Where do banking laws stop and common business practices take over?
Tricky question. Finding out the answer and setting rules accordingly is one of the main objectives of the United States Council on International Banking, the New York-based banking association.
"Law can't get into the kinds of transactional specifics that a set of industry rules can," says Daniel Taylor, the association's president.
"Anyone trying to set such laws would shy away from setting rules, because codes created by lawyers and academics don't necessarily reflect customary practices ."
Set up 70 years ago by a group of banks in New York to solve common problems with correspondent banks overseas, the association plays a little-recognized but critical role, keeping the wheels of banking rolling smoothly.
Besides helping to draft banking laws that legislators deem necessary, the association serves as a forum for arbitrating disputes that crop up.
In fact, agreeing to arbitration is one of the conditions of membership for the 370 banks that are affiliated with the organization. The council's membership is roughly half American and half foreign institutions.
Arbitration occurs, for exampie, when one bank erroneously transfers a large amount to another bank instead of to the proper recipient. In a case like this, the council would help decide how much interest, or compensation, each of the three parties involved is entitled to.
"Litigation can be very costly," Mr. Taylor observes. "The best way to resolve a dispute is by people with technical expertise in the field."
By far the bulk of the council's efforts are devoted to rules and disputes affecting commercial letters of credit, One of the oldest and most widespread instruments for guaranteeing payment on a particular transaction.
Like many standard international banking instruments, letters of credit are American in ongin. Once known as "cotton bills," their use dates back to the growth in commodities shipments, especially of cotton and tobacco, from the United States to Europe m the mid- and late 1800s. The same instruments were used to guarantee the shipment of industrial goods from Europe to America during the last century.
As trade grew, bankers saw the need to standardize documentation and set up an independent agency to help lay down the rules and arbitrate disputes.
The result was creation of the council in 1924 by some 30 U.S. banks, and to this day that body serves much the same purpose.
Among its recent major achievements was helping complete a revision of article 4(a) of the Uniform Commercial Code governing domestic funds transfers. Currently, the council is helping revise article 5 of the same code governing letters of credit.
The Uniform Commercial Cede is a set of laws adopted by individual states that was drafted by the National Conference of Commissioners on Uniform State Law in Chicago and the Philadelphia-based American Law Institute.
"We don't have federal law on a lot of issues," Mr. Taylor notes. "What we have instead are uniform laws that must be adopted by each of the states."
Although the goal is to have the same set of rules in every state, each state still retains the right to modify the code as it sees fit, he notes.
In addition to this code, the council also helps revise and modify what is known as the Uniform Customs Practice for Documentary Credits, a set of rules banks subscribe to around the world to avoid potential conflict with domestic laws.
"Our job is to convey to the drafting committee [of the National Conference of Commissioners] what actual practices are," Mr. Taylor says.
"If laws don't reflect practices, there should at least be some way of acknowledging what the real practices are."
A large part of the council's current efforts also revolve around ensuring that the United States does not adopt laws that might conflict with international practices.
Surprisingly, banks around the world subscribe to pretty much the same practices and use pretty much the same instruments. And although mistakes do occur, fraud between banks is relatively rare.
"Banking codes and standards are rather similar around the world," Mr. Taylor says.
"Otherwise," he adds, "the system wouldn't work."
That doesn't mean banks don't go to court against each other. Typically, disputes revolve around erroneous funds transfers. But even when banks choose not to avail themselves of the council, they still use council guidelines.
In one of the more outstanding cases in recent years, a U.S. District Court ordered the former Security Pacific Corp. to repay Banque Worms, a French bank, nearly $2 million Security Pacific had transferred out of a Banque Worms account at BankAmerica without the French bank's authorization.
BankAmerica, which had requested that Security Pacific return the funds to the Banque Worms account, based its suit on the so-called indemnity principle under rules on interbank compensation set by the council.
A native Virginian from the town of Pulaski, Mr. Taylor started his career with First National Bank of Washington after graduating from East Tennessee State University.
In 1980, he joined Barnett Bank of Miami, where he ran the the bank's international operation, which helped him gain the expertise in global transactions that would later prove extremely useful.
In 1989, Mr. Taylor joined the council after it merged with two similar institutions, the MidAmerican Council on International Banking and the West Coast Council on International Banking.
He notes that although the number of U.S. banks is declining as a result of consolidation, the number of transactions is growing, as is the number of foreign banks engaged in banking transactions with U.S. institutions.
"Most foreign banks still do a pretty heavy volume of trade business," Mr. Taylor remarks.
"As the number of banks on the domestic side [involved in international transactions] continues to go down, the number of foreign banks will continue to grow," he predicts.
Given the extremely technical nature of the council's focus, Mr. Taylor admits it's not odd that the organization has a relatively low profile.
But, he argues, its activities are well known to the governmental agencies and other institutions that matter when it comes to banks, such as the New York Federal Reserve Bank, the U.S. Treasury, the Office of the Comptroller of the Currency, and the Paris-based International Chamber of Commerce.
"We consider the Fed to be virtually a member," Mr. Taylor says, noting that the Fed is a regular participant in council meetings and seminars.
