Payments currency exchange controls

1. Paymentscurrency exchange controls • Various national restrictions on currency exchange for: - the protection of the currency - statistical purposes - combat financing of crime (esp. CFT, counter financing of terrorism) and money laundering (AML, anti-money laundering) • IMF (188 countries, 2012) Main purposes: • Exchange rate stability • Liberalization of payments and transfers for current transactions • Member states limit their monetary sovereignty in exchange for benefits of membership • Quota (subscription) of each member is based on its size in the world economy

2. IMF Agreement &currency exchange controls • art. VIII (2) (a) IMF-Agreement: in principle (i.e. unless approved by the IMF) prohibition of restrictions on international payments and transfers for current transactions. This implies the following obligations for member states: • allow citizens to pay current transactions with national currency or to purchase foreign currency for such payments • allow non-citizens having received payment in national currency to use it for payment of current transactions • where necessary for current transactions, exchange national currency held by another state for foreign currency or SDR Does not affect restrictions on capital movements (v. free movement of capital in the EU)

3. IMF-Agreement &currency exchange controls • Restrictions compatible with Art. VIII IMF: • No current transaction (transfers of capital); or • Approval by the IMF (only if necessary and temporary) (art. VII (3)(b) scarcity; transitional rule for existing restrictions in XIV (2)).

4. IMF-Agreement &currency exchange controls • Effects: art. VIII (2) (b): where *the restriction is consistent with the IMF Agreement, *exchange contracts *involving the currency of a member state and *contrary to its excange control regulations are *unenforceable in all IMF Member States. > A priority rule irrespective of the applicable lex contractus Cfr. art. 9, 3 Rome-I-R.: “Effect may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful.”

5. IMF-Agreement &currency exchange controls • art. VIII (b): where *the restriction is consistent with the IMF Agreement, *exchange contracts *involving the currency of a member state and *contrary to its regulations are *unenforceable in all IMF Member States. • * Questions of interpretation of the terms: - exchange contract: restrictive interpretation in UK & US – only a monetary deal in currencies; other countries use a wider interpretation. Countertrade is never an exchange contract. - involving the currency: restrictive v. wide interpretation - exchange control regulations: not regulations with a different purpose - compatibility: opinion of the IMF should be asked - unenforceable; effect upon the contract depends on contract law.

6. international law &currency exchange controls • Currency exchange restrictions imposed by international law: • in case of economic sanctions decided by the UN Security Council • including sanctions against terrorists and terrorist organisations.

7. money of account/of payment • Money of account = currency used to express the price > price goes up and down with the money of account, but nominally unchanged – principle of « nominalism » • According to contract law, debtor may always pay in the currency of account • Several reasons why payment could be made in a different currency: next slide

8. Money of account/of payment • Several reasons why payment could be made in a different currency, i.e. the payment currency (being the currency of the place of payment): • If payment in foreign currency is prohibited at that place (exchange controls); • If according to local law the debtor is entitled to pay in local currency and prefers to do so (local payment rule); local currency can be excluded by an « effectivo »-clause (see infra 6.1.9 (1) (b)) • Courts normally render judgments in local currency only • Compare art. 6.1.9. Unidroit PICC: • (1) If a monetary obligation is expressed in a currency other than that of the place for payment, it may be paid by the obligor in the currency of the place for payment unless (a) that currency is not freely convertible; or (b) the parties have agreed that payment should be made only in the currency in which the monetary obligation is expressed. • (2) If it is impossible for the obligor to make payment in the currency in which the monetary obligation is expressed, the obligee may require payment in the currency of the place for payment, even in the case referred to in paragraph (1)(b).

9. Money of account /of payment • When payment currency ≠ account currency > issue of (date and place of) conversion • Contract may contain rules for conversion (determine date and place) • National law varies in respect of date of conversion: payment date v. breach date v. conversion at breach date plus additional damage for depreciation • UPICC 6.1.9.: (3) Payment in the currency of the place for payment is to be made according to the applicable rate of exchange prevailing there when payment is due. (4) However, if the obligor has not paid at the time when payment is due, the obligee may require payment according to the applicable rate of exchange prevailing either when payment is due or at the time of actual payment.

10. Protection against currency exchange risks • Three techniques of protection against exchange risks • 1° Maintenance of value clauses; different forms: - Relating the price to (the value of) a foreign currency: Traditionally often gold (gold value clause) – no longer important and in Treaties now usually replaced by SDR (special drawing rights, standard created by IMF in 1969), a monetary « basket » of 4 currencies (last update as from 1 January 2011: 41,9 % US $, 37,4 % EU €, 9,4 % JP ¥ and 11,3% UK £). 1 SDR = on 1-1-2011: 0,423 Eu, 0,66 US $, 0,111 UK £, 12,1 JP ¥. (next revision in 2015) • Currency option clauses (unilateral option) • Relating the price to a specific index (esp. domestic contracts) • Price revision clauses • 2° Exchange rate insurance: in most countries only available with public agencies

11. Protection against currency exchange risks • 3° Hedging transactions: cover the risk with a countertransaction • within the company or group by matching (balancing income and expenditure in the same currency) • Forward exchange contract: creditor sells to a bank an amount of the foreign currency (corresponding to the debt) for a sum in its own currency at a forward exchange rate (or vice-versa for a debtor). • Cross-currency swaps between two creditors (exchange of currency with a period of time at an agreed interest rate) • Bank accounts in foreign currency • Loan by a creditor of foreign currency which is immediately converted into domestic currency (or vice versa: a foreign currency deposit by a debtor) • Currency futures (contract to sell & buy a given currency at a fixed price at a specified future date) • Currency options contracts (call options: right to buy; put option: right to selll); the option itself is bought at a price (« premium « ) • NB. Such contracts traditionally made « OTC » – but see Reg. 648/2012 on OTC derivatives, central counterparties and trade repositories

12. Payment instruments • Payment instruments: • Negotiable instrument with abstract obligation: Bills of exchange and promissory notes • Negotiable instrument without acceptance: cheque • No negotiable instrument : credit card, money transfer (giro), documentary letter of credit, etc.) • Often variations on delegatio solvendi. General characteristics: • Creditor who accepts such instrument (as its beneficiary), must first use the instrument (original right to payment suspended) • Payor who delegates payment to the delegated debtor (issuer of instrument) disposes of its right against the delegated debtor (its right is also suspended)

13. Negotiable instruments in general Negotiable instruments - Mainly 2 functions: • 1° For all negotiable instruments: transfer of the right by transfer of the document (« Das Recht aus dem Papier folgt das Recht am Papier »), thus: • - NI incorporating right to performance: no notification of the debitor cessus necessary • - NI incorporating property in a thing: no notification to bailee necessary • 2° Possible additional function of NI incorporating a right to payment: abstraction of the obligation • at least formal abstraction (reversal burden of proof), even between original parties • substantive abstraction (in relation to third party)

14. Bills of exchange & promissory notes • Promissory note: • Unconditional promise to pay a sum of money (direct promise (« recta »), not drawn) • In a document: to bearer or to order • Transferable (without limits) (if to order, transfer requires an endorsement) • « Abstract »: after transfer of the note, the promisor cannot raise any defence from the underlying relationship (provision relationship) against the holder of the note • See art. 75 and ff. Geneva Convention (= 75 ff. Belgian Statute on Bills of Exchange and promissory notes)

15. Bills of exchange • Bills of exchange: • « Draft », i.e. drawn instrument: the drawer draws a bill (draft) on a drawee which he delivers to a payee (first beneficiary of the bill) • The bill is a document which: • - is explicitly named bill of exchange (or draft) and • - mentions the sum to be paid (unconditionally) and • - the date of maturity (form requirements) (art. 1 & 2 Geneva Law) • The bill implies an order to pay given by drawer to drawee - to pay the holder a certain sum at a future fixed time. • When the drawee accepts* the instruction to pay (acceptance of the draft), he is unconditionally obliged to pay the sum at maturity (value maintenance clause thus impossible) (*on acceptance, see art. 21-29 Geneva Law)

16. Bills of exchange • Bills of exchange: • NB. Drawer can be bearer (art. 3 Geneva Law) • Drawer is also liable towards bearer (in case of acceptance, liability is subsidiary to that of the drawee); as long as bill not accepted, drawer is liable for (non-)acceptance (art. 9 Geneva law). As to this right of recourse against the drawer, see art. 43 Geneva law • Transferable (without limits) (if to order: by endorsement) (art. 11 Geneva law) • Every endorser guarantees (acceptance and) payment (art. 15 Geneva law) • « Abstract » (see infra)

17. Bill of exchange (accepted) Bill of exchange

18. Bills of exchange • Abstraction / autonomy: - independent from provision relationship drawer/drawee (« abstraction ») : acceptor cannot raise defences out of that relationship (against drawer abstraction is merely formal) - independent from valuta relationship drawer/payee: acceptor cannot raise defences out of that relationship • Bill can be « domiciled » on a bank account in order to simplify collection (in Belgium, this collection is since 1999 centralised by the banks in the hands of the National Bank) • Prescription (art. 70 Geneva law) • Against the acceptor: 3 years from the date of maturity • Holder against endorsers and drawer: one year from the date of protest of of maturity • Endorsers against each other: 6 months reckoned from the day when the endorser paid of was himself sued

19. Bills of exchange • Used in various contexts – examples already mentioned: • mode of honouring of a letter of credit (by accepting a draft or by drawing a draft on a third party) • client discount credit (bank purchases bills drawn by client of the bank on its buyers) • endorsement to forfeiter of a bill drawn on a buyer (with forfeiter waivering recourse against the drawer, « Isabel clause ») • Comparative law & harmonisation: • Mainly 2 systems: common law countries v. Geneva Uniform Law (26 ratifications) • UNCITRAL Convention 1987 on International Bills of Exchange and Promissory Notes (if the document explicitly refer to the Convention) – but not in force (only 5 ratifications, 10 required)

20. Bills of exchange • Common law countries (UCC Art. 3 < 1896 Uniform Negotiable Instruments Act; UK 1882 Bills of Exchange Act): less strict system • Bearer is protected against all defences only if he acquired the bill « in due course », i.e. without knowledge of any claim to or defence upon the instrument • In principle no protection of a holder who acquired in good faith from a holder without authority to dispose (unauthorised agent) • « Aval » is qualified as a suretyship (dependent personal security) • Geneva Law: stricter system (higher abstraction) • Defences can only be invoked against a bearer who acquired in bad faith (fraudulently) (art. 17 Geneva law) • Acquirer of possession in good faith is the owner of the bill • « Aval » is a surety largely abstracted from the obligation of the person for whom given (either drawer or drawee): the only defences the aval can raise relate to the formal invalidity of the bill of exchange (see art. 30 – 32 Geneva Law)

21. Modalities of payment The contract (sale, service, ...) will - apart from price and currency - normally also indicate the modalities of payment : • If nothing else agreed: concomitant performance (cash on delivery). Comp. 6.1.4 UPICC • Often specific agreements: • Advance payment (in whole or part), e.g. CWO: Cash with order, CIA Cash in advance); (« cash » includes money transfer, now usually an e-transfer) • CAD: Cash against documents; D/P: Documents against payment: possible when goods are represented by documents (see documentary credit, l/c is honoured when conforming documents are delivered).

22. Modalities of payment Payment by means of instruments implying a delegation to pay (eg buyer paying with a bill of exchange drawn on its debtor; paying with a cheque drawn on its bank, paying by credit card, ...). See 6.1.7 UPICC • Creditor gives payment facilities, i.e. credit. E.g. payment after delivery and inspection, possibly with an extra period for payment (eg 1 month, 90 d.) • « Pay if paid »: debtor only has to pay when he is paid himself by the next in the chain • Credit is often granted only if the debtor accepts (as drawee) a bill of exhange (D/A: documents against acceptance) or signs a promissory. • Where on the contrary no payment instrument is delivered, but only a receipt for the goods, this is called « payment on open account »

23. Payment Collection procedures • Collection procedures: creditor engages one or more intermediaries (esp. banks) as agent to collect the debt • Most commonly when : • a) collecting payment instruments (financial documents) delivered by the debtor to the creditor, such as bills of exchange, cheques, ... and/or • b) documents have to be delivered to the debtor in exchange for payment (documents of title, transport documents, etc.). • a) only = « clean » collection; b) (or b + a) = « documentary collection » • Parties involved: • Principal (who mandates a bank as agent) • Remitting bank (receiving the documents from the principal), agent of the principal • Collecting bank, agent of the remitting bank in the country of payment • Presenting bank: bank of the payor, who pays in return for the required documents • And/or the debtor from whom the money is collected

24. Payment collection procedures • Collection procedures (cont.) • Rights and obligations concerning this intervention: • customs are codified by the ICC in the Uniform Rules for Collections (1956). • they deal with the way banks have to handle documents in collection procedures: Rights and obligations concerning the intervention of intermediaries (information duties, duty of care, calculation of costs and interest, ...)

25. Money transfer (giro) • A bank can be involved as delegated debtor for a money transfer (giro): • instruction to pay given (on paper, or electronically, ...) • by a payor • in favour of a payee • results (when accepted by the bank) in a credit for the beneficiary (on its bank account) as mode of payment • Money transfer with intervention of a single bank: see figure (order, acceptance, performance by crediting account beneficiary) • Often more than 1 bank involved : sending bank, receiving bank

26. Transfer of money Money transfer

27. Money transfer (giro) • Harmonisation ? • UNCITRAL model law 1992 on international credit transfers. Contains: • - a conflict of law rule • - rules concerning the rights and obligations of the parties involved (time for performance, liability, interest for late performance, etc.) • Model law has inspired EC-Directive 1997/5 on cross-border transfers (transparency of contract conditions; duties concerning time of performance, effects of instructions, ...) • Now replaced by the SEPA-Directive 2007/64 (next slide)

28. Other payment procedures • Banks may also be involved as issuer of a documentary l/c (supra) • A credit card company can be involved as delegated debtor • In the EU rights and obligations of parties to a payment service have been harmonised by the SEPA-Directive 2007/64 (in force since November 2009). In 2013 Commission Proposals for a recast. • EU law has introduced a uniform account number: IBAN (+ BIC to identify the bank)

29. Credit card payment Credit card

30. Payments restrictions • Not only currency exchange but also modes of payment can be restricted by regulations to combat financing of crime and money laundering • In 1989, an intergovernmental organisation was founded, the FATF (Financial Action task Force (on Money Laundering)), since 2001 also on combating terrorism financing. • It issues: • Recommendations, recognised as anti-money laundering (AML) and counter-terrorist financing (CTF) standards. • A Blacklist of "Non-Cooperative Countries or Territories" (NCCTs) • National offices, e.g. OFAC (Office on Foreign Assets Control of the US Dept. of Finance)

31. Counter-trade • Counter-trade or compensatory trade: payment of goods (or services) with other goods (or services), directly (barter) or indirectly (linked contracts, such as reciprocal contracts of sale, or buy-back contracts, offset arrangements (eg military equipment or aircraft) • The « counter-trade agreement » is a framework contract setting out matters such as - which goods are suitable for counter-trade - valuation of the goods (determination of price) - modalities of payment of the balance (time, currency) (often through a clearing account) - restriction on further sale - credit security, etc.

32. Counter-trade • Uncitral Guide • Under GATT ? • Impose counter-trade is a quantitative restriction, thus in principle prohibited • Maybe allowed by virtue of a) exceptions for developing countries, b) exception of balance of payments , ... • Obligatory counter-trade prohibited in the Government Procurement Agreement.