TNAG-2029-FCO40-2891-Hong-Kong-freezing-of-Kuwaiti-and-Iraqi-assets-1990 — Page 43

UNCLASSIFIED

FM WASHINGTON

TO PRIORITY FCO

TELNO 2938

OF 05192OZ DECEMBER 90

UNCLASSIFIED

HKB 020/26

виссала

MA. 5/12

(204

165446

MDLIAN 2661

AND TO PRIORITY OTTER, ACTOR

r

FOR VINALL (PEP, DTI), MEADWAY (OT2, DTI), MISS RICHARDSON (SOLS, DTI), SPELLER (ECD (E), FCO) AND MISS BURY (LEGAL ADVISERS, FCO)

IRAQ/KUWAIT: PERFORMANCE BONDS

1. WE DISCUSSED THE QUESTIONS IN VINALL'S LETTER TO HOSKER OF 22 NOVEMBER WITH A TEAM FROM TREASURY'S OFFICE OF FOREIGN ASSETS CONTROL (OFAC) LED BY ITS DIRECTOR, NEWCOMB.

2. NEWCOMB SAID THAT, WHEN A CALL WAS MADE IN RESPECT OF A BOND, THE BANK CONCERNED COULD PAY THE REQUISITE AMOUNT INTO A BLOCKED ACCOUNT, OR THE COMPANY CONCERNED COULD APPLY TO OFAC FOR A LICENCE TO OPEN A BLOCKED ACCOUNT ON ITS OWN BOOKS. THIS LATTER COURSE MEANT THE CREATION OF A CONTINGENT LIABILITY FOR THE COMPANY, BUT HELPED IT TO AVOID CASH FLOW PROBLEMS. NEITHER COURSE OF ACTION REMOVED THE UNDERLYING OBLIGATION UNDER US LAW TO PAY THE BOND: THE BOND WAS NOT REGARDED AS FRUSTRATED, OR CALLS AS FRAUDULENT. HE AND HIS CHIEF COUNSEL BOTH SAID THAT THERE WAS NO DEFENCE AVAILABLE TO BANKS UNDER GENERAL US LAW IN RESPONSE TO ANY CALL MADE DURING THE SANCTIONS PERIOD.

3.

ASKED WHETHER IT WAS LIKELY THAT THE US AUTHORITIES WOULD ALLOW PAYMENTS UNDER BONDS TO BE MADE AFTER THE LIFTING OF SANCTIONS, NEWCOMB SAID THAT THIS WAS QUOTE A NASTY ISSUE UNQUOTE, BUT THAT IT WAS QUOTE TOMORROW'S PROBLEM UNQUOTE. NOBODY KNEW HOW MATTERS WOULD DEVELOP, AND THE QUESTION DID NOT YET NEED TO BE ADDRESSED. ALTHOUGH US BANKS WERE NOT ALTOGETHER HAPPY WITH OFAC'S ARRANGEMENTS FOR PERFORMANCE BONDS AND LETTERS OF CREDIT FOR THE DURATION OF SANCTIONS, THIS WAS PRIMARILY BECAUSE THE BANKS CARRIED THE RISK OF US COMPANIES HAVING GONE BANKRUPT BY THE TIME SANCTIONS WERE LIFTED AND BONDS WERE CALLED. US BANKS AND COMPANIES STARTED FROM THE POSITION OF NOT WANTING TO PAY BONDS: HOWEVER, THEY WANTED TO REVIEW THE QUESTION OF BONDS QUOTE IN THE CONTEXT OF THE UNDERLYING CONTRACT UNQUOTE. THERE WAS NO IMMEDIATE PRESSURE FOR THE ADMINISTRATION SIMPLY TO PREVENT ANY FUTURE PAYMENT OF BONDS. 4. NEWCOMB ADDED THAT HE DID NOT KNOW WHETHER THE BANKS WOULD

PAGE

1

UNCLASSIFIED