[Francois Paulus]

Hello,

I am dealing with advance payments for some high-risk customers who are not sanctioned but are subject to additional screening by the compliance departments of banks.

There have been instances where the payment was credited to my company’s bank account, only to be recalled a couple of months later at the request of one of the correspondent banks.

My bank explained that the payment was an “Incoming payment with cover,” and the customer did not provide the appropriate documentation.

This situation undermines the purpose of advance payments, especially since the products have already been delivered.

Have you encountered similar cases? How did you handle them?

Thank you and best regards,
Francois

[Luis Noriega CICP]

Given how complicated the trade sanctions regimes can be, I would suggest the member engage competent trade regulatory compliance counsel on the front-end, optimally before executing a sales contract with a high-risk customer from a compliance standpoint.  Among other competent law firms, I am familiar with Schulz Trade Law PLLC (http://www.shulztradelaw.com). Michelle Schulz, their managing partner, and her team are particularly well-versed in ITAR, dual-use exports, EAR, import duties and tariff reduction, Section 301 and 232 exclusions, e-commerce, CIFIUS, FTZs, free trade agreements, international contracts, sanctions and embargoes, encryption and trade data reporting to the US Census Bureau, and FCPA.  Based in Dallas, they work for several recognizable corporate names in aerospace, energy, telecom & technology, healthcare, manufacturing, and transportation.

 

Her contact information is as follows:

 

Michelle Schulz, Managing Partner

International Trade and Customs Law

michelle@schulztradelaw.com

Office Phone:  214.643.6150

8150 N. Central Expwy, 10th Floor, Dallas, TX 75206

schulztradelaw.com

[Fred Dons]

Hi Francois, this is based upon my time working at an international bank (for over 30 years) and I have met several situations where money was either held up at correspondent bank level or where a bank tried to reclaim funds already credited to an account.

I have seen banks trying to recall funds, but unless these payments were made “under reserve” a recall is simply not allowed (nevertheless the banks will try)

so the first thing to check is whether any payment or this particular payment is made under reserve to your accounts (the reserve should be mentioned in the payment statement or could be part of the terms and conditions made for your company for your cashmanagement. This not standard btw and if it is part of your cashmanagement agreement have it removed asap). Such a continious “reserve” should only be there in case you have payments made by Checks, where it is customary to get payment under reserve (and which should therefore never be used for prepayment)

If there is doubt on any payment due to compliance issues, the more standard way for a Bank is to hold up payment either at correspondent level or at local level until appropriate documentation is received by the bank before crediting your account.

However what I assumed has happened here is the following and this is a bit of an explanation how a payment is made through a correspondent bank using swift;

if a foreign bank makes a USD payment to a party outside their homecountry the payment is made in 2 steps;

an mt 103 swift message is send to the bank of the beneficiary stating that they have remitted x amount through their New York correspondent bank ‘

and they request the bank to credit your account (the 103 message will contain all the details of the beneficiary)

a second swiftmessage is sent (mt 202) to the correspondent bank  (the bank where the bank of the counterpart holds their USD )  and they are asked to remit the USD to the account of the bank of the Beneficiary so that they are covered for the crediting of the account of said beneficiary.

Now where this goes wrong is when your Bank already acts upon the MT 103 , credits your account and does not check whether cover actually has arrived (the value date of payments in both swiftmessages should be the same but sometimes the bank at the beneficiairies end even takes a day extra to make sure the funds are actually in)

Nowadays one would assume all banks have an automate reconciliation process which checks that the payment has arrived before crediting but apparantly there are still (smaller? ) banks which do not do this.

The proper way as a bank to act is if funds do not arrive (in time or not at all) is to take recourse towards the paying bank as they have send the MT103 giving the bank instructions to pay without providing cover. Not to debit the account of the beneficiary (unless they made the reserve)

Now, in this particular case the payment obligation of the bank of the counterpart of the client is still valid and you should go back to your bank and ask them to remit the funds either through another correspondent or to provide the evidence that payment will not be in breach of any sanctions . (assuming this is indeed the case) .

Going forward, get your bank to either confirm that no standard reserve is in place on your account, or when they make a payment under reserve (for what ever reason) to mention (and highlight) this in their statement, please note that a reserve could be up to 2 years, so this is why I would advise against any reserve in any situation but especially when dealing with prepayments.

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