The implementation of robust anti-bribery and corruption and anti-money laundering (AML) measures in international trade, could threaten the certainty traditionally inherent in letters of credit (L/Cs) according to lawyers.

Four legal experts at King & Wood Mallesons argue that it is clear and well established that the fraud exception principle applies to fraud within L/C documentation, but it is becoming increasingly unclear whether wider compliance requirements under AML legislation will mean that bankers may in the future have to refuse L/C business for a wider range of reasons.

Due diligence

To protect against this increasingly uncertain environment, the lawyers recommend that the most fundamental strategy is a robust and fulsome due diligence process at the L/C application stage.

In an extensive article, the lawyers – Justin McDonnell, Jane Menzies, Darren Roiser and Patrick Schmidt – suggest that banks need to verify the identity of an L/C applicant and be aware of the countries, goods and counterparties involved in a transaction.

Advances in technology and screening have made this process more exhaustive but not necessarily simpler from an operational perspective.

Careful monitoring

If due diligence procedures identify issues of high risk, banks should carefully monitor the transaction.

While an issuing bank’s insight may be limited, continuous review of new parties, locations and goods specified in documents presented under an L/C provides a means of ongoing due diligence.

AML declaration

Finally, banks might consider requiring an AML declaration to be presented as a condition of an L/C.

This, the lawyers say, would create a mechanism to refuse payment based on the fraud exception.

The full article can be found here.

Categories: Trade Based Financial crimes News