Export Rule Sets a Booby Trap for Banks
Moore, Jonathan R., American Banker
When the Bush administration unveiled the details of regulations meant to discourage missile proliferation, the exporting community gave a collective groan.
Numerous categories of previously unregulated commodities were brought under "foreign policy" export controls. The only good news was that exporters would at least know which countries to avoid.
But if they do not avoid them, their bankers could be in for some bad news.
A bank that knowingly finances an export - perhaps even of seemingly innocuous goods - to a buyer involved in building missiles can now be held to have violated U.S. export control law if neither the bank nor the exporter obtained a Commerce Department export license.
New Categories of Control
Although dissolution of the former Soviet Union and the end of the cold war prompted a considerable liberalization of U.S. export controls imposed for national security reasons, the Saddam Husseins and Moammar Gadhafis of the world inspired the United States and its allies to regulate broad new categories of exports.
The new controls target nuclear weapons and missile proliferation, as well as chemical and biological warfare, under the rubric of the Enhanced Proliferation Control Initiative.
In certain product areas, the regulatory framework has been in place for some time. For example, President Bush announced in February 1991 that 39 chemical-weapon precursors would be subjected to new foreign policy export controls.
Although the framework for controls on missile proliferation was published shortly thereafter, interagency disputes delayed announcement of the specific countries that could be regulated until June, when the Commerce Department announced that missile projects in Brazil, China, India, Iran, North Korea, Pakistan, South Africa, and 14 Middle East countries would be controlled.
Buried in the rules, however, is a potential bombshell for banks.
In its zeal to insure that the missile proliferation controls are effective, the Commerce Department reaches the activities of U.S. persons who "knowingly support an export, reexport, and transfer" that lacks the required "validated license or other authorization."
"Support" is then defined to mean any action, including financing, by which an export is facilitated. Until June, these provisions were merely the subject of academic curiosity, With the announcement of newly controlled missile projects and countries, however, it has become clear that the rules could have far-reaching consequences for banks that finance exports.
Depending on how the rules are interpreted, banks might very easily wind up violating laws that carry severe criminal and civil penalties.
A fundamental principle underlying letters of credit is that their terms and conditions are regarded as independent of the underlying transaction. Where, beneficiaries present the documents called for by a letter of credit, banks generally must honor it without further inquiry.
This fundamental premise is threatened by the export regulatory scheme.
Although the drafters of the rules sought comprehensive ancillary powers to aid in enforcement, the full ramifications of these regulations as applied to financial institutions have not been thought through. Taken literally, the new rules can operate much like presidential authority under the International Economic Emergency Powers Act, which has been used many times to freeze letters of credit and to block assets. …