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An occasional look at old ICC Opinions, in this case R720 (TA712rev).

Background:

• Documents were presented under a documentary credit available at 60 days deferred payment.
• At maturity, nominated bank did not receive funds from issuing bank.
• Issuing bank advised that it has been placed under ‘Temporary Administration' for six months by the Central Bank and that the regulator had appointed a state agency for stabilisation of the bank's financial situation.
• It also mentioned that the temporary administration was carrying out a revision of outstanding obligations, and other banking activities, and a decision on all documentary credit payments would be made shortly.
• Six months later, the issuing bank informed the nominated bank that new management had taken over and that it was reviewing outstanding document credit obligations.
• Subsequently, the issuing bank advised that the documentary credits were of an ‘unsecured type' without any collateral or liquidity pledge, and that the issuing bank had not carried out qualitative or quantitative risk assessment of the effected transactions.
• They further advised that half of the overdue debt was not likely to be repaid and that criminal charges were to be made against the former management in respect of money laundering.
• The issuing bank concluded that repayment of the bank's obligations under the documentary credits would only be possible after the legal review on the transactions was finalised.
• The nominated bank totally disagreed with the deferment of payment for an indefinite period and pointed out that the nominated bank had nothing to do with the mismanagement or unlawful activities by former staff of the issuing bank.
• The issuing bank was reminded of its obligations under the credit and UCP 600.
• Should the issuing bank honour its obligations under the documentary credit?
• Should the issuing bank immediately remit proceeds including interest and out-of-pocket expenses?

Analysis:

• The issuing bank had previously confirmed that the documents complied with the terms and conditions of the credit and advised the due dates in respect of each drawing made thereunder. As a consequence, the issuing bank had an obligation to honour on the due dates that were advised to the nominated bank.
• Issues relating to the circumstances under which the credits were issued, and the seeming lack of controls that existed in the issuing bank, are outside of the scope of UCP but do not detract from the obligations of the issuing bank that are created within the UCP and, in particular, article 7. It should also be noted that legal and regulatory issues are outside the control of the ICC, and the ICC cannot offer any position in this respect.
• Despite the above, it must be recognised that the involvement of the Central Bank and an appointed state agency, to oversee the bank's affairs will, as a matter of necessity, postpone or at the very least defer the payments that are due under these credits, pending finalisation of their investigation.

Conclusion:

• The issuing bank issued documentary credits and the nominated bank apparently acted in good faith in handling those transactions. There is no inference in the query that the nominated bank was aware of any issues such as those discussed in the query, i.e., money laundering.
• The issuing bank has an obligation to honour the drawings, and it must be hoped that the Central Bank and the state agency of the country of the issuing bank will do everything in their power to bring this matter to a swift conclusion, recognizing the responsibilities that befall an issuing bank under the UCP and the credit itself.
• The actions of the applicant and/or the previous management of the issuing bank should not be an influence or deciding factor over whether the nominated bank receives the proceeds of the drawings. Presuming that the nominated bank acted on its nomination, it should be reimbursed for the drawings, plus delayed payment interest at the prevailing rates. If the nominated bank did not act on its nomination, the issuing bank is obligated to pay the beneficiary who has presented complying documents.
• The question of, and determination of, losses and out of pocket expenses, will need to be proven and agreed between the issuing bank and the nominated bank.

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