Payments currency exchange controls

1
Paymentscurrency exchange controls

• Various national restrictions on currency
  exchange for
• - the protection of the currency
• - statistical purposes
• - combat financing of crime (esp. CFT,
  counter financing of terrorism) and money
  laundering (AML, anti-money laundering)
• IMF (188 countries, 2012)
• Main purposes
• Exchange rate stability
• Liberalization of payments and transfers for
  current transactions
• Member states limit their monetary sovereignty in
  exchange for benefits of membership
• Quota (subscription) of each member is based on
  its size in the world economy

2
IMF Agreement currency exchange controls

• art. VIII (2) (a) IMF-Agreement
• in principle (i.e. unless approved by the IMF)
  prohibition of restrictions on international
  payments and transfers for current transactions.
• This implies the following obligations for member
  states
• allow citizens to pay current transactions with
  national currency or to purchase foreign currency
  for such payments
• allow non-citizens having received payment in
  national currency to use it for payment of
  current transactions
• where necessary for current transactions,
  exchange national currency held by another state
  for foreign currency or SDR
• Does not affect restrictions on capital movements
  (v. free movement of capital in the EU)

3
IMF-Agreement currency exchange controls

• Restrictions compatible with Art. VIII IMF
• No current transaction (transfers of capital) or
• Approval by the IMF (only if necessary and
  temporary) (art. VII (3)(b) scarcity
  transitional rule for existing restrictions in
  XIV (2)).

4
IMF-Agreement currency exchange controls

• Effects art. VIII (2) (b)
• where the restriction is consistent with the
  IMF Agreement, exchange contracts involving the
  currency of a member state and contrary to its
  excange control regulations are unenforceable in
  all IMF Member States.
• gt A priority rule irrespective of the applicable
  lex contractus
• Cfr. art. 9, 3 Rome-I-R. Effect may be given
  to the overriding mandatory provisions of the law
  of the country where the obligations arising out
  of the contract have to be or have been
  performed, in so far as those overriding
  mandatory provisions render the performance of
  the contract unlawful.

5
IMF-Agreement currency exchange controls

• art. VIII (b) where the restriction is
  consistent with the IMF Agreement, exchange
  contracts involving the currency of a member
  state and contrary to its regulations are
  unenforceable in all IMF Member States.
• Questions of interpretation of the terms
• - exchange contract restrictive interpretation
  in UK US only a monetary deal in currencies
  other countries use a wider interpretation.
  Countertrade is never an exchange contract.
• - involving the currency restrictive v. wide
  interpretation
• - exchange control regulations not regulations
  with a different purpose
• - compatibility opinion of the IMF should be
  asked
• - unenforceable effect upon the contract
  depends on contract law.

6
international law currency exchange controls

• Currency exchange restrictions imposed by
  international law
• in case of economic sanctions decided by the UN
  Security Council
• including sanctions against terrorists and
  terrorist organisations.

7
money of account/of payment

• Money of account currency used to express the
  price
• gt price goes up and down with the money of
  account, but nominally unchanged principle of
   nominalism 
• According to contract law, debtor may always pay
  in the currency of account
• Several reasons why payment could be made in a
  different currency next slide

8
Money of account/of payment

• Several reasons why payment could be made in a
  different currency, i.e. the payment currency
  (being the currency of the place of payment)
• If payment in foreign currency is prohibited at
  that place (exchange controls)
• If according to local law the debtor is entitled
  to pay in local currency and prefers to do so
  (local payment rule) local currency can be
  excluded by an  effectivo -clause (see infra
  6.1.9 (1) (b))
• Courts normally render judgments in local
  currency only
• Compare art. 6.1.9. Unidroit PICC
• (1) If a monetary obligation is expressed in a
  currency other than that of the place for
  payment, it may be paid by the obligor in the
  currency of the place for payment unless (a) that
  currency is not freely convertible or (b) the
  parties have agreed that payment should be made
  only in the currency in which the monetary
  obligation is expressed.
• (2) If it is impossible for the obligor to make
  payment in the currency in which the monetary
  obligation is expressed, the obligee may require
  payment in the currency of the place for payment,
  even in the case referred to in paragraph (1)(b).
  

9
Money of account /of payment

• When payment currency ? account currency gt issue
  of (date and place of) conversion
• Contract may contain rules for conversion
  (determine date and place)
• National law varies in respect of date of
  conversion payment date v. breach date v.
  conversion at breach date plus additional damage
  for depreciation
• UPICC 6.1.9.
• (3) Payment in the currency of the place for
  payment is to be made according to the applicable
  rate of exchange prevailing there when payment is
  due.
• (4) However, if the obligor has not paid at the
  time when payment is due, the obligee may require
  payment according to the applicable rate of
  exchange prevailing either when payment is due or
  at the time of actual payment.

10
Protection against currency exchange risks

• Three techniques of protection against exchange
  risks
• 1 Maintenance of value clauses different forms
• - Relating the price to (the value of) a foreign
  currency
• Traditionally often gold (gold value clause)
  no longer important and in Treaties now usually
  replaced by SDR (special drawing rights, standard
  created by IMF in 1969), a monetary  basket  of
  4 currencies (last update as from 1 January 2011
  41,9 US , 37,4 EU , 9,4 JP and 11,3 UK
  ). 1 SDR on 1-1-2011 0,423 Eu, 0,66 US ,
  0,111 UK , 12,1 JP . (next revision in 2015)
• Currency option clauses (unilateral option)
• Relating the price to a specific index (esp.
  domestic contracts)
• Price revision clauses
• 2 Exchange rate insurance in most countries
  only available with public agencies

11
Protection against currency exchange risks

• 3 Hedging transactions cover the risk with a
  countertransaction
• within the company or group by matching
  (balancing income and expenditure in the same
  currency)
• Forward exchange contract creditor sells to a
  bank an amount of the foreign currency
  (corresponding to the debt) for a sum in its own
  currency at a forward exchange rate (or
  vice-versa for a debtor).
• Cross-currency swaps between two creditors
  (exchange of currency with a period of time at an
  agreed interest rate)
• Bank accounts in foreign currency
• Loan by a creditor of foreign currency which is
  immediately converted into domestic currency (or
  vice versa a foreign currency deposit by a
  debtor)
• Currency futures (contract to sell buy a given
  currency at a fixed price at a specified future
  date)
• Currency options contracts (call options right
  to buy put option right to selll) the option
  itself is bought at a price ( premium  )
• NB. Such contracts traditionally made  OTC 
  but see Reg. 648/2012 on OTC derivatives, central
  counterparties and trade repositories

12
Payment instruments

• Payment instruments
• Negotiable instrument with abstract obligation
  Bills of exchange and promissory notes
• Negotiable instrument without acceptance cheque
• No negotiable instrument credit card, money
  transfer (giro), documentary letter of credit,
  etc.)
• Often variations on delegatio solvendi. General
  characteristics
• Creditor who accepts such instrument (as its
  beneficiary), must first use the instrument
  (original right to payment suspended)
• Payor who delegates payment to the delegated
  debtor (issuer of instrument) disposes of its
  right against the delegated debtor (its right is
  also suspended)

13
Negotiable instruments in general

• Negotiable instruments - Mainly 2 functions
• 1 For all negotiable instruments transfer of
  the right by transfer of the document ( Das
  Recht aus dem Papier folgt das Recht am
  Papier ), thus
• - NI incorporating right to performance no
  notification of the debitor cessus necessary
• - NI incorporating property in a thing no
  notification to bailee necessary
• 2 Possible additional function of NI
  incorporating a right to payment abstraction of
  the obligation
• at least formal abstraction (reversal burden of
  proof), even between original parties
• substantive abstraction (in relation to third
  party)

14
Bills of exchange promissory notes

• Promissory note
• Unconditional promise to pay a sum of money
  (direct promise ( recta ), not drawn)
• In a document to bearer or to order
• Transferable (without limits) (if to order,
  transfer requires an endorsement)
•  Abstract  after transfer of the note, the
  promisor cannot raise any defence from the
  underlying relationship (provision relationship)
  against the holder of the note
• See art. 75 and ff. Geneva Convention ( 75 ff.
  Belgian Statute on Bills of Exchange and
  promissory notes)

15
Bills of exchange

• Bills of exchange
•  Draft , i.e. drawn instrument the drawer
  draws a bill (draft) on a drawee which he
  delivers to a payee (first beneficiary of the
  bill)
• The bill is a document which
• - is explicitly named bill of exchange (or
  draft) and
• - mentions the sum to be paid (unconditionally)
  and
• - the date of maturity (form requirements)
  (art. 1 2 Geneva Law)
• The bill implies an order to pay given by drawer
  to drawee - to pay the holder a certain sum at a
  future fixed time.
• When the drawee accepts the instruction to pay
  (acceptance of the draft), he is unconditionally
  obliged to pay the sum at maturity (value
  maintenance clause thus impossible) (on
  acceptance, see art. 21-29 Geneva Law)

16
Bills of exchange

• Bills of exchange
• NB. Drawer can be bearer (art. 3 Geneva Law)
• Drawer is also liable towards bearer (in case of
  acceptance, liability is subsidiary to that of
  the drawee) as long as bill not accepted, drawer
  is liable for (non-)acceptance (art. 9 Geneva
  law). As to this right of recourse against the
  drawer, see art. 43 Geneva law
• Transferable (without limits) (if to order by
  endorsement) (art. 11 Geneva law)
• Every endorser guarantees (acceptance and)
  payment (art. 15 Geneva law)
•  Abstract  (see infra)

17
Bill of exchange (accepted)

• Bill of exchange

18
Bills of exchange

• Abstraction / autonomy
• - independent from provision relationship
  drawer/drawee ( abstraction ) acceptor cannot
  raise defences out of that relationship (against
  drawer abstraction is merely formal)
• - independent from valuta relationship
  drawer/payee acceptor cannot raise defences out
  of that relationship
• Bill can be  domiciled  on a bank account in
  order to simplify collection (in Belgium, this
  collection is since 1999 centralised by the banks
  in the hands of the National Bank)
• Prescription (art. 70 Geneva law)
• Against the acceptor 3 years from the date of
  maturity
• Holder against endorsers and drawer one year
  from the date of protest of of maturity
• Endorsers against each other 6 months reckoned
  from the day when the endorser paid of was
  himself sued

19
Bills of exchange

• Used in various contexts examples already
  mentioned
• mode of honouring of a letter of credit (by
  accepting a draft or by drawing a draft on a
  third party)
• client discount credit (bank purchases bills
  drawn by client of the bank on its buyers)
• endorsement to forfeiter of a bill drawn on a
  buyer (with forfeiter waivering recourse against
  the drawer,  Isabel clause )
• Comparative law harmonisation
• Mainly 2 systems common law countries v. Geneva
  Uniform Law (26 ratifications)
• UNCITRAL Convention 1987 on International Bills
  of Exchange and Promissory Notes (if the document
  explicitly refer to the Convention) but not in
  force (only 5 ratifications, 10 required)

20
Bills of exchange

• Common law countries (UCC Art. 3 lt 1896 Uniform
  Negotiable Instruments Act UK 1882 Bills of
  Exchange Act) less strict system
• Bearer is protected against all defences only if
  he acquired the bill  in due course , i.e.
  without knowledge of any claim to or defence upon
  the instrument
• In principle no protection of a holder who
  acquired in good faith from a holder without
  authority to dispose (unauthorised agent)
•  Aval  is qualified as a suretyship (dependent
  personal security)
• Geneva Law stricter system (higher abstraction)
• Defences can only be invoked against a bearer who
  acquired in bad faith (fraudulently) (art. 17
  Geneva law)
• Acquirer of possession in good faith is the owner
  of the bill
•  Aval  is a surety largely abstracted from the
  obligation of the person for whom given (either
  drawer or drawee) the only defences the aval can
  raise relate to the formal invalidity of the bill
  of exchange (see art. 30 32 Geneva Law)

21
Modalities of payment

• The contract (sale, service, ...) will - apart
  from price and currency - normally also indicate
  the modalities of payment
• If nothing else agreed concomitant performance
  (cash on delivery). Comp. 6.1.4 UPICC
• Often specific agreements
• Advance payment (in whole or part), e.g. CWO
  Cash with order, CIA Cash in advance) ( cash 
  includes money transfer, now usually an
  e-transfer)
• CAD Cash against documents D/P Documents
  against payment possible when goods are
  represented by documents (see documentary credit,
  l/c is honoured when conforming documents are
  delivered).
• Payment by means of instruments implying a
  delegation to pay (eg buyer paying with a bill of
  exchange drawn on its debtor paying with a
  cheque drawn on its bank, paying by credit card,
  ...). See 6.1.7 UPICC
• Creditor gives payment facilities, i.e. credit.
  E.g. payment after delivery and inspection,
  possibly with an extra period for payment (eg 1
  month, 90 d.)
• Credit is often granted only if the debtor
  accepts (as drawee) a bill of exhange (D/A
  documents against acceptance) or signs a
  promissory.
• Where on the contrary no payment instrument is
  delivered, but only a receipt for the goods, this
  is called  payment on open account 

22
Payment Collection procedures

• Collection procedures creditor engages one or
  more intermediaries (esp. banks) as agent to
  collect the debt
• Most commonly when
• a) collecting payment instruments (financial
  documents) delivered by the debtor to the
  creditor, such as bills of exchange, cheques, ...
  and/or
• b) documents have to be delivered to the debtor
  in exchange for payment (documents of title,
  transport documents, etc.).
• a) only  clean  collection b) (or b a)
   documentary collection 
• Parties involved
• Principal (who mandates a bank as agent)
• Remitting bank (receiving the documents from the
  principal), agent of the principal
• Collecting bank, agent of the remitting bank in
  the country of payment
• Presenting bank bank of the payor, who pays in
  return for the required documents
• And/or the debtor from whom the money is collected

23
Payment collection procedures

• Collection procedures (cont.)
• Rights and obligations concerning this
  intervention
• customs are codified by the ICC in the Uniform
  Rules for Collections (1956).
• they deal with the way banks have to handle
  documents in collection procedures
• Rights and obligations concerning the
  intervention of intermediaries (information
  duties, duty of care, calculation of costs and
  interest, ...)

24
Money transfer (giro)

• A bank can be involved as delegated debtor for a
  money transfer (giro)
• instruction to pay given (on paper, or
  electronically, ...)
• by a payor
• in favour of a payee
• results (when accepted by the bank) in a credit
  for the beneficiary (on its bank account) as mode
  of payment
• Money transfer with intervention of a single
  bank see figure (order, acceptance, performance
  by crediting account beneficiary)
• Often more than 1 bank involved sending bank,
  receiving bank

25
Transfer of money

• Money transfer

26
Money transfer (giro)

• Harmonisation ?
• UNCITRAL model law 1992 on international credit
  transfers. Contains
• - a conflict of law rule
• - rules concerning the rights and obligations of
  the parties involved (time for performance,
  liability, interest for late performance, etc.)
• Model law has inspired EC-Directive 1997/5 on
  cross-border transfers (transparency of contract
  conditions duties concerning time of
  performance, effects of instructions, ...)
• Now replaced by the SEPA-Directive 2007/64 (next
  slide)

27
Other payment procedures

• Banks may also be involved as issuer of a
  documentary l/c (supra)
• A credit card company can be involved as
  delegated debtor
• In the EU rights and obligations of parties to a
  payment service have been harmonised by the
  SEPA-Directive 2007/64 (in force since November
  2009). In 2013 Commission Proposals for a recast.
• EU law has introduced a uniform account number
  IBAN ( BIC to identify the bank)

28
Credit card payment

• Credit card

29
Payments restrictions

• Not only currency exchange but also modes of
  payment can be restricted by regulations to
  combat financing of crime and money laundering
• In 1989, an intergovernmental organisation was
  founded, the FATF (Financial Action task Force
  (on Money Laundering)), since 2001 also on
  combating terrorism financing.
• It issues
• Recommendations, recognised as anti-money
  laundering (AML) and counter-terrorist financing
  (CTF) standards.
• A Blacklist of "Non-Cooperative Countries or
  Territories" (NCCTs)
• National offices, e.g. OFAC (Office on Foreign
  Assets Control of the US Dept. of Finance)

30
Counter-trade

• Counter-trade or compensatory trade payment of
  goods (or services) with other goods (or
  services), directly (barter) or indirectly
  (linked contracts, such as reciprocal contracts
  of sale, or buy-back contracts, offset
  arrangements (eg military equipment or aircraft)
• The  counter-trade agreement  is a framework
  contract setting out matters such as
• - which goods are suitable for counter-trade
• - valuation of the goods (determination of
  price)
• - modalities of payment of the balance (time,
  currency) (often through a clearing account)
• - restriction on further sale
• - credit security, etc.

31
Counter-trade

• Uncitral Guide
• Under GATT ?
• Impose counter-trade is a quantitative
  restriction, thus in principle prohibited
• Maybe allowed by virtue of a) exceptions for
  developing countries, b) exception of balance of
  payments , ...
• Obligatory counter-trade prohibited in the
  Government Procurement Agreement.