The entities involved:
The Supplier is a private company incorporated in Russia exporting nickel worldwide. Supplier is owned by A, B, C and D in equal shares.
Supplier bank’s in Russia is Conforming Bank.
A, B, C and D hold together a private banking account with Gontran & Cie, a private bank in Geneva.
Trader is a Swiss company trading nickel on the international market, based in Geneva. Trader enjoys important credit facilities with Swiss Bank, partly thanks to Oleg, the relationship manager in charge of Trader within Swiss Bank. Oleg was Trader’s chief financial officer prior to joining Swiss Bank.
Oleg holds an account with Swiss Private Bank in Zurich.
Trader is likewise owned by A, B, C, and D, but its accounts are not consolidated with Supplier’s accounts. D appears in the Form K of Swiss Bank as the sole beneficial owner.
Off-Taker is a company incorporated in China and a small trader of nickel.
China Bank is Off-Taker’s bank in China.
The transactions:
Supplier sells 1000 tons of nickel ("Nickel") to Trader at the price of USD 11’500 per ton, to be delivered in July 2020.
The Nickel is then on-sold by Trader to Off-Taker at the price of USD 13’500 per ton.
At the time the parties concluded these contracts the nickel quoted at USD 12’760 per ton.
To secure payment of the Nickel to Supplier, Swiss Bank issued a 90 days differed payment letter of credit in favour of Supplier, to be confirmed by Confirming Bank ("L/C 1").
Trader's important margin in this transaction (USD 2000 per ton) is to remain to the credit of its account with Swiss Bank, as it has been the case for the same type of transactions for the last year.
To secure the payment of the Nickel by Off-Taker to Trader, China Bank issued, by order of Off-Taker, a letter of credit in favour of Trader, payment at sight, which has been advised through Swiss Bank ("L/C 2").
10 transactions of the same type were completed last year to the satisfaction of all parties involved.
For his part, Oleg was gratified by D with USD 10’000 for each transaction, credited to Oleg’s account with Swiss Private Bank.
On June 5, 2020, Supplier presented the documents required under LC1 to Confirming Bank, requesting the same to discount its payment undertaking. Confirming Bank agreed for an amount of USD 11’200’000, which were therefore credited to Supplier’s account with Confirming Bank.
On June 7, 2020, by the debit of such account, Supplier transferred USD 10’000’000 to ABCD’s account with Gontran & Cie.
The LC1 documents were forwarded by Confirming Bank to Swiss Bank, which undertook to pay at maturity (90 days). Swiss Bank remitted the documents onwards to China Bank for payment at sight, which was indeed made on June 15, 2020 to the credit of Trader’s account with Swiss Bank.
On June 18, the Off-Taker willing to take delivery of the Nickel in China realised that the documents which were used for this transaction were forged, with no Nickel in sight.
On June 20, 2020, the US issued sanctions against Supplier and its owners believed to finance terrorism in Syria. Consequently, A, B, C and D appeared immediately in the sanctions lists applied by all Swiss banks.
You have been recently hired as Compliance Officer of Swiss Bank. Oleg (Trader’s relationship manager) comes to your office and tells you that he feels uncomfortable about what to do with Trader’s account.
You have been provided with the details of transactions. The Relationship Manager is also worried about what Swiss Bank should be doing with LC1. Should it pay at maturity ?
You have one hour to examine the overall situation and point out :
- the issues raised by the transaction(s) or the entities involved,
- what legal or regulatory actions shall Swiss Bank take or not, and
- whether China Bank could recover the amount it paid under LC2.
Please do not forget in your review:
The 2020 Swiss Due Diligence Code (Chapter 3); file:///C:/Users/Philippe/Downloads/VSB_2020_Einzelseiten_Print_EN_NEU%20(1).pdf
The rules applicable to Swiss Bank as regards certain categories of clients, in particular Article 9, Federal Act on Combating Money Laundering and Terrorist Financing in the Financial Sector or "LBA":
https://www.admin.ch/opc/en/classified-compilation/19970427/index.html
The Swiss Criminal Code
https:/(www.admin.ch/opc/en/classified-compilation/19370083/index.html
The impact of sanctions on the transactions.