Analysis: Winning the battle against the Gulf's dirty laundry

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A documentary credit or a letter of credit is usually used to finance international trade. Before understanding the legal obligations of the parties involved in documentary credit transactions, it is better to comprehend the terminologies associated with the deal. Usually, four parties are involved in the context of documentary credits transactions, namely: The credit must comply with the sales contract signed between the buyer and seller before the opening of the documentary credit.

Otherwise, the seller may be entitled to reject it. After opening the credit, the Issuing Bank informs the beneficiary directly or through a Correspondent Bank in the country of the recipient. The Issuing Forex trading documentary dubai legal may ask the Correspondent Bank to: The documentary credits are of various kinds bearing different legal implications; however, in this article, we will address the types mentioned explicitly in Commercial Transactions law i.

In revocable documentary credit, the bank can, at any time, amend or cancel the documentary credit on its own initiative or at the request of the buyer and shall not involve any liability by the bank towards the beneficiary Article 2.

In absence of any clear indication, the documentary credit would be irrevocable Article Thus the assumption of irrevocable documentary credit in UAE is in contrast to the applicable laws in the Gulf and internationally which expressly state the stipulating type as revocable in absence of any express mention about irrevocability. It is worth mentioning that Forex trading documentary dubai legal 2 may be disadvantageous to the buyer and the banks in the UAE as the bank is responsible to pay the beneficiary-seller even if the fraud is committed by the seller on buyer as the parties under letter of credit do not physically verify the contents of goods and have no such right thereby relying completely on documentary transactions.

The obligation of a bank under the irrevocable documentary credit is elaborated below. Moreover, if the documentary credit is forex trading documentary dubai legal by the bank in the country of the beneficiary, it will enable the beneficiary to deal exclusively with a local bank, known to the beneficiary. It is therefore recommended to amend the law and bring it in line with the applicable laws in the Gulf and other international trade laws.

An irrevocable documentary forex trading documentary dubai legal constitutes a definite undertaking by the bank which is conclusive and direct towards the beneficiary, provided the conditions therein are complied with Article 1. As per Article 1the liability of the bank shall forex trading documentary dubai legal notwithstanding the instructions by the buyer to cancel the documentary credit. The bank therefore cannot amend and withdraw the irrevocable documentary credit under any circumstances Article 2.

It thus represents a direct relationship between the beneficiary and the bank and the right of the beneficiary against the bank is not harmed by any dispute between the buyer and seller to the contract of sale. Irrevocable documentary credit is therefore more advantageous to the seller as it gives more security in terms of payment.

Documentary credit is considered a separate contract than the underlying sales contract under the principle of Autonomy. It is the key principle governing documentary credits thereby assuring commercial utility of documentary credits since centuries. Accordingly, documentary credit is considered as an independent transaction from the contract for which it is opened and the bank shall remain independent of such contract Article The Issuing Bank undertakes the liability of the buyer towards beneficiary without involving itself in the underlying transaction between the buyer and the seller.

The Issuing Bank will pay to the benficiary without condition if the beneficiary fulfils the documentary obligations based on terms mentioned under the documentary credit, regardless of the disputes, if any, connected to the underlying contract between the buyer and seller.

The specific claim under the underlying sale forex trading documentary dubai legal is considered separately. Courts are quite reluctant to grant injunctions ordering a bank to withhold payment, unless there is a clear indication of fraud, it was held that documentary credit was aimed at providing security to both the seller and buyer in international business transactions. The autonomy of the documentary credit can therefore forex trading documentary dubai legal considered as an advantage in international sales as it serves as a forex trading documentary dubai legal assurance to parties in international trade based in different countries.

If banks were allowed to refuse to pay under a documentary credit, whenever trading parties had a dispute, the vital flow of international trade would have been blocked. The second fundamental principle of documentary credit practice is the requirement that documents are strictly complied with the terms and condictions of the documentary credit Article Documents are considered compliant to the terms if they are complete as described in credit and are devoid of obvious defects. These documents are evidence of the fact that the goods have been shipped and dispatched.

As per Articlethe Issuing Bank assumes liability to pay at the time the seller delivers the documents to the bank before the expiry of the documentary credit. The documents submitted after forex trading documentary dubai legal expiry period grants the bank authority to reject them unless the buyer requests his or her acceptance and the bank approves such request Article Once the documents are tendered, as per Articlethe bank is under an obligation to insure that the required documents are exactly in accordance with the terms and conditions of the documentary credit, and that they correspond with each other.

Once the bank is assured, it shall make the payment Article 2. If the forex trading documentary dubai legal do not comply with the documentary credit, the Issuing Bank shall reject them.

It may also send them to the buyer for approval as soon as possible. Further, the Paying Bank will not be able to recover the amount paid to the beneficiary towards the documentary credit. Once the bank accepts the documents, it shall urgently transfer them to the buyer and pay to the beneficiary; and if the bank rejects them, it shall immediately notify the beneficiary and the buyer.

The bank must provide reasons for such rejection Article However, banks are not under any obligation to check whether such documents represent the goods forex trading documentary dubai legal question. The rationale behind this strict, uncompromising, doctrine is the notion that banks are financiers and not traders. Accordingly, banks should not be dragged into disputes respecting the conformity of goods supplied.

As long as the Paying Bank adheres to strict compliance principle when it examines the documents tendered under the documentary credit, it remains within the ambit of its contract with the applicant for the credit. However, the seller may send defective goods so long as this does not amount to a clear fraud and yet present conforming documents. A rigid application of the forex trading documentary dubai legal of strict compliance forex trading documentary dubai legal therefore lead to results that would, on many occasions, be regarded as both unfair and unsound by the business world in general.

If the buyer fails to pay the value of the documentary credit to the bank within one 1 month from the date of being notified of the arrival of such documents, the bank has the right to have a lien on the goods represented by the documents and can sell the goods. In forex trading documentary dubai legal of the above, documentary credit transactions demand trust towards banks by both the buyer and seller to remain confident that Issuing or Correspondent Banks will respect their payment commitments.

Documentary credit could forex trading documentary dubai legal function if the buyer and seller lacked confidence that the banks would honour their obligations irrespective of their instructions thereby making prinicple of autonomy the most significant practice serving as lifeblood for international trade and to some extent brigding the gap of trust and knowledge between the two trading partners unknown to each other at initial risk taking phase.

Most Viewed Articles Travel ban vs. Once the advising bank has confirmed the documentary credit, it will refuse to accept any instructions to the contrary from the buyer. In Hamzeh Malas and Sons v. British Imex Industries Ltd 2Q.

Revocable In revocable documentary credit, the bank can, at any time, amend or cancel the documentary credit on its own initiative or at the request of the buyer and shall not involve any liability by the bank towards the beneficiary Article 2. Conclusion In view of the above, documentary credit transactions demand trust towards banks by both forex trading documentary dubai legal buyer and seller to remain confident that Issuing or Correspondent Banks will respect their payment commitments.

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He invests the proceeds from his illicit drug trade into a local car wash business. The metaphor is clear: Unfortunately, in real life, the process of illegal money laundering is far more complex and subtle. In Abu Dhabi, 20 people were arrested in February on suspicion of involvement in a bogus car investment portfolio and they face charges including fraud and money laundering. A report by PwC in February concluded that financial crime in the Middle East is as hard to tackle as ever.

Trade-based money laundering TBML — the process of disguising and moving the proceeds of crime across borders via trade transactions rather than currency exchange or cash deals — was also highlighted as a threat. Further, an alarming 40 percent indicated that their organisations had never performed a fraud risk assessment. The cost of falling victim to financial crime, even indirectly, is significant.

Many of them are working in regional offshoots away from the head office, giving them more opportunity. All of these factors give them scope to rationalise their behaviour.

Michael Shepard, US-based global anti-money laundering, sanctions and financial crime leader at Deloitte, adds: It is one of the hottest topics in the world.

After a slew of negative stories post-financial crisis [such as the Swiss Leaks scandal], no one wants to be on the front pages of the newspapers as having a regulatory or ethics issue. The two countries are gearing up to undergo assessment by the Financial Action Task Force FATF , the global inter-governmental body set up by member states in and responsible for developing and upholding policies to combat money laundering and terrorist financing.

The FATF recommendations are a framework of measures that member states are required to implement, and countries are subject to a four-tomonth review every seven years or more to ensure they are maintaining standards.

There are only a few countries with that status, including Iran, Iraq, Afghanistan, Syria and Ethiopia. The review process is tough, and the report straight away affects the reputation of the country and every financial institution in it. Although both countries received satisfactory status in their last reviews in and , the methodology was tightened up in with requirements to assess not only how robust a framework is in place, but how well it is being implemented and enforced.

In , the UAE ratified a new anti-money laundering law intended to clamp down on financial crime. The law also penalises board members and employees who fail to report corruption, and gives legal protection to whistleblowers. Emirates NBD says it is firmly committed to combating financial crime and money laundering.

Dubai established the Dubai Economic Security Centre in April to fight financial crime, and the UAE Central Bank now has an online system for filing reports of suspicious transactions. But despite the beefed up frameworks, challenges remain. Experts note terrorism financing is hard to detect because it is often legal proceeds that are funnelled into an organisation, rather than the proceeds of crime.

Real estate has long been a target. The documentary Cocaine Cowboys showed how South American drug money indirectly financed the construction of much of Miami — and the authorities are aware of this. However, criminals are also getting smarter.

It is now rare to see money laundered in huge piles of cash, as was common in the past with proceeds from drug smuggling, war lords and blood diamonds. Trade-based money laundering is more common, via under- or over-invoicing, misdescription of goods, and so on. With the Gulf occupying a strategic trading position between East and West it is especially vulnerable, experts say, citing industries such as gold and jewellery.

Given the importance of trade to this region, regulators need to effectively oversee and supervise trade finance without hindering actual trade. A business model may have changed but then again it might not have. Emirates NBD notes the concerns held by banks when it comes to fincrime. A shortage of fincrime monitoring skills does not help. The solution is technology. As the financial crime landscape becomes increasingly complex, cutting-edge digital solutions, such as Blockchain, augmented reality and artificial intelligence AI , are required to identify suspicious transactions.

Banks will also have to stay ahead in terms of cybersecurity, as any cyber attack on a financial institution is, ultimately, a financial crime. How do you monitor hundreds of thousands of transactions, in real time, with the human eye?

Khalid Shaikh, head of compliance at Mashreq Bank, agrees: Yet, in working to combat financial crime, authorities must strike a balance between reducing financial risk and promoting financial inclusion, experts warn. Banks are now required to look through global correspondent bank accounts including in the GCC , and move high-risk accounts elsewhere.

As well as digital solutions, increased government sharing is key. We are all required to engage in efforts to mitigate against and investigate it. With stakeholders working together in the fight against fincrime, it may become easier to detect and intercept corruption.

But, at the moment, criminals are often several steps ahead. Winning the battle against the Gulf's dirty laundry With its strategic trading position, it is little surprise the Gulf has been used as a thoroughfare for illicit funds. But banks, regulators and technology firms are clubbing together in the fight against financial crime, and hope to wash corruption out of the system for good.

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