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 scenario presented involves a transaction between Manufacturing Company, Inc., a U.S. company, and Country Z, a boycotting country. The payment for the transaction will be made through a letter of credit in favor of Manufacturing Company at its U.S. address. However, the letter of credit will contain restrictive boycott conditions that would prevent First National Bank, a U.S. bank, from implementing it. In order to avoid this issue, First National Bank suggests that Manufacturing Company, Inc., set up a shell corporation in Country Y, a nonboycotting country, and have the shell corporation be the beneficiary of the letter of credit.
Given this situation, we must consider whether First National Bank has any problems with the proposed transaction. Let us evaluate each answer choice in turn:
A. No. The transaction is now not subject to Department of Commerce regulations because the beneficiary is not a U.S. company. This answer choice is incorrect. The fact that the shell corporation is located in a nonboycotting country does not necessarily exempt the transaction from Department of Commerce regulations. U.S. companies are subject to the U.S. anti-boycott regulations regardless of whether the beneficiary of the transaction is located in the United States or elsewhere.
B. Yes. The transaction is set up to evade the regulation and First National Bank is liable. This answer choice is the most accurate. The proposed transaction appears to be an attempt to circumvent U.S. anti-boycott regulations by using a shell corporation as an intermediary. First National Bank could potentially be held liable for assisting in this evasion, as it is aware that the letter of credit will contain restrictive boycott conditions.
C. No. The transaction is set up to evade the regulation, but First National Bank is not liable because Manufacturing Company, Inc., actually effected the transaction. This answer choice is incorrect. First National Bank's involvement in the transaction makes it a potential party to any violation of U.S. anti-boycott regulations. Even if Manufacturing Company, Inc. ultimately effected the transaction, First National Bank could still be held liable for its role in facilitating the transaction.
D. No. First National should have Manufacturing Company, Inc., sign a statement accepting full responsibility for the establishment of the shell corporation. This answer choice is also incorrect. While having Manufacturing Company, Inc. sign a statement accepting responsibility for the shell corporation may provide some protection for First National Bank, it does not absolve the bank of its obligations under U.S. anti-boycott regulations. The proposed transaction still appears to be an attempt to circumvent these regulations, and First National Bank could still be held liable for its involvement.
In conclusion, the most accurate answer is B. The proposed transaction appears to be an attempt to circumvent U.S. anti-boycott regulations, and First National Bank could potentially be held liable for its involvement.