Letters Of Credit
Many of our financial institutions issue letters of credit. A letter of credit is a bank instrument actually substituting the credit of the issuing bank for the credit of another party-your customer, for instance- who may be an importer of merchandise. The seller in another country is therefore guaranteed the purchaser's ability to pay by their reliance on the backing of the purchaser (your customer) by your financial institution.
We've cautioned you about opening accounts for individuals or businesses that may be on the OFAC (Office of Foreign Assets Control) list of entities with whom we are forbidden to service.
We've also talked about Know Your Customer policies. Nowhere is this knowledge of any more importance than in the area that issues your letters of credit.
Failure to comply with OFAC regulations can carry a big price tag. Depending on the program, OFAC has independent authority to impose civil penalties of up to $250,000 per count, while criminal violations can result in corporate and personal fines of up to $1 million and 12 years in jail!
It is important for letter of credit operations personnel to remember that U.S. sanctions go beyond the borders of target countries such as Cuba, North Korea, Libya, Iraq, Iran, the UNITA faction in Angola, international terrorists, and narcotics traffickers. OFAC has identified and named numerous front organizations as "Specially Designated Nationals" (SDNs). OFAC's master list of "Specially Designated Nationals and Blocked Persons" contains over 5,000 entries-variations on the names of individuals, companies, vessels and banks all over the globe.
U.S. Companies, for example, cannot deal with Atlas Air Conditioning Company Ltd. in London, England because of its links to Iraq.
Banking transactions involving the Arab Bank for Investment and Foreign Trade in AbuDhabi ("ARBIFT") are frozen when they come into the possession or control of U.S. banks because of Libya's involvement in ARBIFT.
Banks cannot advise letters of credit listing Drogas La Rebaja, a major drug store chain in Colombia, as account party, because of its connection to international narcotics trafficking.
It is, therefore, critical for letters of credit professionals to be familiar with OFAC's SDN list.Before any bank issues, confirms, amends, or even advises a letter of credit, it should carefully examine the instrument for clues about potential OFAC violations, such as:
Is the account party, beneficiary, issuing bank or confirming bank blocked?
Is the underlying trade transaction prohibited?
Does the bill of lading indicate that goods were shipped by a blocked shipping company or aboard a blocked merchant vessel? (Often the name of the individual will not pop up in a letter of credit, but it is quite possible that illicit ships or shipping companies may be referenced.)
Does the certificate of origin reveal that the goods originated from a target country?
Does the invoice tip you off that a blocked company supplied the goods to the seller?
If you have reason to believe that a letter of credit involves an interest of a target country or an SDN, you must treat the letter of credit contract itself and all related documents as blocked property.
Depending on the status of the letter of credit, it may be required to debit your customer's account and block the letter of credit payment. In any case, you should perform no further services with regard to the letter of credit without authorization from OFAC. Blocked property must be reported to OFAC's Compliance Programs Division (FAX: (202) 622-1657) within 10 days.
If you have a question or need additional information or advice regarding a specific letter of credit, call (800) 540-OFAC.
Copyright © 1997 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 7, No. 10, 8/97
First published on 08/01/1997