Monday, May 20, 2013

The chain-mail conundrum

Forwarding e-mails (mostly received from others who have similarly forwarded them to us) is a favourite pastime of many. Some have, however, made it a full-time occupation. This piece is primarily about them.

Anyone accessing the internet sometime or the other would surely be aware that there exists an active industry churning out (and recycling) sob-stories, free offers, religious craps and the like, looking for victims in the cyberspace. The first variety is mostly of the ‘chicken soup for the soul’ brand. The stories are mushy, tell of some act of charity or bravery, preach some wonderful sermons (even the Pope could take a leaf out of them) which sound great when you read it for the first time, some lifestyle tips and so on. The basic idea is primarily to pull at the readers’ heart strings (the success of the ‘chicken soup...’ series of books will give you some idea of their universal appeal) and trap them into following the subsequent steps.
Then there is another variety. This says, ‘Forward to ten of your friends in five minutes and you will be the beneficiary of all the blessings of some god or the other, get a free Sony Ericsson high-end mobile phone (claiming that it was a marketing drive by Sony); forward to twenty in 5/10 minutes, and you get a S-Class Mercedes; forward it to forty in five minutes and your Swiss Bank numbered account will be credited with hundred million dollars (yes, USD!)’. And then they add the fear factor, full of threats and horrendous consequences. God (the same one, in all probability!) help you if you don’t do as told. The wrath of Satan will befall you…etc. etc. etc. Some of these e-mails follow up with supposedly real names of those who acted promptly and received unheard of rewards. They also give details of who got what and how much (there is no means to verify the information, but who is interested!). Such e-mails also tell you who got punished for not following the directives in such e-mails.
Some may even ask you to copy the message to a particular address every time you forward a message to twenty others. Obviously to keep track of all your good deeds and later send you the rewards for your troubles, or so you assume!
Whereas the first group play on people’s emotions, the second play on the primal instincts of fear and greed. Some who forward these e-mails want to spread good cheer. Others say to themselves, “It costs me nothing to forward it to 20 of my acquaintances. May be, it could benefit them too (of course, after first benefiting ME!)’’. A click of the mouse, and your mail box is deluged with these messages, day in and day out. The threat at the end of such e-mails, of course, plays its silent role in acting as a motivator.
There is another type of people who probably have nothing better to do. They forward to you YouTube links to items which they assume that you’d enjoy, find useful or informative, or something absolutely irrelevant (to you, but not to him). There are several I know of who keep forwarding messages, at the same time stating something like, “Got this from a friend on the net. No idea if it works. Nothing to lose by someone trying it out.” (Quoted verbatim from a message received on 12 September from a friend of mine based in London). The message was about removing gall stones! You’d have to have his head examined to find out why on earth this "friend" (who had no idea if I or any member of my family had gall stones!) found it necessary to send that message to me.
After I received one so-called e-mail about the Sony Ericsson promotion, I checked with Sony. They denied having ever floated such a promotion (I still have their e-mail with me). There was another about some hospital in Nebraska, USA where a teenaged boy was dying of cancer. The mail said that he had a message for everyone (another lengthy sob story). The hospital promptly denied ever having such a person as its patient.
Many must have forwarded mails they received with 5/10/15 minutes of opening their mail boxes, expecting a reward or to escape the threatened consequences. I wonder how many individuals that you PERSONALLY know that have received the promised windfall benefits. How many have been cast into Hell for not doing as directed? Incidentally, how does anyone actually count the ‘minutes’ (remember the threat, if you do not forward to so many individuals within so many minutes....etc.)? From the time it arrives in your mail box, from the time you open your mail, how? Who keeps track, anyway?
The question that begs an answer is this: If these ‘forward>forward>forward’ e-mails were actually meaningless pursuits or of no consequence, why were they being generated? What makes them go around the world so many times? To answer the second question first, it is nothing but greed, the lure of easy money, of something for nothing. The answer to the first question, and the more relevant one, is: Obviously, for someone’s benefit. For, every time you open your address book and forward these e-mails, you are revealing to the world personal details (e-mail is personal contact information) of someone else, giving a go-bye to the confidentiality or the convenience of the person concerned, acting without his knowledge and permission. The person who receives your bulk mail may know only you. He may not have the faintest idea who the others included in your copied/forwarded mail might happen to be.
But then, would he care in the least? Not at all! He would forward your mail anyway, once again. It takes just a click of the mouse and costs virtually nothing; what does he got to lose, any way? May be someone will benefit, he’d hope. Never mind if he does not agree to the content of the message. Greed and fear help him to overcome such minor distractions. Before forwarding, neither would he take the trouble to physically delete the e-mail addresses carried over from earlier (unknown) senders. So the length of message keeps growing, carrying over all the gory details from former posts.
Can you estimate even roughly how many e-mail addresses one such ‘forwarded’ e-mail may contain if each of us has sent to ten others; every one of those ten having sent it to another ten, and so on, one particular mail having passed through ten hands and multiplied on an exponential basis? If you try out your maths, the answer would stagger you.
A point that often goes unappreciated is the fact that every message that one sends, carries with it an electronic signature. The digital signature is not readily visible, but it is not a great secret and is easily accessible to anyone who wishes to have it for his use. The signature can help the receiver of a message trace the electronic path right back to the source and identify the origin of every message generated. Your location and identity remain confidential no more, thanks to someone else’s generosity.
The e-mail fraud (I would call it just that) is, thus, nothing but the cheapest and the most convenient method used to get hold of totally free, genuine, current and active e-mail addresses. Obtaining such databases would, otherwise, cost the earth.
Spams have unfortunately become a part of our life. We know that computer-generated e-mails are one of the many methods used to spawn spam mails. But the chances are that e-mails created by computer programmes may not be real or active. These attempts are mostly shots in the dark. Therefore, the hit rate is very low, and the results uncertain. On the other hand, the e-mail addresses that you and I help to generate so freely for their benefit, because of their very nature, are worth much, much more. These are, therefore, much sought after by the senders of spam mails and the faceless mail-marketing guys.
There is a third group of the ‘forward’ club that I have not talked about yet. They forward to their friends matters of special interest like jokes, management lessons and things they like to share. I have nothing against them as such. On the contrary, I have in my collection some gems I received from my very considerate friends who shared them with me.
These messages are not harmful because the sender does not insist that you forward these messages to ten or twenty others in ten minutes (or God help you...!). These have little or no nuisance value, since these e-mails are mostly one-to-one, or one-to-many, and are confined to a close circle. Most of the time they do not multiply exponentially, neither do they land in the hands of total outsiders as do the other mails, or pass on personal information to all and sundry.
However, a few words of caution may be in order here. Firstly, before you forward an item that you like to share with someone you know, do show some respect for his time and patience. Rather than simply clicking on the ‘forward’ button, take a little trouble to go through the body of the e-mail. Delete the portions that are irrelevant (like the preceding personal messages, or the large number of e-mail addresses). Clean up the message, retain only the section that you wish him to read, before you hit the ‘forward’ button. This will not only help the receiver to find the intended part quickly, but keep the length of the message to the minimum, thus reducing the overall load on the system.
Secondly, take a second to add a personal note to the person you are forwarding the message to. It is courteous to do so. More importantly, it tells the receiver that the message is not the carrier of any virus. Computer virus gets transmitted through auto-generated messages (mostly, but not always, as attachments) that sometimes carry a bland, impersonal text message on the body of the e-mail, thus: ‘Hi, you’d like this’, ‘something interesting for you’, ‘good one, have a look’, or ‘Hi, this is great, very interesting.’ Some of the computer viruses can hijack your address book without your knowledge and send off e-mails with bland messages as described above. If such mails are opened, the computers of your friends who receive them would get infected. The chain thus continues to grow.
As a matter of routine precaution, I delete all messages (including attachments) that do not carry a personal note addressed to me. On receipt of these impersonal messages, (if I don’t delete them immediately) I invariably enquire with the sender if he/she had actually sent me the message. Till date, 99% of these messages have turned out to be false, virus generated/affected, hence promptly deleted.
Finally, size matters (no pun intended). If the file size is large (say, containing several pictures, pushing up the file size to over 3 MB), do your friend a favour. Think twice before you send him such messages. Large files clog up the mail box, slow down the system horrendously, and act as great nuisance on a busy day, especially if the download takes ages and one is pressed for time.
Therefore, before you blindly hit the ‘forward’ button, take a few seconds to think about the implication of your action.
As I finished writing this piece, I received another ‘forwarded’ e-mail titled ‘Health tips - the joy of good sex’. It had some saucy pictures of an attractive couple in various suggestive poses and stages of undress. At the tail-end of the series of pictures and the narratives recounting the benefits of good sex, the message said (I quote exactly as received): “Do not keep this message, it must disappear from you mailbox in 96 hours. Send 10 copies and see what happens in 4 days. This message must go around the world. She will visit you 4 days after you have received this message, but only if you circulate it. If you do not, then you will never have good sexual relations again for the rest of your life. You will be celibate and your genital organs will rotten and fall off.”
Read carefully through the above quote, and you cannot miss the several fallacies in the message. Yet, I received it because someone did act on it, did actually forward it to me without giving a thought about how ridiculous the message, the promise and the threat were. He forwarded it without a thought about how ridiculous the sender himself may appear by doing so, since he had taken the time and the trouble to forward to others such an idiotic item, obviously looking forward to the promised visit or hoping to avoid the implied threat.
Of course, I have no intention whatsoever to forward the message to anyone, to circulate it futher. If you need a copy of the message, you would have to ask me specifically, before I delete it. You can also e-mail me direct if you want to know if I happen to remain in one piece after the 96-hour deadline [the deadline has passed as I write this article :-)].
Incidentally, ever wondered how one would react to the message (especially the bits about the promised visit by the curvaceous female pictured in the message, and about the threat of losing a male organ) if the recipient happened to be a female of the species!
Originally written on Sunday, July 30, 2006

Sunday, May 19, 2013

Pre-payment, honour and bills of exchange

The terms honour and pre-payment were introduced to documentary credit operations for the very first time through UCP 600. The intended meaning of “pre-pay” appearing in article 12(b) has defied interpretation since its introduction and caused quite some confusion. A recent query on “pre-pay” and related issues came to the fore in the form of the following query on another forum. The query, presented in two parts, was as follows:
“Situation One
LC available with the confirming bank by acceptance; draft to be drawn on the confirming bank. Tenor of the draft: 120 days from the date of bill of lading. Additional condition: Despite the tenor of the draft being 120 days from the date of B/L, the confirming bank may discount the bill upon receipt of complying presentation at its counter and pay the beneficiary at sight. Discounting charge and confirming fee are on applicant's account.
Upon receipt of documents, confirming bank decided that the documents constituted a complying presentation. It discounted the bill as per credit stipulation and forwarded the documents to the issuing bank.
1.     Is the discounting function of the confirming bank equivalent to "honour" as defined in the UCP?
2.     If not, what other function remains pending at the counter of the confirming bank in order to term the transaction for having met the definition of "honour" (Article 2 of UCP 600)?
Situation Two:
LC available with the issuing bank by acceptance; draft to be drawn on the issuing bank. Tenor of the draft is 120 days from the date of bill of lading. Additional condition: Despite the tenor of the draft being 120 days from the date of the B/L, issuing bank may discount 60 per cent bill value upon receipt of complying presentation at their counter and payment made to the beneficiary at sight. Discounting charge and confirming fee are on applicant's account.
Upon receipt of documents, issuing bank decided that documents constituted a complying presentation. It discounted the bill for 60 per cent of face value as per credit stipulation.
1.     Is the discounting function of the issuing bank equivalent to the "honour" function defined in Article 2 of the UCP?
2.     If not, what other steps remain to be completed by the confirming bank in order to term the transaction as having complied with the definition of "honour"?”
In Article 2 of UCP 600 the term “honour” has been defined as follows:
a.   to pay at sight if the credit is available by sight payment.
b.  to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment.
c.   to accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.”
Important points to be noted are as follows:
1.     Under the UCP, for a transaction to be defined as “honour”, payment must be made only when it is due – “at sight”, or “at maturity” – not earlier.
2.     The operations of bills of exchange are governed by certain statutory enactments by the countries concerned. Reference may be made to the Bills of Exchange Act 1882, UK, the Negotiable Instruments Act 1881 (India), the Czech Bill of Exchange and Cheque Act No. 191/1950 (“BECA”), Negotiable Instruments Law of the People's Republic of China (1995, revised in 2004). Although these enactments are somewhat similar in their basic structure, they do differ in detail.
3.     The question has used the term “discount”. In normal banking parlance this term is used to describe an advance against usance bills that are not yet matured for payment, by a bank that is neither the drawee nor the acceptor of the usance draft that, by definition, accompanies usance bills. While on the subject, let me also say that “purchase” is the term used by banks to define an advance by them against demand bills only (not usance bills). Incidentally, discount or purchase is generally (but not always) with recourse, since few banks would like to advance funds leaving itself with no option to reclaim in case of default or non-realisation of the underlying asset.
Problem areas
There would have been no problem in answering the above questions had not the bank that (so-called) “discounted” the bills also been the drawee or the acceptor of the bills of exchange. It would then have been a simple case of a nominated bank advancing funds to the beneficiary (a risk exposure), pending reimbursement in accordance with UCP 600 Article 7(c).
But the issues that this question throws up are a bit more complex. Let me address the issues one at a time.
Issue One
The credits, under “additional condition”, state that the confirming bank or the issuing bank, as the case may be, may discount the bill (for full value or 60% of value, respectively) upon receipt of complying presentation at its counter and pay the beneficiary at sight.
This stipulation appears to be in line with Article 12(b) of UCP 600, which states that, “By nominating a bank to accept or incur a deferred payment undertaking, an issuing bank authorizes that nominated bank to pre-pay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank.” The main issue, however, is: by making this “additional condition” an integral part of the credit, is the issuing bank offering to underwrite the advance, it being a risk exposure of the (nominated) lending bank? Would the nominated bank be protected by the issuing bank if the funds cannot eventually be recovered from the beneficiary? Would the nominated bank take the implication of this “additional condition” into consideration while taking a credit decision – to discount or not to discount? If the answer to all these three questions is “no”, then of what use or relevance is this so called “authorization” that Article 12(b) speaks of?
Issue Two
The second is within the domain of the BoE Act, howsoever named by the country concerned. We are aware that the act of “acceptance”, once completed, is without recourse. Which makes it evident that the payment that consequently follows is inevitable, a natural corollary, and is also without recourse. Common sense tells me that the drawee/acceptor must pay when payment is due, or default in payment on maturity. The critical question here is, how is one to define payment to the beneficiary by the (nominated) accepting bank when it “discounts”? Is it an advance, to be repaid later by the receiver (beneficiary)? Is it in the nature of final payment/settlement (without recourse) by the accepting bank, effected before (earlier to) the original date of maturity of the bill? Is a drawee of a bill of exchange, its acceptor, permitted by the Act to discount its own acceptance? More importantly, are such payments permitted by the law of the land?
Issue Three
A section of Article 12(b) uses the expression “to pre-pay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank”. We know what “purchase” means. But this sub-article is referring to instruments payable not on demand but only at a future date. Should we, then, infer simply by association that “pre-pay” is synonymous with “discount”? That it does not imply final settlement earlier to the date of maturity? Either way, we have to go back to Issue One or Two for answers.
Issue Four
Let us assume “discount” or “pre-payment” to indicate an advance to the beneficiary, not partial or full settlement of dues originally payable on maturity. Then too we land ourselves in a peculiar situation. When the date of maturity date comes around, should the accepting bank recall the advance on the one hand, and pay the same amount once again to the beneficiary as per the original terms of acceptance, just so that the letters of the law, viz., “payment in due course” are complied with? If it does not do so, would it be exposed to claims from the beneficiary for non-payment on due date in accordance with the terms of its original acceptance?
This question may sound peculiar, or go against common sense. The provisions of the BoE Act of the country concerned could, possibly, serve as a guide. Let us first quote from and then examine a few of them.
(1)   BoE Act 1882, UK
Section 59: Payment in due course (Discharge of Bill)
Section 59.1: A bill is discharged by payment in due course by or on behalf of the drawee or acceptor.
“Payment in due course” means payment made at or after the maturity of the bill to the holder thereof in good faith and without notice that his title to the bill is defective.
(2)   Negotiable Instruments Law of the People's Republic of China (1995, Revised in 2004).
Article 58: If a payer makes the payment before the due date for draft payable on a fixed date or on a fixed date after the date of draft or on a fixed date after sight, the payer shall bear the responsibilities arising therefrom on his own.
Article 60: After the payer has paid the draft amount in full, the liabilities of all debts shall be relieved.
(3)   Bill of Exchange and Cheque Act No. 191/1950 (“BECA”) of Czechoslovakia.[iii]
Section 40:
(1) The holder of a bill of exchange cannot be compelled to receive payment before maturity. (2) The drawee who pays before maturity does so at his own risk. (3) Who pays at maturity is validly discharged, unless he has been guilty of fraud or gross negligence. He is bound to verify the regularity of the series of endorsements, but not the signature of the endorsers.
(4)   Negotiable Instruments Act 1881 (India)
Section 10. "Payment in due course"
“Payment in due course" means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof….
Three distinct points that emerge, which are as follows:
(1)   The acceptor is not obliged to pay before maturity.
(2)   The acceptor is validly discharged (only?) when he pays at maturity, defined as “payment in due course”.
(3)   Payment prior to the date of maturity is not specifically prohibited, but such payment is at the payer’s risk.
[Henceforth, wherever mentioned, “Bill of Exchange Act” will imply enactments of similar nature as adopted by the country concerned.]
Issue Five
Let us for a moment revert to the original the query and the question asked, “Is the discounting function of the confirming bank equivalent to "honour" as defined in the UCP?” Strictly speaking, the answer ought to be in the negative, for the reason that such payment (discount) was not “at maturity” (Article 2). But this gives rise to the dilemma posed in the next question, “If not, what other function remains pending at the counter of the confirming bank in order to term the transaction for having met the definition of "honour" (Article 2 of UCP 600)?” None, possibly, since settlement (in full) has already been effected. Only reimbursement would be awaited from the issuing bank as per Article 7(c). Having received payment – assuming, with mutual consent – the beneficiary should have no cause for action against the drawee.
Regulatory requirements
In addition to the provisions contained in the Bills of Exchange Act, a bank desiring to pre-pay may also have to comply with other country-specific statutory or regulatory requirements. In India, for example, the Reserve Bank of India, the central bank of the country, in its Master Circular[iv] on “Import of Goods and Services” stipulates as follows:
“Section C.2.: Interest on Import Bills
(ii) In case of pre-payment of usance import bills, remittances may be made only after reducing the proportionate interest for the unexpired portion of usance at the rate at which interest has been claimed or LIBOR of the currency in which the goods have been invoiced, whichever is applicable. Where interest is not separately claimed or expressly indicated, remittances may be allowed after deducting the proportionate interest for the unexpired portion of usance at the prevailing LIBOR of the currency of invoice.”
Article 12(b)
When we examine Article 12 UCP 600, we come across several flaws, of which we deal with only sub-article 12(b). The reasons why ICC ought to reword Article 12(b) are as follows:
a)     “By nominating a bank to accept or incur a deferred payment undertaking,…”: One cannot accept …a deferred payment undertaking; the word “accept” relates only to a usance bill of exchange and is well defined in the Bills of Exchange Act.
b)    The words “or purchase” should be deleted from the section “…authorizes that nominated bank to pre-pay or purchase a draft accepted or…”. The term “purchase” applies only to instruments payable on demand, definitely not to acceptance drafts or to deferred payment undertakings.
c)     “…authorizes that nominated bank to pre-pay or purchase a draft accepted or…”: The term “pre-pay” should be replaced with “discount”. Until and unless it is clearly defined by the UCP, pre-pay is as yet an ambiguous term, hence best avoided.
Neither Article 12(b) nor any other article of the UCP provides for purchase or pre-payment by the issuing bank. A casual reading of Article 12(b) will show that pre-payment applies only to a nominated bank; not by any stretch of imagination to the issuing bank. Therefore, the incidence of an issuing bank discounting (as distinct from pre-paying) its own obligation should not arise.
If we accept the above argument, where an LC permits or authorises pre-payment, such pre-payment may possibly be made by a bank that is not the drawee bank. Even so, the terms of the LC cannot be above the law of the land. A few experts have introduced matters of pre-payment “with recourse” or “without recourse”. Such arguments lead one to wonder how a nominated drawee bank that has accepted drafts drawn on it can possibly effect pre-payment with recourse.
The ICC has excluded, with good reason, instances of “pre-payment” (payment before maturity) from its definition of “honour”. The term “pre-payment”, which implies payment by the drawee/acceptor prior to maturity of the underlier, appears to be out of the purview of the Bills of Exchange Act, being a matter of mutual agreement and consent. Only the applicable law or judicial pronouncements can tell us whether such pre-payments, i.e. payment in advance of maturity date, could be deemed as equivalent to “payment in due course” in its legal implication, or relieve the drawee/acceptor of all liabilities and debts.
Given the variation in the regulatory framework and the provisions of the Bills of Exchange Act (howsoever named) from one country to another, generalisation could be risky. The interpretation and inference would necessarily have to be country-specific. Therefore “pre-payments”, especially where transactions include bills of exchange, should be handled with due care and circumspection.

[i] Published in Trade & Finance, (under The State Administration of Foreign Exchange), March 2013, China.
[iv] Import of Goods and Services, RBI/2012-13/13 Reserve Bank of India Master Circular No.13 /2012-13 dated July 02, 2012.