conac, a University of Luxembourg law professor and a director of France's oldest corporate-law review. "Banks give haircuts every day." Their refusal was crucial, as it helped set the tone for U.S. banks, including Goldman and Merrill, to resist negotiation.
 

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Nathan Vardi reported in Forbes.com that  Credit Suisse reached an agreement with the U.S. Government and the Manhattan District Attorney’s Office to pay $536 million in monetary penalties, the largest of its kind, in connection with violations of the International Emergency Economic Powers Act and New York State law.

According to the U.S. government and the Manhattan District Attorney's Office, Credit Suisse became one of the main conduits for Iranian banks and financial firms to gain access to the U.S. banking system.  Credit Suisse first started dealing with rogue regimes that were sanctioned by the U.S. government in 1986, when the Zurich-based bank began to assist Libyan customers in evading sanctions by executing payment orders without stating their names, according to U.S. authorities. Later Credit Suisse started to refine its methods, processing payments for clients in sanctioned countries with payment messages that concealed the identity of customers by using false codes. Credit Suisse did this kind of business for other clients in countries that faced U.S. sanctions, including Sudan, Libya, Burma, Cuba, and Charles Taylor's Liberia, the Treasury Department says. But Credit Suisse's biggest rogue clients were in Iran, who as the years went on had to deal with enhanced U.S. sanctions. Credit Suisse employed elaborate procedures for altering payments to hide the involvement of sanctioned Iranian clients from U.S. banks involved in transactions, including stripping out the names of sanctioned parties from payment instructions. Upon request, Credit Suisse not only omitted Iranian bank customer names and identification codes from payment messages sent to U.S. correspondent banks, the Swiss bank also used cover payment messages, eventually doing so for Iranian clients 95% of the time. Then Credit Suisse's employees went into overdrive. With the global financial system cracking down on illicit transactions, Credit Suisse's "specially designated payment team," as it liked to call itself, started to manually review all payments involving Iran before they were sent to U.S. financial institutions, removing any Iranian reference. The time-intensive method was then marketed to sanctioned clients as a special service and subsequently improved with several additional procedures in the face of new money laundering regulations. Credit Suisse provided clients with a pamphlet explaining how they could evade detection.

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 Argentine President Cristina Fernandez de Kirchner has authorized the Economy Ministry to carry out a swap of $20 billion of defaulted debt, paving the way for the nation’s first international bond sale since 2001. The president also allowed the issuance of as much as $15 billion of bonds in U.S. markets as part of the plan to exchange the defaulted debt, according to a decree published in today’s official gazette.Access to debt markets would help Fernandez to maintain government spending ahead of presidential elections in 2011 even as growth in tax revenue slows. Lawsuits from creditors who rejected a 2005 restructuring offer tied to the $95 billion default are preventing the government from selling bonds abroad. An Economy Ministry official said yesterday that today’s decree was needed before filing details of the swap offer with the U.S. Securities and Exchange Commission. The government plans to submit the swap to U.S. regulators by next week and expects to disclose details of the offer in January once the SEC approves it, the official said on condition he not be identified in accordance with government policy.

On the litigation front, several hedge funds, Aurelius Capital Master, Ltd., Aurelius Capital Partners, LP, and Blue Angel Capital I LLC hold final money judgments against Argentina totaling more than $553 million, excluding post judgment interest.  In early 2009 they sought to enforce their judgments against Argentina's rights under a November 2001 trust contract to receive defaulted interests in Global Bonds that Argentina issued in New York through a Fiscal Agency Agreement. Judge Thomas P. Griesa of the U.S. District Court for the Southern District of New York issued temporary restraining orders with respect to these assets and converted the orders into preliminary injunctions 20 days later. In early November, 2009, the Second Circuit keep the injunction in place but remanded the case to Judge Griesa for further fact finding and on November 19, 2009, he issued additional findings of fact continuing the preliminary injunction to preserve the status quo while the court determines plaintiffs' right to a turnover order.

The creditors were not so fortunate in a companion case, Aurelius Capital Partners, LP v. Republic of Argentina, 584 F.3d 120 (2nd Cir. 2009), which held that the hedge funds could not execute against recently nationalized Argentine pension fund assets held in the U.S. 
 

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