Bank Guarantees

1.- What are bank guarantees?

Banks guarantees are written obligations of the issuing bank to
pay a sum to a beneficiary on behalf of their customer in the
event that the customer himself does not pay the beneficiary.
It is important to note that these bank guarantees apply only
whenever the issuing bank's guarantee is not contingent on the
existence, validity and enforceability of it's customer's
obligation; this is called an abstract guarantee (i.e. the bank's
obligation is to pay regardless of any disputes between its
customer and the beneficiary).
The issuance of bank guarantees is a private transaction and
does not result in the issuance of any publicly tradable
instruments.
Today bank guarantees are transmitted electronically on a bank-
to-bank basis. So one must be very concerned if presented with
a hard copy of a bank guarantee; it is likely a fraudulent
instrument. This is not to preclude pro forma writings of bank
guarantees where the parties agree on the terms, and the
applicant takes these terms to the bank and has the bank
incorporate them into the electronic bank guarantee. There is a
pro forma bank guarantee below.

2.- What are the two types of bank guarantees?

There are two types of bank guarantees:

Direct bank guarantees that have the issuing bank guarantee

one's of its customer's (called Obligor) obligations to a third
party (called beneficiary); and

Indirect bank guarantees that are issued in favor of a second

bank which has issued a guarantee on behalf of the of the
original's bank's customer. With an indirect guarantee, a second
bank (usually a foreign bank with head office in the
beneficiary's country of domicile) is involved.
3.- For what purposes are bank guarantees customarily
issued?

a. Bid Bond (tender bond)

These are primarily used in the export business for project

tenders. They are short term guarantees.
It's purpose is to secure any claims by the party inviting the
tender on the tenderer in the event of withdrawal of the bid
before its expiry date or if the bid is modified unilaterally. It is
also used if the tenderer, upon being awarded the contract,
refuses to sign the contract or provide further guarantees on
request.
The guarantee amount is generally 1% to 5% of the value of the
contract.

b. Advance Payment Guarantees

These are used not only in the import-export business but also in
domestic commercial business, trade and industry.
In the event that a seller has failed to meet its contractual
delivery obligations in full, the purpose is to secure any claims
by the buyer on the seller for reimbursement of the buyer's
advance payment on the contract price before delivery of the
goods (or advance payment of the full contract price). The
amount of the guarantee is the amount of the installment or
advance payment.

c. Performance Bond Guarantee

This is used to secure any claims by the buyer on a seller arising

from default in delivery or performance of the terms of a
contract (e.g. construction, assembly, execution). It is used in
import-export businesses as well as in domestic commercial
business, trade and industry.
The guarantee amount is generally 5% to 20% of the value of
the contract. The terms of the guarantee is until the contract has
been fulfilled.

d. Bank Guarantee for Warranty Obligations

The application of this type of bank guarantee is in the import-

export business and in domestic commercial business, trade and
industry, where it is more often a surety. Its purpose is to secure
any claims by the buyer on the seller due to possible defects
appearing after delivery.
The general amount of the guarantee is 5% to 20% of the value
of the contract, and the terms depend on the custom of the
particular business.
In the construction trade, the guarantee for warranty obligation
in the form of a simple guarantee or a joint and several
guarantee is known as a building (or works) contractor's
guarantee. It can also be used in the export business as a
"retention bond" (substitute for payment retention, often 5% to
10% of the value of the contract).

e. Payment Guarantees

These are used in the import-export business or in any

circumstance where payment of an obligation needs to be
guaranteed. It is used to secure any claims by the seller on the
buyer for payment of the contract price by the agreed date. The
payment guarantee is often used instead of a documentary credit
upon delivery against open account.
The amount of the guarantee is the contract price or a part of it.

f. Guarantee Securing Credit Line

The use of this guarantee is to secure any claims by the lender

on the borrower due to a credit (loan, etc.) not being repaid in
accordance with the terms of the lending contract.
The amount of the guarantee is the amount of the credit or loan,
and it usually includes a margin to cover accrued interest and
incidental expenses.
The term of the guarantee is until the expiration date of the loan
plus a few days (e.g. 15 days).
These are often abstract guarantees in favor of a foreign or
domestic lending bank.

g. Letter of Indemnity for Missing Bill of Lading

This guarantee is specifically used for importers when the bill of

lading is missing. Its purpose is to secure any claims by the
shipping line/shipping company on (i) the buyer resulting from
the goods arriving from overseas being released without the
original bill of lading being presented (e.g. due to postal delays
or even loss) or (ii) the supplier due to issuance of a replacement
bill of lading (original misplaced or lost).
The term is often unlimited or until the original bill of lading or
release document from the beneficiary is presented.
In practice the wording of the guarantee is frequently stipulated
by the ship owner and must be sent directly by the debtor, with a
counter-guarantee from the bank to the shipping line.

4.- Are bank guarantees transferable?

a. Assignment of Bank Guarantee Proceeds.

The beneficiary can assign the proceeds of a bank guarantee.

But this assignment does not assign the rights of the beneficiary
as drawer on the bank guarantee, and only the beneficiary
may exercise the drawer rights and present the demand for
payment under the terms of the bank guarantee unless the terms
of the guarantee provide otherwise. This means that the assignee
may receive the proceeds of the guarantee, but in order to obtain
those proceeds, the beneficiary must make the demand for
payment. This means that the beneficiary can transfer by
assignment at discount the benefits of the guarantee. An
assignment of proceeds requires notice to the issuing bank of
this action; otherwise the issuing bank would pay the
beneficiary rather than the assignee.

b. Transfer of Bank Guarantees.

Bank guarantees can be transferred to a third party ONLY with
the written consent of the issuing bank AND the beneficiary.

5.- Are bank guarantees the subject of trading?

a. No Public Market.

There is no public market for the trading of bank guarantees.

Beware! Fraudsters or nave brokers are always erroneously
representing that there is a public market for the trading of bank
guarantees (and standby letters of credit).
This is not to be confused with the trading of other bank issued
instruments. There are genuine markets in medium term notes
(MTN's), in bonds, notes and other credit instruments of various
kinds. Also, there are valid markets in equity instruments of
many varieties.
But there is not a legal market for bank guarantees. Bank
guarantees can only be transferred or the proceeds assigned in
private transactions (See above).

b. No CUSIP or ISIN Numbering.

Bank guarantees are not trading securities, trading debt

instruments, or trading investment funds, and therefore are not
subject to the settlement procedures offered through Euroclear
or DTC and most other settlement firms.
Obviously, therefore, they also are not issued CUSIP or ISIN
numbers for trading purposes.
However, Euroclear may accept such bank guarantees for
safekeeping purposes only. So one has to be careful in
understanding the particular legal relationship of a bank
guarantee to Euroclear or other settlement entities, especially as
to issues of authenticity.
A bank guarantee held in safekeeping does not serve to
authenticate the instrument . Anything can be the subject of a
safe keeping situation. Mixing a metaphor, you can get a safe
keeping receipt for a ham sandwich.

6.- Is there fraud associated with bank guarantees?

a. There are many fraudulent bank guarantees. i.e. they are

NOT issued by the bank that is represented as the issuer.

The authenticity should always be checked (See Paragraph (4)

below for important warning).

The fake financial instrument may have a face value of anything

from $5 million to $600 million or even billions of dollars (or
other currencies), and they usually give the appearance of being
tied to a major international bank.
The scheme involves investors being persuaded to buy these
Bank Guarantees after being offered discounts of over 40%. The
investor would then look forward to redeeming the full face
value on maturity (e.g. one year's time), thereby securing a
healthy profit . Of course no profit is forthcoming; the investor
only suffers the loss of the price paid for the bogus instruments.
Banks do not issue guarantees for this type of proposition. Bank
Guarantees are NOT investment products. Bank guarantees are
issued by banks to cover the liability of its customer to a third
party that the bank agrees to pay.
Sometimes fraudsters use the discounted Bank Guarantee as bait
to secure an advance fee (e.g. 1% of the Guarantee's face value).
The advance fee is represented to pay for alleged due diligence
and administration procedures, but is merely pocketed by the
perpetrators resulting in a fraud loss to the investor.

b. Fraudulent Leasing of bank guarantees. Leasing of bank

guarantees for an upfront fee is invariably a fraud.
These bank guarantees can either be legitimate or bogus, so
checking out the authenticity in the long run is not really
important (See Warning above on going to the bank to check
authenticity of bank guarantees!).

The problem is that after paying an upfront fee there is nothing

in the real world that the lessee can do with a leased guarantee,
and the lessor knows it; i.e. the lessor knows that the bank
guarantee will never be called upon. The lessor does this by
making the terms of the lease such that the bank guarantees can
never be called up. The lease may provide that the leased
guarantee may not be used as collateral without the consent of
the lessor (which is never given); thus it may not be borrowed
against.

Or the lease may provide a time limit for use by the lessee that
the lessor knows cannot be met (e.g. See (3) below leasing for
HYIP).

An important warning to potential lessees is that if one leases a

bank guarantee for credit enhancement and the bank guarantee
cannot be called upon by the lessee, then any credit or loan
issued to the lessee is based on a bank fraud committed by the
lessee on the lending bank unless the lessee fully discloses to the
lending bank the non-callability element of the bank guarantee.
This is a felony . Of course, after such full disclosure, the
lending bank will not consider the bank guarantee as a credit
enhancer, so the whole idea does not work. Leasing is a usually
a bad idea.

NOTE: It is, however, important to note that this author has

been involved in situations where a bank guarantee is leased as
part of a financing for investment structure; however, the
instrument is always at risk, though there are several legal
techniques for substantially diminishing the risk (but not
eliminating the risk) of the guarantee to be called upon for
payment. The remaining risks are worth the rewards the owner
of the bank guarantee receives for its involvement.

c. Leasing for HYIP .

There is the leasing of bank guarantees that are issued by

legitimate banks and with callable terms; however, the short
term of the lease of the guarantee is such that the lessee cannot
possibly perform (or never perform) within the time limits of the
guarantee. Thus, the lessee does not timely perform and the
lessor pockets a large fee.
An example of this situation is where a party agrees to lease a
bank guarantee with the agreement that the lessee will place the
guarantee in a performing high yield investment program
approved by lessor. The lessee cannot find a performing HYIP
within the time limit, because such HYIP's do not exist.

d. Checking authenticity of bank guarantees

The ICC states: Anyone offered an investment opportunity

supported by a financial instrument can have it checked out by
the CCB for a nominal cost. Call +44(0) 208 591 3000 or e-mail
ccb@icc-ccs.org.uk for details.
Big warning! What one (other than a very careful and
knowledgeable attorney) must NOT due is to walk into a bank
(including branch offices) with a bank guarantee (or standby
letter of credit) to check on its authenticity. There is a high
probability (a) the instrument is fraudulent, and (b) therefore one
will be arrested on the spot, and that probability substantially
increases if one is a minority; e.g. African-American, Hispanic,
from the Mideast , etc.

e. Bank Guarantees From Small Offshore Banks

Usually bank guarantees from offshore tax haven banks (unless

an affiliate of a major bank) have little or no value.
Often there is talk about having these bank guarantees
confirmed (i.e. accept liability for the instrument) by a major
bank, but in reality, this does not happen for the most part. This
is particularly true with U.S. banks, as under the Patriot Act in
essence they cannot do business with these small offshore
banks.

f. Funding Projects Using Bank Guarantees and Standby

Letters of Credit

A provider of a bank guarantee or standby letter of credit agrees

to provide you one of these instruments from which you can
borrow the funds to finance a project. The provider requires a
fee; e.g. 1% up front and 7% on Closing. There is a often great
charade of due diligence done by the provider to make sure that
your project is financially feasible so that he or his lender will
be comfortable that the project will generate income so that the
loan you make against the guarantee instrument can be repaid
and his instrument not called upon for payment.
This is all nonsense! It isn't going to happen! In order for the
provider to have his bank issue a bank guarantee or standby
letter of credit, he must put up collateral that at least equals the
face amount of the guarantee instrument or have credit that
satisfies the bank that if the instrument is called upon the
provider can pay the full face amount of the guarantee
instrument plus interest and fees. He must risk the money you
borrow against his guarantee instrument for a fee of for example
7% of that amount.

So the provider has to put up as much collateral with the bank as

you need to do your project, and then when the guarantee
instrument is issued by the bank, you borrow the greatest
amount that a bank will lend against the guarantee instrument,
and the provider is exposed to liability for the full amount of
your borrowing, principal and interest, if you don't pay back the
loan.
Now, does it make any business or economic sense for the
provider to expose the amount borrowed against the guarantee
instrument for a fee that is maybe 5% of his total exposure? No
one would do this just for a fee. It makes no sense and that is
why it is a fraudand the provider knows it is a fraud.
Closing Day . If the provider doesn't just take your front money
and run, there will be a Closing Day ostensibly to close the
transaction and give you your guarantee instrument (at which
time you will have to pay more money). Here is what will
happen on Closing Day; the provider will do one of the
following:

(a) not show up for the closing,

(b) Make an excuse to continue the date of closing (often
finding something wrong with your package that is not being
accepted by a third party with high authority),
(c) deliver a forged instrument,
(d) deliver an instrument that is drawn on a far lesser bank than
was agreed upon [sometimes a fictitious bank],
(d) deliver an instrument where the terms and conditions of the
instrument have been changed so that it is impossible to obtain a
loan against it (though you may not realize it at the closing).

There have been many victims who have paid money for
instruments that have no loan value whatsoever. Also, see
Warning on checking authenticity of instruments. It is also
important to note that with rare exception these instruments are
electronically created and delivered in bank-to-bank
transactions.

So do not pay money or waste your time on financing through

these types of guarantee instruments. It is a fraud! Bank
guarantee or standby letter of credit, the scam is the same.
Please note, that this fraud label may not apply to situations
where the provider is a joint venture partner and is prepared to
take the full exposure on the guarantee instrument as his
contribution to the joint venture. BUT in this situation, there
should be no requirement of an up-front fee for use of the
instrument . The provider may also do a legitimate deal if he
receives acceptable collateral to collect against in the event of
default; e.g. a lien on assets. But be careful here too! He may
require the collateral as part of the scam.

7.- How does one collect on a bank guarantee?

The terms of the bank guarantee itself will advise the

beneficiary of the precise terms that must be followed for
presentment of the demand for payment and the collection
thereof. These terms usually must be precisely followed. Read
the instrument carefully!

8.- How does the bank handle a dispute?

Usually absent visible obvious fraud, the bank will pay

according to the terms of bank guarantee without regard to
looking at the actual performance by the beneficiary of the
underlying agreement. If the obligor (bank's customer) feels that
the bank should not pay because of non-performance or fraud by
the beneficiary, then he should sue the beneficiary and
interplead the bank seeking an injunction to prevent the bank
from paying. The bank will stand on the sidelines until a court
tells it what to do. The bank doesn't care how long the dispute
takes, because it is holding and using the money for its own
profits. Like insurance companies and large law firms, the banks
have a license to steal, and this is what they dothis is their
primary business. So they like a good dispute that is taken to
court.

9.- Sample of Bank Guarantee (Payment Guarantee)

Today bank guarantees are usually issued by wire transfer from

the issuing bank to the bank advising the beneficiary (advising
bank); however, in certain business situations the bank
guarantee is issued in hard copy form directly to the beneficiary.

(Name of Issuing Bank with Bank Coordinates)