U.S. banks and their foreign branches, as well as U.S. branches of foreign banks, are prohibited by law from cooperating with the Arab-led boycott of Israel.
Though the antiboycott proscriptions were implemented in the late 1970s, recent Commerce Department enforcement actions show that risk exposure for banks has risen significantly. This is clear from the pace of enforcement activity and the severity of penalties imposed.
Under Commerce Department regulations, banks are not permitted to "pay, honor, confirm, or otherwise implement a letter of credit" that contains a condition relating to the boycott.
And banks also must report - within specified time periods - the receipt of any letter of credit containing such a condition.
$10,000 per Offense
Failure to abide by either rule is punishable by a civil fine of up to $10,000.
Moreover, each act of implementation, such as an individual payment, constitutes a separate violation that's subject to a fine of up to $10,000.
Though rarely assessed, there are penalties for more serious antiboycott violations.
Penalties include denial of the violator's right to engage in export transactions (including participation in export financing activities). And for a knowing violation, a bank is subject to a criminal fine of up to $50,000, with imprisonment for up to five years.
One example of a major enforcement action ended in a consent agreement in October 1991.
The New York branch of the Commercial Bank of Kuwait agreed to pay a fine of just over $383,000 to settle a case. The Commerce Department charged that the bank was late in reporting the receipt of letters of credit that violated antiboycott regulations.
The agency's Office of Anti-boycott Compliance charged that from 1986 to 1988 the Kuwait bank's branch had received 146 such letters of credit and failed to report them.
The letters of credit were all allegedly issued by banks in Kuwait, and they all allegedly contained statements to the effect that documents indicating the use of Israeli goods would not be accepted.
This was the largest fine paid to date for violations involving solely a failure to meet the antiboycott reporting requirements.
Although the amount paid for each late reporting charge (approximately $2,600) was well below the $10,000 maximum, it was well above the usual fines previous failure-to-report cases.
A Special Category
In this regard, it is worth noting that the Office of Antiboycott Compliance expects banks and other "export specialists" to meet a higher standard of compliance than most businesses. The office consequently makes a practice of assessing higher penalties per violation against such "specialists."
The second recent enforcement action also ended in a consent agreement.
In August, the New York branch of the India-based Bank of Baroda agreed to a fine of just over $500,000 to settle an enforcement action. (Though based on data Baroda supplied about its financial condition, the Commerce Department agreed to reduce the fine to $275,000 provided that the payment was received within 30 days.)
One Case, Many Violations
The bank was charged with 41 violations of the prohibition on implementing proscribed letters of credit and 46 violations of the requirement to report receipt of such letters of credit.
The letters of credit were allegedly issued by affiliated banks in the United Arab Emirates and Oman between 1986 and 1989. The documents allegedly contained conditions that required the absence of Israeli goods be certified or precluded the use of any blacklisted insurer or negotiation by any blacklisted bank.
Typically, the government seeks to impose the maximum penalty per violation - $10,000 - against banks that violate the prohibitions.
Moreover, under revised penalty guidelines, failures to report will typically involve a minimum penalty of $2,000 per violation. The government followed these policies to the letter in arriving at the original fine against Bank of Baroda.
What to Avoid
The regulations define "implementing" a proscribed letters of credit as:
* Issuing or opening a letter of credit at the request of a customer.
* Honoring one by accepting it as a valid instrument of credit. * Paying a draft or other demand for payment under it. * Confirming that letter of credit.
* Negotiating a letter of credit by purchasing a draft and presenting it for reimbursement.
On the other hand, a bank does not "implement" a proscribed letter of credit if it simply:
* Advises a beneficiary of the existence of the document.
* Takes ministerial actions to dispose of it.
* Undertakes to remove (or assists the beneficiary in removing) the outlawed provisions from the letter of credit.
And finally, a bank is not prohibited from implementing a proscribed letter of credit where either the transaction to which the document relates falls entirely outside the domestic or foreign commerce of the United States or the beneficiary is not a U.S. bank, its foreign branch, or the U.S. branch of a foreign bank.
Presumptions by Government
For a letter of credit implemented in the United States, there is a rebuttable presumption that it applies to a transaction in United States commerce and is in favor of a U.S. beneficiary when the letter of credit specifies a U.S. address for the beneficiary.
Similarly, for a letter of credit implemented outside this country, there is a rebuttable presumption that it applies to a transaction in U.S. commerce. It is also assumed to be in favor of a U.S. beneficiary when it specifies a U.S. address for the beneficiary, indicates shipment from the United States, or otherwise indicates that the goods are of U.S. origin.
Regardless of whether a bank implements a proscribed letter of credit, it must report the receipt of one to the Commerce Department if it was received in connection with a transaction that is in the domestic or foreign commerce of the United States.
Deadlines for Reporting
Where the person receiving the letter of credit is a "United States person" - which includes a U.S. bank, its foreign branch, and the U.S. branch of a foreign bank - located in this country U.S., the report must be post-marked by the last day of the month following the calendar quarter in which the letter of credit was received.
Where the person receiving the request is a "United States person" located outside the United States, an extra month is allowed to mail the report.
Each report must be accompanied by two copies of the portions of the letter of credit containing the boycott-related provisions, and must indicate what action the bank has taken or intends to take.
All reports and accompanying documents are available for public inspection.
The reporting bank may, however, protect confidential business information from public disclosure. Such confidential information would include the foreign consignee and the articles, materials, or supplies involved in the transaction.
In light of the increasingly stringent enforcement climate, it is vital for banks to institute and maintain careful compliance procedures to identify proscribed letters of credit and to report their receipt in a timely fashion.
If violations are discovered by a bank or if a bank becomes the target of an investigation, or is charged with a violation it is important to do a thorough internal assessment of the range of exposure.
A bank also should plan carefully the level and nature of contacts with the Department of Commerce, and to take prompt and effective action to prevent similar problems from occurring in the future.
It is not safe to assume that a voluntary disclosure of violations, the "technical" nature of the violations, or one's status as a first-time offender will lead to the imposition of only nominal penalties.
Nor is it safe to assume that criminal enforcement or export denial penalties will remain as rare as in the past.
And any strategy for addressing antiboycott violations must take careful account of the political and public relations consequences of contesting antiboycott charges - and of the considerable leverage that the government obtains from the strong desire of most corporate violators to resolve such charges as quickly as possible.