In this quarter's edition of The Finance Brief, we have taken the opportunity to highlight and re-iterate a number of important legal issues for lenders in the private wealth sector. The first is in respect of anti-money laundering risks and the due diligence obligations which lenders must adhere to if they are to avoid heavy fines. The second is in respect of taking third party security and the key considerations for lenders to bear in mind. Thirdly, prompted by recent case law, we focus on letters of credit, which sometimes arise on financing transactions, and highlight the main characteristics and pitfalls associated with such instruments. We also consider the concept of "equity of exoneration" which has been upheld recently in the Chancery Division of the High Court.
At the beginning of February, Field Fisher Waterhouse LLP attended the annual International Corporate Jet Finance 2014 Conference in London. There was an overall feeling of optimism as to the 2014 outlook for the business jet market. In keeping with this, we look at the recent developments in the UK in relation to ratification of the Cape Town Convention.
Hannah Rowbotham, Editor
Anti-Money Laundering risks and wealth management
Banks are well aware that money laundering risk must be addressed in the context of wealth management. The Joint Money Laundering Steering Group guidance, for example, recognises that the provision of banking and investment services to high net worth clients may carry an enhanced money laundering risk. It points out that complex products and services that operate internationally and within a wealth management environment may also be attractive to money launderers. Equally, clients may have genuine concerns and sensitivities about their legitimate commercial activities and personal security. But the regulators continue to detect shortcomings in AML procedures. This brief note is intended as a reminder of some of the basic customer due diligence requirements in this context, and a look forward at forthcoming changes to the anti-money laundering (AML) rules.
A Guide to Third Party Security
A third party security is security given by an individual or entity which secures the liability of a third party. If the third party security does not contain any personal obligation to pay on the part of the mortgagor or chargor, it can be treated like a limited recourse guarantee so that the liability of the mortgagor or chargor is limited to the amount which can be realised upon disposal of the third party security.
In this guide, we look at how this type of security is different to direct security and the key considerations for lenders to be aware of and take into account when they are being granted third party security.
Letters of Credit
Letters of credit and documentary credits continue to be a mainstay of international trade transactions. Letters of credit are also often used in financing transactions, either as a form of collateral or issued by a bank in connection with an acquisition or another transaction being financed. A recent case, Taurus Petroleum Limited v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq (2013) EWHC 3494 (Comm) relates to letters of credit in a trade transaction and serves as a useful reminder of some of the key issues to be borne in mind.
It should be noted that the case is subject to an appeal to the Court of Appeal.
The Cape Town Convention and Aircraft Protocol: ratification by the UK
The UK government announced, by way of the publishing of the Response to its 2010 Call for Evidence last December, that it is committed to ratifying the Cape Town Convention and Aircraft Protocol (the "Convention"). The ratification will be subject to the results of further consultations on how to implement it, and there are of course further steps to be taken if the Convention is to be made national law in the UK, but this announcement is nonetheless a significant step in the direction towards implementation.
What is the equity of exoneration, and when is it important?
The legal concept "equity of exoneration" is essentially an indemnity coupled with a proprietary interest. Although the term will not be immediately familiar to everyone, the recent decision in Day v Shaw and another (2014) EWHC 36 (Ch) shows that it is alive and well, and can make a significant difference when there is competition between secured creditors against the same asset.
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