Certified Regulatory Compliance Manager (CRCM) — Question 205

Issuing Bank, a foreign bank, maintains an account with First National Bank, a U.S. bank. Issuing Bank issues a letter of credit in favor of ABC, Inc., a U.S. corporation. The letter of credit contains a boycott provision. The letter of credit provides that any negotiating bank may obtain reimbursement from Issuing Bank's account at First National Bank by certifying that the conditions of the letter of credit have been met. Issuing Bank does not send First National Bank a copy of the letter of credit. May First National Bank reimburse negotiating banks for the letter of credit when it contains a boycott provision?

Answer options

• A. Yes. First National Bank did not know of it, so it may reimburse a negotiating bank.
• B. No. First National Bank is under a duty to determine the underlying conditions of any letter of credit it pays.
• C. No. First National Bank should request a copy of the letter of credit at the time of its payment and then refuse to pay once it is aware of the provision.
• D. Yes, provided ABC Company is not a participant in the boycott.

Correct answer: A

Explanation

The correct answer is A because First National Bank is not aware of the boycott provision and is thus permitted to reimburse the negotiating bank. Option B is incorrect as it misinterprets the bank's obligations without knowledge of the provision. Option C incorrectly assumes that First National Bank must have the letter of credit before making a payment, while Option D introduces conditions that do not affect the bank's ability to reimburse without prior knowledge of the clause.