1

1
(No Transcript)
2
John Baranello
Director Deutsche Bank AG The Effect of Recent
Initiatives On Letters of Credits
Presented at the Bankers Association for
Finance and Trades14th Annual Conference on
International Trade The Pace Quickens November
4-5, 2004The Hotel InterContinental, Chicago, IL
3
Letters of Creditsa traditional business.
Goods / Services
Buyer Applicant
Seller Beneficiary
Contract
Letter of Credit Application
D o c u me n t s

Amendment Request

Letter of Credit
Amendment
Documents
Letter of Credit
Issuing Bank
Amendment
Advising / Confirming Bank
Documents

with Banks in the middle.Dealing with our
own Client Import transactions or, Dealing
with the U.S. based Corp. and a Foreign Bank
Export transactions
4
The UCP 500

• The Uniform Customs and Practice for Documentary
  Credits 1993 Revision in force as of January 1,
  1994
• Issued by the International Chamber of Commerce
  (ICC) - first published in 1933.
• Each Partys role, responsibilities and
  liabilities, are clearly defined in 49 Articles.
• back in the day
• Article 4 all parties deal only in documents
• Article 13- face value of documents only
• Article 7 Advising Bank responsible for
  authenticity only
• Cash was King
• .back to the future
• Article 18 the applicant (buyer) is bound and
  liable for all obligations imposed by foreign
  laws and usages.

5
Money Laundering Overview

• Is the facilitation of criminal activities by
  legitimizing funds derived through illegal
  activity by concealing the true origin of the
  funds
• Is estimated to involve 3 trillion a year,
  making it the third largest industry worldwide,
  behind oil and foreign exchange
• Involves far more than just depositing large
  amounts of cash in banks it can be carried out
  through intricate networks of loans, letters of
  credits, wire transfers and shell companies
• If conducted successfully, enables criminals to
  maintain control over their criminally derived
  funds, which they may use to further their
  criminal activities
• Enables criminals to establish front companies,
  used to launder their money, often without regard
  to profitability, which can undermine legitimate
  competitors who need to make a profit, thereby
  upsetting healthy economic competition

6
Anti-Money Laundering Overview
The September 11, 2001 terrorist attacks, as well
as many others before and since then, have
galvanized worldwide anti-terrorism financing and
anti-money laundering efforts. Many governments
have strengthened their anti-money laundering and
anti-terrorism laws and are applying increasing
pressure on all financial institutions to detect
and prevent money laundering and the financing of
terrorism. Financial Institutions have an
obligation to be vigilant and to comply with all
anti-money laundering and anti-terrorism laws, as
this protects national interests and preserves
our reputation in the Institution in the
marketplace.
7
The USA PATRIOT Act
On October 26, 2001, President Bush signed the
Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and
Obstruct Terrorism (USA PATRIOT) Act. Title III
of the Act, the International Money Laundering
Abatement and Anti-Terrorist Financing Act of
2001, contains a number of sections that have
anti-money laundering and anti-terrorism
financing implications for financial institutions.
8
The USA PATRIOT Act

• This act enhances Americas ability to combat
  money laundering and terrorist activities. Some
  of the major requirements of the act include
• Requiring the implementation of AML Compliance
  programs by a broadly defined class of financial
  institutions
• Establishing standards for Customer
  Identification Programs
• Delineating Enhanced due diligence and
  information to be collected on Private Bank and
  Correspondent Bank relationships for non-U.S.
  persons
• Prohibiting U.S. banks from maintaining
  relationships with shell banks
• Providing for increased information sharing
  between and among financial institutions, law
  enforcement, and regulatory agencies

The USA PATRIOT Act stands for the United and
Strengthening America by Providing the
Appropriate Tools Required to Intercept and
Obstruct Terrorism Act
9
Customer Identification Program

• 326 - Verification of Identification
• Purpose
• To enable the firm to form a reasonable belief
  that it knows the true identity of the customer
• Requirements
• Visit the customer
• Verify customers identity
• Risk-based approach
• Applicable to customers who open a new account
• Procedures will apply the next time an existing
  customer opens a new account
• Verify identity
• Minimum identifying information
• Name
• Addresses
• Tax identification number

10
Customer Identification Program

• Non-documentary verification methods
• Review fraud databases
• Check third party credit report
• Check references
• Check for logical consistency
• Recordkeeping
• Records used to verify identify
• Documents obtained from customer
• Other documents or information relied upon
• Methods relied upon
• Records used to resolve discrepancies
• Five years past the life of the account

11
Foreign Banks

• What is a Foreign Shell Bank?
• Foreign bank
• Lacks a physical presence
• Fixed address
• Employees
• Banking records
• Authorized in location
• Subject to inspection
• Exception for Regulated Affiliate
• Recordkeeping
• Certifications from all foreign bank customers
• Certifications that
• Not a foreign shell bank
• Not using the account to provide services to
  foreign shell banks
• Identifying agent for service of process
• Identifying owners
• Check for consistency
• Re-Certification after 3 years

12
Special Due Diligence

• Correspondent Accounts - Enhanced due diligence
  for foreign financial institutions
• Operating under an off-shore license
• Operating under a license from country designated
  by Treasury as warranting special measures due to
  money laundering concern
• FATF non-cooperative country or territory

Cook Islands Indonesia Myanmar
Nauru Nigeria Philippines

• Required to check.

13
Office of Foreign Assets Control

• The Office of Foreign Assets Control
  ("OFAC") of the US Department of the Treasury
  administers and enforces economic and trade
  sanctions based on US foreign policy and national
  security goals against targeted foreign
  countries, terrorists, international narcotics
  traffickers, and those engaged in activities
  related to the proliferation of weapons of mass
  destruction. OFAC acts under Presidential wartime
  and national emergency powers, as well as
  authority granted by specific legislation, to
  impose controls on transactions and freeze
  foreign assets under US jurisdiction. Many of the
  sanctions are based on United Nations and other
  international mandates, are multilateral in
  scope, and involve close cooperation with allied
  governments.

14
Sanctions Programs and Involved Countries

• Balkans, Burma (Myanmar), Cuba, Iran, Iraq,
  Liberia, Libya,
• North Korea, Sudan, Syria, Zimbabwe, and
• Specially Designated Nationals (SDNs),
• Specially Designated Terrorists (SDTs),
• Specially Designated Global Terrorists (SDGTs),
• Specially Designated Narcotics Traffickers
  (SDNTs),
• Foreign Terrorist Organizations (FTOs),
• Blocked Persons,
• Certain Named Ocean Vessels,
• Certain Diamond Traders,
• Nonproliferation Weapons of Mass Destruction
  Trade Controls
• Terrorism Sanctions Regulations,
• Terrorism List Governments Sanctions Regulations
  (Syria)

15
Politically Exposed Persons

• Politically Exposed Persons". The term
  Politically Exposed Persons ("PEPs") applies to
  those individuals who perform public functions
  for a government or administrative body, members
  of ruling royal families, as well as influential
  people in religious organizations that have a
  sphere of influence over political, military or
  judicial matters. The PEPs list includes persons
  who are currently or have formerly occupied their
  position within the past three years. Also of
  regulatory significance are the family and close
  associates of Politically Exposed Persons.

16
Denied Persons List Unverified List Entity
List

• The Bureau of Industry and Security (BIS) of
  the U.S. Department of Commerce is responsible
  for the regulation of exports for national
  security, foreign policy, and nonproliferation
  reasons, as well as the enforcement of those
  regulations. BIS's Export Enforcement program
  seeks to prevent the illegal export of dual-use
  items before they occur investigate and assist
  in the prosecution of violators of the Export
  Administration Regulations (EAR) and the Fastener
  Quality Act (FQA) and inform and educate
  exporters, freight forwarders, and manufacturers
  of their enforcement responsibilities under the
  EAR and FQA.

17
Weapons of Mass Destruction (WMD) Trade Control
Regulations

• In 1994, an Executive Order was issued in
  the United States to impose an import ban on
  foreign persons determined to have engaged in
  activities related to the proliferation of
  weapons of mass destruction. These regulations
  prohibit the direct or indirect importation of
  any goods, technology, or services into the
  United States that were produced or provided by
  the foreign persons designated in this list.

EU Consolidated List The European Union (EU)
has released a consolidated list of persons,
groups and entities subject to Common Foreign
Security Policy (CFSP) related financial
sanctions. This database is maintained by the EU
to assist the members of the EU Credit Sector
Federations in their compliance with financial
sanctions.
18
Suspicious Activity Reporting (SAR)

• FINCEN - Financial Crimes Enforcement Network
• Link between law enforcement, financial and
  regulatory communities.
• Foster interagency and global co-operation as
  well as collection, analysis, and sharing
  information
• Network to support and strengthen domestic and
  international anti-money laundering efforts.
• Central repository for reporting criminal
  activity and suspicious activity,
• To help detect and prevent fraud and,
• Identify trends and patterns
• File 30 days from occurrence
• Records to be stored for 6 years
• if you know, suspect or have reason to
  suspect
• Customer or Beneficiary furnishes unusual
  or suspicious identification documents, is
  unwilling to provide personal background data,
  or
• Exhibits a substantial lack of concern regarding
  risks, commissions, transaction costs, the UCP
  500, title to the goods
• Requests the transfer of funds or investments to
  third parties
• For no apparent reason, a customer maintains or
  opens multiple accounts and regularly transfers
  assets between them
• Deposits or receives funds, followed by an
  immediate instruction to deliver funds to third
  party
• Transaction value irrelevant or not consistent
  with the market

19
preventing Letter of Credit Money Laundering

• We must ensure that the transaction conducts is
  within the scope of their respective business and
  their credit approval.
• We must establish the economic beneficiary of the
  transaction and verify that the transaction is
  within the scope of their usual business.
• Enter into no transaction that involves cash.
• Peculiarities of the Customers financial and
  business situation.
• Purpose and Type of Transaction.
• The beneficiary or purchasing agent is reluctant
  to offer information about the end-use of the
  item.
• The products capabilities do not appear to fit
  the buyers line of business, such as an order
  for sophisticated computers for a small bakery.
• The item ordered appears to be incompatible with
  the technical level of the country to which it is
  being shipped, such as semiconductor
  manufacturing equipment being shipped to a
  country that has no electronics industry.
• Chemicals, Weapons, Ammunition, Chemical Weapons,
  Computers, Computer Products, Fertiliser,
  Technology and any other unfamiliar products
  
• All Letters of Credits must have a complete goods
  or services description in order that you may
  ascertain that they comply with your credit
  policy and U.S. Department of Commerce's
  Regulations.

20
Fraud/ScamKey Phrases/Buzz Words

• Banking Coordinates
• Buy-Sell
• Cash Wire Transfer
• CF ASWP
• Comfort Letter
• Conditional Swift Payment
• CUSIP Number
• Cutting House
• ICC Investment Program
• ICC Promissory Notes
• ICC 322 Program
• ICC 3039/3034
• International Certificate of Deposit (ICD)
• Irrevocable Bank Purchase Order (IBPO)

• Discounting L/Cs
• Due 1, 5, or 10 years and 1 day
• First-cut Paper
• Fresh-cut paper
• Foreign Bank Advice
• Good, clean, cleared funds
• Good, clean, cleared funds of non-criminal origin
• Irrevocable, Divisible, Assignable, Transferable,
  Fractionable, Revolving, Confirmed Credit Payable
  100 at Sight
• Key Tested Telex (KTT)
• Mandate
• Market to Buy or Sell Credits

21
More Key Phrases/Buzz Words

• Middleman
• Non-circumvention
• or, Non-disclosure Agreement
• Prime Bank Financial Instrument
• Prime Bank Guarantees
• Prime Bank Notes
• Prime World Bank
• Proof of Funds
• Proof of Product
• 2 Performance Bond
• Validation of the MCC (Master Collateral
  Commitment)
• Verbiage
• With Full Bank Responsibility
• Zero-Coupon Letter of Credit

• Ready, Willing and Able
• (R,W, A)
• Roll Program
• Secondary Market
• (in letters of credit, prime bank notes,
  guarantees)
• Soft Probe
• Top 50 100 or any number World Bank
• Transaction Tranche
• Third Party Documents Acceptable - Article 2i
  vs. Intent vs. Who they are..
• Seeking our Letter Head, or name dropping

22
United States Anti-boycott Compliance
www.bxa.doc.gov/AntiboycottCompliance/Default.htm
[phone]

• During the mid-1970's the United States adopted
  legislation that seek to counteract the
  participation of U.S. citizens in other nations
  economic boycotts or embargoes.
• These laws have a daily impact on Letters of
  Credits
• The Ribicoff Amendment to the 1976 Tax Reform
  Act,
• The 1977Anti-boycott Amendments to The Export
  Administration Act (EAA), and,
• Export Administration Regulations (EAR)
• Requiring United States Persons to
• To oppose restrictive trade practices or boycotts
  fostered or imposed by foreign countries against
  other countries friendly to the U.S.
• To encourage or require U.S. firms to refuse to
  participate in foreign boycotts that the U.S.
  does not sanction.
• To prevent U.S. persons from being used to
  implement foreign policies of other nations which
  run counter to U.S. policy.

23
Primary Impact

• The Arab League boycott of Israel is the
  principal foreign economic boycott which impacts
  U.S. companies.
• Each of the following is currently a member of
  the Arab League
• Algeria, Bahrain, Iraq, Jordan, Kuwait, Lebanon,
  Libya, Mauritania, Morocco, Oman, Qatar, Saudi
  Arabia, Somalia, Sudan, Tunisia, United Arab
  Emirates, Yemen, Egypt, Palestine, Syria,
  Cosmoros and Djibouti.