First National Bank, a U.S. bank, is contacted by Manufacturing Company, Inc., a U.S. company, to finance its transaction with Country Z, a boycotting country.
Payment will be made through a letter of credit in favor of Manufacturing Company at its U.S. address. First National Bank knows that the letter of credit will contain restrictive boycott conditions that would prevent the bank from implementing it. First National Bank suggests to Manufacturing Company, Inc., that it set up a shell corporation in Country Y, a nonboycotting country, and have the shell corporation be the beneficiary of the letter of credit. Does First National Bank have any problem with this transaction?
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A. B. C. D.B
The situation described in this question relates to the requirements of the U.S. Department of Commerce's Export Administration Regulations (EAR), which prohibit U.S. companies from participating in boycotts of certain countries that are not sanctioned by the U.S. government. Specifically, the EAR prohibits U.S. companies from refusing to do business with or discriminating against individuals or entities based on their nationality, country of residence, or other related factors.
In this scenario, Manufacturing Company, Inc. is seeking to conduct a transaction with Country Z, which is subject to a boycott that the U.S. government does not sanction. The transaction is to be financed through a letter of credit issued by First National Bank, which the bank knows will contain restrictive boycott conditions that it cannot implement without violating the EAR.
To address this issue, First National Bank suggests that Manufacturing Company, Inc. set up a shell corporation in a non-boycotting country, Country Y, and have the shell corporation be the beneficiary of the letter of credit. The question is whether this approach creates any problems for First National Bank.
Answer A is incorrect because the fact that the beneficiary of the letter of credit is not a U.S. company does not necessarily mean that the transaction is not subject to the EAR. The EAR also applies to U.S. persons, which includes U.S. banks like First National Bank, regardless of the nationality of the other parties involved.
Answer B is correct because setting up a shell corporation in a non-boycotting country to evade the restrictive boycott conditions of the letter of credit would violate the EAR. First National Bank is liable for facilitating this violation, as it is aware of the intent to evade the regulation and is actively advising on the structuring of the transaction.
Answer C is incorrect because First National Bank's knowledge of the intent to evade the regulation and its active participation in structuring the transaction would make it liable under the EAR, regardless of whether Manufacturing Company, Inc. actually effected the transaction.
Answer D is incorrect because having Manufacturing Company, Inc. sign a statement accepting full responsibility for the establishment of the shell corporation would not absolve First National Bank of its own liability under the EAR. The bank's involvement in the transaction is what creates the potential violation of the regulation, and a statement of responsibility from Manufacturing Company, Inc. would not change that.
In summary, the correct answer is B: Yes. The transaction is set up to evade the regulation and First National Bank is liable.