Current Legal Issues Affecting Central Banks, Volume I
Back Matter

Back Matter

Editor(s):
Robert Effros
Published Date:
June 1992
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    Appendix I: Revised Basle Concordat and Supplement

    Revised Basle Concordat

    COMMITTEE ON BANKING: REGULATIONS AND SUPERVISORY PRACTICES*

    Principles for the supervision of banks’ foreign establishments

    I. Introduction

    This report sets out certain principles which the Committee believes should govern the supervision of banks’ foreign establishments by parent and host authorities. It replaces the 1975 “Concordat” and reformulates some of its provisions, most particularly to take account of the subsequent acceptance by the Governors of the principle that banking supervisory authorities cannot be fully satisfied about the soundness of individual banks unless they can examine the totality of each bank’s business worldwide through the technique of consolidation.

    The report deals exclusively with the responsibilities of banking supervisory authorities for monitoring the prudential conduct and soundness of the business of banks’ foreign establishments. It does not address itself to lender-of-last-resort aspects of the role of central banks.

    The principles set out in the report are not necessarily embodied in the laws of the countries represented on the Committee. Rather they are recommended guidelines of best practices in this area, which all members have undertaken to work towards implementing, according to the means available to them.

    Adequate supervision of banks’ foreign establishments calls not only for an appropriate allocation of responsibilities between parent and host supervisory authorities but also for contact and cooperation between them. It has been, and remains, one of the Committee’s principal purposes to foster such cooperation both among its member countries and more widely. The Committee has been encouraged by the like-minded approach of other groups of supervisors and it hopes to continue to strengthen its relationships with these other groups and to develop new ones. It strongly commends the principles set out in this report as being of general validity for all those who are responsible for the supervision of banks which conduct international business and hopes that they will be progressively accepted and implemented by supervisors worldwide.

    Where situations arise which do not appear to be covered by the principles set out in this report, parent and host authorities should explore together ways of ensuring that adequate supervision of banks’ foreign establishments is effected.

    II. Types of banks’ foreign establishments

    Banks operating internationally may have interests in the following types of foreign banking establishment:

    • 1. Branches: operating entities which do not have a separate legal status and are thus integral parts of the foreign parent bank;

    • 2. Subsidiaries: legally independent institutions wholly owned or majority-owned by a bank which is incorporated in a country other than that of the subsidiary;

    • 3. Joint ventures or Consortia: legally independent institutions incorporated in the country where their principal operations are conducted and controlled by two or more parent institutions, most of which are usually foreign and not all of which are necessarily banks. While the pattern of shareholdings may give effective control to one parent institution, with others in a minority, joint ventures are, most typically, owned by a collection of minority shareholders.

    In addition, the structure of international banking groups may derive from an ultimate holding company which is not itself a bank. Such a holding company can be an industrial or commercial company, or a company the majority of whose assets consists of shares in banks. These groups may also include intermediate non-bank holding companies or other non-banking companies.

    Banks may also have minority participations in foreign banking or non-banking companies, other than those in joint ventures, which may be held to be part of their overall foreign banking operations. This report does not cover the appropriate supervisory treatment of these participations, but they should be taken into account by the relevant supervisory authorities.

    III. General principles governing the supervision of banks’ foreign establishments

    Effective cooperation between host and parent authorities is a central prerequisite for the supervision of banks’ international operations. In relation to the supervision of banks’ foreign establishments there are two basic principles which are fundamental to such co-operation and which call for consultation and contacts between respective host and parent authorities: firstly, that no foreign banking establishment should escape supervision; and secondly, that the supervision should be adequate. In giving effect to these principles, host authorities should ensure that parent authorities are informed immediately of any serious problems which arise in a parent bank’s foreign establishment. Similarly, parent authorities should inform host authorities when problems arise in a parent bank which are likely to affect the parent bank’s foreign establishment.

    Acceptance of these principles will not, however, of itself preclude there being gaps and inadequacies in the supervision of banks’ foreign establishments. These may occur for various reasons. Firstly, while there should be a presumption that host authorities are in a position to fulfil their supervisory obligations adequately with respect to all foreign bank establishments operating in their territories, this may not always be the case. Problems may, for instance, arise when a foreign establishment is classified as a bank by its parent banking supervisory authority but not by its host authority. In such cases it is the responsibility of the parent authority to ascertain whether the host authority is able to undertake adequate supervision and the host authority should inform the parent authority if it is not in a position to undertake such supervision.

    In cases where host authority supervision is inadequate the parent authority should either extend its supervision, to the degree that it is practicable, or it should be prepared to discourage the parent bank from continuing to operate the establishment in question.

    Secondly, problems may arise where the host authority considers that supervision of the parent institutions of foreign bank establishments operating in its territory is inadequate or non-existent. In such cases the host authority should discourage or, if it is in a position to do so, forbid the operation in its territory of such foreign establishments. Alternatively, the host authority could impose specific conditions governing the conduct of the business of such establishments.

    Thirdly, gaps in supervision can arise out of structural features of international banking groups. For example, the existence of holding companies either at the head, or in the middle, of such groups may constitute an impediment to adequate supervision. Furthermore, particular supervisory problems may arise where such holding companies, while not themselves banks, have substantial liabilities to the international banking system. Where holding companies are at the head of groups that include separately incorporated banks operating in different countries, the authorities responsible for supervising those banks should endeavour to coordinate their supervision of those banks, taking account of the overall structure of the group in question. Where a bank is the parent company of a group that contains intermediate holding companies, the parent authority should make sure that such holding companies and their subsidiaries are covered by adequate supervision. Alternatively, the parent authority should not allow the parent bank to operate such intermediate holding companies.

    Where groups contain both banks and non-bank organisations, there should, where possible, be liaison between the banking supervisory authorities and any authorities which have responsibilities for supervising these non-banking organisations, particularly where the non-banking activities are of a financial character. Banking supervisors, in their overall supervision of banking groups, should take account of these groups’ non-banking activities; and if these activities cannot be adequately supervised, banking supervisors should aim at minimising the risks to the banking business from the non-banking activities of such groups.

    The implementation of the second basic principle, namely that the supervision of all foreign banking establishments should be adequate, requires the positive participation of both host and parent authorities. Host authorities are responsible for the foreign bank establishments operating in their territories as individual institutions while parent authorities are responsible for them as parts of larger banking groups where a general supervisory responsibility exists in respect of their worldwide consolidated activities. These responsibilities of host and parent authorities are both complementary and overlapping.

    The principle of consolidated supervision is that parent banks and parent supervisory authorities monitor the risk exposure—including a perspective of concentrations of risk and of the quality of assets—of the banks or banking groups for which they are responsible, as well as the adequacy of their capital, on the basis of the totality of their business wherever conducted. This principle does not imply any lessening of host authorities’ responsibilities for supervising foreign bank establishments that operate in their territories, although it is recognised that the full implementation of the consolidation principle may well lead to some extension of parental responsibility. Consolidation is only one of a range of techniques, albeit an important one, at the disposal of the supervisory authorities and it should not be applied to the exclusion of supervision of individual banking establishments on an unconsolidated basis by parent and host authorities. Moreover, the implementation of the principle of consolidated supervision presupposes that parent banks and parent authorities have access to all the relevant information about the operations of their banks’ foreign establishments, although existing banking secrecy provisions in some countries may present a constraint on comprehensive consolidated parental supervision.

    IV. Aspects of the supervision of banks’ foreign establishments

    The supervision of banks’ foreign establishments is considered in this report from three different aspects: solvency, liquidity, and foreign exchange operations and positions. These aspects overlap to some extent. For instance, liquidity and solvency questions can shade into one another. Moreover, both liquidity and solvency considerations arise in the supervision of banks’ foreign exchange operations and positions.

    1. Solvency

    The allocation of responsibilities for the supervision of the solvency of banks’ foreign establishments between parent and host authorities will depend upon the type of establishment concerned.

    For branches, their solvency is indistinguishable from that of the parent bank as a whole. So, while there is a general responsibility on the host authority to monitor the financial soundness of foreign branches, supervision of solvency is primarily a matter for the parent authority. The “dotation de capital” requirements imposed by certain host authorities on foreign branches operating in their countries do not negate this principle. They exist firstly to oblige foreign branches that set up in business in those countries to make and to sustain a certain minimum investment in them, and secondly, to help equalise competitive conditions between foreign branches and domestic banks.

    For subsidiaries, the supervision of solvency is a joint responsibility of both host and parent authorities. Host authorities have responsibility for supervising the solvency of all foreign subsidiaries operating in their territories. Their approach to the task of supervising subsidiaries is from the standpoint that these establishments are separate entities, legally incorporated in the country of the host authority. At the same time parent authorities, in the context of consolidated supervision of the parent banks, need to assess whether the parent institutions’ solvency is being affected by the operations of their foreign subsidiaries. Parental supervision on a consolidated basis is needed for two reasons: because the solvency of parent banks cannot be adequately judged without taking account of all their foreign establishments; and because parent banks cannot be indifferent to the situation of their foreign subsidiaries.

    For joint ventures, the supervision of solvency should normally, for practical reasons, be primarily the responsibility of the authorities in the country of incorporation. Banks which are shareholders in consortium banks cannot, however, be indifferent to the situation of their joint ventures and may have commitments to these establishments beyond the legal commitments which arise from their shareholdings, for example through comfort letters. All these commitments must be taken into account by the parent authorities of the shareholder banks when supervising their solvency. Depending on the pattern of shareholdings in joint ventures, and particularly when one bank is a dominant shareholder, there can also be circumstances in which the supervision of their solvency should be the joint responsibility of the authorities in the country of incorporation and the parent authorities of the shareholder banks.

    2. Liquidity

    References to supervision of liquidity in this section do not relate to central banks’ functions as lenders of last resort, but to the responsibility of supervisory authorities for monitoring the control systems and procedures established by their banks which enable them to meet their obligations as they fall due including, as necessary, those of their foreign establishments.

    The allocation of responsibilities for the supervision of the liquidity of banks’ foreign establishments between parent and host authorities will depend, as with solvency, upon the type of establishment concerned. The host authority has responsibility for monitoring the liquidity of the foreign bank’s establishments in its country; the parent authority has responsibility for monitoring the liquidity of the banking group as a whole.

    For branches, the initial presumption should be that primary responsibility for supervising liquidity rests with the host authority. Host authorities will often be best equipped to supervise liquidity as it relates to local practices and regulations and the functioning of their domestic money markets. At the same time, the liquidity of all foreign branches will always be a matter of concern to the parent authorities, since a branch’s liquidity is frequently controlled directly by the parent bank and cannot be viewed in isolation from that of the whole bank of which it is a part. Parent authorities need to be aware of parent banks’ control systems and need to take account of calls that may be made on the resources of parent banks by their foreign branches. Host and parent authorities should always consult each other if there are any doubts in particular cases about where responsibilities for supervising the liquidity of foreign branches should lie.

    For subsidiaries, primary responsibility for supervising liquidity should rest with the host authority. Parent authorities should take account of any standby or other facilities granted as well as any other commitments, for example through comfort letters, by parent banks to these establishments. Host authorities should inform the parent authorities of the importance they attach to such facilities and commitments, so as to ensure that full account is taken of them in the supervision of the parent bank. Where the host authority has difficulties in supervising the liquidity, especially in foreign currency, of foreign banks’ subsidiaries, it will be expected to inform the parent authorities and appropriate arrangements will have to be agreed so as to ensure adequate supervision.

    For joint ventures, primary responsibility for supervising liquidity should rest with the authorities in the country of incorporation. The parent authorities of shareholders in joint ventures should take account of any standby or other facilities granted as well as any other commitments, for example through comfort letters, by shareholder banks to those establishments. The authorities in the country of incorporation of joint ventures should inform the parent authorities of shareholder banks of the importance they attach to such facilities and commitments so as to ensure that full account is taken of them in the supervision of the shareholder bank.

    Within the framework of consolidated supervision, parent authorities have a general responsibility for overseeing the liquidity control systems employed by the banking groups they supervise and for ensuring that these systems and the overall liquidity position of such groups are adequate. It is recognised, however, that full consolidation may not always be practicable as a technique for supervising liquidity because of differences of local regulations and market situations and the complications of banks operating in different time zones and different currencies. Parent authorities should consult with host authorities to ensure that the latter are aware of the overall systems within which the foreign establishments are operating. Host authorities have a duty to ensure that the parent authority is immediately informed of any serious liquidity inadequacy in a parent bank’s foreign establishment.

    3. Foreign exchange operations and positions

    As regards the supervision of banks’ foreign exchange operations and positions, there should be a joint responsibility of parent and host authorities. It is particularly important for parent banks to have in place systems for monitoring their group’s overall foreign exchange exposure and for parent authorities to monitor those systems. Host authorities should be in a position to monitor the foreign exchange exposure of foreign establishments in their territories and should inform themselves of the nature and extent of the supervision of these establishments being undertaken by the parent authorities.

    Basle

    May 1983

    Basle Committee on Banking Supervision

    April 1990

    SUPPLEMENT TO THE CONCORDAT

    The ensuring of adequate information flows between banking supervisory authorities

    The Concordat of 1983 stresses that effective supervision of banks [sic] foreign establishments calls for ongoing contact and collaboration between host and parent supervisors. The recommendations included in this document are designed to supplement the principles of the Concordat by encouraging more regular and structured collaboration between supervisors, with a view to improving the quality and completeness of the supervision of cross-border banking, while not in any way seeking to supplant the discrete responsibilities of host and parent supervisors. As with the Concordat itself, the recommendations are not designed as minimum legal requirements. Rather they are statements of best practice which all members have undertaken to work towards implementing, according to the means available to them.

    A. AUTHORISATION

    The initial opportunity for collaboration between a host and parent supervisor occurs when an individual application by a bank to establish a new foreign presence is first made. The authorisation procedure offers an ideal opportunity for host and parent authority to create the basis for collaboration between them in the future. In particular, it can be used as a means of laying the foundation from which an appropriate system of reporting from the foreign establishment to the parent bank can be developed. Authorisation is a cornerstone of the Concordat.

    Recommendations

    (i) Host authorities should as a matter of routine check that the parent authority has no objection before granting a banking licence.

    (ii) Where a host authority is unable to obtain a positive response from the parent authority, it should consider either refusing the application, increasing the intensity of supervision or imposing conditions on the grant of authorisation. In the latter case, it is recommended that the conditions (and any subsequent changes in the conditions) should be communicated to the parent authority.

    (iii) Host authorities should exercise particular caution in approving applications for banking licences from foreign entities which are not subject to prudential supervision in the parent country or joint ventures for which there is no clear parental responsibility. In such circumstances, any authorisation should be contingent on the host authority’s capacity to exercise a parental role.

    (iv) If the host authority follows the procedures outlined in subsection (i), a parent authority which disapproves of its bank’s plans to establish abroad can recommend the host authority to refuse a licence. Parent authorities nonetheless should ensure that they have taken adequate steps to prevent their banks establishing in unsuitable locations or making inappropriate acquisitions. Where the parent supervisor imposes conditions on a foreign establishment, such conditions should be communicated to the host authority.

    B. INFORMATION NEEDS OF PARENT AUTHORITIES

    The principal requirement of the parent supervisor is to ensure that a routine is laid down for the regular flow of information to the parent bank, and from the parent bank in consolidated form to the parent authority. This calls for a sound system of reporting from foreign establishment to head office or parent bank, for the adequate working of the system to be capable of verification, and for practical solutions to be found for dealing with particular areas of concern.

    Recommendations

    (i) Host and parent authorities should seek to satisfy themselves that banks’ internal controls should include comprehensive and regular reporting between a bank’s foreign establishments and its head office.

    (ii) If a host authority identifies, or has reason to suspect, problems of a material nature in a foreign establishment, it should take the initiative to inform the parent supervisor. The level of materiality will vary according to the nature of the problem. Parent supervisors may wish to inform host authorities as to the precise levels of materiality which would trigger their concern, for the level of materiality is principally a matter for the parent authority’s judgement. However, the host authority is often in the best position to detect problems and therefore should be ready to act on its own initiative.

    (iii) Parent authorities may wish to seek an independent check on data reported by an individual foreign establishment. Where inspection by parent supervisors is permitted, host authorities should welcome such inspections. Where inspection by parent supervisors is not at present possible (or where the parent authority does not use the inspection process), the parent authority can consult the host authority with a view to the host authority checking or commenting on designated features of the bank’s activities, either directly or through the use of the external auditor. Whichever method is chosen, it is important that the results obtained should be available to both host and parent supervisor.

    (iv) If serious problems arise in a foreign establishment, the host authority should consult with the head office or parent bank and also with the parent authority in order to seek possible remedies. If the host authority decides to withdraw banking authorisation from a foreign establishment or take similar action, the parent authority should, where possible, be given prior warning.

    C. INFORMATION NEEDS OF HOST AUTHORITIES

    Mutual trust between supervisory authorities can only be achieved if exchanges of information can flow with confidence in both directions. Host supervision of foreign establishments will be more effective firstly if it is undertaken with an awareness of the extent to which the parent supervisor is able to monitor the foreign establishment and of any prudential constraints placed on the parent bank or the group as a whole; and secondly if host authorities are kept informed about matters affecting particular banks with an office in the host territory.

    Recommendations

    (i) Parent authorities should inform host authorities of changes in supervisory measures which have a significant bearing on the operations of their banks’ foreign establishments. Parent authorities should respond positively to approaches from host authorities for factual information covering, for example, the scope of the activities of a local establishment, its role within the banking group and the application of internal controls and for information relevant for effective supervision by host authorities.

    (ii) Where a parent authority has doubts about the standard of host supervision in a particular country and, as a consequence, is envisaging action which will affect foreign establishments in the territory concerned, advance consultation is recommended so that the host authority may have an opportunity to correct any inadequacies.

    (iii) In the case of particular banks, parent authorities should be ready to take host authorities into their confidence. Even in sensitive cases such as impending changes of ownership or when a bank faces problems, liaison between parent and host authorities may be mutually advantageous.

    (iv) If a parent authority is intending to take action to protect the interests of depositors, such action should be co-ordinated to the extent possible with the host supervisors of the bank’s foreign establishments.

    D. REMOVAL OF SECRECY CONSTRAINTS

    A prerequisite for effective collaboration between supervisory authorities is the freedom to exchange prudential information, subject to certain conditions designed to protect both the provider and receiver of the information. A possible obstacle to the transmission of prudential information is the existence of national secrecy laws designed to protect the legitimate interest of bank customers.

    Recommendations

    Countries whose secrecy requirements continue to constrain or prevent the passage of information to banking supervisors abroad are urged to review and amend their requirements subject to the following conditions:

    • (i) Information received should only be used for purposes related to the prudential supervision of financial institutions. It should not be released to other officials in the recipient’s country not involved in prudential supervision.

    • (ii) The arrangements for transmitting information should be reciprocal in the sense that a two-way flow should be possible, but strict reciprocity in respect of the detailed characteristics of the information should not be demanded.

    • (iii) The confidentiality of information transmitted should be legally protected, except in the event of criminal1 prosecution. All banking supervisors should, of course, be subject to professional secrecy constraints in respect of information obtained in the course of their activities.

    • (iv) The recipient should undertake, where possible, to consult with the supervisor providing the information if he proposes to take action on the evidence of the information received.

    E. EXTERNAL AUDIT

    Supervisors can gain reassurance from sound international auditing standards. At present, not all foreign establishments are subject to external audit and even where they are the quality of the audit may not be of sufficient thoroughness. Where foreign establishments are, in practice, beyond the reach of parent supervisors’ inspection systems and where they are not subject to a formal inspection system in the host country, the external audit may be the only independent check on a bank.

    Recommendations

    (i) The existence of adequate provision for external audit should be a normal condition of authorisation for new establishments. It would be advantageous for the audit firm to be the one that audits the parent bank, provided the firm in question has the appropriate capacity and experience in the local centre. Where a foreign affiliate is audited by a different firm, the external auditor of the parent bank should normally have access to the audit papers of the affiliate.

    (ii) Supervisors have an interest in the quality and thoroughness of audits; in the case of audits that are inadequately conducted, supervisors should address criticism to the local representative body of auditors and should be empowered, where necessary, to have the auditor replaced. As a means of raising auditing standards for international banks, internationally qualified auditors with experience of banking audit in the country concerned should be appointed. Where any doubt arises, host and parent authorities should consult.

    (iii) External auditors may also be asked to verify the accuracy of reporting returns or compliance with any special conditions. It is recommended that all supervisory authorities should have the ability to communicate with banks’ external auditors and vice versa. Any emphasis on the role of external auditors should, however, in no way be such as to as downgrade the need for sound internal controls, including provision for effective internal audit.

    Basle, April 1990

    Since the Revised Basle Concordat was prepared, the Committee’s name has changed to the Committee on Banking Supervision.

    Supervisors may also be subpoenaed to give evidence in civil cases. Although in some countries they may be open to contempt of court if they refuse, they can make clear that, if the court insists, the information flow would dry up and their own ability to supervise effectively in future would be impaired.

    Appendix II: Report of the Basle Committee on International Convergence of Capital Measurement and Capital Standards

    Introduction

    1. This report presents the outcome of the Committee’s1 work over several years to secure international convergence of supervisory regulations governing the capital adequacy of international banks. Following the publication of the Committee’s proposals in December 1987, a consultative process was set in train in all G-10 countries and the proposals were also circulated to supervisory authorities worldwide. As a result of those consultations some changes were made to the original proposals. The present paper is now a statement of the Committee agreed by all its members. It sets out the details of the agreed framework for measuring capital adequacy and the minimum standard to be achieved which the national supervisory authorities represented on the Committee intend to implement in their respective countries. The framework and this standard have been endorsed by the Group of Ten central-bank Governors.

    2. With a view to implementation as soon as possible, it is intended that national authorities should now prepare papers setting out their views on the timetable and the manner in which this accord will be implemented in their respective countries. This document is being circulated to supervisory authorities worldwide with a view to encouraging the adoption of this framework in countries outside the G-10 in respect of banks conducting significant international business.

    3. Two fundamental objectives lie at the heart of the Committee’s work on regulatory convergence. These are, firstly, that the new framework should serve to strengthen the soundness and stability of the international banking system; and secondly that the framework should be fair and have a high degree of consistency in its application to banks in different countries with a view to diminishing an existing source of competitive inequality among international banks. The Committee notes that, in responding to the invitation to comment on its original proposals, banks have welcomed the general shape and rationale of the framework and have expressed support for the view that it should be applied as uniformly as possible at the national level.

    4. Throughout the recent consultations, close contact has been maintained between the Committee in Basle and the authorities of the European Community in Brussels who are pursuing a parallel initiative to develop a common solvency ratio to be applied to credit institutions in the Community. The aim has been to ensure the maximum degree of consistency between the framework agreed in Basle and the framework to be applied in the Community. It is the Committee’s hope and expectation that this consistency can be achieved, although it should be noted that regulations in the European Community are designed to apply to credit institutions generally, whereas the Committee’s framework is directed more specifically with banks undertaking international business in mind.

    5. In developing the framework described in this document the Committee has sought to arrive at a set of principles which are conceptually sound and at the same time pay due regard to particular features of the present supervisory and accounting systems in individual member countries. It believes that this objective has been achieved. The framework provides for a transitional period so that the existing circumstances in different countries can be reflected in flexible arrangements that allow time for adjustment.

    6. In certain very limited respects (notably as regards some of the risk weightings) the framework allows for a degree of national discretion in the way in which it is applied. The impact of such discrepancies on the overall ratios is likely to be negligible and it is not considered that they will compromise the basic objectives. Nevertheless, the Committee intends to monitor and review the application of the framework in the period ahead with a view to achieving even greater consistency.

    7. It should be stressed that the agreed framework is designed to establish minimum levels of capital for internationally active banks. National authorities will be free to adopt arrangements that set higher levels.

    8. It should also be emphasised that capital adequacy as measured by the present framework, though important, is one of a number of factors to be taken into account when assessing the strength of banks. The framework in this document is mainly directed towards assessing capital in relation to credit risk (the risk of counterparty failure) but other risks, notably interest rate risk and the investment risk on securities, need to be taken into account by supervisors in assessing overall capital adequacy. The Committee is examining possible approaches in relation to these risks. Furthermore, and more generally, capital ratios, judged in isolation, may provide a misleading guide to relative strength. Much also depends on the quality of a bank’s assets and, importantly, the level of provisions a bank may be holding outside its capital against assets of doubtful value. Recognising the close relationship between capital and provisions, the Committee will continue to monitor provisioning policies by banks in member countries and will seek to promote convergence of policies in this field as in other regulatory matters. In assessing progress by banks in member countries towards meeting the agreed capital standards, the Committee will therefore take careful account of any differences in existing policies and procedures for setting the level of provisions among countries’ banks and in the form in which such provisions are constituted.

    9. The Committee is aware that differences between countries in the fiscal treatment and accounting presentation for tax purposes of certain classes of provisions for losses and of capital reserves derived from retained earnings may to some extent distort the comparability of the real or apparent capital positions of international banks. Convergence in tax regimes, though desirable, lies outside the competence of the Committee and tax considerations are not addressed in this paper. However, the Committee wishes to keep these tax and accounting matters under review to the extent that they affect the comparability of the capital adequacy of different countries’ banking systems.

    10. This agreement is intended to be applied to banks on a consolidated basis, including subsidiaries undertaking banking and financial business. At the same time, the Committee recognises that ownership structures and the position of banks within financial conglomerate groups are undergoing significant changes. The Committee will be concerned to ensure that ownership structures should not be such as to weaken the capital position of the bank or expose it to risks stemming from other parts of the group. The Committee will continue to keep these developments under review in the light of the particular regulations in member countries, in order to ensure that the integrity of the capital of banks is maintained. In the case of several of the subjects for further work mentioned above, notably investment risk and the consolidated supervision of financial groups, the European Community has undertaken or is undertaking work with similar objectives and close liaison will be maintained.

    11. This document is divided into four sections. The first two describe the framework: Section I the constituents of capital and Section II the risk weighting system. Section III deals with the target standard ratio; and Section IV with transitional and implementing arrangements.

    I. THE CONSTITUENTS OF CAPITAL

    (a) Core capital (basic equity)

    12. The Committee considers that the key element of capital on which the main emphasis should be placed is equity capital2 and disclosed reserves. This key element of capital is the only element common to all countries’ banking systems; it is wholly visible in the published accounts and is the basis on which most market judgements of capital adequacy are made; and it has a crucial bearing on profit margins and a bank’s ability to compete. This emphasis on equity capital and disclosed reserves reflects the importance the Committee attaches to securing a progressive enhancement in the quality, as well as the level, of the total capital resources maintained by major banks.

    13. Notwithstanding this emphasis, the member countries of the Committee also consider that there are a number of other important and legitimate constituents of a bank’s capital base which may be included within the system of measurement (subject to certain conditions set out in sub-section (b) below).

    14. The Committee has therefore concluded that capital, for supervisory purposes, should be defined in two tiers in a way which will have the effect of requiring at least 50 per cent, of a bank’s capital base to consist of a core element comprised of equity capital and published reserves from post-tax retained earnings (tier 1). The other elements of capital (supplementary capital) will be admitted into tier 2 up to an amount equal to that of the core capital. These supplementary capital elements and the particular conditions attaching to their inclusion in the capital base are set out below and in more detail in Annex 1. Each of these elements may be included or not included by national authorities at their discretion in the light of their national accounting and supervisory regulations.3

    (b) Supplementary capital

    (i) Undisclosed reserves

    15. Unpublished or hidden reserves may be constituted in various ways according to differing legal and accounting regimes in member countries. Under this heading are included only reserves which, though unpublished, have been passed through the profit and loss account and which are accepted by the bank’s supervisory authorities. They may be inherently of the same intrinsic quality as published retained earnings, but, in the context of an internationally agreed minimum standard, their lack of transparency, together with the fact that many countries do not recognise undisclosed reserves, either as an accepted accounting concept or as a legitimate element of capital, argue for excluding them from the core equity capital element.

    (ii) Revaluation reserves

    16. Some countries, under their national regulatory or accounting arrangements, allow certain assets to be revalued to reflect their current value, or something closer to their current value than historic cost, and the resultant revaluation reserves to be included in the capital base. Such revaluations can arise in two ways:

    • (a) from a formal revaluation, carried through to the balance sheets of banks’ own premises; or

    • (b) from a notional addition to capital of hidden values which arise from the practice of holding securities in the balance sheet valued at historic cost.

    Such reserves may be included within supplementary capital provided that the assets are considered by the supervisory authority to be prudently valued, fully reflecting the possibility of price fluctuations and forced sale.

    17. Alternative (b) is relevant to those banks whose balance sheets traditionally include very substantial amounts of equities held in their portfolio at historic cost but which can be, and on occasions are, realised at current prices and used to offset losses. The Committee considers these “latent” revaluation reserves can be included among supplementary elements of capital since they can be used to absorb losses on a going-concern basis, provided they are subject to a substantial discount in order to reflect concerns both about market volatility and about the tax charge which would arise were such gains to be realised. A discount of 55 per cent, on the difference between the historic cost book value and market value is agreed to be appropriate in the light of these considerations. The Committee considered, but rejected, the proposition that latent reserves arising in respect of the undervaluation of banks’ premises should also be included within the definition of supplementary capital.

    (iii) General provisions/general loan loss reserves

    18. General provisions or general loan-loss reserves are created against the possibility of future losses. Where they are not ascribed to particular assets and do not reflect a reduction in the valuation of particular assets, these reserves qualify for inclusion in capital and it has been agreed that they should be counted within tier 2. Where, however, provisions have been created against identified losses or in respect of a demonstrable deterioration in the value of particular assets, they are not freely available to meet unidentified losses which may subsequently arise elsewhere in the portfolio and do not possess an essential characteristic of capital. Such specific or earmarked provisions should therefore not be included in the capital base.

    19. The Committee accepts, however, that, in practice, it is not always possible to distinguish clearly between general provisions (or general loan loss reserves) which are genuinely freely available and those provisions which in reality are earmarked against assets already identified as impaired. This partly reflects the present diversity of accounting, supervisory, and, importantly, fiscal policies in respect of provisioning and in respect of national definitions of capital. This means, inevitably, that initially there will be a degree of inconsistency in the characteristics of general provisions or general loan-loss reserves included by different member countries within the framework.

    20. In the light of these uncertainties, the Committee intends during the transitional period (see paragraphs 45 to 50 below) to clarify the distinction made in member countries between those elements which should conceptually be regarded as part of capital and those which should not qualify. The Committee will aim to develop before the end of 1990 firm proposals applicable to all member countries, so as to ensure consistency in the definition of general provisions and general loan-loss reserves eligible for inclusion in the capital base by the time the interim and final minimum target standards fall to be observed.

    21. As a further safeguard, in the event that agreement is not reached on the refined definition of unencumbered resources eligible for inclusion in supplementary capital, where general provisions and general loan-loss reserves may include amounts reflecting lower valuations for assets or latent but unidentified losses present in the balance sheet, the amount of such reserves or provisions that qualify as capital would be phased down so that, at the end of the transitional period, such items would constitute no more than 1.25 percentage points, or exceptionally and temporarily up to 2.0 percentage points, of risk assets within the secondary elements.

    (iv) Hybrid debt capital instruments

    22. In this category fall a number of capital instruments which combine certain characteristics of equity and certain characteristics of debt. Each of these has particular features which can be considered to affect its quality as capital. It has been agreed that, where these instruments have close similarities to equity, in particular when they are able to support losses on an on-going basis without triggering liquidation, they may be included in supplementary capital. In addition to perpetual preference shares carrying a cumulative fixed charge, the following instruments, for example, may qualify for inclusion: long-term preferred shares in Canada, titres participatifs and titres subordonnés à durée indéterminée in France, Genussscheine in Germany, perpetual debt instruments in the United Kingdom and mandatory convertible debt instruments in the United States. The qualifying criteria for such instruments are set out in Annex 1.

    (v) Subordinated term debt

    23. The Committee is agreed that subordinated term debt instruments have significant deficiencies as constituents of capital in view of their fixed maturity and inability to absorb losses except in a liquidation. These deficiencies justify an additional restriction on the amount of such debt capital which is eligible for inclusion within the capital base. Consequently, it has been concluded that subordinated term debt instruments with a minimum original term to maturity of over five years may be included within the supplementary elements of capital but only to a maximum of 50 per cent, of the core capital element, and subject to adequate amortisation arrangements.

    (c) Deductions from capital

    24. It has been concluded that the following deductions should be made from the capital base for the purpose of calculating the risk-weighted capital ratio. The deductions will consist of:

    • (i) goodwill, as a deduction from tier 1 capital elements;

    • (ii) investments in subsidiaries engaged in banking and financial activities which are not consolidated in national systems. The normal practice will be to consolidate subsidiaries for the purpose of assessing the capital adequacy of banking groups. Where this is not done, deduction is essential to prevent the multiple use of the same capital resources in different parts of the group. The deduction for such investments will be made against the total capital base. The assets representing the investments in subsidiary companies whose capital had been deducted from that of the parent would not be included in total assets for the purposes of computing the ratio.

    25. The Committee carefully considered the possibility of requiring deduction of banks’ holdings of capital issued by other banks or deposit-taking institutions, whether in the form of equity or of other capital instruments. Several G-10 supervisory authorities currently require such a deduction to be made in order to discourage the banking system as a whole from creating cross-holdings of capital, rather than drawing capital from outside investors. The Committee is very conscious that such double-gearing (or “double-leveraging”) can have systemic dangers for the banking system by making it more vulnerable to the rapid transmission of problems from one institution to another and some members consider these dangers justify a policy of full deduction of such holdings.

    26. Despite these concerns, however, the Committee as a whole is not presently in favour of a general policy of deducting all holdings of other banks’ capital, on the grounds that to do so could impede certain significant and desirable changes taking place in the structure of domestic banking systems.

    27. The Committee has nonetheless agreed that:

    • (a) individual supervisory authorities should be free at their discretion to apply a policy of deduction, either for all holdings of other banks’ capital, or for holdings which exceed material limits in relation to the holding bank’s capital or the issuing bank’s capital, or on a case-by-case basis;

    • (b) where no deduction is applied, banks’ holdings of other banks’ capital instruments will bear a weight of 100 per cent.;

    • (c) in applying these policies, member countries consider that reciprocal cross-holdings of bank capital designed artificially to inflate the capital position of the banks concerned should not be permitted;

    • (d) the Committee will closely monitor the degree of double-gearing in the international banking system and does not preclude the possibility of introducing constraints at a later date. For this purpose, supervisory authorities intend to ensure that adequate statistics are made available to enable them and the Committee to monitor the development of banks’ holdings of other banks’ equity and debt instruments which rank as capital under the present agreement.

    II. THE RISK WEIGHTS

    28. The Committee considers that a weighted risk ratio in which capital is related to different categories of asset or off-balance-sheet exposure, weighted according to broad categories of relative riskiness, is the preferred method for assessing the capital adequacy of banks. This is not to say that other methods of capital measurement are not also useful, but they are considered by the Committee to be supplementary to the risk weight approach. The Committee believes that a risk ratio has the following advantages over the simpler gearing ratio approach:

    • (i) it provides a fairer basis for making international comparisons between banking systems whose structures may differ;

    • (ii) it allows off-balance-sheet exposures to be incorporated more easily into the measure;

    • (iii) it does not deter banks from holding liquid or other assets which carry low risk.

    29. The framework of weights has been kept as simple as possible and only five weights are used—0, 10, 20, 50 and 100 per cent. There are inevitably some broad-brush judgements in deciding which weight should apply to different types of asset and the weightings should not be regarded as a substitute for commercial judgement for purposes of market pricing of the different instruments.

    30. The weighting structure is set out in detail in Annexes 2 and 3. There are six aspects of the structure to which attention is particularly drawn.

    (i) Categories of risk captured in the framework

    31. There are many different kinds of risks against which banks’ managements need to guard. For most banks the major risk is credit risk, that is to say the risk of counterparty failure, but there are many other kinds of risk—for example, investment risk, interest rate risk, exchange rate risk, concentration risk. The central focus of this framework is credit risk and, as a further aspect of credit risk, country transfer risk. In addition, individual supervisory authorities have discretion to build in certain other types of risk. Some countries, for example, will wish to retain a weighting for open foreign exchange positions or for some aspects of investment risk. No standardisation has been attempted in the treatment of these other kinds of risk in the framework at the present stage.

    32. The Committee considered the desirability of seeking to incorporate additional weightings to reflect the investment risk in holdings of fixed rate government securities—one manifestation of interest rate risk which is of course present across the whole range of a bank’s activities, on and off the balance sheet. For the present, it was concluded that individual supervisory authorities should be free to apply either a zero or a low weight to claims on governments (e.g. 10 per cent. for all securities or 10 per cent. for those maturing in under one year and 20 per cent. for one year and over). All members agreed, however, that interest rate risk generally required further study and that if, in due course, further work made it possible to develop a satisfactory method of measurement for this aspect of risk for the business as a whole, consideration should be given to applying some appropriate control alongside this credit risk framework. Work is already under way to explore the possibilities in this regard.

    (ii) Country transfer risk

    33. In addressing country transfer risk, the Committee has been very conscious of the difficulty of devising a satisfactory method for incorporating country transfer risk into the framework of measurement. In its earlier, consultative, paper two alternative approaches were put forward for consideration and comment. These were, firstly, a simple differentiation between claims on domestic institutions (central government, official sector and banks) and claims on all foreign countries; and secondly, differentiation on the basis of an approach involving the selection of a defined grouping of countries considered to be of high credit standing.

    34. The comments submitted to the Committee by banks and banking associations in G-10 countries during the consultative period were overwhelmingly in favour of the second alternative. In support of this view, three particular arguments were strongly represented to the Committee. Firstly, it was stressed that a simple domestic/foreign split effectively ignores the reality that transfer risk varies greatly between different countries and that this risk is of sufficient significance to make it necessary to ensure that broad distinctions in the credit standing of industrialised and non-industrialised countries should be made and captured in the system of measurement, particularly one designed for international banks. Secondly, it was argued that the domestic/foreign split does not reflect the global integration of financial markets and the absence of some further refinement would discourage international banks from holding securities issued by central governments of major foreign countries as liquid cover against their Euro-currency liabilities. To that extent a domestic/foreign approach would run counter to an important objective of the risk weighting framework, namely that it should encourage prudent liquidity management. Thirdly, and most importantly, the member states of the European Community are firmly committed to the principle that all claims on banks, central governments and the official sector within European Community countries should be treated in the same way. This means that, where such a principle is put into effect, there would be an undesirable asymmetry in the manner in which a domestic/foreign split was applied by the seven G-10 countries which are members of the Community compared with the manner in which it was applied by the non-Community countries.

    35. In the light of these arguments, the Committee has concluded that a defined group of countries should be adopted as the basis for applying differential weighting coefficients, and that this group should be full members of the OECD or countries which have concluded special lending arrangements with the IMF associated with the Fund’s General Arrangements to Borrow. This group of countries is referred to as the OECD in the rest of the report.

    36. This decision has the following consequences for the weighting structure. Claims on central governments within the OECD will attract a zero weight (or a low weight if the national supervisory authority elects to incorporate interest rate risk); and claims on OECD non-central government public-sector entities will attract a low weight [see (iii) below]. Claims on central governments and central banks outside the OECD will also attract a zero weight (or a low weight if the national supervisory authority elects to incorporate interest rate risk), provided such claims are denominated in the national currency and funded by liabilities in the same currency. This reflects the absence of risks relating to the availability and transfer of foreign exchange on such claims.

    37. As regards the treatment of interbank claims, in order to preserve the efficiency and liquidity of the international interbank market there will be no differentiation between short-term claims on banks incorporated within or outside the OECD. However, the Committee draws a distinction between, on the one hand, short-term placements with other banks which is an accepted method of managing liquidity in the interbank market and carries a perception of low risk and, on the other, longer-term cross-border loans to banks which are often associated with particular transactions and carry greater transfer and/or credit risks. A 20 per cent. weight will therefore be applied to claims on all banks, wherever incorporated, with a residual maturity of up to and including one year; longer-term claims on OECD incorporated banks will be weighted at 20 per cent.; and longer-term claims on banks incorporated outside the OECD will be weighted at 100 per cent.

    (iii) Claims on non-central-government, public-sector entities (PSEs)

    38. The Committee concluded that it was not possible to settle on a single common weight that can be applied to all claims on domestic public-sector entities below the level of central government (e.g. states, local authorities, etc.), in view of the special character and varying credit-worthiness of these entities in different member countries. The Committee therefore opted to allow discretion to each national supervisory authority to determine the appropriate weighting factors for the PSEs within that country. In order to preserve a degree of convergence in the application of such discretion, the Committee agreed that the weights ascribed in this way should be 0, 10, 20 or 50 per cent. for domestic PSEs but that PSEs in foreign countries within the OECD should attract a standard 20 per cent, weight. These arrangements will be subject to review by the Committee in pursuit of further convergence towards common weights and consistent definitions in member countries and in the light of decisions to be taken within the European Community on the specification of a common solvency ratio for credit institutions.

    Commercial companies owned by the public sector will attract a uniform weight of 100 per cent. inter alia in order to avoid competitive inequality vis-à-vis similar private-sector commercial enterprises.

    (iv) Collateral and guarantees

    39. The framework recognises the importance of collateral in reducing credit risk, but only to a limited extent. In view of the varying practices among banks in different countries for taking collateral and different experiences of the stability of physical or financial collateral values, it has not been found possible to develop a basis for recognising collateral generally in the weighting system. The more limited recognition of collateral will apply only to loans secured against cash or against securities issued by OECD central governments and specified multilateral development banks. These will attract the weight given to the collateral (i.e. a zero or a low weight). Loans partially collateralised by these assets will also attract the equivalent low weights on that part of the loan which is fully collateralised.

    40. As regards loans or other exposures guaranteed by third parties, the Committee has agreed that loans guaranteed by OECD central governments, OECD public-sector entities, or OECD incorporated banks will attract the weight allocated to a direct claim on the guarantor (e.g. 20 per cent. in the case of banks). Loans guaranteed by non-OECD incorporated banks will also be recognised by the application of a 20 per cent. weight but only where the underlying transaction has a residual maturity not exceeding one year. The Committees [sic] intends to monitor the application of this latter arrangement to ensure that it does not give rise to inappropriate weighting of commercial loans. In the case of loans covered by partial guarantees, only that part of the loan which is covered by the guarantee will attract the reduced weight. The contingent liability assumed by banks in respect of guarantees will attract a credit conversion factor of 100 per cent. (see sub-section (vi) below).

    (v) Loans secured on residential property

    41. Loans fully secured by mortgage on occupied residential property have a very low record of loss in most countries. The framework will recognise this by assigning a 50 per cent. weight to loans fully secured by mortgage on residential property which is rented or is (or is intended to be) occupied by the borrower. In applying the 50 per cent. weight, the supervisory authorities will satisfy themselves, according to their national arrangements for the provision of housing finance, that this concessionary weight is applied restrictively for residential purposes and in accordance with strict prudential criteria. This may mean, for example, that in some member countries the 50 per cent. weight will only apply to first mortgages, creating a first charge on the property; and that in other member countries it will only be applied where strict, legally-based, valuation rules ensure a substantial margin of additional security over the amount of the loan. The 50 per cent. weight will specifically not be applied to loans to companies engaged in speculative residential building or property development. Other collateral will not be regarded as justifying the reduction of the weightings that would otherwise apply.4

    (vi) Off-balance-sheet engagements

    42. The Committee believes that it is of great importance that all off-balance-sheet activity should be caught within the capital adequacy framework. At the same time, it is recognised that there is only limited experience in assessing the risks in some of the activities; also that for some countries, a complex analytical approach and detailed and frequent reporting systems cannot easily be justified when the amounts of such business, particularly in the newer, more innovative instruments, are only small. The approach that has been agreed, which is on the same lines as that described in the Committee’s report on the supervisory treatment of off-balance-sheet exposures issued to banks in March 1986, is comprehensive in that all categories of off-balance-sheet engagements, including recent innovations, will be converted to credit risk equivalents by multiplying the nominal principal amounts by a credit conversion factor, the resulting amounts then being weighted according to the nature of the counterparty. The different instruments and techniques are divided into five broad categories (within which member countries will have some limited discretion to allocate particular instruments according to their individual characteristics in national markets):

    • (a) those which substitute for loans (e.g. general guarantees of indebtedness, bank acceptance guarantees and standby letters of credit serving as financial guarantees for loans and securities)—these will carry a 100 per cent. credit risk conversion factor;

    • (b) certain transaction related contingencies (e.g. performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions)—a 50 per cent. credit risk conversion factor;

    • (c) short-term, self-liquidating trade-related contingent liabilities arising from the movement of goods (e.g. documentary credits collateralised by the underlying shipments)—a 20 per cent. credit risk conversion factor;

    • (d) commitments with an original maturity5 exceeding one year (the longer maturity serving broadly as a proxy for higher risk facilities) and all NIFs and RUFs—a 50 per cent. credit risk conversion factor. Shorter-term commitments or commitments which can be unconditionally canceled at any time, it is agreed, generally carry only low risk and a nil weight for these is considered to be justified on de minimis grounds;

    • (e) interest and exchange rate related items (e.g. swaps, options, futures)—the credit risk equivalent amount for these contracts will be calculated in one of two ways (see below and Annex 3).

    43. Special treatment is needed for the items in (e) above because banks are not exposed to credit risk for the full face value of their contracts, but only to the cost of replacing the cash flow if a counterparty defaults. Most members of the Committee accept that the correct method of assessing the credit risk on these items is to calculate the current replacement cost by marking to market and to add a factor to represent potential exposure during the remaining life of the contract. Some member countries, however, are concerned about the consistency of this method in relation to the rest of the system which only makes broad distinctions between relative risks for on-balance-sheet items, particularly for banks where these off-balance-sheet items currently constitute only a very small part of the total risks. They would prefer to apply an alternative approach consisting of conversion factors based on the nominal principal sum underlying each contract according to its type and maturity. The Committee has concluded that members will be allowed to choose either of the two methods. The details of the two alternative methods are set out in Annex 3.

    III. A TARGET STANDARD RATIO

    44. In the light of consultations and preliminary testing of the framework, the Committee is agreed that a minimum standard should be set now which international banks generally will be expected to achieve by the end of the transitional period. It is also agreed that this standard should be set at a level that is consistent with the objective of securing over time soundly-based and consistent capital ratios for all international banks. Accordingly, the Committee confirms that the target standard ratio of capital to weighted risk assets should be set at 8 per cent. (of which the core capital element will be at least 4 per cent.). This is expressed as a common minimum standard which international banks in member countries will be expected to observe by the end of 1992, thus allowing a transitional period of some four-and-a-half years for any necessary adjustment by banks who need time to build up to those levels. The Committee fully recognises that the transition from existing, sometimes long-established, definitions of capital and methods of measurement towards a new internationally agreed standard will not necessarily be achieved easily or quickly. The full period to end-1992 is available to ensure progressive steps towards adjustment and banks whose ratios are presently below the 8 per cent. standard will not be required to take immediate or precipitate action.

    IV. TRANSITIONAL AND IMPLEMENTING ARRANGEMENTS

    (i) Transition

    45. Certain transitional arrangements have been agreed upon to ensure that there are sustained efforts during the transitional period to build up individual banks’ ratios towards the ultimate target standard; and to facilitate smooth adjustment and phasing in of the new arrangements within a wide variety of existing supervisory systems.

    46. The transitional period will be from the date of this paper to the end of 1992, by which latter date all banks undertaking significant cross-border business will be expected to meet the standard in full (see paragraph 50 below). In addition, there will be an interim standard to be met by the end of 1990 (see paragraph 49 below).

    47. Initially no formal standard or minimum level will be set. It is the general view of the Committee, however, that every encouragement should be given to those banks whose capital levels are at the low end of the range to build up their capital as quickly as possible and the Committee expects there to be no erosion of existing capital standards in individual member countries’ banks. Thus, during the transitional period, all banks which need to improve capital levels up to the interim and final standards should not diminish even temporarily their current capital levels (subject to the fluctuations which can occur around the time new capital is raised). A level of 5 per cent. attained by application of the framework and transitional arrangements is considered by some countries to be a reasonable yardstick for the lower capitalised banks to seek to attain in the short term. Individual member countries will, of course, be free to set, and announce, at the outset of the transitional period the level from which they would expect all their banks to move towards the interim and final target standard. In order to assess and compare progress during the initial period of adjustment to end-1990 in a manner which takes account both of existing supervisory systems and the new arrangements, the Committee and individual supervisory authorities will initially apply the basis of measurement set out in paragraph 48 below.

    48. In measuring the capital position of banks at the start of the transitional period, a proportion of the core capital may be made up of supplementary elements up to a maximum of 25 per cent. of core capital elements, reducing to 10 per cent. by end-1990. In addition, throughout the transitional period up to end-1992, subject to more restrictive policies which individual authorities may wish to apply, term subordinated debt may be included without limit as a constituent of supplementary elements and the deduction from tier 1 capital elements in respect of goodwill may be waived.

    49. At end-1990 there will be an interim minimum standard of 7.25 per cent. of which at least half should be core capital. However, between end-1990 and end-1992 up to 10 per cent. of the required core elements may be made up of supplementary elements. This means, in round figures, a minimum core capital element of 3.6 per cent., of which tier 1 elements should total at least 3.25 per cent., is to be achieved by the end of 1990. In addition, from end-1990, general loan loss reserves or general provisions which include amounts reflecting lower valuations of assets or latent but unidentified losses present in the balance sheet will be limited to 1.5 percentage points, or exceptionally up to 2.06 percentage points, of risk assets within supplementary elements.

    50. At end-1992 the transitional period ends. The minimum standard will then be 8 per cent., of which core capital (tier 1, equity and reserves) will be at least 4 per cent., supplementary elements no more than core capital and term subordinated debt within supplementary elements no more than 50 per cent. of tier 1. In addition, general loan loss reserves or general provisions (having the characteristics described in paragraph 49) will be limited at end-1992 to 1.25 percentage points, or exceptionally and temporarily up to 2.06 percentage points, within supplementary elements.

    For ease of reference, the arrangements described in paragraphs 45 to 50 are summarised in a table at Annex 4.

    (ii) Implementation

    51. The arrangements described in this document will be implemented at national level at the earliest possible opportunity. Each country will decide the way in which the supervisory authorities will introduce and apply these recommendations in the light of their different legal structures and existing supervisory arrangements. In some countries, changes in the capital régime may be introduced, after consultation, relatively speedily without the need for legislation. Other countries may employ more lengthy procedures, and in some cases these may require legislation. In due course the member states of the European Community will also need to ensure that their own domestic regulations are compatible with the Community’s own legislative proposals in this field. None of these factors needs result in any inconsistency in the timing of implementation among member countries. For example, some countries may apply the framework in this report, formally or informally, in parallel with their existing system, certainly during the initial period of transition. In this way banks can be assisted to start the necessary process of adjustment in good time before substantive changes in national systems are formally introduced.

    July 1988

    The Basle Committee on Banking Regulations and Supervisory Practices [since renamed the Basle Committee on Banking Supervision] comprises representatives of the central banks and supervisory authorities of the Group of Ten countries (Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, United Kingdom, United States) and Luxembourg. The Committee meets at the Bank for International Settlements, Basle, Switzerland.

    Issued and fully paid ordinary shares/common stock and non-cumulative perpetual preferred stock (but excluding cumulative preferred stock).

    One member country, however, maintains the view that an international definition of capital should be confined to core capital elements and indicated that it would continue to press for the definition to be reconsidered by the Committee in the years ahead.

    One member country feels strongly that the lower weight should also apply to other loans secured by mortgages on domestic property, provided that the amount of the loan does not exceed 60 per cent. of the value of the property as calculated according to strict legal valuation criteria.

    In order to facilitate data collection, during the transitional period up to end-1992, but not beyond, national supervisory authorities will have discretion to apply residual maturity as a basis for measuring commitments.

    These limits would only apply in the event that no agreement is reached on a consistent basis for including unencumbered provisions or reserves in capital (see paragraphs 20 and 21).

    Annex 1 Definition of capital included in the capital base

    (To apply at end-1992—see Annex 4 for transitional arrangements)

    A. Capital elements

    • Tier 1 (a) Paid-up share capital/common stock

      • (b) Disclosed reserves

    • Tier 2 (a) Undisclosed reserves

      • (b) Asset revaluation reserves

      • (c) General provisions/general loan loss reserves

      • (d) Hybrid (debt/equity) capital instruments

      • (e) Subordinated term debt

    The sum of Tier 1 and Tier 2 elements will be eligible for inclusion in the capital base, subject to the following limits.

    B. Limits and restrictions

    • (i) The total of Tier 2 (supplementary) elements will be limited to a maximum of 100 per cent. of the total of Tier 1 elements;

    • (ii) subordinated term debt will be limited to a maximum of 50 per cent. of Tier 1 elements;

    • (iii) where general provisions/general loan loss reserves include amounts reflecting lower valuations of asset or latent but unidentified losses present in the balance sheet, the amount of such provisions or reserves will be limited to a maximum of 1.25 percentage points, or exceptionally and temporarily up to 2.0 percentage points, of risk assets;1

    • (iv) asset revaluation reserves which take the form of latent gains on unrealised securities (see below) will be subject to a discount of 55 per cent.

    C. Deductions from the capital base

    • From Tier 1: Goodwill

    • From total capital: (i) Investments in unconsolidated banking and financial subsidiary companies

      • N.B. The presumption is that the framework would be applied on a consolidated basis to banking groups.

      • (ii) Investments in the capital of other banks and financial institutions (at the discretion of national authorities).

    D. Definition of capital elements

    (i) Tier 1: includes only permanent shareholders’ equity (issued and fully paid ordinary shares/common stock and perpetual non-cumulative preference shares) and disclosed reserves (created or increased by appropriations of retained earnings or other surplus, e.g. share premiums, retained profit,2 general reserves and legal reserves). In the case of consolidated accounts, this also includes minority interests in the equity of subsidiaries which are less than wholly owned. This basic definition of capital excludes revaluation reserves and cumulative preference shares.

    (ii) Tier 2:(a) undisclosed reserves are eligible for inclusion within supplementary elements provided these reserves are accepted by the supervisor. Such reserves consist of that part of the accumulated after-tax surplus of retained profits which banks in some countries may be permitted to maintain as an undisclosed reserve. Apart from the fact that the reserve is not identified in the published balance sheet, it should have the same high quality and character as a disclosed capital reserve; as such, it should not be encumbered by any provision or other known liability but should be freely and immediately available to meet unforeseen future losses. This definition of undisclosed reserves excludes hidden values arising from holdings of securities in the balance sheet at below current market prices (see below).

    (b) Revaluation reserves arise in two ways. Firstly, in some countries, banks (and other commercial companies) are permitted to revalue fixed assets, normally their own premises, from time to time in line with the change in market values. In some of these countries the amount of such revaluations is determined by law. Revaluations of this kind are reflected on the face of the balance sheet as a revaluation reserve.

    Secondly, hidden values or “latent” revaluation reserves may be present as a result of long-term holdings of equity securities valued in the balance sheet at the historic cost of acquisition.

    Both types of revaluation reserve may be included in Tier 2 provided that the assets are prudently valued, fully reflecting the possibility of price fluctuation and forced sale. In the case of “latent” revaluation reserves a discount of 55 per cent. will be applied to the difference between historic cost book value and market value to reflect the potential volatility of this form of unrealised capital and the notional tax charge on it.

    (c) General provisions/general loan loss reserves: provisions or loan loss reserves held against future, presently unidentified losses are freely available to meet losses which subsequently materialise and therefore qualify for inclusion within supplementary elements. Provisions ascribed to impairment of particular assets or known liabilities should be excluded. Furthermore, where general provisions/general loan loss reserves include amounts reflecting lower valuations of assets or latent but unidentified losses already present in the balance sheet, the amount of such provisions or reserves eligible for inclusion will be limited to a maximum of 1.25 percentage points, or exceptionally and temporarily up to 2.0 percentage points.3

    (d) Hybrid (debt/equity) capital instruments. This heading includes a range of instruments which combine characteristics of equity capital and of debt. Their precise specifications differ from country to country, but they should meet the following requirements:

    • – they are unsecured, subordinated and fully paid-up;

    • – they are not redeemable at the initiative of the holder or without the prior consent of the supervisory authority;

    • – they are available to participate in losses without the bank being obliged to cease trading (unlike conventional subordinated debt);

    • – although the capital instrument may carry an obligation to pay interest that cannot permanently be reduced or waived (unlike dividends on ordinary shareholders’ equity), it should allow service obligations to be deferred (as with cumulative preference shares) where the profitability of the bank would not support payment.

    Cumulative preference shares, having these characteristics, would be eligible for inclusion in this category. In addition, the following are examples of instruments that may be eligible for inclusion: long-term preferred shares in Canada, titres participatifs and titres subordonnés à durée indéterminée in France, Genussscheine in Germany, perpetual subordinated debt and preference shares in the United Kingdom and mandatory convertible debt instruments in the United States. Debt capital instruments which do not meet these criteria may be eligible for inclusion in item (e).

    (e) Subordinated term debt: includes conventional unsecured subordinated debt capital instruments with a minimum original fixed term to maturity of over five years and limited life redeemable preference shares. During the last five years to maturity, a cumulative discount (or amortisation) factor of 20 per cent. per year will be applied to reflect the diminishing value of these instruments as a continuing source of strength. Unlike instruments included in item (d), these instruments are not normally available to participate in the losses of a bank which continues trading. For this reason these instruments will be limited to a maximum of 50 per cent. of Tier 1.

    This limit would only apply in the event that no agreement is reached on a consistent basis for including unencumbered provisions or reserves in capital (see paragraphs 20 and 21).

    Including, at national discretion, allocations to or from reserve during the course of the year from current year’s retained profit.

    This limit would apply in the event that no agreement is reached on a consistent basis for including unencumbered provisions or reserves in capital (see paragraphs 20 and 21).

    Annex 2

    Risk weights by category of on-balance-sheet asset

    0%(a) Cash1
    (b) Claims on central governments and central banks denominated in national currency and funded in that currency
    (c) Other claims on OECD2 central governments3 and central banks
    (d) Claims collateralised by cash or OECD central-government securities3 or guaranteed by OECD central governments4
    0, 10, 20 or 50% (at national discretion)(a) Claims on domestic public-sector entities, excluding central government, and loans guaranteed4 by such entities
    20%(a) Claims on multilateral development banks (IBRD, IADB, AsDB, AfDB, EIB)5 and claims guaranteed by, or collateralised by securities issued by such banks4
    (b) Claims on banks incorporated in the OECD and loans guaranteed4 by OECD incorporated banks
    (c) Claims on banks incorporated in countries outside the OECD with a residual maturity of up to one year and loans with a residual maturity of up to one year guaranteed by banks incorporated in countries outside the OECD
    (d) Claims on non-domestic OECD public-sector entities, excluding central government, and loans guaranteed4 by such entities
    (e) Cash items in process of collection
    50%(a) Loans fully secured by mortgage on residential property that is or will be occupied by the borrower or that is rented
    100%(a) Claims on the private sector
    (b) Claims on banks incorporated outside the OECD with a residual maturity of over one year
    (c) Claims on central governments outside the OECD (unless denominated in national currency—and funded in that currency—see above)
    (d) Claims on commercial companies owned by the public sector
    (e) Premises, plant and equipment and other fixed assets
    (f) Real estate and other investments (including non-consolidated investment participations in other companies)
    (g) Capital instruments issued by other banks (unless deducted from capital)
    (h) All other assets

    Includes (at national discretion) gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities.

    For the purpose of this exercise, the OECD group comprises countries which are full members of the OECD or which have concluded special lending arrangements with the IMF associated with the Fund’s General Arrangements to Borrow.

    Some member countries intend to apply weights to securities issued by OECD central governments to take account of investment risk. These weights would, for example, be 10 per cent. for all securities or 10 per cent. for those maturing in up to one year and 20 per cent. for those maturing in over one year.

    Commercial loans partially guaranteed by these bodies will attract equivalent low weights on that part of the loan which is fully covered. Similarly, loans partially collateralised by cash or securities issued by OECD central governments and multilateral development banks will attract low weights on that part of the loan which is fully covered.

    Claims on other multilateral development banks in which G-10 countries are shareholding members may, at national discretion, also attract a 20 per cent. weight.

    Annex 3 Credit conversion factors for off-balance-sheet items

    The framework takes account of the credit risk on off-balance-sheet exposures by applying credit conversion factors to the different types of off-balance-sheet instrument or transaction. With the exception of foreign exchange and interest rate related contingencies, the credit conversion factors are set out in the table below. They are derived from the estimated size and likely occurrence of the credit exposure, as well as the relative degree of credit risk as identified in the Committee’s paper “The management of banks’ off-balance-sheet exposures: a supervisory perspective” issued in March 1986. The credit conversion factors would be multiplied by the weights applicable to the category of the counterparty for an on-balance-sheet transaction (see Annex 2).

    Instruments
    Credit conversion factors
    1.Direct credit substitutes, e.g. general guarantees of indebtedness (including standby letters of credit serving as financial guarantees for loans and securities) and acceptances (including endorsements with the character of acceptances)100%
    2.Certain transaction-related contingent items (e.g. performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions)50%
    3.Short-term self-liquidating trade-related contingencies (such as documentary credits collateralised by the underlying shipments)20%
    4.Sale and repurchase agreements and asset sales with recourse,1 where the credit risk remains with the bank100%
    5.Forward asset purchases, forward forward deposits and partly-paid shares and securities,1 which represent commitments with certain drawdown100%
    6.Note issuance facilities and revolving underwriting facilities50%
    7.Other commitments (e.g. formal standby facilities and credit lines) with an original2 maturity of over one year50%
    8.Similar commitments with an original2 maturity of up to one year, or which can be unconditionally cancelled at any time0%
    (N.B. Member countries will have some limited discretion to allocate particular instruments into items 1 to 8 above according to the characteristics of the instrument in the national market.)

    Foreign exchange and interest rate related contingencies

    The treatment of foreign exchange and interest rate related items needs special attention because banks are not exposed to credit risk for the full face value of their contracts, but only to the potential cost of replacing the cash flow (on contracts showing positive value) if the counterparty defaults. The credit equivalent amounts will depend inter alia on the maturity of the contract and on the volatility of the rates underlying that type of instrument.

    Despite the wide range of different instruments in the market, the theoretical basis for assessing the credit risk on all of them has been the same. It has consisted of an analysis of the behaviour of matched pairs of swaps under different volatility assumptions. Since exchange rate contracts involve an exchange of principal on maturity, as well as being generally more volatile, higher conversion factors are proposed for those instruments which feature exchange rate risk. Interest rate contracts3 are defined to include single-currency interest rate swaps, basis swaps, forward rate agreements, interest rate futures, interest rate options purchased and similar instruments. Exchange rate contracts3 include cross-currency interest rate swaps, forward foreign exchange contracts, currency futures, currency options purchased and similar instruments. Exchange rate contracts with an original maturity of 14 calendar days or less are excluded.

    A majority of G-10 supervisory authorities are of the view that the best way to assess the credit risk on these items is to ask banks to calculate the current replacement cost by marking contracts to market, thus capturing the current exposure without any need for estimation, and then adding a factor (the “add-on”) to reflect the potential future exposure over the remaining life of the contract. It has been agreed that, in order to calculate the credit equivalent amount of its off-balance-sheet interest rate and foreign exchange rate instruments under this current exposure method, a bank would sum:

    • – the total replacement cost (obtained by “marking to market”) of all its contracts with positive value and

    • – an amount for potential future credit exposure calculated on the basis of the total notional principal amount of its book, split by residual maturity as follows:

    Residual maturityInterest Rate
    Contracts
    Exchange Rate
    Contracts
    Less than one yearnil1.0%
    One year and over0.5%5.0%

    No potential credit exposure would be calculated for single currency floating/floating interest rate swaps; the credit exposure on these contracts would be evaluated solely on the basis of their mark-to-market value.

    A few G-10 supervisors believe that this two-step approach, incorporating a “mark to market” element, is not consistent with the remainder of the capital framework. They favour a simpler method whereby the potential credit exposure is estimated against each type of contract and a notional capital weight allotted, no matter what the market value of the contract might be at a particular reporting date. It has therefore been agreed supervisory authorities should have discretion4 to apply the alternative method of calculation described below, in which credit conversion factors are derived without reference to the current market price of the instruments. In deciding on what those notional credit conversion factors should be, it has been agreed that a slightly more cautious bias is justified since the current exposure is not being calculated on a regular basis.

    In order to arrive at the credit equivalent amount using this original exposure method, a bank would simply apply one of the following two sets of conversion factors to the notional principal amounts of each instrument according to the nature of the instrument and its maturity:

    Maturity5Interest
    Rate
    Contracts
    Exchange Rate
    Contracts
    Less than one year0.5%2.0%
    One year and less than two years1.0%5.0%
    (i.e. 2% + 3%)
    For each additional year1.0%3.0%

    It is emphasised that the above conversion factors, as well as the “addons” for the current exposure method, should be regarded as provisional and may be subject to amendment as a result of changes in the volatility of exchange rates and interest rates.

    Careful consideration has been given to the arguments put forward for recognising netting, i.e. for weighting the net rather than the gross claims arising out of swaps and similar contracts with the same counterparties. The criterion on which a decision has been based is the status of a netting contract under national bankruptcy regulations. If a liquidator of a failed counterparty has (or may have) the right to unbundle the netted contracts, demanding performance on those contracts favourable to his client and defaulting on unfavourable contracts, there is no reduction in counterparty risk. Accordingly, it has been agreed that:

    • – banks may net contracts subject to novation,6 since it appears that counterparty risk is genuinely reduced by the substitution of a no-vated contract which legally extinguishes the previous obligation. However, since under some national bankruptcy laws liquidators may have the right to unbundle transactions undertaken within a given period under a charge of fraudulent preference, supervisory authorities will have national discretion to require a phase-in period before a novation agreement can be recognised in the weighting framework;

    • – banks may not for the time being net contracts subject to close-out clauses.7 The effectiveness of such agreements in an insolvency has not yet been tested in the courts, nor has it been possible to obtain satisfactory legal opinion that liquidators would not be able to overturn them. However, the Committee does not wish to discourage market participants from employing clauses which might well afford protection in certain circumstances in some national jurisdictions and would be prepared to reverse its conclusion if subsequent decisions in the courts support the integrity of close-out netting agreements.8 In any event, the Committee will continue its work to assess the acceptability of various forms of netting.

    Once the bank has calculated the credit equivalent amounts, whether according to the current or the original exposure method, they are to be weighted according to the category of counterparty in the same way as in the main framework, including concessionary weighting in respect of exposures backed by eligible guarantees and collateral. In addition, since most counterparties in these markets, particularly for long-term contracts, tend to be first-class names, it has been agreed that a 50 per cent. weight will be applied in respect of counterparties which would otherwise attract a 100 per cent. weight.9 However, the Committee will keep a close eye on the credit quality of participants in these markets and reserves the right to raise the weights if average credit quality deteriorates or if loss experience increases.

    These items are to be weighted according to the type of asset and not according to the type of counterparty with whom the transaction has been entered into. Reverse repos (i.e. purchase and resale agreements—where the bank is the receiver of the asset) are to be treated as collateralised loans, reflecting the economic reality of the transaction. The risk is therefore to be measured as an exposure on the counterparty. Where the asset temporarily acquired is a security which attracts a preferential risk weighting, this would be recognised as collateral and the risk weighting would be reduced accordingly.

    But see footnote 5 in the main text.

    Instruments traded on exchanges may be excluded where they are subject to daily margining requirements. Options purchased over the counter are included with the same conversion factors as other instruments, but this decision might be reviewed in the light of future experience.

    Some national authorities may permit individual banks to choose which method to adopt, it being understood that once a bank had chosen to apply the current exposure method, it would not be allowed to switch back to the original exposure method.

    For interest rate contracts, there is national discretion as to whether the conversion factors are to be based on original or residual maturity. For exchange rate contracts, the conversion factors are to be calculated according to the original maturity of the instrument.

    Netting by novation as defined in this context is a bilateral contract between two counter parties under which any obligation to each other to deliver a given currency on a given date is automatically amalgamated with all other obligations for the same currency and value date, legally substituting one single net amount for the previous gross obligations.

    Close-out as defined in this context refers to a bilateral contract which provides that, if one of the counterparties is wound up, the outstanding obligations between the two are accelerated and netted to determine the counterparty’s net exposure.

    The other principal form of netting, payments netting, which is designed to reduce the counterparty risk arising out of daily settlements, will not be recognised in the capital framework since the counterparty’s gross obligations are not in any way affected.

    Some member countries reserve the right to apply the full 100 per cent. weight.

    Annex 4 Transitional arrangements
    1. Minimum standardInitialEnd-1990End-1992
    The level prevailing at end-19877.25%8.0%
    2. Measurement formulaCore elements plus 100%Core elements plus 100% (3.625% plus 3.625%)Core elements plus 100% (4% plus 4%)
    3. Supplementary elements included in coreMaximum 25% of total coreMaximum 10% of total core (i.e. 0.36%)None
    4. Limit on general loan loss reserves in supplementary elements*No limit1.5 percentage points, or exceptionally up to 2.0 percentage points1.25 percentage points, or exceptionally and temporarily up to 2.0 percentage points
    5. Limit on term subordinated debt in supplementary elementsNo limit (at discretion)No limit (at discretion)Maximum of 50% of Tier 1
    6. Deduction for goodwillDeducted from Tier 1 (at discretion)Deducted from Tier 1 (at discretion)Deducted from Tier 1

    This limit would only apply in the event that no agreement is reached on a consistent basis for including unencumbered provisions or reserves in capital (see paragraphs 20 and 21).

    Appendix III: Article 4A of the Uniform Commercial Code

    FUNDS TRANSFERS

    (1989 Official Text)

    PART 1 SUBJECT MATTER AND DEFINITIONS

    § 4A-101. SHORT TITLE

    This Article may be cited as Uniform Commercial Code—Funds Transfers.

    § 4A-102. SUBJECT MATTER

    Except as otherwise provided in Section 4A-108, this Article applies to funds transfers defined in Section 4A-104.

    § 4A-103. PAYMENT ORDER—DEFINITIONS

    • (a) In this Article:

      • (1) “Payment order” means an instruction of a sender to a receiving bank, transmitted orally, electronically, or in writing, to pay, or to cause another bank to pay, a fixed or determinable amount of money to a beneficiary if:

        • (i) the instruction does not state a condition to payment to the beneficiary other than time of payment,

        • (ii) the receiving bank is to be reimbursed by debiting an account of, or otherwise receiving payment from, the sender, and

        • (iii) the instruction is transmitted by the sender directly to the receiving bank or to an agent, funds-transfer system, or communication system for transmittal to the receiving bank.

        • (2) “Beneficiary” means the person to be paid by the beneficiary’s bank.

        • (3) “Beneficiary’s bank” means the bank identified in a payment order in which an account of the beneficiary is to be credited pursuant to the order or which otherwise is to make payment to the beneficiary if the order does not provide for payment to an account.

        • (4) “Receiving bank” means the bank to which the sender’s instruction is addressed.

        • (5) “Sender” means the person giving the instruction to the receiving bank.

        • (b) If an instruction complying with subsection (a)(l) is to make more than one payment to a beneficiary, the instruction is a separate payment order with respect to each payment.

        • (c) A payment order is issued when it is sent to the receiving bank.

    § 4A-104. FUNDS TRANSFER—DEFINITIONS

    In this Article:

    (a) “Funds transfer” means the series of transactions, beginning with the originator’s payment order, made for the purpose of making payment to the beneficiary of the order. The term includes any payment order issued by the originator’s bank or an intermediary bank intended to carry out the originator’s payment order. A funds transfer is completed by acceptance by the beneficiary’s bank of a payment order for the benefit of the beneficiary of the originator’s payment order.

    (b) “Intermediary bank” means a receiving bank other than the originator’s bank or the beneficiary’s bank.

    (c) “Originator” means the sender of the first payment order in a funds transfer.

    (d) “Originator’s bank” means (i) the receiving bank to which the payment order of the originator is issued if the originator is not a bank, or (ii) the originator if the originator is a bank.

    § 4A-105. OTHER DEFINITIONS

    (a) In this Article:

    (1) “Authorized account” means a deposit account of a customer in a bank designated by the customer as a source of payment of payment orders issued by the customer to the bank. If a customer does not so designate an account, any account of the customer is an authorized account if payment of a payment order from that account is not inconsistent with a restriction on the use of that account.

    (2) “Bank” means a person engaged in the business of banking and includes a savings bank, savings and loan association, credit union, and trust company. A branch or separate office of a bank is a separate bank for purposes of this Article.

    (3) “Customer” means a person, including a bank, having an account with a bank or from whom a bank has agreed to receive payment orders.

    (4) “Funds-transfer business day” of a receiving bank means the part of a day during which the receiving bank is open for the receipt, processing, and transmittal of payment orders and cancellations and amendments of payment orders.

    (5) “Funds-transfer system” means a wire transfer network, automated clearing house, or other communication system of a clearing house or other association of banks through which a payment order by a bank may be transmitted to the bank to which the order is addressed.

    (6) “Good faith” means honesty in fact and the observance of reasonable commercial standards of fair dealing.

    (7) “Prove” with respect to a fact means to meet the burden of establishing the fact (Section 1-201(8)).

    “Acceptance”Section 4A-209
    “Beneficiary”Section 4A-103
    “Beneficiary’s bank”Section 4A-103
    “Executed”Section 4A-301
    “Execution date”Section 4A-301
    “Funds transfer”Section 4A-104
    “Funds-transfer system rule”Section 4A-501
    “Intermediary bank”Section 4A-104
    “Originator”Section 4A-104
    “Originator’s bank”Section 4A-104
    “Payment by beneficiary’s bank to beneficiary”Section 4A-405
    “Payment by originator to beneficiary”Section 4A-406
    “Payment by sender to receiving bank”Section 4A-403
    “Payment date”Section 4A-401
    “Payment order”Section 4A-103
    “Receiving bank”Section 4A-103
    “Security procedure”Section 4A-201
    “Sender”Section 4A-103
    (c) The following definitions in Article 4 apply to this Article:
    “Clearing house”Section 4-104
    “Item”Section 4-104
    “Suspends payments”Section 4-104

    (d) In addition Article 1 contains general definitions and principles of construction and interpretation applicable throughout this Article.

    § 4A-106. TIME PAYMENT ORDER IS RECEIVED

    (a) The time of receipt of a payment order or communication canceling or amending a payment order is determined by the rules applicable to receipt of a notice stated in Section 1-201(27). A receiving bank may fix a cut-off time or times on a funds-transfer business day for the receipt and processing of payment orders and communications canceling or amending payment orders. Different cut-off times may apply to payment orders, cancellations, or amendments, or to different categories of payment orders, cancellations, or amendments. A cut-off time may apply to senders generally or different cut-off times may apply to different senders or categories of payment orders. If a payment order or communication canceling or amending a payment order is received after the close of a funds-transfer business day or after the appropriate cut-off time on a funds-transfer business day, the receiving bank may treat the payment order or communication as received at the opening of the next funds-transfer business day.

    (b) If this Article refers to an execution date or payment date or states a day on which a receiving bank is required to take action, and the date or day does not fall on a funds-transfer business day, the next day that is a funds-transfer business day is treated as the date or day stated, unless the contrary is stated in this Article.

    § 4A-107. FEDERAL RESERVE REGULATIONS AND OPERATING CIRCULARS

    Regulations of the Board of Governors of the Federal Reserve System and operating circulars of the Federal Reserve Banks supersede any inconsistent provision of this Article to the extent of the inconsistency.

    § 4A-108. EXCLUSION OF CONSUMER TRANSACTIONS GOVERNED BY FEDERAL LAW

    This Article does not apply to a funds transfer any part of which is governed by the Electronic Fund Transfer Act of 1978 (Title XX, Public Law 95-630, 92 Stat. 3728, 15 U.S.C. § 1693 et seq.) as amended from time to time.

    PART 2 ISSUE AND ACCEPTANCE OF PAYMENT ORDER

    § 4A-201. SECURITY PROCEDURE

    “Security procedure” means a procedure established by agreement of a customer and a receiving bank for the purpose of (i) verifying that a payment order or communication amending or canceling a payment order is that of the customer, or (ii) detecting error in the transmission or the content of the payment order or communication. A security procedure may require the use of algorithms or other codes, identifying words or numbers, encryption, callback procedures, or similar security devices. Comparison of a signature on a payment order or communication with an authorized specimen signature of the customer is not by itself a security procedure.

    § 4A-202. AUTHORIZED AND VERIFIED PAYMENT ORDERS

    (a) A payment order received by the receiving bank is the authorized order of the person identified as sender if that person authorized the order or is otherwise bound by it under the law of agency.

    (b) If a bank and its customer have agreed that the authenticity of payment orders issued to the bank in the name of the customer as sender will be verified pursuant to a security procedure, a payment order received by the receiving bank is effective as the order of the customer, whether or not authorized, if (i) the security procedure is a commercially reasonable method of providing security against unauthorized payment orders, and (ii) the bank proves that it accepted the payment order in good faith and in compliance with the security procedure and any written agreement or instruction of the customer restricting acceptance of payment orders issued in the name of the customer. The bank is not required to follow an instruction that violates a written agreement with the customer or notice of which is not received at a time and in a manner affording the bank a reasonable opportunity to act on it before the payment order is accepted.

    (c) Commercial reasonableness of a security procedure is a question of law to be determined by considering the wishes of the customer expressed to the bank, the circumstances of the customer known to the bank, including the size, type, and frequency of payment orders normally issued by the customer to the bank, alternative security procedures offered to the customer, and security procedures in general use by customers and receiving banks similarly situated. A security procedure is deemed to be commercially reasonable if (i) the security procedure was chosen by the customer after the bank offered, and the customer refused, a security procedure that was commercially reasonable for that customer and (ii) the customer expressly agreed in writing to be bound by any payment order, whether or not authorized, issued in its name and accepted by the bank in compliance with the security procedure chosen by the customer.

    (d) The term “sender” in this Article includes the customer in whose name a payment order is issued if the order is the authorized order of the customer under subsection (a), or it is effective as the order of the customer under subsection (b).

    (e) This section applies to amendments and cancellations of payment orders to the same extent it applies to payment orders.

    (f) Except as provided in this section and in Section 4A-203(a)(1), rights and obligations arising under this section or Section 4A-203 may not be varied by agreement.

    § 4A-203. UNENFORCEABILITY OF CERTAIN VERIFIED PAYMENT ORDERS

    (a) If an accepted payment order is not, under Section 4A-202(a), an authorized order of a customer identified as sender, but is effective as an order of the customer pursuant to Section 4A-202(b), the following rules apply:

    • (1) By express written agreement, the receiving bank may limit the extent to which it is entitled to enforce or retain payment of the payment order.

    • (2) The receiving bank is not entitled to enforce or retain payment of the payment order if the customer proves that the order was not caused, directly or indirectly, by a person (i) entrusted at any time with duties to act for the customer with respect to payment orders or the security procedure, or (ii) who obtained access to transmitting facilities of the customer or who obtained, from a source controlled by the customer and without authority of the receiving bank, information facilitating breach of the security procedure, regardless of how the information was obtained or whether the customer was at fault. Information includes any access device, computer software, or the like.

    (b) This section applies to amendments of payment orders to the same extent it applies to payment orders.

    § 4A-204. REFUND OF PAYMENT AND DUTY OF CUSTOMER TO REPORT WITH RESPECT TO UNAUTHORIZED PAYMENT ORDER

    (a) If a receiving bank accepts a payment order issued in the name of its customer as sender which is (i) not authorized and not effective as the order of the customer under Section 4A-202, or (ii) not enforceable, in whole or in part, against the customer under Section 4A-203, the bank shall refund any payment of the payment order received from the customer to the extent the bank is not entitled to enforce payment and shall pay interest on the refundable amount calculated from the date the bank received payment to the date of the refund. However, the customer is not entitled to interest from the bank on the amount to be refunded if the customer fails to exercise ordinary care to determine that the order was not authorized by the customer and to notify the bank of the relevant facts within a reasonable time not exceeding 90 days after the date the customer received notification from the bank that the order was accepted or that the customer’s account was debited with respect to the order. The bank is not entitled to any recovery from the customer on account of a failure by the customer to give notification as stated in this section.

    (b) Reasonable time under subsection (a) may be fixed by agreement as stated in Section 1-204(1), but the obligation of a receiving bank to refund payment as stated in subsection (a) may not otherwise be varied by agreement.

    § 4A-205. ERRONEOUS PAYMENT ORDERS

    (a) If an accepted payment order was transmitted pursuant to a security procedure for the detection of error and the payment order (i) erroneously instructed payment to a beneficiary not intended by the sender, (ii) erroneously instructed payment in an amount greater than the amount intended by the sender, or (iii) was an erroneously transmitted duplicate of a payment order previously sent by the sender, the following rules apply:

    • (1) If the sender proves that the sender or a person acting on behalf of the sender pursuant to Section 4A-206 complied with the security procedure and that the error would have been detected if the receiving bank had also complied, the sender is not obliged to pay the order to the extent stated in paragraphs (2) and (3).

    • (2) If the funds transfer is completed on the basis of an erroneous payment order described in clause (i) or (iii) of subsection (a), the sender is not obliged to pay the order and the receiving bank is entitled to recover from the beneficiary any amount paid to the beneficiary to the extent allowed by the law governing mistake and restitution.

    • (3) If the funds transfer is completed on the basis of a payment order described in clause (ii) of subsection (a), the sender is not obliged to pay the order to the extent the amount received by the beneficiary is greater than the amount intended by the sender. In that case, the receiving bank is entitled to recover from the beneficiary the excess amount received to the extent allowed by the law governing mistake and restitution.

    (b) If (i) the sender of an erroneous payment order described in subsection (a) is not obliged to pay all or part of the order, and (ii) the sender receives notification from the receiving bank that the order was accepted by the bank or that the sender’s account was debited with respect to the order, the sender has a duty to exercise ordinary care, on the basis of information available to the sender, to discover the error with respect to the order and to advise the bank of the relevant facts within a reasonable time, not exceeding 90 days, after the bank’s notification was received by the sender. If the bank proves that the sender failed to perform that duty, the sender is liable to the bank for the loss the bank proves it incurred as a result of the failure, but the liability of the sender may not exceed the amount of the sender’s order.

    (c) This section applies to amendments to payment orders to the same extent it applies to payment orders.

    § 4A-206. TRANSMISSION OF PAYMENT ORDER THROUGH FUNDS-TRANSFER OR OTHER COMMUNICATION SYSTEM

    (a) If a payment order addressed to a receiving bank is transmitted to a funds-transfer system or other third-party communication system for transmittal to the bank, the system is deemed to be an agent of the sender for the purpose of transmitting the payment order to the bank. If there is a discrepancy between the terms of the payment order transmitted to the system and the terms of the payment order transmitted by the system to the bank, the terms of the payment order of the sender are those transmitted by the system. This section does not apply to a funds-transfer system of the Federal Reserve Banks.

    (b) This section applies to cancellations and amendments of payment orders to the same extent it applies to payment orders.

    § 4A-207. MISDESCRIPTION OF BENEFICIARY

    (a) Subject to subsection (b), if, in a payment order received by the beneficiary’s bank, the name, bank account number, or other identification of the beneficiary refers to a nonexistent or unidentifiable person or account, no person has rights as a beneficiary of the order and acceptance of the order cannot occur.

    (b) If a payment order received by the beneficiary’s bank identifies the beneficiary both by name and by an identifying or bank account number and the name and number identify different persons, the following rules apply:

    • (1) Except as otherwise provided in subsection (c), if the beneficiary’s bank does not know that the name and number refer to different persons, it may rely on the number as the proper identification of the beneficiary of the order. The beneficiary’s bank need not determine whether the name and number refer to the same person.

    • (2) If the beneficiary’s bank pays the person identified by name or knows that the name and number identify different persons, no person has rights as beneficiary except the person paid by the beneficiary’s bank if that person was entitled to receive payment from the originator of the funds transfer. If no person has rights as beneficiary, acceptance of the order cannot occur.

    (c) If (i) a payment order described in subsection (b) is accepted, (ii) the originator’s payment order described the beneficiary inconsistently by name and number, and (iii) the beneficiary’s bank pays the person identified by number as permitted by subsection (b)(l), the following rules apply:

    • (1) If the originator is a bank, the originator is obliged to pay its order.

    • (2) If the originator is not a bank and proves that the person identified by number was not entitled to receive payment from the originator, the originator is not obliged to pay its order unless the originator’s bank proves that the originator, before acceptance of the originator’s order, had notice that payment of a payment order issued by the originator might be made by the beneficiary’s bank on the basis of an identifying or bank account number even if it identifies a person different from the named beneficiary. Proof of notice may be made by any admissible evidence. The originator’s bank satisfies the burden of proof if it proves that the originator, before the payment order was accepted, signed a writing stating the information to which the notice relates.

    (d) In a case governed by subsection (b)(l), if the beneficiary’s bank rightfully pays the person identified by number and that person was not entitled to receive payment from the originator, the amount paid may be recovered from that person to the extent allowed by the law governing mistake and restitution as follows:

    • (1) If the originator is obliged to pay its payment order as stated in subsection (c), the originator has the right to recover.

    • (2) If the originator is not a bank and is not obliged to pay its payment order, the originator’s bank has the right to recover.

    § 4A-208. MISDESCRIPTION OF INTERMEDIARY BANK OR BENEFICIARY’S BANK

    (a) This subsection applies to a payment order identifying an intermediary bank or the beneficiary’s bank only by an identifying number.

    • (1) The receiving bank may rely on the number as the proper identification of the intermediary or beneficiary’s bank and need not determine whether the number identifies a bank.

    • (2) The sender is obliged to compensate the receiving bank for any loss and expenses incurred by the receiving bank as a result of its reliance on the number in executing or attempting to execute the order.

    (b) This subsection applies to a payment order identifying an intermediary bank or the beneficiary’s bank both by name and an identifying number if the name and number identify different persons.

    • (1) If the sender is a bank, the receiving bank may rely on the number as the proper identification of the intermediary or beneficiary’s bank if the receiving bank, when it executes the sender’s order, does not know that the name and number identify different persons. The receiving bank need not determine whether the name and number refer to the same person or whether the number refers to a bank. The sender is obliged to compensate the receiving bank for any loss and expenses incurred by the receiving bank as a result of its reliance on the number in executing or attempting to execute the order.

    • (2) If the sender is not a bank and the receiving bank proves that the sender, before the payment order was accepted, had notice that the receiving bank might rely on the number as the proper identification of the intermediary or beneficiary’s bank even if it identifies a person different from the bank identified by name, the rights and obligations of the sender and the receiving bank are governed by subsection (b)(l), as though the sender were a bank. Proof of notice may be made by any admissible evidence. The receiving bank satisfies the burden of proof if it proves that the sender, before the payment order was accepted, signed a writing stating the information to which the notice relates.

    • (3) Regardless of whether the sender is a bank, the receiving bank may rely on the name as the proper identification of the intermediary or beneficiary’s bank if the receiving bank, at the time it executes the sender’s order, does not know that the name and number identify different persons. The receiving bank need not determine whether the name and number refer to the same person.

    • (4) If the receiving bank knows that the name and number identify different persons, reliance on either the name or the number in executing the sender’s payment order is a breach of the obligation stated in Section 4A-302(a)(l).

    § 4A-209. ACCEPTANCE OF PAYMENT ORDER

    (a) Subject to subsection (d), a receiving bank other than the beneficiary’s bank accepts a payment order when it executes the order.

    (b) Subject to subsections (c) and (d), a beneficiary’s bank accepts a payment order at the earliest of the following times:

    • (1) when the bank (i) pays the beneficiary as stated in Section 4A-405(a) or 4A-405(b), or (ii) notifies the beneficiary of receipt of the order or that the account of the beneficiary has been credited with respect to the order unless the notice indicates that the bank is rejecting the order or that funds with respect to the order may not be withdrawn or used until receipt of payment from the sender of the order;

    • (2) when the bank receives payment of the entire amount of the sender’s order pursuant to Section 4A-403(a)(1) or 4A-403(a)(2); or

    • (3) the opening of the next funds-transfer business day of the bank following the payment date of the order if, at that time, the amount of the sender’s order is fully covered by a withdrawable credit balance in an authorized account of the sender or the bank has otherwise received full payment from the sender, unless the order was rejected before that time or is rejected within (i) one hour after that time, or (ii) one hour after the opening of the next business day of the sender following the payment date if that time is later. If notice of rejection is received by the sender after the payment date and the authorized account of the sender does not bear interest, the bank is obliged to pay interest to the sender on the amount of the order for the number of days elapsing after the payment date to the day the sender receives notice or learns that the order was not accepted, counting that day as an elapsed day. If the withdrawable credit balance during that period falls below the amount of the order, the amount of interest payable is reduced accordingly.

    (c) Acceptance of a payment order cannot occur before the order is received by the receiving bank. Acceptance does not occur under subsection (b)(2) or (b)(3) if the beneficiary of the payment order does not have an account with the receiving bank, the account has been closed, or the receiving bank is not permitted by law to receive credits for the beneficiary’s account.

    (d) A payment order issued to the originator’s bank cannot be accepted until the payment date if the bank is the beneficiary’s bank, or the execution date if the bank is not the beneficiary’s bank. If the originator’s bank executes the originator’s payment order before the execution date or pays the beneficiary of the originator’s payment order before the payment date and the payment order is subsequently canceled pursuant to Section 4A-211(b), the bank may recover from the beneficiary any payment received to the extent allowed by the law governing mistake and restitution.

    § 4A-210. REJECTION OF PAYMENT ORDER

    (a) A payment order is rejected by the receiving bank by a notice of rejection transmitted to the sender orally, electronically, or in writing. A notice of rejection need not use any particular words and is sufficient if it indicates that the receiving bank is rejecting the order or will not execute or pay the order. Rejection is effective when the notice is given if transmission is by a means that is reasonable in the circumstances. If notice of rejection is given by a means that is not reasonable, rejection is effective when the notice is received. If an agreement of the sender and receiving bank establishes the means to be used to reject a payment order, (i) any means complying with the agreement is reasonable and (ii) any means not complying is not reasonable unless no significant delay in receipt of the notice resulted from the use of the noncomplying means.

    (b) This subsection applies if a receiving bank other than the beneficiary’s bank fails to execute a payment order despite the existence on the execution date of a withdrawable credit balance in an authorized account of the sender sufficient to cover the order. If the sender does not receive notice of rejection of the order on the execution date and the authorized account of the sender does not bear interest, the bank is obliged to pay interest to the sender on the amount of the order for the number of days elapsing after the execution date to the earlier of the day the order is canceled pursuant to Section 4A-211(d) or the day the sender receives notice or learns that the order was not executed, counting the final day of the period as an elapsed day. If the withdrawable credit balance during that period falls below the amount of the order, the amount of interest is reduced accordingly.

    (c) If a receiving bank suspends payments, all unaccepted payment orders issued to it are deemed rejected at the time the bank suspends payments.

    (d) Acceptance of a payment order precludes a later rejection of the order. Rejection of a payment order precludes a later acceptance of the order.

    § 4A-211. CANCELLATION AND AMENDMENT OF PAYMENT ORDER

    (a) A communication of the sender of a payment order canceling or amending the order may be transmitted to the receiving bank orally, electronically, or in writing. If a security procedure is in effect between the sender and the receiving bank, the communication is not effective to cancel or amend the order unless the communication is verified pursuant to the security procedure or the bank agrees to the cancellation or amendment.

    (b) Subject to subsection (a), a communication by the sender canceling or amending a payment order is effective to cancel or amend the order if notice of the communication is received at a time and in a manner affording the receiving bank a reasonable opportunity to act on the communication before the bank accepts the payment order.

    (c) After a payment order has been accepted, cancellation or amendment of the order is not effective unless the receiving bank agrees or a funds-transfer system rule allows cancellation or amendment without agreement of the bank.

    • (1) With respect to a payment order accepted by a receiving bank other than the beneficiary’s bank, cancellation or amendment is not effective unless a conforming cancellation or amendment of the payment order issued by the receiving bank is also made.

    • (2) With respect to a payment order accepted by the beneficiary’s bank, cancellation or amendment is not effective unless the order was issued in execution of an unauthorized payment order, or because of a mistake by a sender in the funds transfer which resulted in the issuance of a payment order (i) that is a duplicate of a payment order previously issued by the sender, (ii) that orders payment to a beneficiary not entitled to receive payment from the originator, or (iii) that orders payment in an amount greater than the amount the beneficiary was entitled to receive from the originator. If the payment order is canceled or amended, the beneficiary’s bank is entitled to recover from the beneficiary any amount paid to the beneficiary to the extent allowed by the law governing mistake and restitution.

    (d) An unaccepted payment order is canceled by operation of law at the close of the fifth funds-transfer business day of the receiving bank after the execution date or payment date of the order.

    (e) A canceled payment order cannot be accepted. If an accepted payment order is canceled, the acceptance is nullified and no person has any right or obligation based on the acceptance. Amendment of a payment order is deemed to be cancellation of the original order at the time of amendment and issue of a new payment order in the amended form at the same time.

    (f) Unless otherwise provided in an agreement of the parties or in a funds-transfer system rule, if the receiving bank, after accepting a payment order, agrees to cancellation or amendment of the order by the sender or is bound by a funds-transfer system rule allowing cancellation or amendment without the bank’s agreement, the sender, whether or not cancellation or amendment is effective, is liable to the bank for any loss and expenses, including reasonable attorney’s fees, incurred by the bank as a result of the cancellation or amendment or attempted cancellation or amendment.

    (g) A payment order is not revoked by the death or legal incapacity of the sender unless the receiving bank knows of the death or of an adjudication of incapacity by a court of competent jurisdiction and has reasonable opportunity to act before acceptance of the order.

    (h) A funds-transfer system rule is not effective to the extent it conflicts with subsection (c)(2).

    § 4A-212. LIABILITY AND DUTY OF RECEIVING BANK REGARDING UNACCEPTED PAYMENT ORDER

    If a receiving bank fails to accept a payment order that it is obliged by express agreement to accept, the bank is liable for breach of the agreement to the extent provided in the agreement or in this Article, but does not otherwise have any duty to accept a payment order or, before acceptance, to take any action, or refrain from taking action, with respect to the order except as provided in this Article or by express agreement. Liability based on acceptance arises only when acceptance occurs as stated in Section 4A-209, and liability is limited to that provided in this Article. A receiving bank is not the agent of the sender or beneficiary of the payment order it accepts, or of any other party to the funds transfer, and the bank owes no duty to any party to the funds transfer except as provided in this Article or by express agreement.

    PART 3: EXECUTION OF SENDER’S PAYMENT ORDER BY RECEIVING BANK

    § 4A-301. EXECUTION AND EXECUTION DATE

    (a) A payment order is “executed” by the receiving bank when it issues a payment order intended to carry out the payment order received by the bank. A payment order received by the beneficiary’s bank can be accepted but cannot be executed.

    (b) “Execution date” of a payment order means the day on which the receiving bank may properly issue a payment order in execution of the sender’s order. The execution date may be determined by instruction of the sender but cannot be earlier than the day the order is received and, unless otherwise determined, is the day the order is received. If the sender’s instruction states a payment date, the execution date is the payment date or an earlier date on which execution is reasonably necessary to allow payment to the beneficiary on the payment date.

    § 4A-302. OBLIGATIONS OF RECEIVING BANK IN EXECUTION OF PAYMENT ORDER

    (a) Except as provided in subsections (b) through (d), if the receiving bank accepts a payment order pursuant to Section 4A-209(a), the bank has the following obligations in executing the order:

    • (1) The receiving bank is obliged to issue, on the execution date, a payment order complying with the sender’s order and to follow the sender’s instructions concerning (i) any intermediary bank or funds-transfer system to be used in carrying out the funds transfer, or (ii) the means by which payment orders are to be transmitted in the funds transfer. If the originator’s bank issues a payment order to an intermediary bank, the originator’s bank is obliged to instruct the intermediary bank according to the instruction of the originator. An intermediary bank in the funds transfer is similarly bound by an instruction given to it by the sender of the payment order it accepts.

    • (2) If the sender’s instruction states that the funds transfer is to be carried out telephonically or by wire transfer or otherwise indicates that the funds transfer is to be carried out by the most expeditious means, the receiving bank is obliged to transmit its payment order by the most expeditious available means, and to instruct any intermediary bank accordingly. If a sender’s instruction states a payment date, the receiving bank is obliged to transmit its payment order at a time and by means reasonably necessary to allow payment to the beneficiary on the payment date or as soon thereafter as is feasible.

    (b) Unless otherwise instructed, a receiving bank executing a payment order may (i) use any funds-transfer system if use of that system is reasonable in the circumstances, and (ii) issue a payment order to the beneficiary’s bank or to an intermediary bank through which a payment order conforming to the sender’s order can expeditiously be issued to the beneficiary’s bank if the receiving bank exercises ordinary care in the selection of the intermediary bank. A receiving bank is not required to follow an instruction of the sender designating a funds-transfer system to be used in carrying out the funds transfer if the receiving bank, in good faith, determines that it is not feasible to follow the instruction or that following the instruction would unduly delay completion of the funds transfer.

    (c) Unless subsection (a)(2) applies or the receiving bank is otherwise instructed, the bank may execute a payment order by transmitting its payment order by first class mail or by any means reasonable in the circumstances. If the receiving bank is instructed to execute the sender’s order by transmitting its payment order by a particular means, the receiving bank may issue its payment order by the means stated or by any means as expeditious as the means stated.

    (d) Unless instructed by the sender, (i) the receiving bank may not obtain payment of its charges for services and expenses in connection with the execution of the sender’s order by issuing a payment order in an amount equal to the amount of the sender’s order less the amount of the charges, and (ii) may not instruct a subsequent receiving bank to obtain payment of its charges in the same manner.

    § 4A-303. ERRONEOUS EXECUTION OF PAYMENT ORDER

    (a) A receiving bank that (i) executes the payment order of the sender by issuing a payment order in an amount greater than the amount of the sender’s order, or (ii) issues a payment order in execution of the sender’s order and then issues a duplicate order, is entitled to payment of the amount of the sender’s order under Section 4A-402(c) if that subsection is otherwise satisfied. The bank is entitled to recover from the beneficiary of the erroneous order the excess payment received to the extent allowed by the law governing mistake and restitution.

    (b) A receiving bank that executes the payment order of the sender by issuing a payment order in an amount less than the amount of the sender’s order is entitled to payment of the amount of the sender’s order under Section 4A-402(c) if (i) that subsection is otherwise satisfied and (ii) the bank corrects its mistake by issuing an additional payment order for the benefit of the beneficiary of the sender’s order. If the error is not corrected, the issuer of the erroneous order is entitled to receive or retain payment from the sender of the order it accepted only to the extent of the amount of the erroneous order. This subsection does not apply if the receiving bank executes the sender’s payment order by issuing a payment order in an amount less than the amount of the sender’s order for the purpose of obtaining payment of its charges for services and expenses pursuant to instruction of the sender.

    (c) If a receiving bank executes the payment order of the sender by issuing a payment order to a beneficiary different from the beneficiary of the sender’s order and the funds transfer is completed on the basis of that error, the sender of the payment order that was erroneously executed and all previous senders in the funds transfer are not obliged to pay the payment orders they issued. The issuer of the erroneous order is entitled to recover from the beneficiary of the order the payment received to the extent allowed by the law governing mistake and restitution.

    § 4A-304. DUTY OF SENDER TO REPORT ERRONEOUSLY EXECUTED PAYMENT ORDER

    If the sender of a payment order that is erroneously executed as stated in Section 4A-303 receives notification from the receiving bank that the order was executed or that the sender’s account was debited with respect to the order, the sender has a duty to exercise ordinary care to determine, on the basis of information available to the sender, that the order was erroneously executed and to notify the bank of the relevant facts within a reasonable time not exceeding 90 days after the notification from the bank was received by the sender. If the sender fails to perform that duty, the bank is not obliged to pay interest on any amount refundable to the sender under Section 4A-402(d) for the period before the bank learns of the execution error. The bank is not entitled to any recovery from the sender on account of a failure by the sender to perform the duty stated in this section.

    § 4A-305. LIABILITY FOR LATE OR IMPROPER EXECUTION OR FAILURE TO EXECUTE PAYMENT ORDER

    (a) If a funds transfer is completed but execution of a payment order by the receiving bank in breach of Section 4A-302 results in delay in payment to the beneficiary, the bank is obliged to pay interest to either the originator or the beneficiary of the funds transfer for the period of delay caused by the improper execution. Except as provided in subsection (c), additional damages are not recoverable.

    (b) If execution of a payment order by a receiving bank in breach of Section 4A-302 results in (i) noncompletion of the funds transfer, (ii) failure to use an intermediary bank designated by the originator, or (iii) issuance of a payment order that does not comply with the terms of the payment order of the originator, the bank is liable to the originator for its expenses in the funds transfer and for incidental expenses and interest losses, to the extent not covered by subsection (a), resulting from the improper execution. Except as provided in subsection (c), additional damages are not recoverable.

    (c) In addition to the amounts payable under subsections (a) and (b), damages, including consequential damages, are recoverable to the extent provided in an express written agreement of the receiving bank.

    (d) If a receiving bank fails to execute a payment order it was obliged by express agreement to execute, the receiving bank is liable to the sender for its expenses in the transaction and for incidental expenses and interest losses resulting from the failure to execute. Additional damages, including consequential damages, are recoverable to the extent provided in an express written agreement of the receiving bank, but are not otherwise recoverable.

    (e) Reasonable attorney’s fees are recoverable if demand for compensation under subsection (a) or (b) is made and refused before an action is brought on the claim. If a claim is made for breach of an agreement under subsection (d) and the agreement does not provide for damages, reasonable attorney’s fees are recoverable if demand for compensation under subsection (d) is made and refused before an action is brought on the claim.

    (f) Except as stated in this section, the liability of a receiving bank under subsections (a) and (b) may not be varied by agreement.

    PART 4: PAYMENT

    § 4A-401. PAYMENT DATE

    “Payment date” of a payment order means the day on which the amount of the order is payable to the beneficiary by the beneficiary’s bank. The payment date may be determined by instruction of the sender but cannot be earlier than the day the order is received by the beneficiary’s bank and, unless otherwise determined, is the day the order is received by the beneficiary’s bank.

    § 4A-402. OBLIGATION OF SENDER TO PAY RECEIVING BANK

    (a) This section is subject to Sections 4A-205 and 4A-207.

    (b) With respect to a payment order issued to the beneficiary’s bank, acceptance of the order by the bank obliges the sender to pay the bank the amount of the order, but payment is not due until the payment date of the order.

    (c) This subsection is subject to subsection (e) and to Section 4A-303 with respect to a payment order issued to a receiving bank other than the beneficiary’s bank, acceptance of the order by the receiving bank obliges the sender to pay the bank the amount of the sender’s order. Payment by the sender is not due until the execution date of the sender’s order. The obligation of that sender to pay its payment order is excused if the funds transfer is not completed by acceptance by the beneficiary’s bank of a payment order instructing payment to the beneficiary of that sender’s payment order.

    (d) If the sender of a payment order pays the order and was not obliged to pay all or part of the amount paid, the bank receiving payment is obliged to refund payment to the extent the sender was not obliged to pay. Except as provided in Sections 4A-204 and 4A-304, interest is payable on the refundable amount from the date of payment.

    (e) If a funds transfer is not completed as stated in subsection (c) and an intermediary bank is obliged to refund payment as stated in subsection (d) but is unable to do so because not permitted by applicable law or because the bank suspends payments, a sender in the funds transfer that executed a payment order in compliance with an instruction, as stated in Section 4A-302(a)(l), to route the funds transfer through that intermediary bank is entitled to receive or retain payment from the sender of the payment order that it accepted. The first sender in the funds transfer that issued an instruction requiring routing through that intermediary bank is subrogated to the right of the bank that paid the intermediary bank to refund as stated in subsection (d).

    (f) The right of the sender of a payment order to be excused from the obligation to pay the order as stated in subsection (c) or to receive refund under subsection (d) may not be varied by agreement.

    § 4A-403. PAYMENT BY SENDER TO RECEIVING BANK

    (a) Payment of the sender’s obligation under Section 4A-402 to pay the receiving bank occurs as follows:

    • (1) If the sender is a bank, payment occurs when the receiving bank receives final settlement of the obligation through a Federal Reserve Bank or through a funds-transfer system.

    • (2) If the sender is a bank and the sender (i) credited an account of the receiving bank with the sender, or (ii) caused an account of the receiving bank in another bank to be credited, payment occurs when the credit is withdrawn or, if not withdrawn, at midnight of the day on which the credit is withdrawable and the receiving bank learns of that fact.

    • (3) If the receiving bank debits an account of the sender with the receiving bank, payment occurs when the debit is made to the extent the debit is covered by a withdrawable credit balance in the account.

    (b) If the sender and receiving bank are members of a funds-transfer system that nets obligations multilaterally among participants, the receiving bank receives final settlement when settlement is complete in accordance with the rules of the system. The obligation of the sender to pay the amount of a payment order transmitted through the funds-transfer system may be satisfied, to the extent permitted by the rules of the system, by setting off and applying against the sender’s obligation the right of the sender to receive payment from the receiving bank of the amount of any other payment order transmitted to the sender by the receiving bank through the funds-transfer system. The aggregate balance of obligations owed by each sender to each receiving bank in the funds-transfer system may be satisfied, to the extent permitted by the rules of the system, by setting off and applying against that balance the aggregate balance of obligations owed to the sender by other members of the system. The aggregate balance is determined after the right of setoff stated in the second sentence of this subsection has been exercised.

    (c) If two banks transmit payment orders to each other under an agreement that settlement of the obligations of each bank to the other under Section 4A-402 will be made at the end of the day or other period, the total amount owed with respect to all orders transmitted by one bank shall be set off against the total amount owed with respect to all orders transmitted by the other bank. To the extent of the setoff, each bank has made payment to the other.

    (d) In a case not covered by subsection (a), the time when payment of the sender’s obligation under Section 4A-402(b) or 4A-402(c) occurs is governed by applicable principles of law that determine when an obligation is satisfied.

    § 4A-404. OBLIGATION OF BENEFICIARY’S BANK TO PAY AND GIVE NOTICE TO BENEFICIARY

    (a) Subject to Sections 4A-21l(e), 4A-405(d), and 4A-405(e), if a beneficiary’s bank accepts a payment order, the bank is obliged to pay the amount of the order to the beneficiary of the order. Payment is due on the payment date of the order, but if acceptance occurs on the payment date after the close of the funds-transfer business day of the bank, payment is due on the next funds-transfer business day. If the bank refuses to pay after demand by the beneficiary and receipt of notice of particular circumstances that will give rise to consequential damages as a result of nonpayment, the beneficiary may recover damages resulting from the refusal to pay to the extent the bank had notice of the damages, unless the bank proves that it did not pay because of a reasonable doubt concerning the right of the beneficiary to payment.

    (b) If a payment order accepted by the beneficiary’s bank instructs payment to an account of the beneficiary, the bank is obliged to notify the beneficiary of receipt of the order before midnight of the next funds-transfer business day following the payment date. If the payment order does not instruct payment to an account of the beneficiary, the bank is required to notify the beneficiary only if notice is required by the order. Notice may be given by first class mail or any other means reasonable in the circumstances. If the bank fails to give the required notice, the bank is obliged to pay interest to the beneficiary on the amount of the payment order from the day notice should have been given until the day the beneficiary learned of receipt of the payment order by the bank. No other damages are recoverable. Reasonable attorney’s fees are also recoverable if demand for interest is made and refused before an action is brought on the claim.

    (c) The right of a beneficiary to receive payment and damages as stated in subsection (a) may not be varied by agreement or a funds-transfer system rule. The right of a beneficiary to be notified as stated in subsection (b) may be varied by agreement of the beneficiary or by a funds-transfer system rule if the beneficiary is notified of the rule before initiation of the funds transfer.

    §4A-405. PAYMENT BY BENEFICIARY’S BANKTO BENEFICIARY

    (a) If the beneficiary’s bank credits an account of the beneficiary of a payment order, payment of the bank’s obligation under Section 4A-404(a) occurs when and to the extent (i) the beneficiary is notified of the right to withdraw the credit, (ii) the bank lawfully applies the credit to a debt of the beneficiary, or (iii) funds with respect to the order are otherwise made available to the beneficiary by the bank.

    (b) If the beneficiary’s bank does not credit an account of the beneficiary of a payment order, the time when payment of the bank’s obligation under Section 4A-404(a) occurs is governed by principles of law that determine when an obligation is satisfied.

    (c) Except as stated in subsections (d) and (e), if the beneficiary’s bank pays the beneficiary of a payment order under a condition to payment or agreement of the beneficiary giving the bank the right to recover payment from the beneficiary if the bank does not receive payment of the order, the condition to payment or agreement is not enforceable.

    (d) A funds-transfer system rule may provide that payments made to beneficiaries of funds transfers made through the system are provisional until receipt of payment by the beneficiary’s bank of the payment order it accepted. A beneficiary’s bank that makes a payment that is provisional under the rule is entitled to refund from the beneficiary if (i) the rule requires that both the beneficiary and the originator be given notice of the provisional nature of the payment before the funds transfer is initiated, (ii) the beneficiary, the beneficiary’s bank and the originator’s bank agreed to be bound by the rule, and (iii) the beneficiary’s bank did not receive payment of the payment order that it accepted. If the beneficiary is obliged to refund payment to the beneficiary’s bank, acceptance of the payment order by the beneficiary’s bank is nullified and no payment by the originator of the funds transfer to the beneficiary occurs under Section 4A-406.

    (e) This subsection applies to a funds transfer that includes a payment order transmitted over a funds-transfer system that (i) nets obligations multilaterally among participants, and (ii) has in effect a loss-sharing agreement among participants for the purpose of providing funds necessary to complete settlement of the obligations of one or more participants that do not meet their settlement obligations. If the beneficiary’s bank in the funds transfer accepts a payment order and the system fails to complete settlement pursuant to its rules with respect to any payment order in the funds transfer, (i) the acceptance by the beneficiary’s bank is nullified and no person has any right or obligation based on the acceptance, (ii) the beneficiary’s bank is entitled to recover payment from the beneficiary, (iii) no payment by the originator to the beneficiary occurs under Section 4A-406, and (iv) subject to Section 4A-402(e), each sender in the funds transfer is excused from its obligation to pay its payment order under Section 4A-402(c) because the funds transfer has not been completed.

    § 4A-406. PAYMENT BY ORIGINATOR TO BENEFICIARY; DISCHARGE OF UNDERLYING OBLIGATION

    (a) Subject to Sections 4A-211(e), 4A-405(d), and 4A-405(e), the originator of a funds transfer pays the beneficiary of the originator’s payment order (i) at the time a payment order for the benefit of the beneficiary is accepted by the beneficiary’s bank in the funds transfer and (ii) in an amount equal to the amount of the order accepted by the beneficiary’s bank, but not more than the amount of the originator’s order.

    (b) If payment under subsection (a) is made to satisfy an obligation, the obligation is discharged to the same extent discharge would result from payment to the beneficiary of the same amount in money, unless (i) the payment under subsection (a) was made by a means prohibited by the contract of the beneficiary with respect to the obligation, (ii) the beneficiary, within a reasonable time after receiving notice of receipt of the order by the beneficiary’s bank, notified the originator of the beneficiary’s refusal of the payment, (iii) funds with respect to the order were not withdrawn by the beneficiary or applied to a debt of the beneficiary, and (iv) the beneficiary would suffer a loss that could reasonably have been avoided if payment had been made by a means complying with the contract. If payment by the originator does not result in discharge under this section, the originator is subrogated to the rights of the beneficiary to receive payment from the beneficiary’s bank under Section 4A-404(a).

    (c) For the purpose of determining whether discharge of an obligation occurs under subsection (b), if the beneficiary’s bank accepts a payment order in an amount equal to the amount of the originator’s payment order less charges of one or more receiving banks in the funds transfer, payment to the beneficiary is deemed to be in the amount of the originator’s order unless upon demand by the beneficiary the originator does not pay the beneficiary the amount of the deducted charges.

    (d) Rights of the originator or of the beneficiary of a funds transfer under this section may be varied only by agreement of the originator and the beneficiary.

    PART 5 MISCELLANEOUS PROVISIONS

    § 4A-501. VARIATION BY AGREEMENT AND EFFECT OF FUNDS-TRANSFER SYSTEM RULE

    (a) Except as otherwise provided in this Article, the rights and obligations of a party to a funds transfer may be varied by agreement of the affected party.

    (b) “Funds-transfer system rule” means a rule of an association of banks (i) governing transmission of payment orders by means of a funds-transfer system of the association or rights and obligations with respect to those orders, or (ii) to the extent the rule governs rights and obligations between banks that are parties to a funds transfer in which a Federal Reserve Bank, acting as an intermediary bank, sends a payment order to the beneficiary’s bank. Except as otherwise provided in this Article, a funds-transfer system rule governing rights and obligations between participating banks using the system may be effective even if the rule conflicts with this Article and indirectly affects another party to the funds transfer who does not consent to the rule. A funds-transfer system rule may also govern rights and obligations of parties other than participating banks using the system to the extent stated in Sections 4A-404(c), 4A-405(d), and 4A-507(c).

    § 4A-502. CREDITOR PROCESS SERVED ON RECEIVING BANK; SETOFF BY BENEFICIARY’S BANK

    (a) As used in this section, “creditor process” means levy, attachment, garnishment, notice of lien, sequestration, or similar process issued by or on behalf of a creditor or other claimant with respect to an account.

    (b) This subsection applies to creditor process with respect to an authorized account of the sender of a payment order if the creditor process is served on the receiving bank. For the purpose of determining rights with respect to the creditor process, if the receiving bank accepts the payment order the balance in the authorized account is deemed to be reduced by the amount of the payment order to the extent the bank did not otherwise receive payment of the order, unless the creditor process is served at a time and in a manner affording the bank a reasonable opportunity to act on it before the bank accepts the payment order.

    (c) If a beneficiary’s bank has received a payment order for payment to the beneficiary’s account in the bank, the following rules apply:

    • (1) The bank may credit the beneficiary’s account. The amount credited may be set off against an obligation owed by the beneficiary to the bank or may be applied to satisfy creditor process served on the bank with respect to the account.

    • (2) The bank may credit the beneficiary’s account and allow withdrawal of the amount credited unless creditor process with respect to the account is served at a time and in a manner affording the bank a reasonable opportunity to act to prevent withdrawal.

    • (3) If creditor process with respect to the beneficiary’s account has been served and the bank has had a reasonable opportunity to act on it, the bank may not reject the payment order except for a reason unrelated to the service of process.

    (d) Creditor process with respect to a payment by the originator to the beneficiary pursuant to a funds transfer may be served only on the beneficiary’s bank with respect to the debt owed by that bank to the beneficiary. Any other bank served with the creditor process is not obliged to act with respect to the process.

    § 4A-503. INJUNCTION OR RESTRAINING ORDER WITH RESPECT TO FUNDS TRANSFER

    For proper cause and in compliance with applicable law, a court may restrain (i) a person from issuing a payment order to initiate a funds transfer, (ii) an originator’s bank from executing the payment order of the originator, or (iii) the beneficiary’s bank from releasing funds to the beneficiary or the beneficiary from withdrawing the funds. A court may not otherwise restrain a person from issuing a payment order, paying or receiving payment of a payment order, or otherwise acting with respect to a funds transfer.

    § 4A-504. ORDER IN WHICH ITEMS AND PAYMENT ORDERS MAY BE CHARGED TO ACCOUNT; ORDER OF WITHDRAWALS FROM ACCOUNT

    (a) If a receiving bank has received more than one payment order of the sender or one or more payment orders and other items that are payable from the sender’s account, the bank may charge the sender’s account with respect to the various orders and items in any sequence.

    (b) In determining whether a credit to an account has been withdrawn by the holder of the account or applied to a debt of the holder of the account, credits first made to the account are first withdrawn or applied.

    § 4A-505. PRECLUSION OF OBJECTION TO DEBIT OF CUSTOMER’S ACCOUNT

    If a receiving bank has received payment from its customer with respect to a payment order issued in the name of the customer as sender and accepted by the bank, and the customer received notification reasonably identifying the order, the customer is precluded from asserting that the bank is not entitled to retain the payment unless the customer notifies the bank of the customer’s objection to the payment within one year after the notification was received by the customer.

    § 4A-506. RATE OF INTEREST

    (a) If, under this Article, a receiving bank is obliged to pay interest with respect to a payment order issued to the bank, the amount payable may be determined (i) by agreement of the sender and receiving bank, or (ii) by a funds-transfer system rule if the payment order is transmitted through a funds-transfer system.

    (b) If the amount of interest is not determined by an agreement or rule as stated in subsection (a), the amount is calculated by multiplying the applicable Federal Funds rate by the amount on which interest is payable, and then multiplying the product by the number of days for which interest is payable. The applicable Federal Funds rate is the average of the Federal Funds rates published by the Federal Reserve Bank of New York for each of the days for which interest is payable divided by 360. The Federal Funds rate for any day on which a published rate is not available is the same as the published rate for the next preceding day for which there is a published rate. If a receiving bank that accepted a payment order is required to refund payment to the sender of the order because the funds transfer was not completed, but the failure to complete was not due to any fault by the bank, the interest payable is reduced by a percentage equal to the reserve requirement on deposits of the receiving bank.

    § 4A-507. CHOICE OF LAW

    (a) The following rules apply unless the affected parties otherwise agree or subsection (c) applies:

    • (1) The rights and obligations between the sender of a payment order and the receiving bank are governed by the law of the jurisdiction in which the receiving bank is located.

    • (2) The rights and obligations between the beneficiary’s bank and the beneficiary are governed by the law of the jurisdiction in which the beneficiary’s bank is located.

    • (3) The issue of when payment is made pursuant to a funds transfer by the originator to the beneficiary is governed by the law of the jurisdiction in which the beneficiary’s bank is located.

    (b) If the parties described in each paragraph of subsection (a) have made an agreement selecting the law of a particular jurisdiction to govern rights and obligations between each other, the law of that jurisdiction governs those rights and obligations, whether or not the payment order or the funds transfer bears a reasonable relation to that jurisdiction.

    (c) A funds-transfer system rule may select the law of a particular jurisdiction to govern (i) rights and obligations between participating banks with respect to payment orders transmitted or processed through the system, or (ii) the rights and obligations of some or all parties to a funds transfer any part of which is carried out by means of the system. A choice of law made pursuant to clause (i) is binding on participating banks. A choice of law made pursuant to clause (ii) is binding on the originator, other sender, or a receiving bank having notice that the funds-transfer system might be used in the funds transfer and of the choice of law by the system when the originator, other sender, or receiving bank issued or accepted a payment order. The beneficiary of a funds transfer is bound by the choice of law if, when the funds transfer is initiated, the beneficiary has notice that the funds-transfer system might be used in the funds transfer and of the choice of law by the system. The law of a jurisdiction selected pursuant to this subsection may govern, whether or not that law bears a reasonable relation to the matter in issue.

    (d) In the event of inconsistency between an agreement under subsection (b) and a choice-of-law rule under subsection (c), the agreement under subsection (b) prevails.

    (e) If a funds transfer is made by use of more than one funds-transfer system and there is inconsistency between choice-of-law rules of the systems, the matter in issue is governed by the law of the selected jurisdiction that has the most significant relationship to the matter in issue.

    TECHNICAL AMENDMENT TO ARTICLE 1

    A state enacting Article 4A should amend Section 1-105(2) by adding the following:

    “Governing law in the Article on Funds Transfers. Section 4A-507.”

    Appendix IV: Draft UNCITRAL Model Law on International Credit Transfers

    Part I. Text of articles 1 to 15 as they result from the work of the Commission at its twenty-fourth session

    CHAPTER I. GENERAL PROVISIONS

    Article 1 Sphere of application*

    (1) This law applies to credit transfers where any sending bank and its receiving bank are in different States.

    (2) This law applies to other entities that as an ordinary part of their business engage in executing payment orders in the same manner as it applies to banks.

    (3) for the purpose of determining the sphere of application of this law, branches and separate offices of a bank in different States are separate banks.

    Article 2 Definitions

    For the purposes of this law:

    (a) “Credit transfer” means one or more payment orders, beginning with the originator’s payment order, made for the purpose of placing funds at the disposal of a beneficiary. The term includes any payment order issued by the originator’s bank or any intermediary bank intended to carry out the originator’s payment order. A payment order issued for the purpose of effecting payment for such an order is considered to be part of a different credit transfer.

    (b) “Payment order” means an unconditional instruction, in any form, by a sender to a receiving bank to place at the disposal of a beneficiary a fixed or determinable amount of money if:

    • (i) the receiving bank is to be reimbursed by debiting an account of, or otherwise receiving payment from, the sender, and

    • (ii) the instruction does not provide that payment is to be made at the request of the beneficiary.

    Nothing in this paragraph prevents an instruction from being a payment order merely because it directs the beneficiary’s bank to hold, until the beneficiary requests payment, funds for a beneficiary that does not maintain an account with it.

    (c) “Originator” means the issuer of the first payment order in a credit transfer.

    (d) “Beneficiary” means the person designated in the originator’s payment order to receive funds as a result of the credit transfer.

    (e) “Sender” means the person who issues a payment order, including the originator and any sending bank.

    [(f) omitted]

    (g) A “receiving bank” is a bank that receives a payment order.

    (h) “Intermediary bank” means any receiving bank other than the originator’s bank and the beneficiary’s bank.

    (i) “Funds” or “money” includes credit in an account kept by a bank and includes credit denominated in a monetary unit of account that is established by an intergovernmental institution or by agreement of two or more States, provided that this law shall apply without prejudice to the rules of the intergovernmental institution or the stipulations of the agreement.

    (j) “Authentication” means a procedure established by agreement to determine whether a payment order or a revocation of a payment order was issued by the person indicated as the sender.

    (k) “Execution period” means the period of one or two days beginning on the first day that a payment order may be executed under article 10(1) and ending on the last day on which it may be executed under that article, on the assumption that it is accepted on receipt.

    [(l) “Execution”, in so far as it applies to a receiving bank other than the beneficiary’s bank, means the issue of a payment order intended to carry out the payment order received by the receiving bank.]

    [(m) omitted]

    (n) “Interest” means the time value of the funds or money involved, which, unless otherwise agreed, is calculated at the rate and on the basis customarily accepted by the banking community for the funds or money involved.

    Article 2 bis Conditional instructions

    (1) When an instruction is not a payment order because it is subject to a condition but a bank that has received the instruction executes it by issuing an unconditional payment order, thereafter the sender of the instruction has the same rights and obligations under this law as the sender of a payment order and the beneficiary designated in the instruction shall be treated as the beneficiary of a payment order.

    (2) This law does not govern the time of execution of a conditional instruction received by a bank, nor does it affect any right or obligation of the sender of a conditional instruction that depends on whether the condition has been satisfied.

    Article 3 Variation by agreement

    Except as otherwise provided in this law, the rights and obligations of parties to a credit transfer may be varied by their agreement.

    CHAPTER II. OBLIGATIONS OF THE PARTIES

    Article 4: Obligations of sender

    (1) A sender is bound by a payment order or a revocation of a payment order if it was issued by the sender or by another person who had the authority to bind the sender.

    (2) When a payment order or a revocation of a payment order is subject to authentication other than by means of a mere comparison of signature, a purported sender who is not bound under paragraph (1) is nevertheless bound if:

    • (a) the authentication is in the circumstances a commercially reasonable method of security against unauthorized payment orders, and

    • (b) the receiving bank complied with the authentication.

    (3) The parties are not permitted to agree that paragraph (2) shall apply if the authentication is not commercially reasonable in the circumstances.

    (4) A purported sender is, however, not bound under paragraph (2) if it proves that the payment order as received by the receiving bank resulted from the actions of a person other than

    • (a) a present or former employee of the purported sender, or

    • (b) a person whose relationship with the purported sender enabled that person to gain access to the authentication procedure.

    The preceding sentence does not apply if the receiving bank proves that the payment order resulted from the actions of a person who had gained access to the authentication procedure through the fault of the purported sender.

    (5) A sender who is bound by a payment order is bound by the terms of the order as received by the receiving bank. However, the sender is not bound by an erroneous duplicate of, or an error in, a payment order if:

    • (a) the sender and the receiving bank have agreed upon a procedure for detecting erroneous duplicates or errors in a payment order, and

    • (b) use of the procedure by the receiving bank revealed or would have revealed the erroneous duplicate or the error.

    If the error that the bank would have detected was that the sender instructed payment of an amount greater than the amount intended by the sender, the sender is bound only to the extent of the amount that was intended. This paragraph applies to an error in a revocation order as it applies to an error in a payment order.

    (6) A sender becomes obligated to pay the receiving bank for the payment order when the receiving bank accepts it, but payment is not due until the beginning of the execution period.

    Article 5 Payment to receiving bank

    For the purposes of this law, payment of the sender’s obligation under article 4(6) to pay the receiving bank occurs:

    • (a) if the receiving bank debits an account of the sender with the receiving bank, when the debit is made; or

    • (b) if the sender is a bank and subparagraph (a) does not apply,

      • (i) when a credit that the sender causes to be entered to an account of the receiving bank with the sender is used or, if not used, on the banking day following the day on which the credit is available for use and the receiving bank learns of that fact, or

      • (ii) when a credit that the sender causes to be entered to an account of the receiving bank in another bank is used or, if not used, on the banking day following the day on which the credit is available for use and the receiving bank learns of that fact, or

      • (iii) when final settlement is made in favour of the receiving bank at a central bank at which the receiving bank maintains an account, or

      • (iv) when final settlement is made in favour of the receiving bank in accordance with

        • a. the rules of a funds transfer system that provides for the settlement of obligations among participants either bilaterally or multilaterally, or

        • b. a bilateral netting agreement with the sender; or

    • (c) If neither subparagraph (a) nor (b) applies, as otherwise provided by law.

    Article 6 Acceptance or rejection of a payment order by receiving bank other than the beneficiary’s bank

    (1) The provisions of this article apply to a receiving bank other than the beneficiary’s bank.

    (2) A receiving bank accepts the sender’s payment order at the earliest of the following times:

    • (a) when the bank receives the payment order, provided that the sender and the bank have agreed that the bank will execute payment orders from the sender upon receipt,

    • (b) when the bank gives notice to the sender of acceptance,

    • (c) when the bank issues a payment order intended to carry out the payment order received,

    • (d) when the bank debits an account of the sender with the bank as payment for the payment order,

    • (e) when the time for giving notice of rejection under paragraph (3) has elapsed without notice having been given.

    (3) A receiving bank that does not accept a payment order is required to give notice of rejection no later than on the banking day following the end of the execution period, unless:

    • (a) where payment is to be made by debiting an account of the sender with the receiving bank, there are insufficient funds available in the account to pay for the payment order;

    • (b) where payment is to be made by other means, payment has not been made; or

    • (c) there is insufficient information to identify the sender.

    (4) A payment order ceases to have effect if it is neither accepted nor rejected under this article before the close of business on the fifth banking day following the end of the execution period.

    Article 7: Obligations of receiving bank other than the beneficiary’s bank

    (1) The provisions of this article apply to a receiving bank other than the beneficiary’s bank.

    (2) A receiving bank that accepts a payment order is obligated under that payment order to issue a payment order, within the time required by article 10, either to the beneficiary’s bank or to an intermediary bank, that is consistent with the contents of the payment order received by the receiving bank and that contains the instructions necessary to implement the credit transfer in an appropriate manner.

    (3) If a receiving bank determines that it is not feasible to follow an instruction of the sender specifying an intermediary bank or funds transfer system to be used in carrying out the credit transfer, or that following such an instruction would cause excessive costs or delay in completing the credit transfer, the receiving bank shall be taken to have complied with paragraph (2) if it inquires of the sender what further actions it should take in the light of the circumstances, before the end of the execution period.

    (4) When an instruction is received that appears to be intended to be a payment order but does not contain sufficient data to be a payment order, or being a payment order it cannot be executed because of insufficient data, but the sender can be identified, the receiving bank shall give notice to the sender of the insufficiency, within the time required by article 10.

    (5) When a receiving bank detects that there is an inconsistency in the information relating to the amount of money to be transferred, it shall, within the time required by article 10, give notice to the sender of the inconsistency, if the sender can be identified. Any interest payable under article 16(3) for failing to give the notice required by this paragraph shall be deducted from any interest payable under article 16(1) for failing to comply with paragraph (2).

    (6) For the purposes of this article, branches and separate offices of a bank, even if located in the same State, are separate banks.

    Article 8 Acceptance or rejection of a payment order by beneficiary’s bank

    (1) The beneficiary’s bank accepts a payment order at the earliest of the following times:

    • (a) when the bank receives the payment order, provided that the sender and the bank have agreed that the bank will execute payment orders from the sender upon receipt,

    • (b) when the bank gives notice to the sender of acceptance,

    • (c) when the bank debits an account of the sender with the bank as payment for the payment order,

    • (d) when the bank credits the beneficiary’s account or otherwise places the funds at the disposal of the beneficiary,

    • (e) when the bank gives notice to the beneficiary that it has the right to withdraw the funds or use the credit,

    • (f) when the bank otherwise applies the credit as instructed in the payment order,

    • (g) when the bank applies the credit to a debt of the beneficiary owed to it or applies it in conformity with an order of a court or other competent authority,

    • (h) when the time for giving notice of rejection under paragraph (2) has elapsed without notice having been given.

    (2) A beneficiary’s bank that does not accept a payment order is required to give notice of rejection no later than on the banking day following the end of the execution period, unless:

    • (a) where payment is to be made by debiting an account of the sender with the beneficiary’s bank, there are insufficient funds available in the account to pay for the payment order;

    • (b) where payment is to be made by other means, payment has not been made; or

    • (c) there is insufficient information to identify the sender.

    (3) A payment order ceases to have effect if it is neither accepted nor rejected under this article before the close of business on the fifth banking day following the end of the execution period.

    Article 9 Obligations of beneficiary’s bank

    (1) The beneficiary’s bank is, upon acceptance of a payment order, obligated to place the funds at the disposal of the beneficiary, or otherwise to apply the credit, in accordance with the payment order and the law governing the relationship between the bank and the beneficiary.

    (2) When an instruction is received that appears to be intended to be a payment order but does not contain sufficient data to be a payment order, or being a payment order it cannot be executed because of insufficient data, but the sender can be identified, the beneficiary’s bank shall give notice to the sender of the insufficiency, within the time required by article 10.

    (3) When the beneficiary’s bank detects that there is an inconsistency in the information relating to the amount of money to be transferred, it shall, within the time required by article 10, give notice to the sender of the inconsistency if the sender can be identified.

    (4) When the beneficiary’s bank detects that there is an inconsistency in the information that identifies the beneficiary, it shall, within the time required by article 10, give notice to the sender of the inconsistency if the sender can be identified.

    (5) Unless the payment order states otherwise, the beneficiary’s bank shall, within the time required for execution under article 10, give notice to a beneficiary who does not maintain an account at the bank that it is holding funds for his benefit, if the bank has sufficient information to give such notice.

    Article 10 Time for receiving bank to execute payment order and give notices

    (1) In principle, a receiving bank is required to execute the payment order on the banking day it is received. However, if it does not, it shall do so on the banking day after the order is received, unless

    • (a) a later date is specified in the order, in which case the order shall be executed on that date, or

    • (b) the order specifies a date when the funds are to be placed at the disposal of the beneficiary and that date indicates that later execution is appropriate in order for the beneficiary’s bank to accept a payment order and execute it on that date.

    (1 bis) If the receiving bank executes the payment order on the banking day after it is received, except when complying with subparagraph (a) or (b) of paragraph (1), the receiving bank must execute for value as of the day of receipt.

    (1 ter) if a receiving bank accepts a payment order only by virtue of article 6(2)(e), it must execute for value as of the day on which

    • (a) where payment is to be made by debiting an account of the sender with the receiving bank, there are sufficient funds available in the account to pay for the payment order, or

    • (b) where payment is to be made by other means, payment has been made.

    (2) A notice required to be given under article 7(4) or (5) or article 9(2), (3) or (4) shall be given on or before the banking day following the end of the execution period.

    (3) Deleted

    (4) A receiving bank that receives a payment order after the receiving bank’s cut-off time for that type of payment order is entitled to treat the order as having been received on the next day the bank executes that type of payment order.

    (5) If a receiving bank is required to perform an action on a day when it does not perform that type of action, it must perform the required action on the next day it performs that type of action.

    (6) For the purposes of this article, branches and separate offices of a bank, even if located in the same State, are separate banks.

    Article 11 Revocation

    (1) A payment order may not be revoked by the sender unless the revocation order is received by a receiving bank other than the beneficiary’s bank at a time and in a manner sufficient to afford the receiving bank a reasonable opportunity to act before the actual time of execution or the beginning of the day on which the payment order ought to have been executed under subparagraph (a) or (b) of article 10(1), if later.

    (2) A payment order may not be revoked by the sender unless the revocation order is received by the beneficiary’s bank at a time and in a manner sufficient to afford the bank a reasonable opportunity to act before the time the credit transfer is completed or the beginning of the day when the funds are to be placed at the disposal of the beneficiary, if later.

    (3) Notwithstanding the provisions of paragraphs (1) and (2), the sender and the receiving bank may agree that payment orders issued by the sender to the receiving bank are to be irrevocable or that a revocation order is effective only if it is received by an earlier point of time than provided in paragraphs (1) and (2).

    (4) A revocation order must be authenticated.

    (5) A receiving bank other than the beneficiary’s bank that executes, or a beneficiary bank that accepts, a payment order in respect of which an effective revocation order has been or is subsequently received is not entitled to payment for that payment order. If the credit transfer is completed, the bank shall refund any payment received by it.

    (6) If the recipient of a refund is not the originator of the credit transfer, it shall pass on the refund to the previous sender.

    (6 bis) A bank that is obligated to make a refund to its sender is discharged from that obligation to the extent that it makes the refund direct to a prior sender. Any bank subsequent to that prior sender is discharged to the same extent. This paragraph does not apply to a bank if it would affect the bank’s rights or obligations under any agreement or any rule of a funds transfer system.

    (6 ter) An originator entitled to a refund under this article may recover from any bank obligated to make a refund hereunder to the extent that the bank has not previously refunded. A bank that is obligated to make a refund is discharged from that obligation to the extent that it makes the refund direct to the originator. Any other bank that is obligated is discharged to the same extent.

    (7) If the credit transfer is completed but a receiving bank executes a payment order in respect of which an effective revocation order has been or is subsequently received, the receiving bank has such rights to recover from the beneficiary the amount of the credit transfer as may otherwise be provided by law.

    (8) The death, insolvency, bankruptcy or incapacity of either the sender or the originator does not of itself operate to revoke a payment order or terminate the authority of the sender.

    (8 bis) The principles contained in this article apply to an amendment of payment order.

    (9) For the purposes of this article, branches and separate offices of a bank, even if located in the same State, are separate banks.

    CHAPTER III. CONSEQUENCES OF FAILED, ERRONEOUS OR DELAYED CREDIT TRANSFERS

    Article 12 Assistance

    Until the credit transfer is completed, each receiving bank is under a duty to assist the originator and each subsequent sending bank, and to seek the assistance of the next receiving bank, in completing the banking procedure of the credit transfer.

    Article 13 Refund

    (1) If the credit transfer is not completed, the originator’s bank is obligated to refund to the originator any payment received from it, with interest from the day of payment to the day of refund. The originator’s bank and each subsequent receiving bank is entitled to the return of any funds it has paid to its receiving bank, with interest from the day of payment to the day of refund.

    (2) The provisions of paragraph (1) may not be varied by agreement except when a prudent originator’s bank would not have otherwise accepted a particular payment order because of a significant risk involved in the credit transfers.

    (3) A receiving bank is not required to make a refund under paragraph (1) if it is unable to obtain a refund because an intermediary bank through which it was directed to effect the credit transfer has suspended payment or is prevented by law from making the refund. A receiving bank is not considered to have been directed to use the intermediary bank unless the receiving bank proves that it does not systematically seek such directions in similar cases. The sender that first specified the use of that intermediary bank has the right to obtain the refund from the intermediary bank.

    (4) A bank that is obligated to make a refund to its sender is discharged from that obligation to the extent that it makes the refund direct to a prior sender. Any bank subsequent to that prior sender is discharged to the same extent. This paragraph does not apply to a bank if it would affect the bank’s rights or obligations under any agreement or any rule of a funds transfer system.

    (5) An originator entitled to a refund under this article may recover from any bank obligated to make a refund hereunder to the extent that the bank has not previously refunded. A bank that is obligated to make a refund is discharged from that obligation to the extent that it makes the refund direct to the originator. Any other bank that is obligated is discharged to the same extent.

    Article 14 Correction of underpayment

    If the amount of the payment order executed by a receiving bank is less than the amount of the payment order it accepted, it is obligated to issue a payment order for the difference.

    Article 15 Restitution of overpayment

    If the credit transfer is completed, but the amount of the payment order executed by a receiving bank is greater than the amount of the payment order it accepted, it has such rights to recover the difference from the beneficiary as may otherwise be provided by law.

    Part II. Text of articles 16 to 18 as they resulted from the work of the Working Group on International Payments at its twenty-second session

    (The text of those articles was not considered by the Commission at its twenty-fourth session.)

    Article 16 Liability and damages

    (1) A receiving bank other than the beneficiary’s bank is liable to the beneficiary for its failure to execute its sender’s payment order in the time required by article 10(1), if the credit transfer is completed under article 17(1). The liability of the receiving bank shall be to pay interest on the amount of the payment order for the period of delay caused by the receiving bank’s failure. Such liability may be discharged by payment to its receiving bank or by direct payment to the beneficiary.

    (2) If a receiving bank that is the recipient of interest under paragraph (1) is not the beneficiary of the transfer, the receiving bank shall pass on the benefit of the interest to the next receiving bank or, if it is the beneficiary’s bank, to the beneficiary.

    (3) A receiving bank other than the beneficiary’s bank that does not give a notice required under article 7(3), (4) or (5) shall pay interest to the sender on any payment that it has received from the sender under article 4(6) for the period during which it retains the payment.

    (4) A beneficiary’s bank that does not give a notice required under article 9(2) or (3) shall pay interest to the sender on any payment that it has received from the sender under article 4(6), from the day of payment until the day that it provides the required notice.

    (5) A receiving bank that issues a payment order in an amount less than the amount of the payment order it accepted shall, if the credit transfer is completed under article 17(1), be liable to the beneficiary for interest on any part of the difference that is not placed at the disposal of the beneficiary on the payment date, for the period of time after the payment date until the full amount is placed at the disposal of the beneficiary. This liability applies only to the extent that the late payment is caused by the receiving bank’s improper action.

    (6) The beneficiary’s bank is liable to the beneficiary to the extent provided by the law governing the relationship between the beneficiary and the bank for its failure to perform one of the obligations under article 9(1) or (5).

    (7) The provisions of this article may be varied by agreement to the extent that the liability of one bank to another bank is increased or reduced. Such an agreement to reduce liability may be contained in a bank’s standard terms of dealing. A bank may agree to increase its liability to an originator or beneficiary that is not a bank, but may not reduce its liability to such an originator or beneficiary.

    (8) The remedies provided in this law do not depend on the existence of a pre-existing relationship between the parties, whether contractual or otherwise. These remedies shall be exclusive, and no other remedy arising out of other doctrines of law shall be available except any remedy that may exist when a bank has improperly executed a payment order or failed to execute a payment order (a) with the intent to cause loss, or (b) recklessly and with knowledge that loss might result.

    CHAPTER IV. COMPLETION OF CREDIT TRANSFER AND DISCHARGE OF OBLIGATION

    Article 17 Completion of credit transfer and discharge of obligation

    (1) A credit transfer is completed when the beneficiary’s bank accepts the payment order. When the credit transfer is completed, the beneficiary’s bank becomes indebted to the beneficiary to the extent of the payment order accepted by it.

    (2) If the transfer was for the purpose of discharging an obligation of the originator to the beneficiary that can be discharged by credit transfer to the account indicated by the originator, the obligation is discharged when the beneficiary’s bank accepts the payment order and to the extent that it would be discharged by payment of the same amount in cash.

    (3) A credit transfer shall be considered complete notwithstanding that the amount of the payment order accepted by the beneficiary’s bank is less than the amount of the originator’s payment order because one or more receiving banks have deducted charges. The completion of the credit transfer shall not prejudice any right of the beneficiary under the applicable law to recover the amount of those charges from the originator.

    CHAPTER V. CONFLICT OF LAWS

    Article 18 Conflict of laws

    (1) The rights and obligations arising out of a payment order shall be governed by the law chosen by the parties. In the absence of agreement, the law of the State of the receiving bank shall apply.

    (2) The second sentence of paragraph (1) shall not affect the determination of which law governs the question whether the actual sender of the payment order had the authority to bind the purported sender for the purposes of article 4(1).

    (3) For the purposes of this article,

    • (a) where a State comprises several territorial units having different rules of law, each territorial unit shall be considered to be a separate State, and

    • (b) branches and separate offices of a bank in different States are separate banks.

    This law does not deal with issues related to the protection of consumers.

    Appendix V: United Nations Convention on v International Bills of Exchange and International Promissory Notes: FUNDS TRANSFERS (1989 Official Text)

    CHAPTER I. SPHERE OF APPLICATION AND FORM OF THE INSTRUMENT

    Article 1

    1. This Convention applies to an international bill of exchange when it contains the heading “International bill of exchange (UNCITRAL Convention)” and also contains in its text the words “International bill of exchange (UNCITRAL Convention)”.

    2. This Convention applies to an international promissory note when it contains the heading “International promissory note (UNCITRAL Convention)” and also contains in its text the words “International promissory note (UNCITRAL Convention)”.

    3. This Convention does not apply to cheques.

    Article 2

    1. An international bill of exchange is a bill of exchange which specifies at least two of the following places and indicates that any two so specified are situated in different States:

    • (a) The place where the bill is drawn;

    • (b) The place indicated next to the signature of the drawer;

    • (c) The place indicated next to the name of the drawee;

    • (d) The place indicated next to the name of the payee;

    • (e) The place of payment, provided that either the place where the bill is drawn or the place of payment is specified on the bill and that such place is situated in a Contracting State.

    2. An international promissory note is a promissory note which specifies at least two of the following places and indicates that any two so specified are situated in different States:

    • (a) The place where the note is made;

    • (b) The place indicated next to the signature of the maker;

    • (c) The place indicated next to the name of the payee;

    • (d) The place of payment, provided that the place of payment is specified on the note and that such place is situated in a Contracting State.

    3. This Convention does not deal with the question of sanctions that may be imposed under national law in cases where an incorrect or false statement has been made on an instrument in respect of a place referred to in paragraph 1 or 2 of this article. However, any such sanctions shall not affect the validity of the instrument or the application of this Convention.

    Article 3

    1. A bill of exchange is a written instrument which:

    • (a) Contains an unconditional order whereby the drawer directs the drawee to pay a definite sum of money to the payee or to his order;

    • (b) Is payable on demand or at a definite time;

    • (c) Is dated;

    • (d) Is signed by the drawer.

    2. A promissory note is a written instrument which:

    • (a) Contains an unconditional promise whereby the maker undertakes to pay a definite sum of money to the payee or to his order;

    • (b) Is payable on demand or at a definite time;

    • (c) Is dated;

    • (d) Is signed by the maker.

    CHAPTER II. INTERPRETATION

    Section 1. General provisions Article 4

    In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international transactions.

    Article 5

    In this Convention:

    • (a) “Bill” means an international bill of exchange governed by this Convention;

    • (b) “Note” means an international promissory note governed by this Convention;

    • (c) “Instrument” means a bill or a note;

    • (d) “Drawee” means a person on whom a bill is drawn and who has not accepted it;

    • (e) “Payee” means a person in whose favour the drawer directs payment to be made or to whom the maker promises to pay;

    • (f) “Holder” means a person in possession of an instrument in accordance with article 15;

    • (g) “Protected holder” means a holder who meets the requirements of article 29;

    • (h) “Guarantor” means any person who undertakes an obligation of guarantee under article 46, whether governed by paragraph 4 (b) (“guaranteed”) or paragraph 4 (c) (“aval”) of article 47;

    • (i) “Party” means a person who has signed an instrument as drawer, maker, acceptor, endorser or guarantor;

    • (j) “Maturity” means the time of payment referred to in paragraphs 4, 5, 6 and 7 of article 9;

    • (k) “Signature” means a handwritten signature, its facsimile or an equivalent authentication effected by any other means; “forged signature” includes a signature by the wrongful use of such means;

    • (l) “Money” or “currency” includes a monetary unit of account which is established by an intergovernmental institution or by agreement between two or more States, provided that this Convention shall apply without prejudice to the rules of the intergovernmental institution or to the stipulations of the agreement.

    Article 6

    For the purposes of this Convention, a person is considered to have knowledge of a fact if he has actual knowledge of that fact or could not have been unaware of its existence.

    Section 2. Interpretation of formal requirements Article 7

    The sum payable by an instrument is deemed to be a definite sum although the instrument states that it is to be paid:

    • (a) With interest;

    • (b) By instalments at successive dates;

    • (c) By instalments at successive dates with a stipulation in the instrument that upon default in payment of any instalment the unpaid balance becomes due;

    • (d) According to a rate of exchange indicated in the instrument or to be determined as directed by the instrument; or

    • (e) In a currency other than the currency in which the sum is expressed in the instrument.

    Article 8

    1. If there is a discrepancy between the sum expressed in words and the sum expressed in figures, the sum payable by the instrument is the sum expressed in words.

    2. If the sum is expressed more than once in words, and there is a discrepancy, the sum payable is the smaller sum. The same rule applies if the sum is expressed more than once in figures only, and there is a discrepancy.

    3. If the sum is expressed in a currency having the same description as that of at least one other State than the State where payment is to be made, as indicated in the instrument, and the specified currency is not identified as the currency of any particular State, the currency is to be considered as the currency of the State where payment is to be made.

    4. If an instrument states that the sum is to be paid with interest, without specifying the date from which interest is to run, interest runs from the date of the instrument.

    5. A stipulation stating that the sum is to be paid with interest is deemed not to have been written on the instrument unless it indicates the rate at which interest is to be paid.

    6. A rate at which interest is to be paid may be expressed either as a definite rate or as a variable rate. For a variable rate to qualify for this purpose, it must vary in relation to one or more reference rates of interest in accordance with provisions stipulated in the instrument and each such reference rate must be published or otherwise available to the public and not be subject, directly or indirectly, to unilateral determination by a person who is named in the instrument at the time the bill is drawn or the note is made, unless the person is named only in the reference rate provisions.

    7. If the rate at which interest is to be paid is expressed as a variable rate, it may be stipulated expressly in the instrument that such rate shall not be less than or exceed a specified rate of interest, or that the variations are otherwise limited.

    8. If a variable rate does not qualify under paragraph 6 of this article or for any reason it is not possible to determine the numerical value of the variable rate for any period, interest shall be payable for the relevant period at the rate calculated in accordance with paragraph 2 of article 70.

    Article 9

    1. An instrument is deemed to be payable on demand:

    • (a) If it states that it is payable at sight or on demand or on presentment or if it contains words of similar import; or

    • (b) If no time of payment is expressed.

    2. An instrument payable at a definite time which is accepted or endorsed or guaranteed after maturity is an instrument payable on demand as regards the acceptor, the endorser or the guarantor.

    3. An instrument is deemed to be payable at a definite time if it states that it is payable:

    • (a) On a stated date or at a fixed period after a stated date or at a fixed period after the date of the instrument;

    • (b) At a fixed period after sight;

    • (c) By instalments at successive dates; or

    • (d) By instalments at successive dates with the stipulation in the instrument that upon default in payment of any instalment the unpaid balance becomes due.

    4. The time of payment of an instrument payable at a fixed period after date is determined by reference to the date of the instrument.

    5. The time of payment of a bill payable at a fixed period after sight is determined by the date of acceptance or, if the bill is dishonoured by non-acceptance, by the date of protest or, if protest is dispensed with, by the date of dishonour.

    6. The time of payment of an instrument payable on demand is the date on which the instrument is presented for payment.

    7. The time of payment of a note payable at a fixed period after sight is determined by the date of the visa signed by the maker on the note or, if his visa is refused, by the date of presentment.

    8. If an instrument is drawn, or made, payable one or more months after a stated date or after the date of the instrument or after sight, the instrument is payable on the corresponding date of the month when payment must be made. If there is no corresponding date, the instrument is payable on the last day of that month.

    Article 10

    1. A bill may be drawn:

    • (a) By two or more drawers;

    • (b) Payable to two or more payees.

    2. A note may be made:

    • (a) By two or more makers;

    • (b) Payable to two or more payees.

    3. If an instrument is payable to two or more payees in the alternative, it is payable to any one of them and any one of them in possession of the instrument may exercise the rights of a holder. In any other case the instrument is payable to all of them and the rights of a holder may be exercised only by all of them.

    Article 11

    A bill may be drawn by the drawer:

    • (a) On himself;

    • (b) Payable to his order.

    Section 3. Completion of an incomplete instrument Article 12

    1. An incomplete instrument which satisfies the requirements set out in paragraph 1 of article 1 and bears the signature of the drawer or the acceptance of the drawee, or which satisfies the requirements set out in paragraph 2 of article 1 and paragraph 2 (d) of article 3, but which lacks other elements pertaining to one or more of the requirements set out in articles 2 and 3, may be completed, and the instrument so completed is effective as a bill or a note.

    2. If such an instrument is completed without authority or otherwise than in accordance with the authority given:

    • (a) A party who signed the instrument before the completion may invoke such lack of authority as a defence against a holder who had knowledge of such lack of authority when he became a holder;

    • (b) A party who signed the instrument after the completion is liable according to the terms of the instrument so completed.

    CHAPTER III. TRANSFER

    Article 13

    An instrument is transferred:

    • (a) By endorsement and delivery of the instrument by the endorser to the endorsee; or

    • (b) By mere delivery of the instrument if the last endorsement is in blank.

    Article 14

    1. An endorsement must be written on the instrument or on a slip affixed thereto “allonge”). It must be signed.

    2. An endorsement may be:

    • (a) In blank, that is, by a signature alone or by a signature accompanied by a statement to the effect that the instrument is payable to a person in possession of it;

    • (b) Special, that is, by a signature accompanied by an indication of the person to whom the instrument is payable.

    3. A signature alone, other than that of the drawee, is an endorsement only if placed on the back of the instrument.

    Article 15

    1. A person is a holder if he is:

    • (a) The payee in possession of the instrument; or

    • (b) In possession of an instrument which has been endorsed to him, or on which the last endorsement is in blank, and on which there appears an uninterrupted series of endorsements, even if any endorsement was forged or was signed by an agent without authority.

    2. If an endorsement in blank is followed by another endorsement, the person who signed this last endorsement is deemed to be an endorsee by the endorsement in blank.

    3. A person is not prevented from being a holder by the fact that the instrument was obtained by him or any previous holder under circumstances, including incapacity or fraud, duress or mistake of any kind, that would give rise to a claim to, or a defence against liability on, the instrument.

    Article 16

    The holder of an instrument on which the last endorsement is in blank may:

    • (a) Further endorse it either by an endorsement in blank or by a special endorsement;

    • (b) Convert the blank endorsement into a special endorsement by indicating in the endorsement that the instrument is payable to himself or to some other specified person; or

    • (c) Transfer the instrument in accordance with subparagraph (b) of article 13.

    Article 17

    1. If the drawer or the maker has inserted in the instrument such words as “not negotiable”, “not transferable”, “not to order”, “pay (X) only”, or words of similar import, the instrument may not be transferred except for purposes of collection, and any endorsement, even if it does not contain words authorizing the endorsee to collect the instrument, is deemed to be an endorsement for collection.

    2. If an endorsement contains the words “not negotiable”, “not transferable”, “not to order”, “pay (X) only”, or words of similar import, the instrument may not be transferred further except for purposes of collection, and any subsequent endorsement, even if it does not contain words authorizing the endorsee to collect the instrument, is deemed to be an endorsement for collection.

    Article 18

    1. An endorsement must be unconditional.

    2. A conditional endorsement transfers the instrument whether or not the condition is fulfilled. The condition is ineffective as to those parties and transferees who are subsequent to the endorsee.

    Article 19

    An endorsement in respect of a part of the sum due under the instrument is ineffective as an endorsement.

    Article 20

    If there are two or more endorsements, it is presumed, unless the contrary is proved, that each endorsement was made in the order in which it appears on the instrument.

    Article 21

    1. If an endorsement contains the words “for collection”, “for deposit”, “value in collection”, “by procuration”, “pay any bank”, or words of similar import authorizing the endorsee to collect the instrument, the endorsee is a holder who:

    • (a) May exercise all rights arising out of the instrument;

    • (b) May endorse the instrument only for purposes of collection;

    • (c) Is subject only to the claims and defences which may be set up against the endorser.

    2. The endorser for collection is not liable on the instrument to any subsequent holder.

    Article 22

    1. If an endorsement contains the words “value in security”, “value in pledge”, or any other words indicating a pledge, the endorsee is a holder who:

    • (a) May exercise all rights arising out of the instrument;

    • (b) May endorse the instrument only for purposes of collection;

    • (c) Is subject only to the claims and defences specified in article 28 or article 30.

    2. If such an endorsee endorses for collection, he is not liable on the instrument to any subsequent holder.

    Article 23

    The holder of an instrument may transfer it to a prior party or to the drawee in accordance with article 13; however, if the transferee has previously been a holder of the instrument, no endorsement is required, and any endorsement which would prevent him from qualifying as a holder may be struck out.

    Article 24

    An instrument may be transferred in accordance with article 13 after maturity, except by the drawee, the acceptor or the maker.

    Article 25

    1. If an endorsement is forged, the person whose endorsement is forged, or a party who signed the instrument before the forgery, has the right to recover compensation for any damage that he may have suffered because of the forgery against:

    • (a) The forger;

    • (b) The person to whom the instrument was directly transferred by the forger;

    • (c) A party or the drawee who paid the instrument to the forger directly or through one or more endorsees for collection.

    2. However, an endorsee for collection is not liable under paragraph 1 of this article if he is without knowledge of the forgery:

    • (a) At the time he pays the principal or advises him of the receipt of payment; or

    • (b) At the time he receives payment, if this is later, unless his lack of knowledge is due to his failure to act in good faith or to exercise reasonable care.

    3. Furthermore, a party or the drawee who pays an instrument is not liable under paragraph 1 of this article if, at the time he pays the instrument, he is without knowledge of the forgery, unless his lack of knowledge is due to his failure to act in good faith or to exercise reasonable care.

    4. Except as against the forger, the damages recoverable under paragraph 1 of this article may not exceed the amount referred to in article 70 or article 71.

    Article 26

    1. If an endorsement is made by an agent without authority or power to bind his principal in the matter, the principal, or a party who signed the instrument before such endorsement, has the right to recover compensation for any damage that he may have suffered because of such endorsement against:

    • (a) The agent;

    • (b) The person to whom the instrument was directly transferred by the agent;

    • (c) A party or the drawee who paid the instrument to the agent directly or through one or more endorsees for collection.

    2. However, an endorsee for collection is not liable under paragraph 1 of this article if he is without knowledge that the endorsement does not bind the principal:

    • (a) At the time he pays the principal or advises him of the receipt of payment; or

    • (b) At the time he receives payment, if this is later, unless his lack of knowledge is due to his failure to act in good faith or to exercise reasonable care.

    3. Furthermore, a party or the drawee who pays an instrument is not liable under paragraph 1 of this article if, at the time he pays the instrument, he is without knowledge that the endorsement does not bind the principal, unless his lack of knowledge is due to his failure to act in good faith or to exercise reasonable care.

    4. Except as against the agent, the damages recoverable under paragraph 1 of this article may not exceed the amount referred to in article 70 or article 71.

    CHAPTER IV. RIGHTS AND LIABILITIES

    Section 1. The rights of a holder and of a protected holder Article 27

    1. The holder of an instrument has all the rights conferred on him by this Convention against the parties to the instrument.

    2. The holder may transfer the instrument in accordance with article 13.

    Article 28

    1. A party may set up against a holder who is not a protected holder:

    • (a) Any defence that may be set up against a protected holder in accordance with paragraph 1 of article 30;

    • (b) Any defence based on the underlying transaction between himself and the drawer or between himself and his transferee, but only if the holder took the instrument with knowledge of such defence or if he obtained the instrument by fraud or theft or participated at any time in a fraud or theft concerning it;

    • (c) Any defence arising from the circumstances as a result of which he became a party, but only if the holder took the instrument with knowledge of such defence or if he obtained the instrument by fraud or theft or participated at any time in a fraud or theft concerning it;

    • (d) Any defence which may be raised against an action in contract between himself and the holder;

    • (e) Any other defence available under this Convention.

    2. The rights to an instrument of a holder who is not a protected holder are subject to any valid claim to the instrument on the part of any person, but only if he took the instrument with knowledge of such claim or if he obtained the instrument by fraud or theft or participated at any time in a fraud or theft concerning it.

    3. A holder who takes an instrument after the expiration of the time-limit for presentment for payment is subject to any claim to, or defence against liability on, the instrument to which his transferor is subject.

    4. A party may not raise as a defence against a holder who is not a protected holder the fact that a third person has a claim to the instrument unless:

    • (a) The third person asserted a valid claim to the instrument; or

    • (b) The holder acquired the instrument by theft or forged the signature of the payee or an endorsee, or participated in the theft or the forgery.

    Article 29

    “Protected holder” means the holder of an instrument which was complete when he took it or which was incomplete within the meaning of paragraph 1 of article 12 and was completed in accordance with authority given, provided that when he became a holder:

    • (a) He was without knowledge of a defence against liability on the instrument referred to in paragraphs 1 (a), (b), (c) and (e) of article 28;

    • (b) He was without knowledge of a valid claim to the instrument of any person;

    • (c) He was without knowledge of the fact that it had been dishonoured by non-acceptance or by non-payment;

    • (d) The time-limit provided by article 55 for presentment of that instrument for payment had not expired;

    • (e) He did not obtain the instrument by fraud or theft or participate in a fraud or theft concerning it.

    Article 30

    1. A party may not set up against a protected holder any defence except:

    • (a) Defences under paragraph 1 of article 33, article 34, paragraph 1 of article 35, paragraph 3 of article 36, paragraph 1 of article 53, paragraph 1 of article 57, paragraph 1 of article 63 and article 84 of this Convention;

    • (b) Defences based on the underlying transaction between himself and such holder or arising from any fraudulent act on the part of such holder in obtaining the signature on the instrument of that party;

    • (c) Defences based on his incapacity to incur liability on the instrument or on the fact that he signed without knowledge that his signature made him a party to the instrument, provided that his lack of knowledge was not due to his negligence and provided that he was fraudulently induced so to sign.

    2. The rights to an instrument of a protected holder are not subject to any claim to the instrument on the part of any person, except a valid claim arising from the underlying transaction between himself and the person by whom the claim is raised.

    Article 31

    1. The transfer of an instrument by a protected holder vests in any subsequent holder the rights to and on the instrument which the protected holder had.

    2. Those rights are not vested in a subsequent holder if:

    • (a) He participated in a transaction which gives rise to a claim to, or a defence against liability on, the instrument;

    • (b) He has previously been a holder, but not a protected holder.

    Article 32

    Every holder is presumed to be a protected holder unless the contrary is proved.

    Section 2. Liabilities of the parties A. General provisions Article 33

    1. Subject to the provisions of articles 34 and 36, a person is not liable on an instrument unless he signs it.

    2. A person who signs an instrument in a name which is not his own is liable as if he had signed it in his own name.

    Article 34

    A forged signature on an instrument does not impose any liability on the person whose signature was forged. However, if he consents to be bound by the forged signature or represents that it is his own, he is liable as if he had signed the instrument himself.

    Article 35

    1. If an instrument is materially altered:

    • (a) A party who signs it after the material alteration is liable according to the terms of the altered text;

    • (b) A party who signs it before the material alteration is liable according to the terms of the original text. However, if a party makes, authorizes or assents to a material alteration, he is liable according to the terms of the altered text.

    2. A signature is presumed to have been placed on the instrument after the material alteration unless the contrary is proved.

    3. Any alteration is material which modifies the written undertaking on the instrument of any party in any respect.

    Article 36

    1. An instrument may be signed by an agent.

    2. The signature of an agent placed by him on an instrument with the authority of his principal and showing on the instrument that he is signing in a representative capacity for that named principal, or the signature of a principal placed on the instrument by an agent with his authority, imposes liability on the principal and not on the agent.

    3. A signature placed on an instrument by a person as agent but who lacks authority to sign or exceeds his authority, or by an agent who has authority to sign but who does not show on the instrument that he is signing in a representative capacity for a named person, or who shows on the instrument that he is signing in a representative capacity but does not name the person whom he represents, imposes liability on the person signing and not on the person whom he purports to represent.

    4. The question whether a signature was placed on the instrument in a representative capacity may be determined only by reference to what appears on the instrument.

    5. A person who is liable pursuant to paragraph 3 of this article and who pays the instrument has the same rights as the person for whom he purported to act would have had if that person had paid the instrument.

    Article 37

    The order to pay contained in a bill does not of itself operate as an assignment to the payee of funds made available for payment by the drawer with the drawee.

    B. The drawer Article 38

    1. The drawer engages that upon dishonour of the bill by non-acceptance or by non-payment, and upon any necessary protest, he will pay the bill to the holder, or to any endorser or any endorser’s guarantor who takes up and pays the bill.

    2. The drawer may exclude or limit his own liability for acceptance or for payment by an express stipulation in the bill. Such a stipulation is effective only with respect to the drawer. A stipulation excluding or limiting liability for payment is effective only if another party is or becomes liable on the bill.

    C. The maker Article 39

    1. The maker engages that he will pay the note in accordance with its terms to the holder, or to any party who takes up and pays the note.

    2. The maker may not exclude or limit his own liability by a stipulation in the note. Any such stipulation is ineffective.

    D. The drawee and the acceptor Article 40

    1. The drawee is not liable on a bill until he accepts it.

    2. The acceptor engages that he will pay the bill in accordance with the terms of his acceptance to the holder, or to any party who takes up and pays the bill.

    Article 41

    1. An acceptance must be written on the bill and may be effected:

    • (a) By the signature of the drawee accompanied by the word “accepted” or by words of similar import; or

    • (b) By the signature alone of the drawee.

    2. An acceptance may be written on the front or on the back of the bill.

    Article 42

    1. An incomplete bill which satisfies the requirements set out in paragraph 1 of article 1 may be accepted by the drawee before it has been signed by the drawer, or while otherwise incomplete.

    2. A bill may be accepted before, at or after maturity, or after it has been dishonoured by non-acceptance or by non-payment.

    3. If a bill drawn payable at a fixed period after sight, or a bill which must be presented for acceptance before a specified date, is accepted, the acceptor must indicate the date of his acceptance; failing such indication by the acceptor, the drawer or the holder may insert the date of acceptance.

    4. If a bill drawn payable at a fixed period after sight is dishonoured by non-acceptance and the drawee subsequently accepts it, the holder is entitled to have the acceptance dated as of the date on which the bill was dishonoured.

    Article 43

    1. An acceptance must be unqualified. An acceptance is qualified if it is conditional or varies the terms of the bill.

    2. If the drawee stipulates in the bill that his acceptance is subject to qualification:

    • (a) He is nevertheless bound according to the terms of his qualified acceptance;

    • (b) The bill is dishonoured by non-acceptance.

    3. An acceptance relating to only a part of the sum payable is a qualified acceptance. If the holder takes such an acceptance, the bill is dishonoured by non-acceptance only as to the remaining part.

    4. An acceptance indicating that payment will be made at a particular address or by a particular agent is not a qualified acceptance, provided that:

    • (a) The place in which payment is to be made is not changed;

    • (b) The bill is not drawn payable by another agent.

    E. The endorser Article 44

    1. The endorser engages that upon dishonour of the instrument by non-acceptance or by non-payment, and upon any necessary protest, he will pay the instrument to the holder, or to any subsequent endorser or any endorser’s guarantor who takes up and pays the instrument.

    2. An endorser may exclude or limit his own liability by an express stipulation in the instrument. Such a stipulation is effective only with respect to that endorser.

    F. The transferor by endorsement or by mere delivery Article 45

    1. Unless otherwise agreed, a person who transfers an instrument, by endorsement and delivery or by mere delivery, represents to the holder to whom he transfers the instrument that:

    • (a) The instrument does not bear any forged or unauthorized signature;

    • (b) The instrument has not been materially altered;

    • (c) At the time of transfer, he has no knowledge of any fact which would impair the right of the transferee to payment of the instrument against the acceptor of a bill or, in the case of an unaccepted bill, the drawer, or against the maker of a note.

    2. Liability of the transferor under paragraph 1 of this article is incurred only if the transferee took the instrument without knowledge of the matter giving rise to such liability.

    3. If the transferor is liable under paragraph 1 of this article, the transferee may recover, even before maturity, the amount paid by him to the transferor, with interest calculated in accordance with article 70, against return of the instrument.

    G. The guarantor Article 46

    1. Payment of an instrument, whether or not it has been accepted, may be guaranteed, as to the whole or part of its amount, for the account of a party or the drawee. A guarantee may be given by any person who may or may not already be a party.

    2. A guarantee must be written on the instrument or on a slip affixed thereto (“allonge”).

    3. A guarantee is expressed by the words “guaranteed”, “aval”, “good as aval” or words of similar import, accompanied by the signature of the guarantor. For the purposes of this Convention, the words “prior endorsements guaranteed” or words of similar import do not constitute a guarantee.

    4. A guarantee may be effected by a signature alone on the front of the instrument. A signature alone on the front of the instrument, other than that of the maker, the drawer or the drawee, is a guarantee.

    5. A guarantor may specify the person for whom he has become guarantor. In the absence of such specification, the person for whom he has become guarantor is the acceptor or the drawee in the case of a bill, and the maker in the case of a note.

    6. A guarantor may not raise as a defence to his liability the fact that he signed the instrument before it was signed by the person for whom he is a guarantor, or while the instrument was incomplete.

    Article 47

    1. The liability of a guarantor on the instrument is of the same nature as that of the party for whom he has become guarantor.

    2. If the person for whom he has become guarantor is the drawee, the guarantor engages:

    • (a) To pay the bill at maturity to the holder, or to any party who takes up and pays the bill;

    • (b) If the bill is payable at a definite time, upon dishonour by non-acceptance and upon any necessary protest, to pay it to the holder, or to any party who takes up and pays the bill.

    3. In respect of defences that are personal to himself, a guarantor may set up:

    • (a) Against a holder who is not a protected holder only those defences which he may set up under paragraphs 1, 3 and 4 of article 28;

    • (b) Against a protected holder only those defences which he may set up under paragraph 1 of article 30.

    4. In respect of defences that may be raised by the person for whom he has become a guarantor:

    • (a) A guarantor may set up against a holder who is not a protected holder only those defences which the person for whom he has become a guarantor may set up against such holder under paragraphs 1, 3 and 4 of article 28;

    • (b) A guarantor who expresses his guarantee by the words “guaranteed”, “payment guaranteed” or “collection guaranteed”, or words of similar import, may set up against a protected holder only those defences which the person for whom he has become a guarantor may set up against a protected holder under paragraph 1 of article 30;

    • (c) A guarantor who expresses his guarantee by the words “aval” or “good as aval” may set up against a protected holder only:

    • (i) The defence, under paragraph 1 (b) of article 30, that the protected holder obtained the signature on the instrument of the person for whom he has become a guarantor by a fraudulent act;

    • (ii) The defence, under article 53 or article 57, that the instrument was not presented for acceptance or for payment;

    • (iii) The defence, under article 63, that the instrument was not duly protested for non-acceptance or for non-payment;

    • (iv) The defence, under article 84, that a right of action may no longer be exercised against the person for whom he has become guarantor;

    • (d) A guarantor who is not a bank or other financial institution and who expresses his guarantee by a signature alone may set up against a protected holder only the defences referred to in subparagraph (b) of this paragraph;

    • (e) A guarantor which is a bank or other financial institution and which expresses its guarantee by a signature alone may set up against a protected holder only the defences referred to in subparagraph (c) of this paragraph.

    Article 48

    1. Payment of an instrument by the guarantor in accordance with article 72 discharges the party for whom he became guarantor of his liability on the instrument to the extent of the amount paid.

    2. The guarantor who pays the instrument may recover from the party for whom he has become guarantor and from the parties who are liable on it to that party the amount paid and any interest.

    CHAPTER V. PRESENTMENT, DISHONOUR BY NON-ACCEPTANCE OR NON-PAYMENT, AND RECOURSE

    Section 1. Presentment for acceptance and dishonour by non-acceptance Article 49

    1. A bill may be presented for acceptance.

    2. A bill must be presented for acceptance:

    • (a) If the drawer has stipulated in the bill that it must be presented for acceptance;

    • (b) If the bill is payable at a fixed period after sight; or

    • (c) If the bill is payable elsewhere than at the residence or place of business of the drawee, unless it is payable on demand.

    Article 50

    1. The drawer may stipulate in the bill that it must not be presented for acceptance before a specified date or before the occurrence of a specified event. Except where a bill must be presented for acceptance under paragraph 2 (b) or (c) of article 49, the drawer may stipulate that it must not be presented for acceptance.

    2. If a bill is presented for acceptance notwithstanding a stipulation permitted under paragraph 1 of this article and acceptance is refused, the bill is not thereby dishonoured.

    3. If the drawee accepts a bill notwithstanding a stipulation that it must not be presented for acceptance, the acceptance is effective.

    Article 51

    A bill is duly presented for acceptance if it is presented in accordance with the following rules:

    • (a) The holder must present the bill to the drawee on a business day at a reasonable hour;

    • (b) Presentment for acceptance may be made to a person or authority other than the drawee if that person or authority is entitled under the applicable law to accept the bill;

    • (c) If a bill is payable on a fixed date, presentment for acceptance must be made before or on that date;

    • (d) A bill payable on demand or at a fixed period after sight must be presented for acceptance within one year of its date;

    • (e) A bill in which the drawer has stated a date or time-limit for presentment for acceptance must be presented on the stated date or within the stated time-limit.

    Article 52

    1. A necessary or optional presentment for acceptance is dispensed with if:

    • (a) The drawee is dead, or no longer has the power freely to deal with his assets by reason of his insolvency, or is a fictitious person, or is a person not having capacity to incur liability on the instrument as an acceptor; or

    • (b) The drawee is a corporation, partnership, association or other legal entity which has ceased to exist.

    2. A necessary presentment for acceptance is dispensed with if:

    • (a) A bill is payable on a fixed date, and presentment for acceptance cannot be effected before or on that date due to circumstances which are beyond the control of the holder and which he could neither avoid nor overcome; or

    • (b) A bill is payable at a fixed period after sight, and presentment for acceptance cannot be effected within one year of its date due to circumstances which are beyond the control of the holder and which he could neither avoid nor overcome.

    3. Subject to paragraphs 1 and 2 of this article, delay in a necessary presentment for acceptance is excused, but presentment for acceptance is not dispensed with, if the bill is drawn with a stipulation that it must be presented for acceptance within a stated time-limit, and the delay in presentment for acceptance is caused by circumstances which are beyond the control of the holder and which he could neither avoid nor overcome. When the cause of the delay ceases to operate, presentment must be made with reasonable diligence.

    Article 53

    1. If a bill which must be presented for acceptance is not so presented, the drawer, the endorsers and their guarantors are not liable on the bill.

    2. Failure to present a bill for acceptance does not discharge the guarantor of the drawee of liability on the bill.

    Article 54

    1. A bill is considered to be dishonoured by non-acceptance:

    • (a) If the drawee, upon due presentment, expressly refuses to accept the bill or acceptance cannot be obtained with reasonable diligence or if the holder cannot obtain the acceptance to which he is entitled under this Convention;

    • (b) If presentment for acceptance is dispensed with pursuant to article 52, unless the bill is in fact accepted.

    2.

    • (a) If a bill is dishonoured by non-acceptance in accordance with paragraph 1 (a) of this article, the holder may exercise an immediate right of recourse against the drawer, the endorsers and their guarantors, subject to the provisions of article 59.

    • (b) If a bill is dishonoured by non-acceptance in accordance with paragraph 1 (b) of this article, the holder may exercise an immediate right of recourse against the drawer, the endorsers and their guarantors.

    • (c) If a bill is dishonoured by non-acceptance in accordance with paragraph 1 of this article, the holder may claim payment from the guarantor of the drawee upon any necessary protest.

    3. If a bill payable on demand is presented for acceptance, but acceptance is refused, it is not considered to be dishonoured by non-acceptance.

    Section 2. Presentment for payment and dishonour by non-payment Article 55

    An instrument is duly presented for payment if it is presented in accordance with the following rules:

    • (a) The holder must present the instrument to the drawee or to the acceptor or to the maker on a business day at a reasonable hour;

    • (b) A note signed by two or more makers may be presented to any one of them, unless the note clearly indicates otherwise;

    • (c) If the drawee or the acceptor or the maker is dead, presentment must be made to the persons who under the applicable law are his heirs or the persons entitled to administer his estate;

    • (d) Presentment for payment may be made to a person or authority other than the drawee, the acceptor or the maker if that person or authority is entitled under the applicable law to pay the instruments;

    • (e) An instrument which is not payable on demand must be presented for payment on the date of maturity or on one of the two business days which follow;

    • (f) An instrument which is payable on demand must be presented for payment within one year of its date;

    • (g) An instrument must be presented for payment:

    • (i) At the place of payment specified on the instrument;

    • (ii) If no place of payment is specified, at the address of the drawee or the acceptor or the maker indicated in the instrument; or

    • (iii) If no place of payment is specified and the address of the drawee or the acceptor or the maker is not indicated, at the principal place of business or habitual residence of the drawee or the acceptor or the maker;

    • (h) An instrument which is presented at a clearing-house is duly presented for payment if the law of the place where the clearing-house is located or the rules or customs of that clearing-house so provide.

    Article 56

    1. Delay in making presentment for payment is excused if the delay is caused by circumstances which are beyond the control of the holder and which he could neither avoid nor overcome. When the cause of the delay ceases to operate, presentment must be made with reasonable diligence.

    2. Presentment for payment is dispensed with:

    • (a) If the drawer, an endorser or a guarantor has expressly waived presentment; such waiver:

    • (i) If made on the instrument by the drawer, binds any subsequent party and benefits any holder;

    • (ii) If made on the instrument by a party other than the drawer, binds only that party but benefits any holder;

    • (iii) If made outside the instrument, binds only the party making it and benefits only a holder in whose favour it was made;

    • (b) If an instrument is not payable on demand, and the cause of delay in making presentment referred to in paragraph 1 of this article continues to operate beyond thirty days after maturity;

    • (c) If an instrument is payable on demand, and the cause of delay in making presentment referred to in paragraph 1 of this article continues to operate beyond thirty days after the expiration of the time-limit for presentment for payment;

    • (d) If the drawee, the maker or the acceptor has no longer the power freely to deal with his assets by reason of his insolvency, or is a fictitious person or a person not having capacity to make payment, or if the drawee, the maker or the acceptor is a corporation, partnership, association or other legal entity which has ceased to exist;

    • (e) If there is no place at which the instrument must be presented in accordance with subparagraph (g) of article 55.

    3. Presentment for payment is also dispensed with as regards a bill, if the bill has been protested for dishonour by non-acceptance.

    Article 57

    1. If an instrument is not duly presented for payment, the drawer, the endorsers and their guarantors are not liable on it.

    2. Failure to present an instrument for payment does not discharge the acceptor, the maker and their guarantors or the guarantor of the drawee of liability on it.

    Article 58

    1. An instrument is considered to be dishonoured by non-payment:

    • (a) If payment is refused upon due presentment or if the holder cannot obtain the payment to which he is entitled under this Convention;

    • (b) If presentment for payment is dispensed with pursuant to paragraph 2 of article 56 and the instrument is unpaid at maturity.

    2. If a bill is dishonoured by non-payment, the holder may, subject to the provisions of article 59, exercise a right of recourse against the drawer, the endorsers and their guarantors.

    3. If a note is dishonoured by non-payment, the holder may, subject to the provisions of article 59, exercise a right of recourse against the endorsers and their guarantors.

    Section 3. Recourse Article 59

    If an instrument is dishonoured by non-acceptance or by non-payment, the holder may exercise a right of recourse only after the instrument has been duly protested for dishonour in accordance with the provisions of articles 60 to 62.

    A. Protest Article 60

    1. A protest is a statement of dishonour drawn up at the place where the instrument has been dishonoured and signed and dated by a person authorized in that respect by the law of that place. The statement must specify:

    • (a) The person at whose request the instrument is protested;

    • (b) The place of protest;

    • (c) The demand made and the answer given, if any, or the fact that the drawee or the acceptor or the maker could not be found.

    2. A protest may be made:

    • (a) On the instrument or on a slip affixed thereto (“allonge”); or

    • (b) As a separate document, in which case it must clearly identify the instrument that has been dishonoured.

    3. Unless the instrument stipulates that protest must be made, a protest may be replaced by a declaration written on the instrument and signed and dated by the drawee or the acceptor or the maker, or, in the case of an instrument domiciled with a named person for payment, by that named person; the declaration must be to the effect that acceptance or payment is refused.

    4. A declaration made in accordance with paragraph 3 of this article is a protest for the purpose of this Convention.

    Article 61

    Protest for dishonour of an instrument by non-acceptance or by non-payment must be made on the day on which the instrument is dishonoured or on one of the four business days which follow.

    Article 62

    1. Delay in protesting an instrument for dishonour is excused if the delay is caused by circumstances which are beyond the control of the holder and which he could neither avoid nor overcome. When the cause of the delay ceases to operate, protest must be made with reasonable diligence.

    2. Protest for dishonour by non-acceptance or by non-payment is dispensed with:

    • (a) If the drawer, an endorser or a guarantor has expressly waived protest; such waiver:

    • (i) If made on the instrument by the drawer, binds any subsequent party and benefits any holder;

    • (ii) If made on the instrument by a party other than the drawer, binds only that part)’ but benefits any holder;

    • (iii) If made outside the instrument, binds only the party making it and benefits only a holder in whose favour it was made;

    • (b) If the cause of the delay in making protest referred to in paragraph 1 of this article continues to operate beyond thirty days after the date of dishonour;

    • (c) As regards the drawer of a bill, if the drawer and the drawee or the acceptor are the same person;

    • (d) If presentment for acceptance or for payment is dispensed with in accordance with article 52 or paragraph 2 of article 56.

    Article 63

    1. If an instrument which must be protested for non-acceptance or for non-payment is not duly protested, the drawer, the endorsers and their guarantors are not liable on it.

    2. Failure to protest an instrument does not discharge the acceptor, the maker and their guarantors or the guarantor of the drawee of liability on it.

    B. Notice of dishonour Article 64

    1. The holder, upon dishonour of an instrument by non-acceptance or by non-payment, must give notice of such dishonour:

    • (a) To the drawer and the last endorser;

    • (b) To all other endorsers and guarantors whose addresses the holder can ascertain on the basis of information contained in the instrument.

    2. An endorser or a guarantor who receives notice must give notice of dishonour to the last party preceding him and liable on the instrument.

    3. Notice of dishonour operates for the benefit of any party who has a right of recourse on the instrument against the party notified.

    Article 65

    1. Notice of dishonour may be given in any form whatever and in any terms which identify the instrument and state that it has been dishonoured. The return of the dishonoured instrument is sufficient notice, provided it is accompanied by a statement indicating that it has been dishonoured.

    2. Notice of dishonour is duly given if it is communicated or sent to the party to be notified by means appropriate in the circumstances, whether or not it is received by that party.

    3. The burden of proving that notice has been duly given rests upon the person who is required to give such notice.

    Article 66

    Notice of dishonour must be given within the two business days which follow:

    • (a) The day of protest or, if protest is dispensed with, the day of dishonour; or

    • (b) The day of receipt of notice of dishonour.

    Article 67

    1. Delay in giving notice of dishonour is excused if the delay is caused by circumstances which are beyond the control of the person required to give notice, and which he could neither avoid nor overcome. When the cause of the delay ceases to operate, notice must be given with reasonable diligence.

    2. Notice of dishonour is dispensed with:

    • (a) If, after the exercise of reasonable diligence, notice cannot be given;

    • (b) If the drawer, an endorser or a guarantor has expressly waived notice of dishonour; such waiver:

    • (i) If made on the instrument by the drawer, binds any subsequent party and benefits any holder;

    • (ii) If made on the instrument by a party other than the drawer, binds only that party but benefits any holder;

    • (iii)If made outside the instrument, binds only the party making it and benefits only a holder in whose favour it was made;

    • (c) As regards the drawer of the bill, if the drawer and the drawee or the acceptor are the same person.

    Article 68

    If a person who is required to give notice of dishonour fails to give it to a party who is entitled to receive it, he is liable for any damages which that party may suffer from such failure, provided that such damages do not exceed the amount referred to in article 70 or article 71.

    Section 4. Amount payable Article 69

    1. The holder may exercise his rights on the instrument against any one party, or several or all parties, liable on it and is not obliged to observe the order in which the parties have become bound. Any party who takes up and pays the instrument may exercise his rights in the same manner against parties liable to him.

    2. Proceedings against a party do not preclude proceedings against any other party, whether or not subsequent to the party originally proceeded against.

    Article 70

    1. The holder may recover from any party liable:

    • (a) At maturity: the amount of the instrument with interest, if interest has been stipulated for;

    • (b) After maturity:

    • (i) The amount of the instrument with interest, if interest has been stipulated for, to the date of maturity;

    • (ii) If interest has been stipulated to be paid after maturity, interest at the rate stipulated, or, in the absence of such stipulation, interest at the rate specified in paragraph 2 of this article, calculated from the date of presentment on the sum specified in subparagraph (b) (i) of this paragraph;

    • (iii)Any expenses of protest and of the notices given by him;

    • (c) Before maturity:

    • (i) The amount of the instrument with interest, if interest has been stipulated for, to the date of payment; or, if no interest has been stipulated for, subject to a discount from the date of payment to the date of maturity, calculated in accordance with paragraph 4 of this article;

    • (ii) Any expenses of protest and of the notices given by him.

    2. The rate of interest shall be the rate that would be recoverable in legal proceedings taken in the jurisdiction where the instrument is payable.

    3. Nothing in paragraph 2 of this article prevents a court from awarding damages or compensation for additional loss caused to the holder by reason of delay in payment.

    4. The discount shall be at the official rate (discount rate) or other similar appropriate rate effective on the date when recourse is exercised at the place where the holder has his principal place of business, or, if he does not have a place of business, his habitual residence, or, if there is no such rate, then at such rate as is reasonable in the circumstances.

    Article 71

    A party who pays an instrument and is thereby discharged in whole or in part of his liability on the instrument may recover from the parties liable to him:

    • (a) The entire sum which he has paid;

    • (b) Interest on that sum at the rate specified in paragraph 2 of article 70, from the date on which he made payment;

    • (c) Any expenses of the notices given by him.

    CHAPTER VI. DISCHARGE

    Section 1. Discharge by payment Article 72

    1. A party is discharged of liability on the instrument when he pays the holder, or a party subsequent to himself who has paid the instrument and is in possession of it, the amount due pursuant to article 70 or article 71:

    • (a) At or after maturity; or

    • (b) Before maturity, upon dishonour by non-acceptance.

    2. Payment before maturity other than under paragraph 1 (b) of this article does not discharge the party making the payment of his liability on the instrument except in respect of the person to whom payment was made.

    3. A party is not discharged of liability if he pays a holder who is not a protected holder, or a party who has taken up and paid the instrument, and knows at the time of payment that the holder or that party acquired the instrument by theft or forged the signature of the payee or an endorsee, or participated in the theft or the forgery.

    4. (a) A person receiving payment of an instrument must, unless agreed otherwise, deliver:

    • (i) To the drawee making such payment, the instrument;

    • (ii) To any other person making such payment, the instrument, a receipted account, and any protest.

    • (b) In the case of an instrument payable by instalments at successive dates, the drawee or a party making a payment, other than payment of the last instalment, may require that mention of such payment be made on the instrument or on a slip affixed thereto (“allonge”) and that a receipt therefor be given to him.

    • (c) If an instrument payable by instalments at successive dates is dishonoured by non-acceptance or by non-payment as to any of its instalments and a party, upon dishonour, pays the instalment, the holder who receives such payment must give the party a certified copy of the instrument and any necessary authenticated protest in order to enable such party to exercise a right on the instrument.

    • (d) The person from whom payment is demanded may withhold payment if the person demanding payment does not deliver the instrument to him. Withholding payment in these circumstances does not constitute dishonour by non-payment under article 58.

    • (e) If payment is made but the person paying, other than the drawee, fails to obtain the instrument, such person is discharged but the discharge cannot be set up as a defence against a protected holder to whom the instrument has been subsequently transferred.

    Article 73

    1. The holder is not obliged to take partial payment.

    2. If the holder who is offered partial payment does not take it, the instrument is dishonoured by non-payment.

    3. If the holder takes partial payment from the drawee, the guarantor of the drawee, or the acceptor or the maker:

    • (a) The guarantor of the drawee, or the acceptor or the maker is discharged of his liability on the instrument to the extent of the amount paid;

    • (b) The instrument is to be considered as dishonoured by non-payment as to the amount unpaid.

    4. If the holder takes partial payment from a party to the instrument other than the acceptor, the maker or the guarantor of the drawee:

    • (a) The party making payment is discharged of his liability on the instrument to the extent of the amount paid;

    • (b) The holder must give such party a certified copy of the instrument and any necessary authenticated protest in order to enable such party to exercise a right on the instrument.

    5. The drawee or a party making partial payment may require that mention of such payment be made on the instrument and that a receipt therefor be given to him.

    6. If the balance is paid, the person who receives it and who is in possession of the instrument must deliver to the payor the receipted instrument and any authenticated protest.

    Article 74

    1. The holder may refuse to take payment at a place other than the place where the instrument was presented for payment in accordance with article 55.

    2. In such case if payment is not made at the place where the instrument was presented for payment in accordance with article 55, the instrument is considered to be dishonoured by non-payment.

    Article 75

    1. An instrument must be paid in the currency in which the sum payable is expressed.

    2. If the sum payable is expressed in a monetary unit of account within the meaning of subparagraph (1) of article 5 and the monetary unit of account is transferable between the person making payment and the person receiving it, then, unless the instrument specifies a currency of payment, payment shall be made by transfer of monetary units of account. If the monetary unit of account is not transferable between those persons, payment shall be made in the currency specified in the instrument or, if no such currency is specified, in the currency of the place of payment.

    3. The drawer or the maker may indicate in the instrument that it must be paid in a specified currency other than the currency in which the sum payable is expressed. In that case:

    • (a) The instrument must be paid in the currency so specified;

    • (b) The amount payable is to be calculated according to the rate of exchange indicated in the instrument. Failing such indication, the amount payable is to be calculated according to the rate of exchange for sight drafts (or, if there is no such rate, according to the appropriate established rate of exchange) on the date of maturity:

    • (i) Ruling at the place where the instrument must be presented for payment in accordance with subparagraph (g) of article 55, if the specified currency is that of that place (local currency); or

    • (ii) If the specified currency is not that of that place, according to the usages of the place where the instrument must be presented for payment in accordance with subparagraph (g) of article 55;

    • (c) If such an instrument is dishonoured by non-acceptance, the amount payable is to be calculated:

    • (i) If the rate of exchange is indicated in the instrument, according to that rate;

    • (ii) If no rate of exchange is indicated in the instrument, at the option of the holder, according to the rate of exchange ruling on the date of dishonour or on the date of actual payment;

    • (d) If such an instrument is dishonoured by non-payment, the amount payable is to be calculated:

    • (i) If the rate of exchange is indicated in the instrument, according to that rate;

    • (ii) If no rate of exchange is indicated in the instrument, at the option of the holder, according to the rate of exchange ruling on the date of maturity or on the date of actual payment.

    4. Nothing in this article prevents a court from awarding damages for loss caused to the holder by reason of fluctuations in rates of exchange if such loss is caused by dishonour for non-acceptance or by non-payment.

    5. The rate of exchange ruling at a certain date is the rate of exchange ruling, at the option of the holder, at the place where the instrument must be presented for payment in accordance with subparagraph (g) of article 55 or at the place of actual payment.

    Article 76

    1. Nothing in this Convention prevents a Contracting State from enforcing exchange control regulations applicable in its territory and its provisions relating to the protection of its currency, including regulations which it is bound to apply by virtue of international agreements to which it is a party.

    2.

    • (a) If, by virtue of the application of paragraph 1 of this article, an instrument drawn in a currency which is not that of the place of payment must be paid in local currency, the amount payable is to be calculated according to the rate of exchange for sight drafts (or, if there is no such rate, according to the appropriate established rate of exchange) on the date of presentment ruling at the place where the instrument must be presented for payment in accordance with subparagraph (g) of article 55.

    • (b) (i) If such an instrument is dishonoured by non-acceptance, the amount payable is to be calculated, at the option of the holder, at the rate of exchange ruling on the date of dishonour or on the date of actual payment.

    • (ii) If such an instrument is dishonoured by non-payment, the amount is to be calculated, at the option of the holder, according to the rate of exchange ruling on the date of presentment or on the date of actual payment.

    • (iii) Paragraphs 4 and 5 of article 75 are applicable where appropriate.

    Section 2. Discharge of other parties Article 77

    1. If a party is discharged in whole or in part of his liability on the instrument, any party who has a right on the instrument against him is discharged to the same extent.

    2. Payment by the drawee of the whole or apart of the amount of a bill to the holder, or to any party who takes up and pays the bill, discharges all parties of their liability to the same extent, except where the drawee pays a holder who is not a protected holder, or a party who has taken up and paid the bill, and knows at the time of payment that the holder or that party acquired the bill by theft or forged the signature of the payee or an endorsee, or participated in the theft or the forgery.

    CHAPTER VII. LOST INSTRUMENTS

    Article 78

    1. If an instrument is lost, whether by destruction, theft or otherwise, the person who lost the instrument has, subject to the provisions of paragraph 2 of this article, the same right to payment which he would have had if he had been in possession of the instrument. The party from whom payment is claimed cannot set up as a defence against liability on the instrument the fact that the person claiming payment is not in possession of the instrument.

    2.

    • (a) The person claiming payment of a lost instrument must state in writing to the party from whom he claims payment:

    • (i) The elements of the lost instrument pertaining to the requirements set forth in paragraph 1 or paragraph 2 of articles 1, 2 and 3; for this purpose the person claiming payment of the lost instrument may present to that party a copy of that instrument;

    • (ii) The facts showing that, if he had been in possession of the instrument, he would have had a right to payment from the party from whom payment is claimed;

    • (iii)The facts which prevent production of the instrument.

    • (b) The party from whom payment of a lost instrument is claimed may require the person claiming payment to give security in order to indemnify him for any loss which he may suffer by reason of the subsequent payment of the lost instrument.

    • (c) The nature of the security and its terms are to be determined by agreement between the person claiming payment and the party from whom payment is claimed. Failing such an agreement, the court may determine whether security is called for and, if so, the nature of the security and its terms.

    • (d) If the security cannot be given, the court may order the party from whom payment is claimed to deposit the sum of the lost instrument, and any interest and expenses which may be claimed under article 70 or article 71, with the court or any other competent authority or institution, and may determine the duration of such deposit. Such deposit is to be considered as payment to the person claiming payment.

    Article 79

    1. A party who has paid a lost instrument and to whom the instrument is subsequently presented for payment by another person must give notice of such presentment to the person whom he paid.

    2. Such notice must be given on the day the instrument is presented or on one of the two business days which follow and must state the name of the person presenting the instrument and the date and place of presentment.

    3. Failure to give notice renders the party who has paid the lost instrument liable for any damages which the person whom he paid may suffer from such failure, provided that the damages do not exceed the amount referred to in article 70 or article 71.

    4. Delay in giving notice is excused when the delay is caused by circumstances which are beyond the control of the person who has paid the lost instrument and which he could neither avoid nor overcome. When the cause of the delay ceases to operate, notice must be given with reasonable diligence.

    5. Notice is dispensed with when the cause of delay in giving notice continues to operate beyond thirty days after the last day on which it should have been given.

    Article 80

    1. A party who has paid a lost instrument in accordance with the provisions of article 78 and who is subsequently required to, and does, pay the instrument, or who, by reason of the loss of the instrument, then loses his right to recover from any party liable to him, has the right:

    • (a) If security was given, to realize the security; or

    • (b) If an amount was deposited with the court or other competent authority or institution, to reclaim the amount so deposited.

    2. The person who has given security in accordance with the provisions of paragraph 2 (b) of article 78 is entitled to obtain release of the security when the party for whose benefit the security was given is no longer at risk to suffer loss because of the fact that the instrument is lost.

    Article 81

    For the purpose of making protest for dishonour by non-payment, a person claiming payment of a lost instrument may use a written statement that satisfies the requirements of paragraph 2 (a) of article 78.

    Article 82

    A person receiving payment of a lost instrument in accordance with article 78 must deliver to the party paying the written statement required under paragraph 2 (a) of article 78, receipted by him, and any protest and a receipted account.

    Article 83

    1. A party who pays a lost instrument in accordance with article 78 has the same rights which he would have had if he had been in possession of the instrument.

    2. Such party may exercise his rights only if he is in possession of the receipted written statement referred to in article 82.

    CHAPTER VIII. LIMITATION (PRESCRIPTION)

    Article 84

    1. A right of action arising on an instrument may no longer be exercised after four years have elapsed:

    • (a) Against the maker, or his guarantor, of a note payable on demand, from the date of the note;

    • (b) Against the acceptor or the maker or their guarantor of an instrument payable at a definite time, from the date of maturity;

    • (c) Against the guarantor of the drawee of a bill payable at a definite time, from the date of maturity or, if the bill is dishonoured by non-acceptance, from the date of protest for dishonour or, where protest is dispensed with, from the date of dishonour;

    • (d) Against the acceptor of a bill payable on demand or his guarantor, from the date on which it was accepted or, if no such date is shown, from the date of the bill;

    • (e) Against the guarantor of the drawee of a bill payable on demand, from the date on which he signed the bill or, if no such date is shown, from the date of the bill;

    • (f) Against the drawer or an endorser or their guarantor, from the date of protest for dishonour by non-acceptance or by non-payment or, where protest is dispensed with, from the date of dishonour.

    2. A party who pays the instrument in accordance with article 70 or article 71 may exercise his right of action against a party liable to him within one year from the date on which he paid the instrument.

    CHAPTER IX. FINAL PROVISIONS

    Article 85

    The Secretary-General of the United Nations is hereby designated as the Depositary for this Convention.

    Article 86

    1. This Convention is open for signature by all States at the Headquarters of the United Nations, New York, until 30 June 1990.

    2. This Convention is subject to ratification, acceptance or approval by the signatory States.

    3. This Convention is open for accession by all States which are not signatory States as from the date it is open for signature.

    4. Instruments of ratification, acceptance, approval and accession are to be deposited with the Secretary-General of the United Nations.

    Article 87

    1. If a Contracting State has two or more territorial units in which, according to its constitution, different systems of law are applicable in relation to the matters dealt with in this Convention, it may, at the time of signature, ratification, acceptance, approval or accession, declare that this Convention is to extend to all its territorial units or only to one or more of them, and may amend its declaration by submitting another declaration at any time.

    2. These declarations are to be notified to the Depositary and are to state expressly the territorial units to which the Convention extends.

    3. If a Contracting State makes no declaration under paragraph 1 of this article, the Convention is to extend to all territorial units of that State.

    Article 88

    1. Any State may declare at the time of signature, ratification, acceptance, approval or accession that its courts will apply the Convention only if both the place indicated in the instrument where the bill is drawn, or the note is made, and the place of payment indicated in the instrument are situated in Contracting States.

    2. No other reservations are permitted.

    Article 89

    1. This Convention enters into force on the first day of the month following the expiration of twelve months after the date of deposit of the tenth instrument of ratification, acceptance, approval or accession.

    2. When a State ratifies, accepts, approves or accedes to this Convention after the deposit of the tenth instrument of ratification, acceptance, approval or accession, this Convention enters into force in respect of that State on the first day of the month following the expiration of twelve months after the date of deposit of its instrument of ratification, acceptance, approval or accession.

    Article 90

    1. A Contracting State may denounce this Convention by a formal notification in writing addressed to the Depositary.

    2. The denunciation takes effect on the first day of the month following the expiration of six months after the notification is received by the Depositary. Where a longer period for the denunciation to take effect is specified in the notification, the denunciation takes effect upon the expiration of such longer period after the notification is received by the Depositary. The Convention remains applicable to instruments drawn or made before the date at which the denunciation takes effect.

    DONE at New York, this ninth day of December, one thousand nine hundred and eighty-eight in a single original, of which the Arabic, Chinese, English, French, Russian and Spanish texts are equally authentic.

    IN WITNESS WHEREOF the undersigned plenipotentiaries, being duly authorized by their respective Governments, have signed this Convention.

    Notes

    Introduction (Effros)

    Hilbert’s famous lecture, “Mathematical Problems,” together with an appreciation of the influence it has exerted on the subsequent development of mathematics, is set out in Mathematical Developments Arising from Hilbert Problems, Proceedings of Symposia in Pure Mathematics, Vol. 28 (Providence, Rhode Island: American Mathematical Society, 1976).

    Ibid., p. 1.

    Chapter 1, “The Fund Agreement in the Courts” (Gianviti)

    Another exception is Article VII, Section 3(b), but it has never been applied.

    [1989] 3 All ER 252.

    371 N.Y.S. 2d 892 at 898-99.

    757 F. 2d 516 (1985).

    The text of the decision appears in the appendix to this paper.

    Corresponds to Article XXIX of the Articles of Agreement after the Second Amendment.

    Chapter 2, “Developing a Market for the Official SDR” (Coats)

    SDRs pay holders the SDR interest rate while participants that have been allocated SDRs pay a charge that is also equal to the SDR interest rate on the amount they were allocated. The “combined market interest rate” is derived from a basket of essentially three-month prime financial instruments—from the same five economies whose currencies are in the SDR valuation basket—which are weighted the same as the currencies in the valuation basket.

    These steps have included raising the SDR interest rate to market levels, its calculation on a weekly rather than a quarterly basis, abrogation of the reconstitution requirement, and the prescription of 12 operational uses of SDRs among participants and prescribed holders. The Second Amendment itself removed the requirement that a member have a balance of payments need when using SDRs in transactions by agreement.

    Since June 1983, the standard designation instructions sent to the Fund by a participant with a balance of payments need and wishing to sell SDRs immediately have allowed the Fund to substitute a transaction by agreement if it was able to do so. Cumulative transactions by agreement in lieu of designation amounted to SDR 1,055 million as of the end of May 1988, which was 12.3 percent of the amount of SDRs used with designation over the same period.

    The exchange rate used to compare these interest incomes is the one used to value the transaction itself.

    The forward exchange rate predicts the future spot rate comparatively well if there is a large difference between the rates of inflation in the two countries; otherwise it does not.

    Exchange rates are in the unique group of variables for which the best guess of the market for future values (abstracting from differences in risk premiums for certain currencies, which would be reflected in the forward exchange rates for these currencies) is available at zero cost.

    The forward exchange rate is generally equal to the spot rate plus a premium or discount that reflects the interest rate differential between assets of the same maturity as the forward transaction in the two currency units being exchanged.

    There have been a few cases in which members have requested that the Fund arrange a sale of SDRs only when the exchange rate exceeded a stipulated rate.

    It should be noted that many, and perhaps most, orders to buy or sell foreign exchange in the private market are placed without knowing the exchange rate—that is, transactions are carried out at whatever the prevailing market rate is.

    The compensation rules reflect market practice to the extent possible.

    The interest cost in terms of currency is compared with the SDR interest income using the SDR/currency exchange rate on the day of actual settlement.

    This reflects the fact that the SDRs are not transferred until currency has been received. Therefore, the seller continues to cam the SDR interest rate until the actual transfer is made.

    See, for example, Alan V. Deardorff, “One-Way Arbitrage and Its Implications for the Foreign Exchange Markets,” Journal of Political Economy, Vol. 87 (April 1979), pp. 351–64, or Peter Isard, “Lessons from Empirical Models of Exchange Rates,” Staff Papers, International Monetary Fund, Vol. 34 (March 1987), pp. 1–28. For a recent empirical analysis, see Mark P. Taylor, “Covered Interest Parity: A High-frequency, High-quality Data Study,” Economica, Vol. 54 (November 1987), pp. 429–38.

    This gives rise to the possibility of calculating forward SDR exchange rates as the official SDR (spot) rates, adjusted by the difference between the SDR interest rate and the comparable rate on the currency counterpart.

    These differences are analogous to different yields on national currency-denominated assets, which are also irrelevant for the level of forward exchange rates to the extent that the markets for these instruments are fully arbitraged. If the interest rate on the SDR is not competitive, there will not, in general, be a market either in forward operations or in voluntary spot transactions in SDRs.

    If the active party wishes to purchase SDRs forward with U.S. dollars, a market maker can sell the SDRs forward without incurring an exchange rate risk by simultaneously buying the SDR’s component currencies forward against the U.S. dollars it will receive in the future. For this purpose, the market maker must pay the ask rate, and if it is not to incur a systematic loss from its market-making activity, it must receive this rate for the SDRs it sells forward.

    These are the rates used by the Bank of England in determining the mid rates it reports to the Fund each day for use in computing the SDR/U.S. dollar spot rates.

    Following market convention, forward exchange rates refer to the number of days (not business days) to settlement after the conventional settlement of spot exchanges, which takes place two business days after the transaction is initiated. For example, a seven-day forward transaction initiated on (i.e., using the exchange rate of) Thursday, June 2, 1988, would be for value Monday, June 13, 1988, seven days after the spot value date of Monday, June 6, 1988.

    Chapter 3, “The Role of the BIS in International Monetary Cooperation and Its Tasks Relating to the ECU” (Giovanoli)

    Resolution V of the Final Act of the Bretton Woods Conference reads: “The United Nations Monetary and Financial Conference recommends: The liquidation of the Bank for International Settlements at the earliest possible moment.” See Proceedings and Documents of the United Nations Monetary and Financial Conference, Bretton Woods, New Hampshire, July 122, 1944 (Washington, 1948), at 939. The Final Act, however, was not an international agreement imposing obligations on parties but merely a final record of the discussions, and Resolution V, as opposed to other resolutions of the Final Act, was never incorporated into a ratified treaty.

    The United States’ monetary authorities have chosen not to be a shareholder in the BIS and not to exercise the voting rights of shares issued in the U.S. market. Initially, a banking group formed by three U.S. banks—J.P. Morgan and Company, the First National Bank of New York, and the First National Bank of Chicago—acted instead of U.S. monetary authorities. The rights of voting and representation conferred by the issue of shares in the United States are now being exercised by Citibank N.A., New York, upon appointment by the BIS Board of Directors, according to Article 27 (2) of the Statutes. See Roger Auboin, The Bank for International Settlements, 1930–1955, Essays in International Finance, No. 22 (Princeton, New Jersey: International Finance Section, Princeton University, 1955), at 4.

    See Hudson, “The Bank for International Settlements,” Am. J. Int’l. L. (1930) 562–63; Beitzke, Die Rechtsstellung der Bank fur Internationalen Zahlungsausgleich (1932); Graner, “Bank fur International Zahlungsausgleich (BIZ),” 4 Banken und Börsen, Schweiz. Juristisehe Kartothek, Karte N° 123, Sektion XV (1941).

    See Williams, “Legal Character of the Bank for International Settlements,” Am.J. Int’ IL. (1930), 665–73; Daubitz, a.k.a. Joachim, Zur Gerichtsbarkeit über die Bank für Internationalen Zahlungsausgleich (1937); Guindey, “La Banque des Règlements Internationaux hier et aujourd’hui,” Revue d’Economie Politique (1960), 35–37.

    Accord entre le Conseil fédéral suisse et la Banque des Règlements Internationaux en vue de déterminer le statut juridique de la Banque en Suisse, du 10 février 1987 (Headquarters Agreement), ROLF No. 8, (Berne, March 3, 1987), SR 0.192.122.971.3, English translation reprinted in Bank for International Settlements: Basic Texts (1987), 29–39.

    See Schlüter, Die Bank für Internationalen Zahlungsausgleich (1932), 343–47, 399–407; Auboin, supra, footnote 2, at 7; Mann, “International Corporations and National Law,” Brit. ϒ. B. Int’l L. (1967), 145; Piérot, “La Banque des Reglements Internationaux,” Notes et Etudes Documentaires, Nos. 3953–3954 (1973), at 22; D. Carreau, P. Juilard, and T. Flory, Droit international économique (3rd ed., 1980), at 191; Coing, Bank for International Settlements, Encyclopedia of Public International Law (1983), 1–2; Edwards, International Monetary Collaboration (1985), 52–63.

    See Headquarters Agreement, supra, footnote 5.

    See Convention Respecting the Bank for International Settlements, Art.2, 104 L.N.T.S. 441 (January 20, 1930); Constituent Charter, para.11, 104 L.N.T.S. 444; Statutes of the Bank for International Settlements, Art.54, 104 L.N.T.S. 448; Protocol Regarding Immunities, Art.4, 197 L.N.T.S. 30 (July 30, 1936); Headquarters Agreement, supra, footnote 5, Art.27, para. 1.

    On the Bank’s immunities, see The Bank for International Settlements and the Basle Meetings (1980), 24–41 (published on the occasion of the fiftieth anniversary, 1930–80) (hereinafter referred to as BIS 193080).

    See Guisan, “L’unité de compte de la Banque des Reglements Internationaux,” Banque (1978), 1201–1205.

    On jurisdiction al immunities of international organizations, see also Georges R. Delaume, Transnational Contracts: Applicable Law and Settlement of Disputes, Binder II, Booklet 13, Release 86-2, Chap. XI, “Immunity from Suit of Foreign States and International Organization” Text, §11.03, “International Organizations” (1986), 22–28.

    See David J. Bederman, “The Bank for International Settlements and the Debt Crisis: A New Role for the Central Bankers’ Bank?,” 6 International Tax & Business Lawyer(1988), 104–109.

    On the EMCF (also known as FECOM, the abbreviation for the Fonds européen de coopération monétaire), see Louis, “Le fonds européen de coopération monétaire,” Cahiers de Droit Européen (1973), 255–97.

    Bank for International Settlements, Recent Innovations in International Banking, prepared by a study group established by the central banks of the Group of Ten countries (Basle, 1986).

    See G.K. Simons and L.G. Radicati, “A Trustee in Continental Europe: The Experience of the Bank for International Settlements,” 30 Netherlands International Law Review (1983), 330–45.

    The ECU is, in fact, the successor to various units of account utilized by the European Community. For an exposé of these different units, see Kees, “Les unités de compte dans la Communauté,” Unités et monnaies de compte (Travaux du colloque international organisé par J.-L. Guglielmi et M. Lavigne) (1978), 31–56; and J.A. Usher, “The Legal Regulation of the European Currency Unit,” 37 Int’l & Comp. L. Q. (1988), 249–67.

    For a description of the “official” ECU functions, see Jacques van Ypserle and Jean Claude Koeune, Le Système monétaire européen: origines, fonctionnement et perspectives (Luxembourg: Office des publics dons officielles des Communautés européennes, 2nd ed., 1984), 61–65.

    See Daniel Lefort, “Problèmes juridiques soulevés par l’utilisation privée des monnaies composites,” 115 Journal du Droit International (1988), 369–412.

    “Clearing system for the private ECU,” 56 Bank for International Settlements: Annual Report, 1985/86 (1986), 172–73.

    See Pierre Guimbretière, “L’Association bancaire pour l’ECU,” 14 Eurépargne (November 1985), 13–15.

    See “The ECU Clearing System” (press release), ECU Newsletter, 16 Istituto Bancario San Paolo di Torino (April 1986), 29. For an overview of recent changes, see Daniel Lefort, “Aspects juridiques de l’ecu privé,” in Schweiz. Zs. F. Wirtschaftsrecht/Rev. suisse de dr. des affaires, No. 2 (1991).

    Chapter 3, Comment (Rhomberg)

    Rule P-6 of the Fund’s Rules and Regulations was subsequently amended on June 1, 1988, making it clear that the applicable exchange rate is that of the date of the agreement. The new provision reads as follows:

    • “(a) The exchange rate in a transaction by agreement between participants shall be determined under Rule O-2 as of the date of the agreement, unless the transaction is carried out at another exchange rate pursuant to authorization by the Fund under Article XIX, Section 7(b). Settlement shall take place on the date of the agreement or any business day within three business days from that date, as agreed between the participants.

    • (b) No participant shall levy any charge or commission in respect of a transaction under Article XIX, Section 2(b).”

    Chapter 4, “History of the Debt Crisis” (Watson and Regling)

    Defined as the average nominal interest rate deflated by the percentage change in U.S. dollar prices.

    This preference was made explicit in a publication issued by the Institute of International Finance: Restoring Market Access: New Directions in Bank Lending: A Report (Washington, 1987).

    Chapter 5, “New Proposal for the Debt Crisis” (Levinson)

    See the testimony of W.W Messick, Executive Staff, Production, ARAMCO, on oil production problems in Multinational Corporations and United States Foreign Policy: Hearings Before the Subcommittee on Multinational Corporations of the Senate Committee on Foreign Relations (hereinafter referred to as Multinational Corporations and United States Foreign Policy, Hearings), 93rd Cong., 2d Sess. (Part 7) (1974), 442, 444–45.

    Testimony of William E. Simon, Secretary of the Treasury, Multinational Corporations and Foreign Policy, Hearings, 93rd Cong., 2d Sess. (Part 9) (1974), at 237.

    Id. at 238.

    Marcilio M. Moreira, The Brazilian Quandary (New York: Twentieth Century Fund, 1986), at 22.

    Multinational Corporations and United States Foreign Policy, Hearings, 94th Cong., 1st. Sess. (Part 15) (1975) at 17. In addition to the Senatorsand staff of the Subcommittee, present were Hon. Philip E. Coldwell, Governor of the Federal Reserve System; Hon. Henry C. Wallich, Governor of the Federal Reserve System; Hon. Paul Volcker, President of the New York Federal Reserve Bank; Hon. Thomas Enders, Assistant Secretary of State for Economic Affairs; Hon. Edwin Yeo, Under Secretary for Monetary Affairs, Department of Treasury; G.A. Costanzo, Vice Chairman of First National City Bank of New York; Hans H. Angermueller, Senior Vice President and General Counsel of First National City Bank of New York; Thomas Farmer, Counsel, Bankers Association for Foreign Trade; Gaylord Freeman, Chairman of the Board of First National Bank of Chicago; Alfred Miossi, Executive Vice President of Continental Illinois Bank; Lewis Preston, Vice President of Morgan Guaranty and Trust Bank; Boris S. Berkovitch, Senior Vice President and Counsel of Morgan Guaranty and Trust Company, New York; Leland S. Prussia, Cashier of Bank of America; Gary Welch of the Legal Staff of the Federal Reserve; William S. Ogden, Executive Vice President of Chase Manhattan Bank; Lisle Widman of the Department of the Treasury; Roy C. Haberkern, Jr. of Milbank, Tweed, Hadley and McCloy, Counsel for Chase Manhattan Bank; and Paul K. Stahnke, Congressional Relations, Department of State.

    Id. at 45 (statement of Karin Lissakers, Subcommittee staff member).

    Id. at 239.

    Testimony of Anthony Solomon, Under Secretary for Monetary Affairs, U.S. Department of the Treasury, The Witteveen Facility and the OPEC Financial Surpluses: Hearings Before the Subcommittee on Foreign Economic Policy of the Senate Committee on Foreign Relations (hereinafter referred to as 1977 Hearings on Witteveen Facility), 95th Cong., 1st Sess. (1977), 22.

    Id. at 28.

    Id. at 38–39.

    Id. at 38.

    Johannes Witteveen, “We couldn’t tell a country, ‘You shouldn’t spend so much money for buying airplanes; spend more for something else‘,” Institutional Investor (June 1987), International Edition, 20th Anniversary Issue, at 27, 33.

    Id.

    Denis Healey, “I thought if I let the pound slide, then went to the IMF meeting, we could be facing a very serious crisis,” Institutional Investor (June 1987), International Edition, 20th Anniversary Issue, at 66, 67.

    International Monetary Fund, Annual Report (Washington, 1985), at 21.

    Id. at 19.

    Id. at 19.

    Id. at 21–22.

    Declaration of Montevideo, “Emergency Proposals for Negotiations on Debt and Growth,” signed December 17, 1985 by the ministers of foreign affairs and ministers responsible for economic matters of the countries making up the Consensus of Cartagena, at 3.

    Leonard Silk, “Economic Scene: Good Reasons to Lend More,” New York Times, Vol. 133 (November 4, 1983) at D2.

    Morgan Guaranty Trust Company, World Financial Markets (December 1985), at 9.

    Statement of James A. Baker III, Secretary of the Treasury of the United States, before the Joint Annual Meetings of the International Monetary Fund and the World Bank, October 8, 1985, Seoul, Korea. See International Monetary Fund, Summary Proceedings of the Fortieth Annual Meeting of the Board of Governors (Washington, 1986), at 54–55. Fifteen countries were identified as potential beneficiaries, ten of which were in Latin America: Argentina, Brazil, Mexico, Venezuela, Colombia, Peru, Uruguay, Costa Rica, Chile, and Bolivia.

    See Robin Broad, “How About a Real Solution to Third World Debt?,” New York Times, Vol. 137 (September 28, 1987), at A25.

    A Proposal for Third World Debt Management, Senator Bill Bradley, June 29, 1986, Zurich, Switzerland.

    Quoted in Hobart Rowen, “Third World Debt Has Nations Looking for Creative Answers,” Washington Post (March 20, 1988), at H1.

    “Balance Preliminar de la EconomÍa Latinoamericana 1987,” ComisiÓn EconÓmica para América Latina, December 31, 1987, at 1.

    John W. Sewell, “Overview—The Dual Challenge: Managing the Economic Crisis and Technological Change,” in Growth, Exports, and Jobs in a Changing World Economy, Agenda 1988, Transaction Books (New Brunswick, New Jersey, and Oxford, England, 1988) for the Overseas Development Council, at 4.

    Id. at 10.

    I will not deal here with such alternative proposals as that put forward by the Executive Director of the International Monetary Fund for the constituency including India, Mr. Arjun K. Sengupta. I think it more appropriate that his proposal be summarized by someone other than myself.

    “LaFalce Unveils Major Legislative Initiative to Confront Third World Debt Crisis,” News from Congressman John J. LaFalce, March 5, 1987.

    “Third World Legislative Report,” Bruce A. Morrison, Member of Congress, September 25, 1987.

    Omnibus Trade and Competitiveness Act of 1988, Pub. L. No. 100–418, §3103 (2), at 1376 (to be codified at 22 U.S.C. §5323).

    Id. §3111(a)(2)(A)–(C) at 1376.

    James D. Robinson III, Chairman and Chief Executive Officer, American Express Company, “A Comprehensive Agenda for LDC Debt and World Trade Growth,” a speech before the Overseas Development Council, Washington, D.C., February 29, 1988 (reproduced in AMEX Bank Review Special Papers, No. 13 (London: American Express Bank Ltd, Economics Unit, 1988). See also James D. Robinson III, “‘Radical’ Relief,” Washington Post (March 15, 1988), at A23.

    See “Capital: Risk-based Capital Guidelines,” Department of the Treasury, Office of the Comptroller of the Currency, 12 CFR Part 3 [Docket No. 88–5], Federal Reserve System, 12 CFR Part 225, Appendix B, [Regulation Y; Docket No. R-0628], Federal Deposit Insurance Corporation, 12 CFR Part 235, Appendix A. A useful summary of both proposals can be found in David Spencer and Alan Murray-Jones, “Capital Adequacy: Towards a Level Playing Field,” 7 International Financial Law Review (March 1988), at 19.

    Regulation K, Bank Holding Company Act of 1956,53 Fed. Reg. 5358 (1988) (to be codified at 12 CFR 211).

    See Richard Evans, “Bankers Proceed Cautiously With Debt/Equity Strategy,” Euromoney (January 1988), at 5.

    See, generally, Kenneth L. Telljohann and Richard H. Buckholz, “The Mexican Bond Exchange Offer: An Analytical Framework,” Salomon Brothers Inc. (January 1988).

    Art Pine, “Pressure to Revamp Third World Debt Strategy Mounting,” Los Angeles Times (March 11, 1988) IV at 1 (quoting Angel Gurría, Secretary of Finance and Public Credit of Mexico).

    Mario Brodersohn, interview in Prensa Económica, Año XIII, No. 161 (March 20, 1988), at 7.

    Hannah Arendt, On Revolution (New York: Viking Press, 1963), at 54.

    Id. at 55.

    Chapter 8, “Sovereign Immunity and Central Bank Immunity in the United States” (Patrikis)

    Ernest Patrikis, “Foreign Central Bank Property: Immunity from Attachment in the United States,” 1982 U. III. L. Rev. 265.

    Baglab Ltd. v. Johnson Matthey Bankers Ltd., 665 F. Supp. 289 (S.D.N.Y. 1987).

    Trendtex Trading Corporation Ltd. v. Central Bank of Nigeria, [1977] 1 All ER 881, 894–95 (CA).

    Banque Compafina v. Banco de Guatemala, 583 F. Supp. 320, 322–23 (S.D.N.Y. 1984).

    Chapter 9, “The Settlement of Disputes Regarding Foreign Investments: The Role of the World Bank, with Particular Reference to ICSID and MIGA” (Shihata)

    Edward S. Mason and Robert E. Asher, The World Bank since Bretton Woods (Washing ton: The Brookings Institution, 1973), p. 18.

    United States, Department of the Treasury, Questions and Answers on the Bank for Reconstruction and Development 4 (June 10, 1944). Quoted in Mason and Asher, World Bank since Bretton Woods, supra note 1, p. 18.

    Articles of Agreement of the International Bank for Reconstruction and Development, December 27, 1945, 60 Stat. 1440, 2 U.N.T.S. 134.

    Id. at art. I(i). See also Id. atart. I(iii): “[The purposes of the Bank are:] to promote the long-range balanced growth of international trade and the maintenance of equilibrium in balances of payments by encouraging international investment for the development of the productive resources of members.”

    Id. at art. I(ii).

    Fora description of the Bank’s cofinancing activities, see International Bank for Reconstruction and Development, Cofinancing (Washington, 1983).

    An overview of the Bank’s recent technical assistance activities is provided in International Bank for Reconstruction and Development, Annual Report 1985 (Washington, 1985), p. 70.

    Articles of Agreement of the International Finance Corporation, May 25, 1955, 6 U.S.T. 6186, 219 U.N.T.S. 79.

    See id. at arts. I and II(2).

    The Bank has also lent its good offices to the settlement of economic disputes between its member governments. A notable example is the Bank’s mediation of the dispute between India and Pakistan regarding the utilization of the waters of the Indus River system. The efforts of the Bank, which culminated in the conclusion of the Indus Water Treaty (September 19, 1960, 419 U.N.T.S. 126), are described in Mason and Asher, World Bank since Bretton Woods, supra note 1, pp. 610–27. See also Fischer, “La Banque internationale pour la reconstruction et le développement et l’utilisation des eaux du Bassin de l’Indus,” 6 Annuaire Francais de Droit International, Vol. 6 (1960), p. 667. In another type of intervention, the Bank, in 1977, assisted the Partner States of the East African Community in appointing a mediator to settle their differences. See International Bank for Reconstruction and Development, Annual Report 1978 (Washington, 1978), p. 38.

    See Mason and Asher, World Bank since Bretton Woods, supra note 1, pp. 595–610.

    Ibid., p. 641.

    See International Bank for Reconstruction and Development, Fifteenth Annual Report 19591960 (Washington, 1960), p. 26. See also World Bank, press release of April 4, 1960.

    See International Bank for Reconstruction and Development, Thirteenth Annual Report, 19571958 (Washington, 1958), p. 6. See also Mason and Asher, World Bank since Bretton Woods, supra note 1, p. 641. The settlement included payment by Egypt of a lumpsum compensation for nationalized property and receipt by it of a fee for administering sequestered properties.

    Cf. 1969 Annual Meetings of the Boards of Governors of the International Bank for Reconstruction and Development, the International Finance Corporation, and the International Development Association, Summary Proceedings (Washington, 1969), p. 67.

    See address of Bank President Eugene R. Black in 1961 Annual Meetings of the Boards of Governors of the International Bank for Reconstruction and Development and the International Development Association, Summary Proceedings (Washington, 1961), pp. 8–9.

    Ibid.

    See International Center for Settlement of Investment Disputes, Convention on the Settlement of Investment Disputes between States and Nationals of Other States: Documents Concerning the Origin and Formulation of the Convention, Vol. 2, Part 1 (Washington, 1968), p. 608.

    Convention on the Settlement of Investment Disputes between States and Nationals of other States, March 18, 1965, 17 U.S.T. 1270, 575 U.N.T.S. 15 (the ICSID Convention). The ICSID Convention, along with the text of the report thereon of the Bank’s Executive Directors, is reproduced at 4 International Legal Materials 524 (1965).

    Report of the Bank’s Executive Directors, supra note 19, at para. 3.

    ICSID Convention, supra note 19, at art. 1.

    Id. at art. 5.

    Report of the Bank’s Executive Directors, supra note 19, at para. 33.

    Cf. id. at para. 9.

    So far, only five states (Israel, Jamaica, Guyana, Papua New Guinea, and Saudi Arabia) have made such notifications, and one of them (Guyana) subsequently withdrew its notification. The texts of the notifications may be found in Measures taken by Contracting States for the Purpose of the Convention, ICSID Doc. ICSID/8-C.

    Cf. ICSID Convention, supra note 19, at art. 25(1).

    Summary information on the disputes so far submitted to ICSID is available in ICSID Cases, 1972–1987, ICSID Doc. ICSID/16/Rev. 1 (July 1987).

    See Georges R. Delaume, “The ICSID and the Banker,” International Financial Law Review (October 1983), p. 9.

    The only mandatory provisions are those according to which: (i) an arbitral tribunal composed of more than a sole arbitrator must include an uneven number of arbitrators, (ii) arbitrators must possess certain basic qualities, such as integrity and recognized competence in relevant fields, and (iii) the majority of the arbitrators must be nationals of a state other than the Contracting State party to the dispute or whose national is a party to the dispute. This last-mentioned provision will not, however, apply if the sole arbitrator or each individual member of the tribunal has been appointed by agreement of the parties. See ICSID Convention, supra note 19, at arts. 14(1), 37(2), 39, and 40(2).

    See id. at art. 38.

    Id. at art. 45(2).

    Id. at art. 55.

    Including the resumption of diplomatic protection hitherto suspended under the ICSID Convention and the right of the Contracting State whose national is a party to the dispute to bring an international claim against the noncomplying state. Id. at arts. 27 and 64.

    A notable example of this may be found in several recent guarantee agreements executed by Brazil, which is not a member of ICSID, in respect of loans to Brazilian public entities by a national of Canada (a Canadian bank), which is not a member of ICSID either. Cf. Georges R. Delaume, “The ICSID and the Banker,” supra note 28, p. 13. In addition, the April 25, 1987 U.S.-Bahrain Investment Incentive Agreement, which is reproduced in ICSID Review — Foreign Investment Law Journal, Vol. 2 (Fall 1987), p. 533, specifies that the ICSID Secretary-Genera l has the authority to appoint arbitrators for disputes between the parties to the Agreement.

    As in the case of the Brazilian guarantee agreements mentioned in note 34, these have included cases where the states involved were not parties to the ICSID Convention. It should also be noted that since 1978, ICSID has offered an “Additional Facility” under which the Center can administer conciliation and arbitration proceedings in cases where the disputes fall outside the scope of the ICSID Convention, either because one of the parties is not a Contracting State or a national of one or because the dispute does not directly arise out of an investment. Fact-finding proceedings may also be conducted under the Additional Facility. Conscious of the fact that references to the Additional Facility now appear in a number of bilateral investment treaties and national investment laws, ICSID’s Administrative Council, which introduced the facility on a trial basis, decided in 1984 that the Additional Facility should be continued indefinitely. See Additional Facility for the Administration of Conciliation, Arbitration and Fact-Finding Proceedings, ICSID Doc. ICSID/11 (June 1979); 2 News from ICSID, No. 1 at 6 (1985). See also Aron Broches, “The ‘Additional Facility’ of the International Centre for Settlement of Investment Disputes (ICSID),” 4 ϒ.B. Com. Arb. 373 (1979).

    See address of Bank President A. W. Clausen at the 1981 Joint Annual Meetings of the World Bank and the International Monetary Fund, Summary Proceedings (Washington, 1982), pp. 15, 23.

    The Convention Establishing the Multilateral Investment Guarantee Agency, October 11, 1985 (the MIGA Convention), along with the official commentary thereon, is published in 24 International Legal Materials 1598 (1985) and in 1 ICSID ReviewForeign Investment Law Journal 145 (1988). For a detailed examination of the history and operations of MIGA and of the major policy issues it will face, see Ibrahim F.I. Shihata, MIGA and Foreign Investment: Origins, Operations, Policies and Basic Documents of the Multilateral Investment Guarantee Agency (Dordrecht: Martinus Nijhoff, 1988).

    These included 55 developing countries and 15 industrial countries. As of February 1991, 98 countries (81 developing and 17 industrial) had signed, and 73 countries had ratified, the MIGA Convention. See List of Signatures and Ratifications of the Convention Establishing the Multilateral Investment Guarantee Agency, Multilateral Investment Guarantee Agency document (February 21, 1991).

    Pursuant to MIGA Convention, supra note 37, at art. 62.

    Id. at art. 2.

    Id. at art. 2(a). Articles 11–18 of the MIGA Convention detail MIGA’s insurance activities, and Article 20 elaborates on the reinsurance of national and regional entities (both public and private), which cover foreign investment against political risk.

    Id. at art. 2(b).

    Id. atart. 11(a).

    Id. at art. 12.

    Coverage of such forms of investment is provided for in the draft operational regulations of MIGA.

    MIGA Convention, supra note 37, at art. 13(a).

    Id. at art. 13(c).

    Id. at art. 23(a).

    Id. at arts. 30, 31(b), 33, and 41(a).

    Id. at art. 32(b).

    Id. at art. 4(a).

    For the text of the MIGA Convention as proposed by the management of the Bank, see 24 International Legal Materials 688 (1985). The principle of equal representation of groups of countries which have distinct interests in the activities of the institution is reflected in most international commodity agreements. For example, the International Coffee, Cocoa, and Jute Agreements [647 U.N.T.S. 3; 882 U.N.T.S. 67; UNCTAD Doc. TD/JUTE/11/Rev. 1 (1983)] distinguish between member countries which are primarily exporters of the commodity concerned and those which are primarily importers; each group is allotted 1,000 votes, which are then divided among the members of the group in various ways.

    Under the system of weighted voting which prevails in most international lending institutions, voting rights are tied to capital subscriptions (one vote per share) while, in addition, each member also receives an equal amount of membership votes. The Articles of Agreement of the Bank, supra note 3, at art. V(3)(a), for instance, accord to each member country 250 basic votes, as well as one additional vote per share held in the Bank’s capital stock, with each share being worth $100,000. But cf. Agreement Establishing the International Fund for Agricultural Development, June 13, 1976, 28 U.S.T. 8435, 15 International Legal Materials 922 (1976), where members are divided into 3 groups, with each having one third of the total votes.

    See MIGA Convention, supra note 37, at art. 39(a) and Schedule A.

    Id. at arts. 3(d), 39(b), and 39(d).

    Id. at arts. 39(b) and 39(c).

    Id. at art. 5(a).

    Id. at art. 7(i).

    Id. at art. 7(ii).

    Id. at art. 8(a).

    Id. at art. 22(a).

    Ibid.

    Id. at art. 24 and Annex I, arts. 1 and 2(c).

    Id. at Annex I, art. 2(a).

    Id. at Annex I, art. 2(b).

    Id. at Annex I, art. 1(b).

    Id. at Annex I, art. 6.

    Id. at art. 18(a).

    Id. at art. 57(b).

    Cf. Id. at art. 18(c).

    According to unpublished figures obtained from the Overseas Private Investment Corporation (OPIC)in 1985, that corporation settled claims totaling $96 million by paying compensation in cash to the investor while accepting installments from the host government; it settled claims totaling some $292 million by persuading investors to accept host-government commitments backed by OPIC guarantees or by a combination of cash payments and gua guarantees.

    MIGA Convention, supra note 37, at art. 23(b)(i).

    Cf. Address of Bank President A.W. Clausen, supra note 36.

    MIGA Convention, supra note 37, at art. 12(d).

    Id.

    Id. at art. 15.

    As of the date of writing, the ICSID Convention had been signed by 97 countries and ratified by 89 of these. See List of Contracting States and Signatories of the Convention, ICSID Doc. ICSID/3 (June 1987). As of January 1991, 100 states had signed, and 92 states had ratified, the ICSID Convention. See List of Contracting States and Signatories of the Convention, ICSID Doc. ICSID/3 (January 25, 1991).

    Chapter 9, Comment (Munk)

    Mr. J. Voss, Counsel, Legal Department, World Bank; and Mr. A. Parra, Senior Counsel, International Center for the Settlement of Investment Disputes.

    Amco Asia Corporation, Pan American Development Ltd. and P.T. Amco v. Republic of Indonesia (Case No. ARB/81/1), ICSIDCases, 19721987, ICSID Doc. ICSID/16/Rev. 1 (July 1987), 24 ILM 1022 (July 1985) (excerpts).

    Chapter 11, “Commercial Bank Liability Under the Law of the United States for Deposits in Foreign Branches That Are Subject to Expropriation or Exchange Restrictions Imposed by Sovereign Governments” (Tigert)

    623 F. Supp. 1526 (E.D. Mich. 1985), aff’d, 850 F.2d 1164 (6th Cir. 1988), cert. denied, 110 S.Ct. 2602 (1990).

    660 F. Supp. 946 (S.D.N.Y. 1987), on remand 695 F. Supp. 1450 (S.D.N.Y. 1988), aff’d, 852 F.2d 657 (2d. Cir. 1988), vacated and remanded, 110 S.Ct. 2034 (1990).

    The facts are drawn from the reported decisions in the two cases and from the respective records.

    660 F.2d 854 (2d Cir. 1981), cert. denied, 459 U.S. 976 (1982).

    General Dynamics Telephone Systems v. Islamic Republic of Iran, Iran-United States Claims Tribunal, Case No. 285 at 12 (October 4, 1985).

    The Kronprinzessin Cecilie, 244 U.S. 12 (1917).

    157 Misc. 849, 285 N.Y.S. 491 (1935).

    118 F.2d 631, 635–36 (2d Cir. 1941), cert. denied, 314 U.S. 650.

    239 N.Y. 158, 145 N.E. 917 (1924).

    Claim of the PearlS. Buck Foundation, Inc., Claim No. V-0261, Decision No. V-0439 (October 15, 1985).

    Tribunal de Grande Instance de Paris, as reported in Recueil Dalloz Sirey, 1985; Dame Ba Ta Thu Van v. Banque Nationale de Paris (9ème Chambre, March 8, 1985); Dame Dang Thi To Tarn et al. v. Banque Francaise Commerciale (9ème Chambre, March 12, 1985).

    850 F.2d at 1170.

    Id.

    Id.

    Id. at 1171.

    Id.

    850 F.2d at 1173, Brown, J., dissenting.

    Id. at 1178

    Id.

    Id.

    The petition for a writ of certiorari in the case was denied by the Supreme Court; therefore, the decision of the U.S. Court of Appeals for the Sixth Circuit was allowed to stand as the resolution of the case. The position of the U.S. Government with respect to the petition for certiorari is discussed infra at p. 232.

    Wells Fargo Asia Ltd. v. Citibank N.A., 695 F. Supp. 1450 (S.D.N.Y. 1988).

    61 N.Y.2d 460, 474 N.Y.S.2d 689 (1984), cert, denied, 469 U.S. 966.

    735 F.2d 645 (2d Cir. 1984).

    See, e.g., Underhill v. Hernandez, 168 U.S. 250 (1897); Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398 (1964).

    852 F.2d at 660.

    See, e.g., Williams v. Walker-Thomas Furniture Co., 350 F.2d 445 (D.C. Cir. 1965).

    Brief of the United States as amicus curiae in Wells Fargo at pp. 11–12, n.7.

    Chapter 12, “Banking Secrecy: Coping with Money Laundering in the International Arena” (Hilsher)

    “Data Show Increase in Lending in 1985 by International Banks,” IMF Survey, Vol. 16 (June 15, 1987), at 185. The Fund staff defined the term “offshore banking centers” as The Bahamas, Bahrain, the Cayman Islands, Hong Kong, the Netherlands Antilles, Panama, and Singapore. Id. at 186. In the first half of 1987, international bank lending to offshore banking centers increased to $47 billion, but international bank deposit taking from offshore centers decreased to $24 billion. “Bank Lending During First Half of 1987 Is Triple the Year-Earlier Level,” IMF Survey, Vol. 16 (November 30, 1987), at 360 (table).

    Pub. L. No. 91-508, 84 Stat. 1114, 1118(1970) (codified as amended at 12 U.S.C. §§1730d, 1829b, 1951–1959 (1989) and 31 U.S.C. §§321, 5311–5324 (1989), amended by 31 U.S.C.A. §§5312(a)(2)(T), (u)(5), 5316(a)(l)–(2), 5316(d), 5317(b)–(c), 5318(a)–(f), 5321(a)(l), (4)–(6), 5321(b)–(d), 5322(a)–(c), 5323(a)–(d), 5324 (1989)).

    See id.

    31 C.F.R. §103.22 (a) (1) (1989). See also, 31 U.S.C. §5313 (a) (1989).

    31 C.F.R. §103.22 (a) (2) (1989). See also, 31 U.S.C. §5313 (a) (1989).

    31 C.F.R. §103.23 (a) (1989). See also, 31 U.S.C. §5316 (a) (2) (1989).

    31 C.F.R. §103.23 (b) (1989). See also, 31 U.S.C. §5316 (a) (2) (1989).

    See 31 C.F.R. §103.24 (a) (1989). See also, U.S. Department of Treasury Form T DF 90-22.1, Report of Foreign Bank and Financial Accounts (April 1990 edition).

    31 C.F.R. §103.34 (b) (1), (2), (3), and (4).

    31 C.F.R. §103.38 (d).

    See 31 C.F.R. §103.51.

    614 F. Supp. 194 (S.D.N.Y. 1985), aff’d, 794 F.2d 821 (2d Cir. 1986).

    See United States v. Kattan-Kassin, 696 F.2d 893 (11th Cir. 1983). Kattan, prosecuted for numerous Bank Secrecy Act violations, cooperated with the federal government. See also Preside nt’s Commission on Organized Crime, Interim Report to the President and the Attorney General, The Cash Connection: Organized Crime, Financial Institutions, and Money Laundering, at 40–41 (1984) [hereinafter referred to as PCOC Report].

    See United States v. Milian-Rodriguez, 759 F.2d 1558 (11th Cir. 1985), cert. denied, 474 U.S. 845 (1985), on remand, 828 F.2d at 679 (11th Cir. 1987), cert. denied, 468 U.S. 1054 (1988). When he was apprehended in May 1983, Milian was about to fly more than $5.6 million in U.S. currency to Panama in his Lear jet. 759 F.2d at 1560. Milian was subsequently convicted on 60 counts of racketeering, drug offenses, and Bank Secrecy Act violations.

    See United States v. Orozco-Prada, 732 F.2d 1076, 1078 (2d Cir.), cert, denied, 469 U.S. 845 (1984). Orozco was convicted on seven counts of drug offenses, conspiracy, false statements, and Bank Secrecy Act violations, and was sentenced to eight years’ imprisonment and a fine of $ 1,035,000. 732 F.2d at 107. See also, PCOC Report, supra, note 13, at 29–35.

    See United States v. Mouzin, 785 F.2d 682 (9th Cir. 1986); 559 F. Supp. 463 (D.C. CA, 1983); cert. denied, sub nom Carvajal v. United States, 479 U.S. 985. Mouzin was convicted of 19 separate offenses (including Bank Secrecy Act violations, conspiracy, drug offenses, and racketeering) and was sentenced to 25 years’ imprisonment with a lifetime special parole term. The co-leader of her organization was convicted of 8 counts of the same indictment and was sentenced to 29 years’ imprisonment with a lifetime special parole term. 785 F.2d at 682.

    See, Tax Evasion, Drug Trafficking and Money Laundering as They Involve Financial Institutions: Hearings on H.R. 1367, H.R. 1474, H.R. 1945, H.R. 2785, H.R.. 3892, H.R. 4280, and H.R. 4573 Before the Subcommittee on Financial Institutions Supervision, Regulation and Insurance of the House Committee on Banking, Finance, and Urban Affairs (hereinafter referred to as Tax Evasion Hearings), 99th Cong., 2d Sess. (1986) at 124 (testimony of Richard C. Wassenaar, Assistant Commissioner for Criminal Investigation, Internal Revenue Service).

    The Bank Secrecy Act regulations delegate to the Internal Revenue Service (IRS) the authority to investigate all criminal violations of the Act (except for Currency and Monetary Instrument Report (CMIR) transactions) and to the U.S. Customs Service the authority to investigate criminal CMIR violations. See, 31 C.F.R. §103.46 (c) (1987).

    The following table sets forth statistics prepared by the IRS Criminal Investigation Division on their criminal investigations of Bank Secrecy Act violations from fiscal years 1982 (beginning October 1, 1981) through 1987 (ending September 30, 1987).

    Fiscal Year
    198219831984198519861987
    Investigations initiated126177238338354400
    Prosecution recommendations55119143174275256
    Indictments29103102144204236
    Convictions25617391108153

    From fiscal years 1982 to 1985, the percentage of these investigations that involved narcotics ranged from 36.5 to 51.7. See, Rusch, Hue and Cry in the Counting-House: Some Observations on the Bank Secrecy Act, 37 Cath. U. L. Rev. 465, 473 n. 35 (1988). See also, Tax Evasion Hearings, supra, note 17, at 115–116 (testimony of Richard C. Wassenaar, Assistant Commissioner for Criminal Investigation, Internal Revenue Service). In addition, the Anti-Drug Abuse Act of 1986, Pub. L. 99-570, 100 Stat. 3207 (1986), created a new offense for structuring currency transactions to evade the Currency Transaction Report (CTR) reporting requirement under the Bank Secrecy Act. See, 31 U.S.C. §5324. There have been six indictments and two convictions under this provision to date.

    See, 31 U.S.C. §5317 (1989); 31 C.F.R. §103.50 (1989).

    From 1984 to 1986, the U.S. Customs Service increased the total of all currency and monetary-instrument seizures from $67.7 million to $96.1 million. Federal Accounting of Seized Cash in Federal Agencies: Hearings Before the Subcommittee on Federal Spending, Budget, and Accounting of the Senate Committee on Governmental Affairs, 100th Cong., 1st Sess., 19 (1987) (testimony of William von Raab, Commissioner of Customs).

    U.S. Department of the Treasury statistics compiled by author in Rusch, Hue and Cry in the Counting-House: Some Observations on the Bank Secrecy Act, 37 Cath. U. L. Rev. 465, at 474 note 38 (1988).

    See, e.g., Tax Evasion Hearings, supra, note 17, passim.

    See, 31 U.S.C. §5313 (a) (1989).

    See, e.g., United States v. Heyman, 794 F.2d 788 (2d Cir. 1986) (affirming conviction under 31 U.S.C. §§5313(a), itself for willful failure to file a CTR), cert. denied, 479 U.S. 989 (1986); United States v. Massa, 740 F.2d 629, 645 (8th Cir. 1984) [affirming conviction under 18 U.S.C. §1001 (1989) (concealing or covering up “by any trick, scheme, or device a material fact,” and making “false, fictitious or fraudulent statements or representations” “in any matter within the jurisdiction of any department or agency of the United States”)], on remand, 804 F.2d 1020 (8th Cir. 1986), cert. denied, 471 U.S. 1115 (1985); United States v. Tobon-Buihs, 706 F.2d 1092 (11th Cir. 1983) (affirming another conviction under 18 U.S.C. §1001).

    See, e.g., United States v. Anzalone, 766 F.2d 676 (1st Cir. 1985) (reversing an individual conviction for structuring and failure to file a CTR under 31 USC 5313 (a) on the grounds that the statute’s filing requirement only applied to institutions); United States v. Gimbel, 830 F.2d 621 (7th Cir. 1987), rev’g., 632 F. Supp. 748 (E.D.Wisc. 1985) [reversing an attorney’s conviction under 18 U.S.C. §2(b) for “aiding and abetting” (by causing his clients to structure transactions) and for concealing information from the Internal Revenue Service (18 U.S.C. §1001)]. The court also reversed on mail and wire fraud charges (18 U.S.C. §§1341 and 1343)); United States v. Larson, 796 F.2d 244, 247 (8th Cir. 1986) [reversing another conviction under 18 U.S.C. §2 (aiding and abetting) and §1001]; United States v. Varvel, 780 F.2d 758, 760 (9th Cir. 1986) [reversing convictions under 18 U.S.C. §§2, 371 (conspiracy to defraud the United States), 1001, and 1343 (wire fraud)]; United States v. Denemark, 779 F.2d 1559, 1561–1563 (11th Cir. 1986) [reversing conviction under 18 U.S.C. §§2 and 1001, as well as 31 U.S.C. §5313 (failure to file a CTR)].

    18 U.S.C. §§1956, 1957 (1989).

    Pub. L. 99-570, 100 Stat. 3207 (1986).

    18 U.S.C. §1956(a)(1) (1989). A violation of this section constitutes a criminal offense punishable by imprisonment for not more than 20 years and a fine of not more than $500,000 or twice the value of the property, funds, or monetary instruments involved in the transaction (whichever is greater). In addition, the U.S. Government can seek a civil penalty of not more than the greater of (1) the value of the property, funds, or monetary instruments involved in the transaction; or (2) $ 10,000. 18 U.S.C. §1956 (b).

    18 U.S.C. §1956 (f).

    18 U.S.C. § 1957. A violation of this section constitutes a criminal offense punishable by imprisonment for not more than ten years, and either a fine under Title 18 or not more than twice the amount of the criminally derived property involved in the transaction. Id., 1957 (b).

    18 U.S.C. 1957 (d)(2) (1989) (extending jurisdiction to all defendants who qualify as “United States persons”). See also, 18 U.S.C. §3077 (2) (1989) (defining “United States persons”).

    31 U.S.C. §5324 (1–3). A willful violation of any of the three provisions of Section 5324 constitutes a criminal offense punishable by imprisonment for not more than five years and a fine of not more than $250,000; if the violation is committed while violating another federal law or as part of a pattern of any illegal activity involving more than $ 100,000 in a 12–month period, the maximum punishment may be increased to imprisonment for not more than ten years and a $500,000 fine. Id., §5322. A willful violation of any of the three provisions of Section 5324 may also constitute a civil violation for which the U.S. Treasury Department may impose a civil monetary penalty that may not exceed the amount of the coins, currency, or other monetary instruments used in the transaction, Id, §5321 (4) (a).

    See, Drug Trafficking Offenses Act (1986), c. 32.

    357 U.S. 197 (1958).

    357 U.S. 197 (1958), at 209–12.

    691 F.2d 1384 (11th Cir. 1982), cert. denied, 462 U.S. 1119 (1983) [hereinafter referred to as Nova Scotia I].

    Restatement (Sec ond) of Foreign Relations Law of the United States, §40 (1965), quoted in, 691 F.2d at 1389 n.7.

    Id.

    Nova Scotia I, at 1391.

    Id., (quoting In re: Grand Jury Proceedings, United States v. Field, 532 F.2d 404 (5th Cir. 1976), cert. denied, 429 U.S. 940 (1976).

    Nova Scotia I, at 1389.

    In re: Grand Jury Proceedings, the Bank of Nova Scotia, 740 F.2d 817, 820 (11th Cir.1984), cert. denied, 469 U.S. 1106 (1985), [hereinafter referred to as Nova Scotia II].

    Id., at 829.

    See, e.g., Marc Rich & Co., A.G. v. United States, 707 F.2d 663 (2d Cir.) cert. denied. 463 U.S. 1215 (1983); United States a First National Bank of Chicago, 699 F.2d 341, 345 (7th Cir. 1983); United States v. Vetco, Inc., 644 F.2d 1324,1331 (9th Cir.), aff’d, 691 F.2d 1281 (9th Cir. 1981), cert. denied, 454 U.S. 1098 (1981).

    See, Nova Scotia I, at 826; Nova Scotia II, at 1389.

    825 F.2d 494 (D.C. Cir. 1987) (per curiam).

    Id., at 495.

    See, U.S. Constitution, 5th Amendment.

    406 U.S. 472, 478 (1972).

    732 F.2d 814 (11th Cir.), cert. denied, 469 U.S. 932 (1984).

    732 F.2d at 816–17 & n.4.

    See, e.g., United States v. Davis, 767 F.2d 1025, 1039–40 (2d Cir. 1985); United States v. Cid Molina, 767 F.2d 1131, 1132–33 (5th Cir. 1985).

    Davis, 767 F.2d at 1040.

    See, In re: Grand Jury Proceedings (Ranauro), 814 F.2d791 (1st Cir. 1987) (per curiam); Senate Select Committee on Secret Military Assistance v. Secord, 664 F. Supp. 562 (D.D.C. 1987); United States v. Pedro, 662 F. Supp. 47 (W.D.Ky. 1987), vacated, 889 F.2d 1089 (1989).

    Ranauro, 814 F.2d at 793.

    Id.

    See, John Doe v. United States, 487 U.S. 201 (1988).

    Supra, note 32.

    Chapter 12, Comment (Zeldin)

    United States v. Bank of Nova Scotia, 691 F.2d (11th Cir. 1982), cert. denied, 462 U.S. 1119 (1983); In re: Grand Jury Proceedings, the Bank of Nova Scotia, 740 F.2d 817, 820 (11th Cir. 1984), cert. denied, 469 U.S. 1106 (1985).

    United States v. John Doe, 487 U.S. 201 (1988).

    Chapter 14, “The Legal Barrier Between U.S. Investment and Commercial Banking: Its Origin, Application, and Prospects” (Horn)

    Act of June 16, 1933, c.89, 48 Stat. 162 (1933).

    The development of U.S. commercial and investment banking has been reviewed at length in the legal, financial, and trade literature. The sources used to develop the textual discussion include the following: Vincent P. Carosso, Investment Banking in America: A History (Cambridge, Massachusetts: Harvard University Press, 1970)(hereinafter referred to, 15 Carosso); Federal Deposit Insurance Corporation, Mandate for Change: Restructuring the Banking Industry, Staff Study (Washington, 1987)(hereinafter referred to as FDIC Staff Study), at 17–34; Benjamin J. Klebaner, Commercial Banking in the United States: A History (Hinsdale, Illinois: Dryden Press, 1974), at 1–45, 75–85, and 131–43 (hereinafter referred to as Klebaner); Peach, The Security Affiliates of National Banks (Baltimore: Johns Hopkins Press, 1941; Arno Press ed., 1975)(hereinafter referred to as Peach); Perkins, “The Divorce of Commercial and Investment Banking: A History,” 88 Banking L. Journal 483–528 (1971)(hereinafter referred to as Perkins); I and II Redlich, The Molding of American Banking (New York: Johnson Reprint Corp. ed., 1967) (hereinafter referred to as Redlich); Golembe Associates Inc., Commercial Banking and the Glass-Steagall Act (Washington: American Bankers Association, 1982), at 19–48; Samuel L. Hayes III, A. Michael Spence, and David Van P. Marks, Competition in the Investment Banking Industry (Cambridge, Massachusetts: Harvard University Press, 1983), at 5–44; Ross M. Robertson, The Comptroller and Bank Supervision: A Historical Appraisal ( Washington: Office of the Comptroller of the Currency, 1968)(hereinafter referred to as Robertson).

    Peach, n.2 supra, at 16; Perkins, n.2 supra, at 485–86.

    I Redlich, n.2 supra, at 10–11.

    Id., at 47.

    Id., at 12–13, 46–47.

    II Redlich, n.2 supra, at 324–25; Carosso, n.2 supra, at 2–3.

    FDIC Staff Study, n.2 supra, at 22–25.

    Id; II Redlich, n.2 supra, at 324—26.

    FDIC Staff Study, n.2 supra, at 23; II Redlich, n.2 supra, at 324–25.

    Prior to the U.S. Civil War, two efforts were made by Congress to charter a national Bank of the United States, which would, in part, have acted as a central bank by providing liquidity to the U.S. banking system in the form of short-term credit and by issuing bank notes. Both efforts died, however, largely as a result of popular sentiment against a powerful central bank controlled by the national government. Robertson, n.2 supra, at 17–20; FDIC Staff Study, n.2 supra, at 21–22.

    I Redlich, n.2 supra, at 20; Klebaner, n.2 supra, at 9.

    Symons, “The ‘Business of Banking’ in Historical Perspective,” 51 Geo. Wash. L. Rev. 676–726 (August 1983), 688–89.

    FDIC Staff Study, n.2 supra, at 27; II Redlich, n.2 supra, at 333–37.

    FDIC Staff Study, n.2 supra, at 27; II Redlich, n.2 supra, at 343.

    FDIC Staff Study, n.2 supra, at 27.

    Robertson, n.2 supra, at 33–45.

    Carosso, n.2 supra, at 29–50; II Redlich, n.2 supra, at 357–60.

    Symons, n.13 supra, at 688–89; Klebaner, n.2 supra, at 75–76.

    As previously noted, the earliest commercial banks were chartered by acts of specific legislation, which specified in each case the powers which these chartered institutions could exercise.

    Act of February 25, 1863, c.58, 12 Stat. 665(1863), repealed by Act of June 3, 1864, n.22 infra.

    Act of June 3, 1864, c.106, 13 Stat. 99 (1864)(codified at 12 U.S.C. §§l et seq.).

    Klebaner, n.2 supra, at 56–57.

    Perkins, n.2 supra, at 486.

    Peach, n.2 supra, at 31–34.

    Id. See also, Carosso, n.2 supra, at 79–105.

    Peach, n.2 supra, at 24–28.

    Id.

    Peach’s discussion of bank “security affiliates” in the twentieth century deals extensively with the legal incentives for establishing these affiliates and the mechanisms used. Peach, n.2 supra, at 38–70. See also Perkins, n.2 supra, at 487–90; Carosso, n.2 supra, at 271–99.

    Peach, n.2 supra, at 71–112.

    Carosso, n.2 supra, at 110–92. See, e.g., Report of the Committee Appointed Pursuant to House Resolutions 429 and 504 to Investigate the Concentration of Control of Money and Credit, H.R. 1593, 62nd Cong., 3rd Sess. (1913).

    Among other things, there were continuing questions about the legal authority of national banks to buy and sell securities. Although rulings by the Comptroller of the Currency generally permitted national banks to buy and sell corporate bonds as a form of “negotiating and discounting” indebtedness, in 1902 the Comptroller ruled that national banks did not have the power directly to deal in and underwrite securities, a ruling which provided a direct impetus for national banks to move these activities into securities affiliates. II Redlich, n.2 supra, at 393. On the other hand, the competitive disadvantages imposed on national banks in this regard helped lead to the passage, in 1927, of the McFadden Act, which affirmed that national banks could acquire and underwrite “investment securities” (debt obligations), and gave national banks still another impetus to become involved in these activities. Act of February 25, 1927, c.191, §2, 44 Stat. 1226 (1927).

    Carosso, n.2 supra, at 96–100.

    The 1913 “Money Trust” (or Pujo) investigation led to a series of congressional recommendations for reform of the financial-services markets, one of which was that commercial banks, either directly or through affiliates, be prohibited from dealing in or underwriting corporate securities. See, Report of the Committee Appointed Pursuant to House Resolutions 429 and 504, n.31 supra, at 166–70.

    See, c.g., Hearings on S. Res. 19, Senate Committee on Finance, 72nd Cong., 1st Sess. (1931); Operation of the National and Federal Reserve Banking Systems, Hearings pursuant to S. Res. 71 before a Subcommittee of the Senate Banking and Currency Committee, 71st Cong., 3rd Sess. (1931); Hearings on the Operation of the National and Federal Reserve Banking Systems, S. 4115, Senate Committee on Banking and Currency, 72nd Cong., 1st Sess. (1932). See generally, Carosso, n.2 supra, at 300–51.

    Peach, n.2 supra, at 151.

    See, Perkins, n.2 supra, at 499–524; Carosso, n.2 supra, at 322–511.

    FDIC Staff Study, n.2 supra, at 36–38.

    Banking Act of 1933, S. Rep. No. 73–77 to Accompany S. 1631, 73rd Cong., 1st Sess. (hereinafter referred to as Senate Report), at 6–10. See also, S. Res. 71 Hearings, n.35 supra, at 1052–68.

    Senate Report, n.39 supra, at 2–5, 8–9.

    Id., at 8–10.

    Perkins, n.2 supra, at 497–505; FDIC Staff Study, n.2 supra, at 38—39.

    Senate Report, n.39 supra, at 8. See also, 77 Cong. Rec. 3835 (remarks of Representative Steagall); 75 Cong. Rec. 9884 (remarks of Senator Glass).

    Senate Report, n.39 supra, at 2.

    See, Carosso, n.2 supra, at 300–51.

    Id.

    Act of May 27, 1933, c.38, Title I, 48 Stat. 74 (1933) (codified at 15 U.S.C. §§77a et seq.).

    Act of June 6, 1934, c.404, Title I,48 Stat. 881 (1934) (codified at 15 U.S.C. §§78a et seq.).

    Act of Aug. 22, 1940, c.686, Title I, 54 Stat. 789 (1940) (codified at 15 U.S.C. §§80a-l et seq.).

    Act of Aug. 22, 1940, c.686, Title II, 54 Stat. 847 (1940) (codified at 15 U.S.C.§§80b-l et seq.).

    FDIC Staff Study, n.2 supra, at 36–38.

    12 U.S.C. §24 (Seventh). It provides, in pertinent part, that

    • “… The business of dealing in securities and stock by the association shall be limited to purchasing and selling such securities and stock without recourse, solely upon the order, and for the account of customers, and in no case for its own account, and the association shall not underwrite any issue of securities or stock: Provided, That the association may purchase for its own account ‘investment securities’ under such limitations and restrictions as the Comptroller of the Currency may by regulation prescribe. In no event shall the total amount of the investment securities of any one obligor or maker, held by the association for its own account, exceed at any time 10 percent of its capital stock actually paid in and unimpaired and 10 percent of its unimpaired surplus fund, except that this limitation shall not require any association to dispose of any securities lawfully held by it on August 23, 1935. As used in this section the term ‘investment securities’ shall mean marketable obligations, evidencing indebtedness of any person, copartnership, association, or corporation in the form of bonds, notes and/or debentures commonly known as investment securities under such further definition of the term ‘investment securities’ as may by regulation be prescribed by the Comptroller of the Currency. Except as hereinafter provided or otherwise permitted by law, nothing herein contained shall authorize the purchase by the association for its own account of any shares of stock of any corporation. The limitations and restrictions herein contained as to dealing in, underwriting and purchasing for its own account, investment securities shall not apply to obligations of the United States, or general obligations of any State or of any political subdivision thereof....”

    12 U.S.C. §335.

    12 U.S.C. §24 (Seventh).

    12 U.S.C. §378(a) provides, in relevant part, that

    • “(a) After the expiration of one year after June 16, 1933, it shall be unlawful—

      • (1) For any person, firm, corporation, association, business trust, or other similar organization, engaged in the business of issuing, underwriting, selling, or distributing, at wholesale or retail, or through syndicate participation, stocks, bonds, debentures, notes, or other securities, to engage at the same time to any extent whatever in the business of receiving deposits subject to check or to repayment upon presentation of a passbook, certificate of deposit, or other evidence of debt, or upon request of the depositor: Provided, That the provisions of this paragraph shall not prohibit national banks or State banks or trust companies (whether or not members of the Federal Reserve System) or other financial institutions or private bankers from dealing in, underwriting, purchasing, and selling investment securities, or issuing securities, to the extent permitted to national banking associations by the provisions of section 24 of this title: Provided further, That nothing in the paragraph shall be construed as affecting in any way such right as any bank, banking association, savings bank, trust company, or other banking institution, may otherwise possess to sell, without recourse or agreement to repurchase, obligations evidencing loans on real estate ....”

    Banking Act of 1935, Act of August 23, 1935, c.614, §303, 49 Stat. 707 (1935).

    12 U.S.C. §377 provides, in pertinent part, that

    • “After one year from June 16, 1933, no member bank shall be affiliated in any manner described in subsection (b) of section 221a of this title with any corporation, association, business trust, or other similar organization engaged principally in the issue, flotation, underwriting, public sale, or distribution at wholesale or retail or through syndicate participation of stocks, bonds, debentures, notes, or other securities ....”

    The term “affiliate,” as used in Section 20 of the Glass-Steagall Act, is defined at 12 U.S.C. §221a(b). It provides that

    • “Except where otherwise specifically provided, the term ‘affiliate’ shall include any corporation, business trust, association, or other similar organization—

    • (1) Of which a member bank, directly or indirectly, owns or controls either a majority of the voting shares or more than 50 percent of the number of shares voted for the election of its directors, trustees, or other persons exercising similar functions at the preceding election, or controls in any manner the election of a majority of its directors, trustees, or other persons exercising similar functions; or

    • (2) Of which control is held, directly or indirectly, through stock ownership or in any other manner, by the shareholders of a member bank who own or control either a majority of the shares of such bank or more than 50 percent of the number of shares voted for the election of directors of such bank at the preceding election, or by trustees for the benefit of the shareholders of any such bank; or

    • (3) Of which a majority of its directors, trustees, or other persons exercising similar functions are directors of any one member bank; or

    • (4) Which owns or controls, directly or indirectly, either a majority of the shares of capital stock of a member bank or more than 50 percent of the number of shares voted for the election of directors of a member bank at the preceding election, or controls in any manner the election of a majority of the directors of a member bank, or for the benefit of whose shareholders or members all or substantially all the capital stock of a member bank is held by trustees.”

    U.S.C. §78 provides:

    • “No officer, director, or employee of any corporation or unincorporated association, no partner or employee of any partnership, and no individual, primarily engaged in the issue, flotation, underwriting, public sale, or distribution, at wholesale or retail, or through syndicate participation, of stocks, bonds, or other similar securities, shall serve at the same time as an officer, director, or employee of any member bank except in limited classes of cases in which the Board of Governors of the Federal Reserve System may allow such service by general regulations w hen in the judgment of the said Board it would not unduly influence the investment policies of such member bank or the advice it gives its customers regarding investments.”

    12 C.F.R. Part 218.

    Board of Governors of the Federal Reserve System v. Investment Company Institute, 450 U.S. 46, 71 (1981).

    See, 12 U.S.C. §24 (Seventh) (1988).

    See, e.g., 75 Cong. Rec. 9905 (May 10, 1932) (remarks of Senator Walcott); Id. at 9911, 9913–14 (remarks of Senator Bulkley).

    Since 1982, the Federal Deposit Insurance Corporation (FDIC) has taken the position that Section 21 does not prohibit affiliates of deposit-taking entities from engaging in securities dealing and underwriting activities. Federal Deposit Insurance Corporation, Policy Statement Concerning the Applicability of the Glass-Steagall Act to Securities Activities of Subsidiaries of Insured Nonmember Banks (August 23, 1982),47 Fed. Reg. 38984 (September 2, 1982). This interpretation, which some have criticized as the “state non m ember loophole,” has been upheld in litigation since that time. Investment Company Institute v. Federal Deposit Insurance Corporation, 815 F.2d. 1540 (D.C. Cir. 1987), cert. denied, 108 S. Ct. 143, 98 L. Ed. 2d 99 (1988).

    The phrase “without recourse” means that a bank may not buy or sell securities for customers if, by endorsement or guaranty, the bank assumes the risk of loss which would otherwise fall on the buyer of the securities. Awotin v. Atlas Exchange National Bank of Chicago, 295 U.S. 209,212 (1935).

    Among other things, branches of national banks generally may, under Federal Reserve Board regulations, exercise such powers as may be “usual” in connection with the business of banking in those foreign places where the branches are located. Such branches may not, however, engage or participate, directly or indirectly, in the business of underwriting, selling, or distributing securities (except with respect to “foreign state” securities as allowed by the Board). 12 U.S.C. §604a. Domestic banking organizations which establish “Edge Act or Agreement” corporations to conduct foreign banking activities under Section 25(a) of the Federal Reserve Act, as amended (12 U.S.C. §§611–37), may buy and sell securities in connection with such activities (including U.S. and state obligations), but not including corporate stock. 12 U.S.C. §615(a).

    Under the Bank Holding Company Act of 1956, as amended, 12 U.S.C. §§1840 et seq., U.S. bank holding companies are permitted to acquire the voting shares of companies doing no business in the United States “… except as an incident to its international or foreign business ....” Bank Holding Company Act Section 4(c)(13), 12 U.S.C. §1843 (c)(13). See also, Bank Holding Company Act Section 4(c)(9)(shares of corporations organized under foreign law), 12 U.S.C. §1843(c)(9). Under authority of the Bank Holding Company Act, as well as other provisions of the Federal Reserve Act, the Board has adopted Regulation K, 12 C.F.R. Part 211, which, in relevant part, generally allows foreign subsidiaries of U.S. banking organizations to deal in and underwrite, subject to certain limitations, debt and equity securities abroad to the same extent local banking organizations are permitted to do so. Regulation K, Section 5(d)(13), 12 C.F.R. §211.5(d)(13). By the same token, foreign branches of U.S. banks are generally limited under Regulation K to dealing in and underwriting the obligations of foreign governments and their instrumentalities. Regulation K, Section 3(b)(3), 12 C.F.R. §211.3(b)(3).

    See, Bank Holding Company Act Section 2(h), 12 U.S.C. §1841(h); International Banking Act of 1978, Pub. L. No. 95-369, §8, 92 Stat. 622-23 (1978) (codified at 12 U.S.C. §3106).

    12 U.S.C. §3106(c).

    Competitive Equality Banking Act of 1987, Pub. L. No. 100–86, Title II, §204(a), 101 Stat. 584, 100th Cong., 1st Sess. (1987) (codified at 12 U.S.C. §3106(c)(2)).

    Specifically, the Banking Act of 1933 generally provided that federal deposit insurance would be permanently available for the time and demand deposits of all banks which were members of the Federal Reserve System, as well as those of banks which had applied for membership but whose applications had not yet been acted on; the deposits of state non-member banks, however, would not be insured after July 1, 1937. Banking Act of 1933, Sections 8(f) and 8(1), 12 U.S.C. §§264(f), (1)(1933). In 1935, however, the deposit insurance limitation applicable to state nonmember banks was removed, thus allowing any commercial bank to secure permanent deposit insurance subject to the other eligibility criteria provided in the statute. Banking Act of 1935, Pub. L. 74-305, c.614, §101(f), 74th Cong., 1st Sess. (1935), 12 U.S.C. §264(f)(1935), transferred to 12 U.S.C. §1811 et seq. by Act of Sept. 21, 1950, c.967, §1, 64 Stat. 876. See 12 U.S.C. §1815. One accompanying legislative report tersely noted that “… membership in the Federal Reserve System, however desirable it may be from the viewpoint of bringing about a unified banking system, should not be rendered practically compulsory by requiring insured banks to either join the system or terminate their insurance ....” Banking Act of 1935, H.R. Rep. No. 742 to Accompany H.R. 7617, 74th Cong., 1st Sess. 3 (1935).

    For example, the relatively broad exceptions that Congress has created for obligations representing interests in real estate mortgage loans reflects a congressional policy to promote the development of a secondary mortgage market, a market which has steadily grown in significance in this country. Banking Act of 1935, c.614, §303, 49 Stat. 707; H.R. Rep. No. 742, 74th Cong., 1st Sess. 14–15 (1935). See also, Secondary Mortgage Market Enhancement Act of 1984, Pub. L. No. 98–440, Title I, §105(c), 98 Stat. 1691 (1984). In a similar vein, the authority of the Federal Reserve Board to allow certain securities dealing and underwriting activities overseas by U.S. banking organizations was conferred in part to allow such organizations to compete on a more equal footing with their local counterparts.

    Senate Report, n.39 supra, at 16. See also, Securities Industry Association v. Board of Governors of the Federal Reserve System, 469 U.S. 207, 215 (1984).

    Investment Company Institute v. Camp, 401 U.S. 617, 629 (1971).

    401 U.S. 617 (1971).

    401 U.S. at 620–21.

    401 U.S. at 624–25, 634–35. The Court noted that while banks have for many years collectively managed funds they held as fiduciaries and also have managed customer funds on an agency basis, the “union” of these two permissible activities gave rise to an investment fund of a different and impermissible character. 401 U.S. at 625.

    401 U.S. at 629–39.

    Id.

    468 U.S. 137 (1984).

    468 U.S. at 149–52.

    468 U.S. at 150–52.

    468 U.S. at 152–55.

    468 U.S. at 152–54.

    468 U.S. at 145, 154–59.

    In Camp, the Court viewed the bank’s collective fund activities as the equivalent of a bank-sponsored and bank-underwritten mutual fund. 401 U.S. at 625,637. In the Commercial Paper case, the commercial paper placement service was accompanied by a backup credit facility provided to issuers on terms and conditions closely related to those of the commercial paper sold. 468 U.S. at 155–57.

    Camp, 401 U.S. at 625; SIA v. Board, 468 U.S. at 159–60.

    In Camp, the Court noted that the Comptroller of the Currency had failed, at the administrative level, to provide any justification for its approval of the collective investment fund, and declined to defer to the “post hoc” arguments of appellate counsel. 401 U.S. at 626–28. In the Commercial Paper case, the Court criticized the Federal Reserve Board’s failure to discuss, at the administrative level, the “hazards” of the commercial paper placement activity, and thus viewed the administrative reasoning as incomplete. 468 U.S. at 142–44, 155.

    450 U.S. 46 (1981).

    450 U.S. at 63.

    450 U.S. at 55–56.

    450 U.S. at 66–67.

    468 U.S. 207 (1984).

    468 U.S. at 217–18 (footnotes omitted), 221.

    468 U.S. at 219–21. The Court, however, expressly declined to consider whether a bank affiliate could underwrite securities to the public on an agency (or “best efforts”) basis. 468 U.S. at 217–18 n.17.

    468 U.S. at 211, 215.

    In Securities Industry Association v. Comptroller of the Currency(hereinafter referred to as SIA v. Comptroller). 577 F. Supp. 252, aff’d, 758 F.2d 739, reh. denied, 765 F.2d 1196 (D.C. Cir. 1985), cert. denied, 475 U.S. 1044 (1986) (another “bank brokerage case”), the federal courts concluded that the authority of national banks to buy and sell securities “without recourse” and on the order of customers, as stated in Section 16 of the Act (which, as noted above, applies directly to the activities of national and state member banks), permitted a national bank to establish or acquire a subsidiary to conduct public discount-brokerage activities. In that case, the plaintiff argued that the Comptroller’s regulatory approval of this activity was in direct contradiction to earlier interpretations of the Comptroller which limited this provision to bank brokerage provided as an “accommodation” to existing customers. The courts declined to limit the availability of this particular provision to “accommodation” activities of national banks and their subsidiaries. In reaching its conclusion, the district court applied what it believed to be the “plain language” of the Act’s permissive provisions regarding securities-agency activities and, in partial reliance on the 1984 Discount Brokerage decision, concluded again that the hazards against which the Glass-Steagall Act was directed were not significant for these discount-brokerage activities. One year later, the Supreme Court decided that discount-brokerage activities were not included among the “core banking activities” subject to substantive restrictions found in national banking laws on the establishment and operations of bank branch offices. Clarke v. Securities Industry Association, 107 S. Ct. 750, 93 L. Ed. 2d 757 (1987) (construing provisions of 12 U.S.C. §§36, 81).

    See, Investment Company Institute v. Camp, n.73 supra, 401 U.S. at 629–34.

    See, Board v. ICI, n.61 supra, 450 U.S. at 55; SIA v. Board, n.72 supra, 468 U.S. at 215. In this regard, the Court’s decision in the Commercial Paper case was not untent, but everal justices of the Supreme Court vigorously dissented from the majority opinion, stating, among other things, that a broad construction of the term “security” would subject many traditional bank activities (including traditional lending activities) to the Act’s prohibitions. 468 U.S. at 166.

    Investment Company Institute v. Clarke, 793 F.2d 220 (9th Cir. 1986); Investment Company Institute v. Conover, 790 F.2d 925 (D.C. Cir. 1986); Investment Company Institute v. Clarke, 789 F.2d 175 (2d Cir. 1986). The Supreme Court denied petitions for certiorari in all three cases. 107 S. Ct. 422, 93 L. Ed. 2d 372 (1986).

    See, c.g., Investment Company Institute v. Conover, n.99 supra, 790 F.2d at 933–36.

    Camp, n.73 supra, 401 U.S. at 638.

    885 F.2d 1034 (2d Cir. 1989), cert, denied, 110 S. Ct. 1113 (1990).

    Comptroller of the Currency, Interpretive Letter No. 388 (June 16, 1987), reprinted in Fed. Banking L. Rep (CCH) ¶ 85,6120.

    Id.

    Securities Industry Association v. Clarke, 703 F. Supp. 256 (S.D.N.Y. 1988), vacated and remanded with instructions to dismiss, 885 F. 2d 1034 (2d Cir. 1989).

    807 F.2d 1056 (D.C. Cir. 1986), cert. denied, 107 S. Ct. 3228, 92 L. Ed. 2d 734 (1987).

    See, p. 296 supra.

    Federal Reserve System, Statement Concerning Applicability of the Glass-Steagall Act to the Commercial Paper Placement Activities of Bankers Trust Company (June 4, 1985). At the time of that decision, the commercial bank whose activities were at issue had been extending backup credit to its commercial paper issuer-customers on terms and conditions closely tied to the issuance of the paper, enabling those issuers to draw down on the line of credit to cover the unsold portion of a particular commercial-paper issue. 468 U.S. at 157. In its decision, the Supreme Court raised significant questions as to whether this activity might cause the bank to “underwrite” the commercial paper through the device of a standby credit support. Id. In reaction to this question, and similar concerns raised by the Board, the bank modified its credit-support activities to segregate the backup-credit function, and the terms and conditions of the credit lines made available to commercial-paper issuers, to ensure the functional and legal independence of the credit and placement activities.

    627 F. Supp. 695 (D.D.C. 1986).

    627 F. Supp. at 711.

    Id.

    807 F.2d at 1058–62.

    807 F.2d at 1062–65.

    Id.

    807 F.2d at 1066–69.

    807 F.2d at 1069.

    821 F.2d at 810 (D.C. Cir. 1987), cert, denied, 108 S. Ct. 697, 98 L. Ed. 2d 649 (1988).

    821 F.2d at 813–15.

    821 F.2d at 813–19. The Board’s Natwest decision was not the first regulatory ruling authorizing a banking organization’s combination of brokerage and investment advice. In 1983, the Comptroller of the Currency allowed a national bank to offer these activities to the same customers through two operating subsidiaries. This ruling was challenged in Securities Industry Association v. Conover, Civil Action No. 83-3581 (D.D.C.), but the case was stayed pending the disposition of the discount brokerage matter ultimately decided in SIA v. Comptroller, n.96 supra. After that decision, the former case was stayed again pending the Natwest decision, and it has since been dismissed by consent of the parties as a result of the Natwest decision.

    Federal Deposit Insurance Corporation, Securities Subsidiaries and Affiliates of Insured Nonmember Banks, 12 C.F.R. §337.4 (Nov. 19, 1984),49 Fed. Reg. 46709 (Nov. 28, 1984).

    815 F.2d at 1540 (D.C. Cir. 1987).

    815 F.2d at 1546–49.

    815 F.2d at 1547.

    An early Supreme Court case to arise under the Act was Board of Governors of the Federal Reserve System v. Agnew, 329 U.S. 441 (1947). In that decision, the Supreme Court was asked to construe the term “primarily” as used in Section 32 of the Act, which, as noted above, prohibits interlocks between member banks and entities “primarily engaged” in certain securities activities. The Court determined that an activity is “primary” within the meaning of the Act if it is “substantial,” although the Court declined to identify a specific level of business at which an activity became “primary.” 329 U.S. at 446. In its reasoning, the Court asserted that Section 32 was intended to limit the ability of a bank director who was affiliated with a securities firm to use his influence with the bank “to involve it or its customers in securities which his underwriting house has in its portfolio or has committed itself to take.” 329 U.S. at 447.

    Federal Reserve System, Citi corp; J.P. Morgan & Co. Incorporated; Bankers Trust New ϒork Corporation: Order Approving Applications to Engage in Limited Underwriting and Dealing in Certain Securities (April 30, 1987), 73 Fed. Reserve Bull. 473 (June 1987). Federal Reserve System, Chase Manhattan Corporation; Chemical New York Corporation; Manufacturers Hanover Corporation; Security Pacific Corporation (May 18, 1987), 73 Fed. Reserve Bull. 607, 616, 620, 622 (July 1987).

    The court upheld the Board’s “principally engaged” standard (i.e., “substantial” bank-ineligible activity), but rejected the Board’s 5 percent “market share” limitation, stating that the application of the market-share test to the activities of bank securities affiliates did not address the concerns of the Act. 839 F.2d at 62–68. Previously, in Board of Governors v. ICI, n.61 supra, the Supreme Court had indicated that Sections 20 and 32 of the Glass-Steagall Act would allow bank affiliates to engage in activities which would not be permissible for banks to engage in directly. 450 U.S. at 60 n.26.

    839 F.2d at 58–62. Since the time of this decision, the Federal Reserve Board has modified, by order, its interpretation of Section 20 to allow bank-holding-company affiliates to derive up to 10 percent of their gross revenues from “impermissible” securities activities, and further permitting them, subject to supervisory limitations, to engage in the underwriting of, and dealing in, all types of corporate debt and equity securities. The SIA also sought to invalidate this decision, but was rebuffed in its challenge on the ground that the previous SIA decision on this question collaterally estopped SIA from relitigating this same issue. Securities Industry Association v. Board of Governors of the Federal Reserve System, 900 F.2d 360 (D.C. Cir. 1990).

    See, SIA v. Board, (“Natwest”), n.117 supra, 821 F.2d at 817.

    The U.S. Supreme Court, in the 1984 Commercial Paper case, seemingly struggled with this question, as is suggested by its conclusion that the prohibitions of the Glass-Steagall Act should not be read to interfere with activities expressly permitted under the National Bank Act. 468 U.S. at 158 n.11.

    One commentator has asserted that the Act was, in fact, a piece of “special interest group legislation,” the real purpose of which (to protect investment bankers) was quite removed from its stated legislative purposes. J. Macey, Special Interest Groups Legislation and the Judicial Function: The Dilemma of Glass-Steagall, 33 Emory L. Jour. 1 (Winter 1984).

    See, e.g., FDIC Staff Study, n.2. supra; E. Gerald Corrigan, Financial Market Structure: A Longer View (January 1987), reprinted in the Annual Report of the Federal Reserve Bank of New York (February 1987).

    See, e.g., House of Representatives, Committee on Government Operations, Modernization of the Financial Services Industry: A Plan for Capital Mobility Within a Framework of Safe and Sound Banking, H.R. Rep. No. 100–324, 100th Cong., 1st Sess. (1987); U.S. General Accounting Office, Bank Powers: Issues Related to Repeal of the Glass-Steagall Act (January 1988).

    Competitive Equality Banking Act of 1987 (CEBA), Pub. L. No. 100-86, 101 Stat. 552, 100th Cong., 1st Sess. (1987).

    CEBA, Section 201 (b)(2).

    CEBA, Section 203.

    S. 1886, 100th Cong., 1st Sess. (1988).

    Instead, recent banking legislation has clearly demonstrated that Congress is very concerned over the need to regulate the activities of banks and savings and loan associations alike. This concern has been reflected in numerous new statutory provisions significantly augmenting the regulatory authority of the banking and thrift regulatory agencies over financial institutions, and curbing in many respects these institutions’ activities. See, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. 101–73, 101st Cong., 1st Sess. (1989); and the Crime Control Act of 1990, Title XXV, Pub. L. 101–647, 101st Cong., 2d Sess. (1990).

    Chapter 14, Comment (Roberts)

    The number of commercial banks in the United States has decreased over the last few years and is currently estimated at 12,500.

    Chapter 15, “Stability of Financial Markets: Federal Reserve Responsibility?” (Fogel)

    Bank Powers: Issues Related to Repeal of the Glass-Steagall Act, GAO/GGD-88-37, January 22, 1988; Financial Markets: Preliminary Observations on the October 1987 Crash, GAO/GGD-88-38, January 26, 1988.

    12 U.S.C. §§24 (Seventh), 78, 377–78 (1982 & Supp. IV 1986). The Glass-Steagall Act was enacted as part of the Banking Act of 1933.

    Federal Reserve Act Sections 23A and 23B are codified in 12 U.S.C. §371c-l.

    Chapter 16, “The Basle Concordat: Collaboration in Banking Supervision” (Thompson)

    Belgium, Canada, France, the Federal Republic of Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States.

    Committee on Banking Regulations and Supervisory Practices, Revised Basle Concordat on Principles for the Supervision of Banks’ Foreign Establishments, 22 International Legal Materials (1983) 900, 903. (The Revised Concordat also appears in Appendix I of this volume.)

    Chapter 17, “Risk-Based Assessment of the Capital Adequacy of Commercial Banks” (Taylor)

    The Basle Supervisors’ Committee consists of representatives of the central banks and supervisory authorities from the Group of Ten countries (Belgium, Canada, France, the Federal Republic of Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, the United States, and Switzerland) and Luxembourg.

    Chapter 18, “The Legal Framework for Islamic Banking: Pakistan’s Experience” (Murvat)

    The attention of the reader is drawn to the following excerpt from the judgment of Justice Tanzil-ur-Rahman, in Bank of Oman Ltd. v. East Trading Co. Ltd., since reported in All Pakistan Legal Decisions (PLD) 1987 Kar. 404:

    • “19. When the Britishers captured the reins of powers from the Mughal Rulers in the subcontinent, the pre-existing laws which had been in force for a number of centuries, were repealed by the Britishers. They enforced their own laws and established their own legal system—Regulation No. 11 of 1772 was a first step in this direction. After the war of Independence .... in 1857, a number of substantive laws, e.g., Contract Act, The Transfer of Property Act, Penal Code, etc., were enacted by the Britishers and to enforce them, procedural laws like that of Code of Civil Procedure, Criminal Procedure and Evidence Act, etc., were framed and a new court system was evolved and put into practice.... Thus all the civil, criminal, fiscal, commercial, taxation and other laws as enforced by the British Parliament or Indian Legislature with the exception of Personal Law.... continued (and still continue) to be applied in Pakistan. The British rulers, through their laws and system, demolished Muslim social and cultural structure. They also changed our social concepts and ideas viz the moral background of laws too. It meant that a cancellation mark had been drawn across one system of morality and culture, and the foundation of another ethical, cultural and social system had been laid. The result was that they legalized adultery, gambling, drinking and other corrupt practices and trades. They even subverted our basic concept of lawmaking that Allah the Almighty is the Sole Law-Maker and the words and deeds of His last Prophet Muhammad (Sallahu ‘alaihi Wa Sallam) … are binding on us....”

    Anyone interested in knowing the details of the legal battle fought in the Superior Courts following the dissolution of the National Assembly on October 24, 1954 may read judgments published in PLD 1955 Sind 963, PLD 1955 F.C. 240, PLD 1955 F.C. 387, and PLD 1985 EC. 435.

    Parallel provisions will be found in relevant provisions of 1962 Constitution and 1973 Constitution.

    Id.

    For parallel provisions, please see the relevant article of the 1962 Constitution and Article 199 of the 1973 Constitution.

    For parallel provisions, please see the relevant provisions of the 1962 Constitution and the 1973 Constitution.

    See note 3.

    Id.

    Id.

    Webster’s Third New International Dictionary (Springfield, Massachusetts: G. & C. Merriam, 1961) defines zakat as “an annual alms tax or poor rate that each Muslim is expected to pay as a religious duty and that is used forcharitable and religious purposes” It defines wakf as “a Muslim religious or charitable foundation created by an endowed trust fund.”

    See note 3.

    See PLD 1968 S.C. 185.

    See also PLD 1962 Lah. 999.

    See also PLD 1963 S.C. 51 at 74. As for reasons given by the then Law Minister for opposing the suggestion that the Law Courts should be given jurisdiction to determine if a particular law is in accordance with the Holy Quran and Sunnah, attention is drawn to the following speech he made during debate in the National Assembly on the Constitution (First Amendment) Bill in the 1963 Session at Dhaka:

    • “The position is that in my winding up submissions, I would be very clear; it would be deterrent at this stage to give this right to the Courts to determine as the last authority whether a particular law is in accordance with the Holy Qur’an and Sunnah and I have made detailed submission on that point and I would not like to repeat them. Finally, I would say, there have been many proposals in this country since 1947, subject to correction, but there is no proposal which was ever brought before any Committee in which such a provision was made. As I submitted earlier, the Constitution provides a machinery whereby we can Islamise our laws. We have already amended Article 204, we have provided that the Advisory Council should give report annually in a nicer and better and more beneficial and practical way. Islam should not be the subject-matter of argument of professional lawyers, our Courts are not conversant with the religious knowledge and very few lawyers with western knowledge ever dared make any ‘Ijtehad’ and very few lawyers conversant with the western jurisprudence are entitled to make submission about our religious faith. Then it would be a great mistake to leave this matter to the Court and the arguments of the Counsel who would be representing the litigant parties and the Court would be determining this question in a particular case where the party would be represented by particular lawyers putting particular points of view and we cannot leave the interpretation of Islam to such parties. It would be dangerous. The best thing is that we create a situation in the country by education and by spirit of ‘Ijtehad’, we create such public opinion that we Islamise our laws. Under Article 198, I would say again, of the late Constitution had nothing compelling in it whereby the House was bound to accept the recommendations of the Commission. Under Article 198, the Commission was to give the report in five years and then that report was to be brought before the National Assembly. Ultimately, it was for [the] National Assembly whether to make the laws or not. I maintain that this matter was not envisaged to be debated in the Courts.”

    The question of legal effect of the Objectives Resolution came up for consideration for the first time, in Asma’s case PLD 1972 S.C. 139. Late Chief Justice Hamoodur Rahman, regarding the Objectives Resolution, observed as under:

    • “In any event, if a grund norm is necessary for us I do not have to look to the Western legal theorists to discover one. Our own grund norm is enshrined in our own doctrine that the real sovereignty over the entire universe belongs to Almighty Allah alone, and the authority exercisable by the people within the limits prescribed by Him is a sacred trust. This is an immutable and unalterable norm which was clearly accepted by the Objectives Resolution passed by the Constituent Assembly of Pakistan on the 7th of March, 1949. This Resolution has been described by Mr. Brohi as the ‘corner stone of Pakistan’s legal edifice’ and recognized even by the learned Attorney-General himself ‘as the bond which binds the nation’ and as a document from which the Constitution of Pakistan ‘must draw its inspiration’. This has not been abrogated by any one so far, nor has this been departed or deviated from by any regime, military or civil. Indeed, it cannot be, for, it is one of the fundamental principles enshrined in the Holy Qur’an.”

    • “Say, ‘O Allah, Lord of sovereignty. Thou givest sovereignty to whomsoever Thou pleasest, and Thou takes taway sovereignty from whomsoever Thou pleasest. Thou exaltest whomsoever Thou pleasest and Thou abasest whomsoever Thou pleasest.’” [111:26]

    The basic concept underlying this unalterable principle of sovereignty is that the entire body politic becomes a trustee for the discharge of sovereign functions. Since in a complex society every citizen cannot personally participate in the performance of the trust, the body politic appoints state functionaries to discharge these functions on its behalf and for its benefit, and has the right to remove the functionary so appointed by it if he goes against the law of the legal sovereign, or commits any other breach of trust or fails to discharge his obligations under a trust. The functional head of the state is chosen by the community and has to be assisted by a council which must hold its meetings in public view and remain accountable to the public. It is under this system that the government becomes a government of laws and not of men, for no one is above the law. It is this that led Von Hammer, a renowned orientalist, to remark that under the Islamic system, “the law rules through the utterance of justice, and the power of the Governor carried out the utterance of it.”

    On page 147 of the report, it was further observed that:

    • “Pakistan is an Islamic Republic. Its ideology is enshrined in the Objectives Resolution of the 7th [of] April, 1949 [sic], which, inter alia, declares wherein the Muslims shall be enabled to order their lives in the individual and collective spheres in accordance with the teachings and requirements of Islam as set out in the Holy Qur’an and Sunnah. We should, therefore, turn more appropriately to Islamic jurisprudence for the definition of ‘law’. One method of defining ‘law’ is to know its source. In Shariat, laws have divine origin. They are contained in the Holy Qur’an and Hadith, namely, precepts and actions of the Holy Prophet (peace be upon him). The other sources are Ijma’ Consensus and justice deductions including Qiyas: Analogy, Istihsan or Justice, Equity, Public Good, Istidlal; Reason and Ijtihad; Justice Exposition. While Juristic Deductions are judge-made laws, Ijma is based on the doctrine of Imam Shafe’i that the ‘voice of the people is the voice of God,’ and is the most fruitful source of law-making in Shari’at. In the present day context the Legislative Assemblies comprising ofchosen representatives of the people perform this function. Thus, in Islamic jurisprudence, the will of a sovereign, be [it] the monarch, the President or the Chief Martial Law Administrator is not the source of law. The people as delegatee of the Sovereignty of the Almighty alone can make laws which are in conformity with the Holy Qur’an and Sunnah.”

    • The question again came up before the Supreme Court for consideration in the case of State v. Zia-ur-Rahman, PLD1973S.C.49. Regarding the Objectives Resolution, the Chief Justice, Hamoodur Rahman, again observed that:

    • “… after a normal written Constitution has been lawfully adopted by a competent body and has been generally accepted by the people including the judiciary as the Constitution of the country, the judiciary cannot claim to declare any of its provisions ultra vires or void. This will be no part of its function of interpretation. Therefore in my view, however solemn or sacrosanct a document [may be], if it is not incorporated in the Constitution or does not form a part thereof it cannot control the Constitution. At any rate, the Courts created under the Constitution will not have the power to declare any provision of the Constitution itself as being in violation of such a document. If in fact that document contains the expression of the will of the vast majority of the people then the remedy for correcting such a violation will lie with the people and not with the judiciary. It follows from this that under our own system too the Objectives Resolution of 1949, even though it is a document which has been generally accepted and has never been repealed or renounced, will not have the same status or authority as the Constitution itself. If it appears only as a preamble of the Constitution, then it will serve the same purpose as any other preamble serves, namely, that in the case of any doubt as to the intent of the law maker, it may be looked at to ascertain the true intent, but it cannot control the substantive provisions thereof.”

    It was further observed that:

    “The Objectives Resolution being the ‘grund norm’ for Pakistan. The ‘grund norm’ referred to by us was something even above the Objectives Resolution which as Sajjad Ahmad Jan, J. put it ‘embodies the spirit and the fundamental norms of the constitutional concept of Pakistan’. It was expected by the Objectives Resolution itself to be translated into the Constitution. Even those that adopted the Objectives Resolution did not envisage that it would be [a] document above the Constitution. It is incorrect, therefore, to say that it was held by this Court that the Objectives Resolution of the 7th of March, 1949, stands on a higher pedestal than the Constitution itself.”

    This article was replaced by the Constitution (Eighth Amendment) Act, 1985, effective December 30, 1985, and so far the Lahore High Court and Karachi High Court, respectively, have given judgments in the case of Ghulam Mustafa Khar (PLD 1988 Lah. 49) and that of Muhammad Bachal Memon (PLD 1987 Kar. 296) on important law points arising out of the interpretation of this article in relation to certain steps taken against the petitioners by the Martial Law authority. The Supreme Court of Pakistan has reserved judgment on appeals from these and other similar cases.

    The list of such reports is as follows:

    III. Reports on Islamization of Laws Contained in the Pakistan Code Number Subject/Volume Month and Year

    NumberSubject/VolumeMonth and Year
    First ReportVol. I—1836–71December 1981
    Second ReportVol. II—1872–81March 1982
    Third ReportVol. III—1882–97April 1982
    Fourth ReportVol. IV—1898–1906April 1982
    Fifth ReportVol. V—1908–10January 1983
    Sixth ReportVol. VI—1911–19February 1983
    Seventh ReportVol. VII—1920–23March 1983
    Eighth ReportVol. VIII—1924–33June 1983
    Ninth ReportonThe Code of Criminal Procedure, 1898September 1983
    Tenth Reportnot available
    Eleventh ReportonInsurance and Laws ThereofMarch 1984
    Twelfth ReportonPublic Finance and Fiscal LawsMarch 1984
    Thirteenth Reportnot available
    Fourteenth ReportonThe Contract Act, 1872;
    The Specific Relief Act, 1877;May 1984
    The Transfer of Property Act, 1882

    List of Reports of the Islamic Ideology Council, Government of Pakistan, Islamabad

    I. Annual Reports

    • 1. Interim Annual Report for 1974–75

    • 2. Annual Report for 1977–78 (including law for Enforcement of Hudood)

    • 3. Annual Report for 1978–79

    • 4. Annual Report for 1980–81

    • 5. Annual Report for 1981–82

    II. Special Reports

    • 1. (a) Report for the year 1978 regarding revival and organization of the Zakat and Usher System

      • (b) Interim Report on (1) the elimination of the interest system and (2) non-interest banking (including the Annual Report for 1977–78)

    • 2. Report regarding elimination of interest from the economy—June 1980

    • 3. Public information media (Report—June 1982)

    • 4. Recommendations of the Council regarding the system of education (1962 to 1982)—June 1982

    • 5. Report for the construction of Islamic society (1962 to 1982)—June 1982

    • 6. Muslim Family Laws’ Report—April 1983

    • 7. Report regarding Islamic system of justice—February 1984

    • 8. Family Planning Report—April 1984

    The number of laws so far examined runs into the hundreds.

    The word “decree” was subsequently changed by the words “institution of suit” by Ordinance 11 of 1983. The ordinance further provided that “the Special Court shall not, without the consent of the decree, allow the decretal amount to be paid in such installments as would extend the period of full repayment of the decretal amount beyond one year from the date of the decree.” By another ordinance, No. XXXIV of 1984, for the purposes of determining requirements of minimum paid-up capital and reserves by foreign banks, cash reserves, and maintenance of liquid assets, liabilities were not, inter alia, to include “any credit balance in the profit and loss account of the banking company.”

    Notification No. S.R.O. 658(1) 85, dated July 1, 1985, was issued under this clause by the federal government to the effect that the domestic operations of the banking companies have become free of interest effective on and from July 1, 1985.

    See, for example, Notification No. PA/DS(B)-Misc-l/84, dated January 1, 1985 and issued by the Sind Government; Notification No. 266/Stamps dated January 1, 1985 and issued by the Government of the North-West Frontier Province (NWFP); and Notification No. FD (SOV) Stamp/Exemp/1985, dated January 16, 1985 and issued by the Government of Baluchistan.

    Attention is drawn to the Baluchistan Finance Act (Amendment) Ordinance, 1985 (PLD 1985 Baluchistan Statutes 86); The Punjab Finance (Amendment) Ordinance, 1984 (PLD 1985 Punjab Statutes 16–17); the Sind Laws (Amendment) Ordinance, 1984 (PLD 1985 Sind Statutes 29); NWFP Ordinance No. 1 of 1985; etc. Section 16 has since been repealed in all provinces; see PLD 1986 NWFP Statutes 41; PLD 1986 Punjab Statutes 69 at p. 71; PLD 1986 Sind Statutes 22 at 23; etc.

    See, in this regard, PLD 1985 Baluchistan Statutes 88; PLD 1985 Punjab Statutes 17; PLD 1985 Sind Statutes 29; and NWFP Ordinance No. 1 of 1985.

    See, for example, PLD 1985 Baluchistan Statutes 87; PLD 1985 Punjab Statutes 18; PLD 1985 Sind Statutes 29; and NWFP Ordinance No. 1 of 1985.

    The private senators bill—that is, the proposed Enforcement of Shariat Act—reportedly was passed by the Senate but not by the National Assembly. It stands for the enforcement of Shariah through and by all organs of the state. Any decision against the Shariah would be void and challengeable in the Federal Shariat Court. All courts would be bound to decide all cases, including finance cases and others, according to Shariah; and decisions given otherwise would be void. The decision of the Federal Shariat Court will be final and shall apply to all office bearers. This obviously does away with the immunity given to, inter alia, banking practice and procedure. The federal government has, however, moved a separate bill, according to which the immunity given to banking practices and procedures, etc. in Article 203-C would come to an end. However, it proposes the following new clauses in Article 203-D:

    • “(3A) Notwithstanding anything contained in this Chapter, in respect of any fiscal law or any law relating to, the levy and collection of taxes and fees or banking or insurance practice and procedure, the Court shall, in case of a law held by it to be repugnant to the Injunctions of Islam, in consultation with persons having special knowledge of the subject, recommend to the Government specific measures and a reasonable time within which to take adequate steps and amend such law so as to bring it in conformity with the Injunctions of Islam:

    • Provided that the decisions of the Court shall not have retrospective effect and no right or claim shall be based thereon accordingly, directly or indirectly.

    • (3B) Notwithstanding anything contained in the Constitution, including this Chapter or clause (3A) or anything done pursuant thereto, or any law or any judgment of any Court to the contrary, all existing laws relating to the levy and collection of taxes and fees or banking or insurance practice and procedure which are the subject matter of decision of the Court referred to in clause (3A), shall continue to remain in force until such time as appropriate laws are enacted by the Legislature in substitution of such existing laws as a consequence of the final decision of the Court, as stated in clause (3A), and until the said laws have been enforced:

    • Provided that nothing contained in clauses (3A) and (3B) shall apply to assessments made, orders passed, proceedings pending, and amounts payable or recovered before the enforcement of the laws enacted in pursuance of clause (3A).”

    Its perusal will show that the Federal Shariat Court will have the jurisdiction to declare banking practice or procedure as repugnant to the injunctions of Islam and in case it so holds, it will, in consultation with experts on the subject, recommend specific measures to the federal government and a reasonable time within which to take steps and amend such law in conformity with the injunctions of Islam. Furt her, notwithstanding anything contained in the Constitution, including proposed clause (3A), all existing laws will continue to remain in force until such time as appropriate laws are passed in substitution of such existing laws. Moreover, the fact that the injunctions of Islam shall be the supreme law and source of guidance for legislation and for policymaking by the Government is subject to the overriding condition that effect shall be given to it in the manner provided by Chapter 3A, i.e., by the Federal Shariat Court and by no other court, e.g., the High Court.

    Irshad H. Khan v. Mrs. Parveen Ajaz (PLD 1987 Kar. 466 = KLR Civil Cases 742), Bank of Oman Limited v. East Trading Company Limited and others (PLD 1987 Kar. 404 = KLR 1987 Magazine Cases 39) (under appeal in the Supreme Court of Pakistan), and Habib Bank Limited v. Mohammad Hussain and others (PLD 1987 Kar. 612 = PLJ 1988 Kar. 193) (under appeal in the Sind High Court).

    See PLD 1986 Journal 249.

    See his article, “The Objectives Resolution and Its Impact on the Administration of Justice in Pakistan,” published in PLD 1987 Journal 186. It has been stated therein that:

    “The wheel has turned the full circle. New and exciting prospects have appeared on the horizon and a new dawn is rising.”

    See PLD 1987 Kar. 296 at 328–29.

    See PLD 1988 Lah. 49 at 118.

    Chapter 18, Addendum (Hamid)

    Bank of Oman Ltd. v. East Trading Co. Ltd. and Others, All Pakistan Legal Decisions (PLD) 1987 Kar. 404; Irshad H. Khan v. Mrs. Parveen Ajaz, PLD 1987 Kar. 466; Habib Bank Ltd. v. Muhammad Hussain and Others, PLD 1987 Kar. 612; and an unreported decision of a single judge of the Sind High Court in Civil Suit No. 429/1983.

    PLD 1987 Kar. 404; PLD 1987 Kar. 466; and PLD 1987 Kar. 612.

    PLD 1987 Kar. 612 at 648–49.

    Civil Suit No. 429/1983 (unreported decision).

    PLD 1988 Lah. 49 at 118.

    Tanzil-ur-Rahman, J.

    PLD 1987 Kar. 612.

    See the main paper for a more detailed treatment of these questions.

    This being the point which the 1987 cases seemed to indicate could give rise to a serious difference of judicial opinion at the lower levels and which, therefore, called for a binding settlement by courts at the highest levels.

    Aijaz Haroon v. Inam Durrani, PLD 1989 Kar. 304, per Wajihuddin Ahmad, J.

    Id. at 334.

    These being Article 270-A(1) of the Constitution, which declares, with respect to laws adopted by the martial-law government between 1977 and 1985, that such laws “are hereby affirmed, adopted and declared, notwithstanding any judgment of any Court, to have been val idly made by competent authority and, notwithstanding anything contained in the Constitution, shall not be called in question in any Court on any ground whatsoever ....”

    PLD 1989 Kar. 304 at 333.

    Habib Bank Ltd. v. Wabeed Textile Mills Ltd., PLD 1989 Kar. 371, per Mamoon Kazi, J.

    See note 3.

    See note 5.

    PLD 1987 Kar. 296 at 328–29.

    PLD 1989 Kar. 371 at 389.

    ML, at 390.

    ML, at 390–91.

    ML, at 387.

    ML, at 387.

    Id., at 389.

    ML, at 389.

    Id., at 386.

    Id., at 389.

    PLD 1987 Kar. 612 at 650.

    PLD 1989 Kar. 371, where the learned judge restricted himself to the constitutional question before him. (See, for example, as indicative of the judge’s frame of mind, his conclusion at 390 that the laws in force in Pakistan permitting the charging of interest must be given effect “… even if the contention … that charging of interest is prohibited by Islam, is accepted ....”

    It is not known whether the 1989 Habib Bank case is also under appeal.

    Act No. X of 1991 (the Shariah Act).

    For example, personal conduct, education, the economy, mass media, law and order, social evils, the judicial system, and financial obligations.

    The Shariah Act, Section 2.

    Id., Section 3(1).

    Id., Section 4.

    Id., Section 5.

    ML, Section 8(1).

    Religious scholars.

    The Shariah Act, Section 8(2).

    Id., Section 8(3)(b).

    Id., Section 8(3)(a).

    Id., Section 8(3)(a).

    ML, Section 8(3)(d).

    Id., Section 8(3)(d).

    Id., Section 8(3)(c).

    Loosely translated, riba means interest.

    The Shariah Act, Section 8(4).

    Id., Section 8(5).

    Id., Section 18.

    Id., Section 18.

    Id., Section 18.

    Id., Section 19.

    Id., Section 8(4).

    Constitution of Pakistan, Article 203B(c).

    The President’s Order (P.O. No. 1 of 1980), which inserted the current Chapter 3A (The Federal Shariat Court) into the Constitution, took effect from June 25, 1980.

    Since the FSC’s judgment has not yet been reported in any of the official journals, the author has had to work with a certified double-spaced photocopy (the FSC Judgment). References to or quotations from this copy do not, therefore, appear in this paper in the form of official citations.

    See note 2.

    Irshad H. Khan v. Mrs. Parveen Ajaz, PLD 1987 Kar. 466.

    PLD 1989 Kar. 304 at 334.

    Tyeb v. Messrs. Alpha Insurance Co. Ltd. & others, Commercial Law Cases (CLC) 1990 428.

    For a general discussion of indexation, see the FSC Judgment, paragraphs 153–234.

    See main paper, paragraph 9 in Part VI.

    For an extensive discussion of markup, see the FSC Judgment, paragraphs 249–62.

    See, for example, the FSC Judgment, paragraphs 339 and 354.

    Constitution of Pakistan, Article 203F(1), proviso.

    Id., Article 203D(2), proviso read with Article 203D(3)(b).

    Chapter 19, “Proposed Article 4A of the Uniform Commercial Code” (Felsenfeld)

    The final draft of this article has since been issued. Some of the changes made between the February 1, 1988 draft and the final draft are discussed in an addendum to this paper.

    673 F.2d 951 (7th Cir.), cert. denied 459 U.S. 1017 (1982).

    609 F.2d 1047 (2d Cir. 1979).

    In Evra, if the Swiss Bank Corporation had been held liable for loss of the bargain, or for consequential damages, its liability would have been $2.1 million. Otherwise, it would have been required only to complete the $27,000 transfer.

    A prior effort to fill this statutory vacuum was the New Payments Code (NPC), a project initiated by a joint committee of the American Law Institute and the American Bar Association. The NPC consumed considerable effort from 1980 to 1983 and culminated in Draft No. 3, dated June 2, 1983. Underlying the NPC was a belief that electronic payments and checks are conceptually similar enough to be treatable by one body of law. It therefore removed checks from Articles 3 and 4 of the UCC and created a new statute combining checks and electronic transfers—and also, incidentally, credit and debit cards. When members of the banking community became aware of the NPC, they saw it as an unnecessary statutory revolution and caused it to be put aside.

    15 USC 1693 et seq.

    See note 2.

    9 Ex. 156 Eng. Rep. 145 (1854).

    This solution is analogous to the UCC solution prescribed by Section 3-802.

    Section 4A-302(6) authorizes this practice.

    Section 4A-402 creates an obligation upon each sender to pay the receiver when the latter accepts an order. Until payment occurs, however, the obligation is no more than the equivalent of an unsecured account payable.

    See Comment 7 to Section 4A-409.

    An earlier draft of 4A placed the risk of loss differently. Based upon a recommendation made by the Banking Law Committee of the New York City Bar Association, the loss was placed on the sender’s bank or the beneficiary’s bank, depending upon which selected the failed bank as a member of the payment chain.

    See UCC, Sections 1-102(3) and 4–103.

    See Sections 4A-202(3) and 4A-502(4).

    Chapter 20, “The Work of the United Nations Commission on International Trade Law in Electronic Funds Transfers” (Bergsten)

    The Electronic Funds Transfer Act of 1978, 15 U.S.C. §§1693–1693r.

    Chapter 21, “The Proposed UNCITRAL Convention on International Bills of Exchange and International Promissory Notes” (Spanogle)

    Subsequently, on December 9, 1988, the United Nations General Assembly adopted and opened for ratification by states the United Nations Convention on International Bills of Exchange and International Promissory Notes, which appears in Appendix V of this volume.

    UN Document No. A/42/17, Annex I. On December 9, 1988, the United Nations General Assembly approved Resolution 43/165, adopting and opening for ratification by states the UN Convention on International Bills of Exchange and International Promissory Notes. The text of this convention, which appears in Appendix V of this volume, can also be found at 28 I.L.M. 170 (1989) or in UN Document A/43/820, pp. 2–42 (November 21, 1988).

    Convention, Article 1(3).

    See, for example, U niform Law on Bills of Exchange and Promissory Notes, set forth in Annex I to the Geneva Convention of 1930, League of Nations Treaty Series, Vol. 143 (1933–34) (hereinafter referred to as the ULB), Article 5; Uniform Commercial Code (hereinafter referred to as the UCC) §3–106(l)(a). A. Alport and Sons, Inc. v. Hotel Evans, Inc., 65 Misc. 2d 374, 317 N.Y.S. 2d 937 (Sup. Ct., 1970).

    ULB, Articles 33, 77.

    See, for example, Greene, “Personal Defenses Under the Geneva Uniform Law of Bills of Exchange and Promissory Notes: A Comparison,” 46 Marquette L. Rev. 281 (1963).

    ULB, Article 16.

    See, for example, UCC §§3–401, 403.

    See, for example, UCC §§3–417, 4–208.

    See, for example, UCC §3–416.

    ULB, Articles 18, 32.

    ULB, Article 17.

    UN Document No. A/CN.9/213 (1982).

    UN Document No. A/CN.9/248.

    UN Document No. A/CN.9/249.

    See, for example, UCC §3–104(1)(b), ULB Article 1.

    Northern Trust Co. v. E.T Clancy Export, 612 E Supp. 712 (N.D. Ill., 1985); Farmers Production Credit Association v. Arena, 481 A. 2d 1064 (Vt. 1984).

    ULB Articles 33, 72.

    ULB Article 17.

    Convention, Article 32.

    Convention, Articles 26, 27.

    Convention, Article 46.

    Convention, Articles 47, 48.

    Convention, Article 9(6).

    Convention, Article 8(b), (c).

    Convention, Article 6(12).

    Convention, Articles 8(8), 71(2).

    Biographical Sketches

    EDITOR

    Robert C. Effros received his law degree from Harvard Law School and a master of laws (taxation) degree from Georgetown University. He served in the Legal Department of the Federal Reserve Bank of New York before joining the Legal Department of the International Monetary Fund in 1963. Mr. Effros, who currently serves as Assistant General Counsel (Legislation) of the Fund, has participated in many staff missions involving legislative drafting and advice on general banking and central banking laws of member countries of the Fund. He is an adjunct lecturer on banking law at the American University Washington College of Law and the George Washington University National Law Center. He is also the author of a number of articles on banking and financial matters that have appeared in legal and other journals, and the editor of Emerging Financial Centers: Legal and Institutional Framework (International Monetary Fund, 1982).

    AUTHORS OF CHAPTERS

    Eric Bergsten received his law degree at the University of Michigan and studied at Aix-en-Provence, France. He received his master’s degree and doctorate in comparative law from the University of Chicago. He was a Professor of Law at the University of Iowa from 1961 to 1974. From 1975 to 1985, he was Senior Legal Officer on the United Nations Commission on International Trade Law (UNCITRAL) Secretariat and was Secretary of UNCITRAL from 1985 to July 1991. During 1991–92, he served as the Bacon Kilkenney Distinguished Visiting Professor of Law at Fordham University. Since September 1991, he has been Visiting Professor of Law at Pace University. Mr. Bergsten has written extensively in the field of electronic funds transfers. While at UNCITRAL, he was responsible for the work of its Secretariat in this field and was involved in the preparation of the UNCITRAL Model Law on International Credit Transfers.

    Michael Bradfield received his law degree and a master of arts degree in international affairs from Columbia University. From 1968 to 1975, he served as Assistant General Counsel with the U.S. Treasury Department. From 1975 to 1981, he was in private practice with the law firm of Cole Corrette & Bradfield, specializing in international finance and trade law. From 1981 to 1989, Mr. Bradfield served as General Counsel of the Federal Reserve Board in Washington. In this position, he was responsible for all of the legal work of the Board, with special emphasis on domestic and international banking issues, and worked with two successive Board chairmen on measures to cope with the developing country debt crisis. Since March 1989, he has been a partner in the law firm of Jones, Day, Reavis & Pogue.

    Warren Coats received his master’s degree and doctorate in economics from the University of Chicago. During 1966–70, he was an Instructor in Economics at the Illinois Institute of Technology. From 1970 to 1976, he was an Assistant Professor of Economics at the University of Virginia, Charlottesville. Since joining the Fund in 1976, Mr. Coats has served in a variety of economist and executive positions with both the Treasurer’s Department and the Monetary and Exchange Affairs Department (formerly the Central Banking Department). He currently serves as Advisor in the Monetary and Exchange Affairs Department. He has published extensively on domestic and international banking and finance, as well as monetary policy. Mr. Coats is co-editor (with D. R. Khatkhate) of Money and Monetary Policy in Less Developed Countries: Survey of Issues and Evidence (Pergamon Press, 1980) and author of Special Drawing RightsOperations and Role in Development Finance (Allied Publishers, 1990).

    Richard J. Davis received his law degree from Columbia University. From 1970 to 1973, he served in the Office of the U.S. Attorney for the Southern District of New York. From 1973 to 1975, he was a member of the Watergate Special Prosecution Force, serving as Chief Trial Counsel for two trials and as chief of two task forces. During 1976–77, he was in private practice (general litigation) with the law firm of Weil, Gotshal & Manges. From 1977 to 1981, Mr. Davis served with the U.S. Treasury Department as Assistant Secretary (Enforcement and Operations). In this position, his responsibilities included the supervision of the U.S. Customs Service; the Bureau of Alcohol, Tobacco and Firearms; the U.S. Secret Service; the Federal Law Enforcement Training Center; and the Office of Foreign Assets Control. Since 1981, he has been a partner in the law firm of Weil, Gotshal & Manges. Mr. Davis is a co-author of American Hostages in Iran: The Conduct of a Crisis (Yale University Press, 1986).

    John L. Douglas received his law degree from the University of Georgia. From 1987 to 1989, he was the General Counsel of the Federal Deposit Insurance Corporation (FDIC). In that position, he participated in the U.S. Government’s efforts to cope with the major bank failures of the period, played a significant role on behalf of the FDIC in the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), and assisted in the regulatory initiatives of the FDIC and the Resolution Trust Corporation (RTC) following FIRREA. Since 1989, Mr. Douglas has been a partner in the law firm of Alston & Bird, where he specializes in the regulation of financial institutions. He has written numerous articles about, and frequently lectures on, such regulation.

    Carl Felsenfeld received his law degree from Columbia University. From 1973 to 1984, he was the senior lawyer at Citicorp for both its Consumer Finance and its (domestic) Corporate Finance Groups. In these positions, his functions included legal support in connection with Citicorp’s interstate expansions and new product developments. Since 1984, he has been Professor of Law at Ford ham University, where he concentrates on the regulation of banks and other financial institutions. More recently, Mr. Felsenfeld has become involved in electronic banking issues. He serves as a representative to the United Nations Commission on International Trade Law (UNCITRAL) project concerning legislation on international funds transfers and has served as an Advisor to the National Conference of Commissioners on Uniform State Laws in its project to develop a model domestic law on electronic funds transfers. Mr. Felsenfeld has co-authored two books on writing about legal concepts so that they can be understood by laypersons and is the author of Legal Aspects of Electronic Funds Transfer (Butterwort h Legal Publishers, 1988).

    Richard L. Fogel received master’s degrees in comparative politics and public administration from Sussex University and the University of Pittsburgh, respectively. Since joining the U.S. General Accounting Office (GAO) in 1969, he has served in a variety of positions. He currently serves as Assistant Comptroller General for General Government Programs. In this capacity, he directs the GAO’s reviews of government management by central agencies and cabinet-level departments, including GAO’s program work in tax policy and administration, banking and financial markets, and law enforcement. During the past several years, Mr. Fogel has been deeply involved with financial-services issues, such as developing solutions to the savings-and-loan crisis, developing reforms for the U.S. deposit-insurance system, and reviewing the adequacy of regulations of the equities and securities markets in the United States. He is a member of the (U.S.) National Academy of Public Administration and has published several articles in professional journals and books on program evaluation.

    François Gianviti, a citizen of France, studied at the Sorbonne, the Paris School of Law, and New York University. He obtained a licence ès lettres from the Sorbonne in 1959, a licence en droit from the Paris School of Law in 1960, a diplôme d’études supérieures de droit pénal et science criminelle in 1961, a diplôme d’études supérieures de droit privé in 1962, and a doctorat d’Etat en droit in 1967. From 1967 to 1969, he was a Lecturer in Law, first at the Nancy School of Law and subsequently at the Caen School of Law. In 1969, Mr. Gianviti obtained the agrégation de droit privé et science criminelle of French universities and was appointed Professor of Law at the University of Besançon. From 1970 through 1974, he was seconded to the Legal Department of the International Monetary Fund, where he served as Counsellor and, subsequently, as Senior Counsellor. In 1974, he became Professor of Law at The University of Paris XII. He served as Dean of its School of Law from 1979 through 1985. In 1986, Mr. Gianviti became Director of the Legal Department, and, in 1987, General Counsel, of the International Monetary Fund. He is a member of the Monetary Committee of the International Law Association and has published many articles on aspects of international law.

    Mario Giovanoli, a citizen of Switzerland, received degrees as a Licencié ès sciences politiques and a doctor of law from the University of Lausanne. He then spent two years as an assistant at the Law Faculty of the University of Mainz before joining the Bank for International Settlements (Basle, Switzerland), which he currently serves as Legal Adviser and Deputy Manager. Since 1987, he has also been Professor at the Law Faculty of the University of Lausanne, where he lectures on such topics as banking regulation, bank operations, central banks, money and payments systems, financial markets, and European banking and monetary law. He has also published a number of papers on these topics and is the author of a major comparative study, as well as several articles, on the law of financial leasing.

    Gerald L. Hilsher received his law degree from the University of Texas in 1979. From 1982 to 1985, he served as the Assistant United States Attorney in charge of the Organized Crime Drug Enforcement Task Force in Tulsa, Oklahoma. During 1987–89, he served as Deputy Assistant Secretary for Law Enforcement at the U.S. Treasury Department. In this position, he had oversight responsibility for Treasury law-enforcement bureaus and its Office of Financial Enforcement. He was also responsible for the promulgation, administration, and enforcement of regulations under the Bank Secrecy Act. Mr. Hilsher is currently a partner in the law firm of Huffman, Arrington, Kihle, Gaberino & Dunn, where he is primarily engaged in commercial litigation. He has lectured extensively on the Bank Secrecy Act and the Money Laundering Control Act to professional banking groups and law-enforcement entities. He is also the author of “Money Laundering: The Banker’s Role as Watchdog,” which appeared in the Fall 1989 issue of Issues in Bank Regulation.

    Charles M. Horn received his law degree from Cornell University. From 1976 to 1983, he served with the U.S. Securities and Exchange Commission, beginning as an Attorney in the Division of Market Regulation and subsequently becoming a Branch Chief in the Division of Enforcement. During 1983–89, he served with the U.S. Office of the Comptroller of the Currency in several positions, including Director of the Securities and Corporate Practices Division. In this latter position, he was responsible for the management and supervision of a professional staff responsible for legal issues pertaining to securities-related activities and transactions of national banks. From 1989 to early 1992, Mr. Horn was a partner in the law firm of Stroock & Stroock & Lavan, participating in its Financial Services Institutions Group. Since February 1992, he has been a partner in the law firm of Mayer, Brown & Platt. He is the author of many articles about, and is a frequent lecturer on, a variety of topics relating to depository institutions.

    Jerome I. Levinson received his law degree from Harvard University. He was a Fulbright Scholar in India during the year after his graduation from law school. During the 1970s, Mr. Levinson served as Chief Counsel of the U.S. Senate Foreign Relations Committee’s Subcommittee on Multinational Corporations. In that position, he directed a number of inquiries into the relationship of U.S. foreign policy and the activities of multinational corporations. From 1977 to 1989, he was with the Inter-American Development Bank, which he served as General Counsel and Senior Special Adviser to the President of the Bank. Mr. Levinson is currently Of Counsel to the law firm of Arnold & Porter. During the fall of 1990, he was a Visiting Scholar at the University of Illinois Law School and the University of Wisconsin’s Law School and Latin American Studies program. He is a co-author of the book The Alliance That Lost Its Way, a study of the Alliance for Progress program in Latin America during the 1960s, and the drafter of a chapter entitled “Black Gold,” which deals with the geopolitics of internationally traded oil, in Saddam Hussein and the Crisis in the Gulf (Times Books, 1991)

    Francis D. Logan received a bachelor of arts degree in jurisprudence from Queen’s College, Oxford University, where he was a Rhodes Scholar, and a bachelor of laws degree from Harvard University. Since 1955, he has been with the law firm of Milbank, Tweed, Hadley & McCloy, of which he has been a partner since 1965. He is a member of the Council on Foreign Relations and the American Society of International Law, as well as of the Editorial Board of the International Financial Law Review. Mr. Logan has written numerous articles about, and has spoken frequently at national and international conferences on, various legal aspects of international banking and finance.

    Herbert V. Morais, a citizen of Malaysia, received his master of laws and doctor of juridical science degrees from Harvard University, where he was a Fulbright and Harvard Scholar. From 1968 to 1970, he was Sub-Dean and Lecturer in Law at the University of Singapore. During 1970–73, he was in private practice, first with the law firm of Donaldson & Burkinshaw (Kuala Lumpur and Singapore) and then with Sullivan & Cromwell (New York). From 1973 through 1985, he served with the Asian Development Bank, where he held the position of Assistant General Counsel during 1980–85. Since January 1986, Mr. Morais has been with the World Bank, where he held the position of Legal Adviser, Cofinancing and Financial Intermediation during 1986–91 and currently serves as Chief Counsel of the Middle East and North Africa/Cofinancing Division. He has conducted seminars and presented papers on World Bank cofinancing and on commercial debt-reduction and debt-service-reduction operations supported by the World Bank. His professional interests are primarily in public international law, international institutional law, and international financial law.

    Alfred Mudge received his law degree from the University of Michigan. In 1969, he joined the law firm of Shearman & Sterling, of which he has been a partner since 1977. During his tenure with the firm, he worked in Athens during 1976–78 and in Paris during 1978–81. He has broad experience in international and domestic financings, including acquisition, aircraft, energy, commercial paper, letter of credit, and acceptance financings; asset sales and monetization; swaps; corporate reorganizations; and country debt restructure. Mr. Mudge has worked on the restructure of commercial bank debt of several developing countries. He was counsel to the Bank Advisory Group for one of them during 1982–88 and head of the Country Debt Restructure practice at Shearman & Sterling during 1984–88. He now works in the International Financial practice at the firm.

    Sardad Khan Murvat, a citizen of Pakistan, received a bachelor of laws degree from Karachi University. After completing six months of training with Mr. Hafiz Sultan Ahmed, Advocate, he started an independent law practice in Karachi. In 1964, he joined the State Bank of Pakistan, the country’s central bank, as an Assistant Legal Adviser. Mr. Murvat was promoted several times and became Director of the Bank’s Legal Department in 1978, serving in this capacity until his death in March 1991. He was a member of Pakistan’s High Court Bar Association and was enrolled as an Advocate of the Sind Bar Council. He published numerous legal articles in the journals of the Institute of Bankers in Pakistan, as well as several literary articles, and translated a book, Islam at the Crossroads by Muhammad Asad, from English into Urdu.

    Ernest Patrikis received his law degree from Cornell University. He joined the Federal Reserve Bank of New York in 1968, serving in several positions, including Assistant Secretary of the Bank, before being named Executive Vice President and General Counsel in 1987. In his current position, he is responsible for the Bank’s Legal Department and serves as Chairman of its Financial Policy Council. Mr. Patrikis is also the Deputy General Counsel of the Federal Open Market Committee. He serves as a U.S. delegate to the Working Group on International Payments of the United Nations Commission on International Trade Law (UNCITRAL). He is also an advisor to the (U.S.) National Conference of Commissioners on Uniform State Laws and served as the first Chairman of the New York State Bar Association’s Committee on International Banking, Securities and Financial Transactions. Mr. Patrikis has lectured and written on the supervision and regulation of U.S. and non-U.S. banks, reserve requirements, payments laws, and sovereign immunity.

    Klaus P. Regling, a citizen of Germany, received his master’s degree in economics from the University of Regensburg. In 1975, he joined the International Monetary Fund, where he participated in the Young Professionals program and subsequently served as an Economist in the Research Department until 1980. During 1980–81, he was with the German Bankers’ Association, and from 1981 to 1985, he served with Germany’s Ministry of Finance as an Economist in its European Monetary Affairs Division. In 1985, Mr. Regling returned to the International Monetary Fund, where he served in several positions, including Deputy Chief of the Exchange and Trade Relations Department’s International Capital Markets Division and Resident Representative in Indonesia. In 1991, he rejoined Germany’s Ministry of Finance as Chief of its International Monetary Affairs Division.

    Ibrahim F. I. Shihata, a citizen of Egypt, received three law degrees from the University of Cairo and a doctorate in juridical science from Harvard University. He has been a member of the Faculty of Law of Ain-Shams University (Cairo) and of the Egyptian Conseil d’Etat, Legal Adviser of the Kuwait Fund for Arab Economic Development, an Executive Director of the International Fund for Agricultural Development, and the first Director-General of the OPEC Fund for International Development. He currently serves as the General Counsel of the World Bank and the Secretary-General of the International Center for Settlement of Investment Disputes (ICSID). Mr. Shihata is Chairman of the Board of the International Development Law Institute (Rome), a member of the Institut de Droit International (Geneva), and the Editor of the ICSID Review — Foreign Investment Law Journal. He has published extensively on international law, foreign investment, and international development issues. Among his 14 books are MIGA and Foreign Investment — Origins, Operations, Policies and Basic Documents of the Multilateral Investment Guarantee Agency (Martinus Nijhoff, 1988), The European Bank for Reconstruction and Development: A Comparative Analysis of the Constituent Agreement (Martinus Nijhoff, 1990), and The World Bank in a Changing World (Martinus Nijhoff, 1991).

    John A. Spanogle received his law degree from the University of Chicago, where he also served as Research Assistant to Professor Karl Llewellyn, the principal drafter of the (U.S.) Uniform Commercial Code. He served as an Associate in Law at the University of California at Berkeley (1960–61), an Assistant Professor of Law at Vanderbilt University (1961–64), a Professor of Law at the University of Maine at Portland (1964–74), and a Professor of Law at the State University of New York at Buffalo (1974–88). Since 1988, he has served as Professor of Law at George Washington University. From 1982 to 1989, Mr. Spanogle was a member of the U.S. delegation to the United Nations Commission on International Trade Law (UNCITRAL) and was the Chief of Delegation to UNCITRAL’s Working Group on Payments Systems. Mr. Spanogle’s primary teaching and research interest is in international business transactions. He has co-authored (with R. Folsom and M. Gordon) International Business Transactions: A Problem-Oriented Casebook (West Publishing, 2nd ed., 1991). He has also engaged in research on the commercial law of other nations and on U.S. domestic commercial law. Mr. Spanogle has co-authored (with D. Pridgen and P. Razor) Cases and Materials on Consumer Law (West Publishing, 2nd ed., 1990) and was an originating member of U.S. consumer advocate Ralph Nader’s Public Interest Research Group.

    William Taylor graduated from Cornell College (Mount Vernon, Iowa) and joined the Federal Reserve Bank of Chicago as a bank examiner in 1961. In 1968, he joined Chicago’s Upper Avenue Bank as Vice President in charge of lending. During 1972–76, he served as Manager of the Chicago Office of James W. Rouse and Company, a real-estate development and mortgage-banking firm. In 1976, Mr. Taylor returned to the Federal Reserve System as Chief of Financial Institutions Supervision in the Division of Banking Supervision and Regulation (Board of Governors of the Federal Reserve System, Washington, D.C.). He became Assistant Division Director in 1977, Associate Director in 1979, Director in 1985, and Staff Director in 1987. In 1990, he served as Acting President of the Resolution Trust Corporation Oversight Board, subsequently returning to his position as Staff Director at the Fed. In October 1991, he became Chairman of the (U.S.) Federal Deposit Insurance Corporation (FDIC).

    Christopher J. Thompson joined the Bank of England in 1966. During his subsequent career there, he has been primarily involved in banking supervision. During 1984–88, he was seconded from the Bank to serve as Secretary of the Basle Committee on Banking Supervision. Most of his time with the Committee was spent working on the agreement for convergence toward minimum standards for the capital adequacy of international banks. Mr. Thompson currently serves the Bank of England as Manager of the Banking Supervision Division.

    Ricki Rhodarmer Tigert received a master of arts degree in political science from the University of North Carolina at Chapel Hill and her law degree from the University of Chicago. From 1976 to 1977, she was a law clerk to the Honorable John Minor Wisdom of the U.S. Court of Appeals for the Fifth Circuit. During 1977–78, she served as Counsel to the U.S. Senate Committee on the Judiciary’s Subcommittee on Citizens’ and Shareholders’ Rights and Remedies. From 1979 to 1983, Ms. Tigert was in private practice with the law firm of Leva, Hawes, Symington, Martin & Oppenheimer, of which she became a partner in 1983. During 1983–85, she served with the U.S. Treasury Department as Senior Counsel for International Finance. Since 1985, she has served with the Board of Governors of the Federal Reserve System as Associate General Counsel for International Banking. At the Federal Reserve, her responsibilities include legal, regulatory, and legislative issues associated with the activities of U.S. banks outside the United States, including the developing country debt problem, and the operations of foreign banks inside the United States. Ms. Tigert is currently Chair of the Committee on International Banking and Finance of the International Law and Practice Section of the American Bar Association. In 1990, she was an Adjunct Professor of Law at the Georgetown University Law Center. She is the author of a number of articles about, and has lectured frequently on, international banking and sovereign debt issues.

    C. Maxwell Watson received his master of arts degree from Cambridge University and a master of business administration degree from the European Business School (INSEAD). He joined the Bank of England in 1969 as an Economist in the European Section, serving in a variety of positions before joining S.G. Warburg (London) as Manager of the International Corporate Finance Department in 1976. After serving with that firm during 1976–78, he served during 1978 as Secretary of the Joint Committee on Future of London as a Financial Center and, subsequently, of the European Community Bank Supervisors’ Group. Mr. Watson returned to the Bank of England in 1979 as Manager of the Banking Supervision Division. Later that year, he was seconded to the International Monetary Fund as Personal Assistant to the Managing Director. After completing that assignment in 1982, he returned to the Bank of England as Advisor on North American Affairs. In 1983, he rejoined the staff of the International Monetary Fund as Chief of the International Capital Markets Division in the Exchange and Trade Relations Department. He was promoted to Assistant Director in 1988. During 1987, Mr. Watson was a Fellow of the U.K. Institute of Bankers, and during 1991–92, he was a Visiting Research Fellow at Queen Elizabeth House, Oxford University.

    COMMENTATORS

    Robert R. Bench received a master of public administration degree from Harvard University. He joined the (U.S.) Office of the Comptroller of the Currency in 1965 and became a National Bank Examiner in 1970, Director of International Banking in 1974, Associate Deputy Comptroller of Currency in 1975, Assistant Chief National Bank Examiner of the United States in 1979, and Deputy Comptroller of Currency in 1982. As Deputy Comptroller, he was responsible for working with bank supervisors in other countries, bilaterally and multilaterally, on international banking and debt issues. Mr. Bench co-chaired the Expert Banking Group at the Organization for Economic Cooperation and Development and served with the Basle Committee on Banking Supervision at the Bank for International Settlements. In 1987, he joined Price Waterhouse as a Managing Partner and National Director of Regulatory Advisory Services. In this position, he advises financial institutions on regulatory matters, including examination policy, practice, and procedures, as well as remedial enforcement actions. Mr. Bench is a member of the Bretton Woods Committee, the Financial Services Commission of the International Chamber of Commerce, and the Economic Policy Council of the United Nations Association.

    Whitney Debevoise received his law degree from Harvard University. During 1978–79, he served as Law Clerk to the Honorable William J. Holloway of the U.S. Court of Appeals for the Tenth Circuit. In 1979, he joined the law firm of Arnold & Porter, of which he is currently a partner. His work for the firm includes international finance and monetary affairs (including representation of developing countries with respect to their external debt restructurings); securities and bank regulation; international trade and customs law; foreign asset, export, and munitions controls; treaty negotiation and ratification; transnational litigation and international arbitration; and foreign investment in the United States. Mr. Debevoise is a member of the Council on Foreign Relations and of the International Law Section of the American Bar Association. He has written numerous articles on legal aspects of international banking, finance, and trade.

    Pierre Francotte, a citizen of Belgium, received his law degree (licence en droit) from the Free University of Brussels in 1979; was then granted a full scholarship to attend Cambridge University, from which he received a Diploma in Comparative Legal Studies in 1981; and subsequently returned to the Free University of Brussels, from which he received a postgraduate degree in economic and financial law in 1982. During 1981–82, he was an associate at the law firm of Bornet et associes (Brussels). In August 1982, he joined the Legal Department of the International Monetary Fund. In 1989, he became a Senior Counsel. Mr. Francotte advises Fund member countries on legal matters relating to various Fund policies, including issues involved in the debt strategy and use of the financial facilities of the Fund (including the compensatory and contingency financing facility). He is also responsible for all legal advice on country-specific matters (financial and regulatory) relating to European countries, including the republics of the former U.S.S.R.

    Daniel L. Goelzer received his law degree from the University of Wisconsin at Madison and a master of laws degree from George Washington University. During 1969–70, he was a member of the audit staff of Touche Ross & Com pany (Milwaukee, Wisconsin). In 1977, he became a Certified Public Accountant. During 1973–74, he was Law Clerk to the Honorable Thomas E. Fairchild of the U.S. Court of Appeals for the Seventh Circuit. In 1974, he joined the (U.S.) Securities and Exchange Commission’s Office of the General Counsel as a Staff Attorney. He subsequently served as Special Counsel, as Executive Assistant to the Chairman of the SEC (1978–81 and 1981–83), Associate General Counsel, and General Counsel (1983–90). In June 1990, Mr. Goelzer became a partner in the law firm of Baker & McKenzie. Since 1986, he has served as an Adjunct Professor of Law at Georgetown University Law Center. He is a member of the Advisory Council of the SEC and has written numerous articles on national and international securities law and regulation.

    Akhtar Hamid, a citizen of Pakistan, received his bachelor of laws degree from the Punjab University (Pakistan) and also earned master of arts and bachelor of civil law degrees from Oxford University. He was called to the bar in England and is an Advocate of the Punjab High Court in Pakistan. After some years of private practice and work for the Government of Pakistan, he joined the Legal Department of the Asian Development Bank, where he spent more than seven years before coming to the Legal Department of the World Bank, where he currently serves as Senior Counsel, in 1983.

    Zubair Iqbal, a citizen of Pakistan, received his master of arts degree in economics from the Punjab University (Pakistan) and a doctorate in economics from Michigan State University. In 1972, he joined the staff of the International Monetary Fund as an Economist under the Young Professionals program. He then served as Economist (1974–79), Senior Economist (1979–81), and Deputy Division Chief (1981–82) in the Exchange and Trade Relations Department. Mr. Iqbal then moved to the Fund’s Middle Eastern Department, where he served as Deputy Division Chief (1982–89). After an assignment as Advisor to an Executive Director of the Fund during 1989–91, he rejoined the Middle Eastern Department as a Division Chief in April 1991. He has published a number of articles on trade policy, external debt, Islamic banking, and oil producing economies.

    G. Russell Kincaid received his doctorate in economics from Columbia University. In 1976, he joined the International Monetary Fund and subsequently served as Economist (1976–83), Senior Economist (1983–84), and Assistant Division Chief (1984–88) before becoming an Advisor in the Exchange and Trade Relations Department in 1988. He currently is the Chief of the Special Facilities and Issues Division, which reviews Fund policies, including their implementation in individual country cases, with regard to the compensatory and contingency financing facility, the buffer stock financing facility, overdue obligations to the Fund and other multilateral financial obligations, and special issues as they arise and are assigned by the Director of the Department.

    Eugene A. Ludwig received a bachelor of laws degree from Yale University, a master of arts degree from Oxford University, and a bachelor of arts degree from Haverford College. He joined the law firm of Covington & Burling in 1973 and became a partner in 1981. In his work for the firm, he specializes in international banking, corporate law, and international trade. He has frequently lectured on, and written a number of articles about, these topics. Mr. Ludwig is a member of the U.S. State Department Study Group on International Negotiable Instruments of the Secretary of State’s Advisory Committee on Private International Law. He also serves as a Contributing Editor of the Journal of International Banking Law.

    Abbas Mirakhor, a citizen of the Islamic Republic of Iran, received master of arts and doctoral degrees in economics from Kansas State University. In 1968, he joined the faculty of the University of Alabama at Huntsville, where he served as Assistant Professor of Economics (1968–72) and Associate Professor and Chairman of the Department of Economics and Business Administration (1972–77). He then moved to AzZahara University (Tehran), where he served as Professor and Chairman of the Department of Economics (1977–78) and Professor of Economics and Academic Vice-Chancellor (1978–80). In 1980, Mr. Mirakhor joined the faculty of Alabama A&M University, where he served as Professor of Economics (1980–82) and Professor of Economics and Chairman of the Department of Graduate Studies and Research in the School of Business. During 1983–84, he was Professor of Economics at the Florida Institute of Technology. In 1984, he joined the staff of the International Monetary Fund, on which he served as Economist (1984–88) and Senior Economist (1988–89) in the Research Department, and as Senior Economist in the Middle Eastern Department (1989–90). In November 1990, Mr. Mirakhor was elected an Executive Director of the Fund for Afghanistan, Algeria, Ghana, the Islamic Republic of Iran, Morocco, and Tunisia. He is author or co-author of a number of articles, books, and other publications.

    Russell L. Munk serves as Assistant General Counsel for International Affairs at the U.S. Treasury Department.

    John C. Murphy, Jr. received his law degree from the University of Pennsylvania and was a graduate fellow at the University of Pennsylvania Law School Center for Study of Financial Institutions. During 1975–77, he served as Special Counsel with the Office of the Bank Study of the (U.S.) Securities and Exchange Commission. He joined the law firm of Cleary, Gottlieb, Steen & Hamilton in 1977 and became a partner in 1982. In 1984, Mr. Murphy left the firm to serve as General Counsel of the (U.S.) Federal Deposit Insurance Corporation, rejoining the firm after resigning from this position in 1987. His work for the firm focuses on matters relating to financial institutions and corporate transactions. He represents financial institutions in connection with mergers and acquisitions, regulatory and supervisory issues, Glass-Steagall Act issues, new product development, and enforcement proceedings. Mr. Murphy is the Vice-Chairman of the Executive Council of the Federal Bar Association’s Banking Law Committee and is a member of the editorial advisory boards of Banking Policy Report and Bank Attorney. He has frequently lectured on, and written numerous articles about, legal aspects of banking, thrift, and securities matters.

    Rudolf R. Rhomberg received his diploma (1947) and doctorate (1949) in political economy from the University of Vienna. He then earned master of arts (1950) and doctoral (1959) degrees in economics from Yale University. In 1954, he joined the faculty of the University of Connecticut as an Instructor in economics, subsequently becoming an Assistant Professor. In 1959, Mr. Rhomberg joined the staff of the International Monetary Fund. He served in a variety of positions, becoming Deputy Director of the Research Department in 1980 and serving in this capacity until he retired from the Fund in 1987. During a sabbatical leave from the Fund in 1968–69, he was a research professor at Yale University. In the Fund, he played important roles in the development of econometric modeling and in the evolution of the special drawing right (SDR)—the composite currency allocated by the Fund to its members. Mr. Rhomberg has published extensively in the fields of international economics and finance.

    Steven Roberts received master of science and doctoral degrees in economics from Purdue University. He has taught economics at Purdue University and the University of Maryland. He has also served as Chief Economist of the U.S. Senate Committee on Banking, Housing and Urban Affairs; Vice President for Government Affairs at the American Express Company; and as Assistant to (then) Chairman Paul A. Volcker of the Board of Governors of the Federal Reserve System. Mr. Roberts currently serves the management consulting firm of KPMG Peat Marwick as Principal-In-Charge of its Financial Institutions Washington Advisory Service and National Director of Financial Institutions Regulatory Policy. In his work for the firm, he provides domestic and international financial institutions with advice on many matters, including mergers and acquisitions and regulatory/public policy issues. He has spoken frequently before bank and thrift institution trade associations, has published articles in economic and banking journals, and has given testimony before congressional committees.

    William A. Ryback received a bachelor of science degree from Seton Hall University. He joined the New York District office of the (U.S.) Comptroller of the Currency as a Field Examiner and subsequently served as Director for International Banking and, later, as Director of Regional and Multinational Policy in the Office of the Comptroller of the Currency (Washington). In March 1986, he joined the Board of Governors of the Federal Reserve System as Deputy Associate Director for International Operations. He was named an Associate Director in 1991. In this position, Mr. Ryback is responsible for overseeing the International Applications and International Supervision sections. The former administers applications for the international expansion of U.S. banks and bank holding companies, as well as the expansion of foreign banking organizations in the United States; the latter is responsible for overseeing U.S. banks operating overseas and foreign banks operating in the United States, monitoring country risk developments, coordinating the international supervisory functions of the Federal Reserve System, and liaising with the bank regulatory authorities of other nations, as well as relevant international organizations.

    Edwin M. Truman received master of arts (1964) and doctoral (1967) degrees in economics from Yale University. He subsequently served as Assistant Professor (1967–72) and Associate Professor (1972–74) in Yale University’s Department of Economics. In 1972, he joined the Board of Governors of the Federal Reserve System as an Economist in the Division of International Finance. Mr. Truman then served the Division as Chief of the International Monetary System Section (1973–74), Assistant Adviser and Chief of the Balance of Payments Section (1974–75), Associate Adviser (1975–77), Associate Director (1977), and Director (1977–87), becoming Staff Director—his current position—in 1987. During 1973–74, he served on several technical groups of the Committee on Reform of the International Monetary System and Related Issues (Committee of Twenty). He currently also serves as an Economist on the Federal Open Market Committee. He is a member of the Council on Foreign Relations, and his publications include works on European economic integration, international monetary economics, economic development, and the international debt problem. In 1988, he received an honorary doctor of laws degree from Amherst College.

    Michael Zeldin received his law degree (1976) and a master of laws degree (1983) from George Washington University. During 1976–77, he was an associate with the law firm of Cole, Raywid & Braverman. From 1977 to 1980, he served as an Instructor of Law at George Washington University Law School. During 1980–82, Mr. Zeldin was an E. Barrett Prettyman Fellow at the Georgetown University Law Center. From 1982 to 1984, he served as Associate Dean of the Antioch School of Law and Chief of its Criminal Assistance Project. In 1984, he joined the U.S. Department of Justice. As Special Counsel for Money Laundering, he prosecuted numerous violations of federal law, including financial cases involving multiple defendants; he also authored and argued motions and appellate briefs on complex financial matters referred to the Department by U.S. Attorneys’ offices. While serving with the Department of Justice, Mr. Zeldin served as U.S. delegate to various international expert groups, such as the Financial Action Task Force; the Council of Europe’s Select Committee of Experts Regarding Search, Seizure and Confiscation of Crime Proceeds; and the United Nations Convention Against Illicit Traffic in Narcotics, Drugs, and Psychotropic Substances. In April 1992, he joined the October Surprise Task Force of the U.S. House of Representatives as Deputy Chief Counsel. He served as Adjunct Professor at the Georgetown University Law Center during 1986-87 and has served since 1988 as an Instructor with the National Institute of Trial Advocacy’s Criminal Trial Advocacy Program. Mr. Zeldin is also the author of published articles on various legal topics.

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