Magazine article American Banker

Commerce Keeps Watch on Banks and Boycotts

Magazine article American Banker

Commerce Keeps Watch on Banks and Boycotts

Article excerpt

MONEY, POWER, AND vegeance in the Middle East. Drugstore newsstands are full of thick, trashy novels based on this theme.

Books with this same scenario also fill the shelves of a group of offices on the third floor of the U.S. Commerce Department. But these are real-life reports of real-life problems in the Middle East associated with the Arab boycott of Israel. In many cases, they detail how American banks, though apparently unintentionally, allegedly violated a law that prohibits U.S. companies from cooperating with the Arab boycott.

The department grabbed headlines in 1983 and 1984 after imposing penalties on a number of major institutions. New Ork's Citibank agreed to pay a $323,000 penalty in 1983 for alleged violations of reporting requirements. It did not admit or deny its guilt.

Problems with banks have been on the decline, though, in part because of rule changes, as well as a better understanding and awareness of the rules. Compliance still is an issue, however.

The Arab boycott of Israel dates back to 1944, but it wasn't until the late 1970s, when oil-rich nations began to flex their economic muscles, that U.S. lawmakers passed Section 8 of th e Export Administration Act. Under this law, which went into effect in January 1978, Americans are prohiubited from refusing to do business with others because of a foreign boycott of a country friendly to the United States. The rules also prohibit them from furnishing information about business relationships with boycotted firms.

Failure to comply can mean civil penalties of up to $10,000 per violation, denial of export privileges, and criminal penalties.

Although the law is not limited to the Arab boycott, "98% of our activity is related to Israel," says William V. Skidmore, director of the Commerce Department's office of antiboycott compliance.

"The Arab boycott of Israel is over-whelmingly the most pervasive and well-organized international boycott in existence today," he said. "It is administered through a central office in Damascus. Each member of the Arab League has a boycott office in each country that administers it.

"It's a fairly complex international bureaucracy with regulations that make ours look simple by comparison."

The Commerce Department rules also require U.S. firms to report requests for action or information in support of a boycott. Under the law, for example, a bank would be required to report receiving a letter of credit that included directives that goods to be shipped not be from blacklisted firms.

Most bank violations have been in the nature of failing to promptly report boycott-related requests. In some cases, banks also implemented letters of credit containing prohibited boycott terms or conditions.

But according to Commerce Department officials interviewed here, there is no evidence that American banks have willfully complied with the Arab boycott. Banks that have run afoul of U.S. rules, they say, have done so because of oversight, carelessness, or confusion over requirements.

Bankers are quick to state that most of the past violations were the result of confusion over the rules, especially a change regarding "vessel eligibility" clauses in contracts. These are clauses in letters of credit from many Arab banks requiring certifications that vessels are eligible to enter ports in the boycotting nations -- a clause the Commerce Department says is the equivalent of stating that the vessel is not blacklisted.

Some banks did not file reports on vessel eligibility clauses before mid-1982 because, they claimed, it was unclear that the reports were necessary. The department in 1982 amended its rules so that reports on these clauses were not required after July 1 of that year, but it held banks accountable for earlier reports. That was the source of many of the penalties.

According to one banking industry lawyer, U. …

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