Content area
Full Text
In order to avoid pitfalls in documentary credit transactions, bankers need to take a due diligence approach in their handling of documentary credit transactions. What is `due diligence'?
`At a recent conference in London an eminent corporate attorney from New York, when asked to explain what he meant by the term "due diligence" stated "protecting your butt!" Had he been a member of the English Bar, he may well have said "protecting your back!" Nonetheless, the concept clearly involves taking steps to ensure, as far as is reasonable, that if subsequently challenged it can be proved that all due care was in fact taken.'31
Bankers handling letters of credit transactions undertake an onerous task in reviewing documents and making a judgment whether or not to pay against them. The sums of money at stake are high and decisions must be made within a limited time and with little documentation. Undoubtedly, under anti-money laundering regulations, bankers can be exposed to substantial risks if a criminal act occurs in the transaction, even when the operation appears to have adopted UCP in its entirety. For instance, in Switzerland, it is a criminal offence for anyone who is involved in financial transactions in a professional capacity to fail to check, with due diligence, the true identity of the beneficial owner of assets which he/she is asked to deposit, invest, transfer, or otherwise manage and the criminal sanction on a professional who violates the identification duty is a term of imprisonment of up to one year or maximum fine of CHF40,000.(32)
It is important for banks to develop a due diligence process within their L/C departments to ensure that if subsequently challenged, they can prove that due care was taken to avoid fraud or money laundering in their handling of documentary credit transactions.
'Due diligence procedures are not, however, merely a shield to avoid liability in the civil courts or elsewhere. It may also be a sword. For example, the procedures that have been created to show due care has been taken, or that there is proper compliance with relevant regulatory requirements, may well generate information which itself either creates a greater standard of care or compliance, or exposes the possessors to liability for conflicts of interest.33
In particular, when...