Scenario: An institutional resident in Vietnam intends to open an at sight L/C at a CPTPP bank (i.e., banks which are located in a country being a signatory to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership) (Offshore L/C Issuer) to import equipment into Vietnam. Can the Offshore L/C Issuer issue the Offshore L/C to the Vietnamese client under Vietnamese laws?
Short answer: Yes, subject to our discussions at 1.2 and 1.3 below.
1.1. The Offshore L/C Issuer should be able to issue a L/C to a resident in Vietnam if the Offshore L/C Issuer is not regarded as regularly conducting banking business in Vietnam (see 1.2). This is because:
1.1.1. Under Article 75.1(a) of the Commercial Law 2005, unless otherwise provided by the laws or the international treaties to which Vietnam is a member, business entities have the right to provide services to residents of Vietnam for use within the territory of Vietnam. Therefore, one can argue that except where the provision of such service is clearly prohibited by the law or the international treaty entered into by Vietnam, a foreign entity (which should include the Offshore L/C Issuer) can provide services to a resident in Vietnam; and
1.1.2. The Offshore L/C Issuer should be permitted to provide the cross border L/C services under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) to which both Vietnam and Japan are members. Specifically,
(a) Article 11.6(2) of the CPTPP provides that each Party (e.g., Vietnam) shall permit persons located in its territory (e.g., Vietnamese client) to purchase financial services (e.g., L/C services) from cross-border financial service suppliers of another Party located in the territory of a Party other than the permitting Party (e.g., the Offshore L/C Issuer). The only exception under Article 11.6(2) of the CPTPP is that the cross-border financial service supplier is not allowed to “do business” or “solicit” customers in Vietnam;
(b) Under Article 11.10(2) and Section B of Annex III of Vietnam’s schedule, which specifies Vietnam’s non-conforming measures to Article 11.6(2) above, Vietnam does not list out any measure that prohibiting an offshore bank to provide L/C services to Vietnamese customers;
(c) Though Article 11.6(3) of the CPTPP provides that a Party may require the registration or authorisation of cross-border financial service suppliers of another Party and of financial instruments, Vietnamese laws currently do not expressly impose a registration or authorisation requirement on an offshore L/C. Details are explained below:
(i) Under Circular 12/2022 of the State Bank of Vietnam (SBV) dated 30 September 2022 (Circular 12/2022), mid-long term foreign loans are subject to the registration with the SBV. Though Article 3.1 of Circular 12/2022 lists out certain types of foreign loans (i.e. loan agreements, deferred payment contracts for import goods, lending entrustment contracts, contracts for financial leasing or issuing debt instrument on the international market), these do not specifically include offshore L/C. Therefore, arguably, the registration requirement of Circular 12/2022 should not apply to the issuance of an offshore L/C; and
(ii) We understand that in practice, certain offshore banks have also granted bank guarantees to residents in Vietnam (which is quite similar to L/C) to guarantee their repayment of foreign loans but such bank guarantees were not registered with the SBV independently. Instead, these guarantees were recorded in the foreign loan registration certificate issued by the SBV as a security of the foreign loan only.
(d) Article 10.12 and 11.2(2)(c) of the CPTPP further provides that each Party shall permit all transfers and payments that relate to the cross-border supply of services (including cross border financial services) to be made freely and without delay into and out of its territory.
Requirement to obtain licence to conduct regular banking services in Vietnam
1.2. If the Offshore L/C Issuer regularly provides banking services including L/C services to customers in Vietnam, then there is a risk that the SBV may prohibit the Offshore L/C Issuer from issuing the offshore L/C since the Offshore L/C Issuer is not licensed to provide banking activities in Vietnam. This is because:
1.2.1. Under Article 8 of the Law on Credit Institution 2010, only organisations which have been granted a license by the SBV can conduct the banking activities in Vietnam;
1.2.2. Under Article 4.12, 4.14 and 4.15 of the Law on Credit Institution 2010, banking operation means conducting or providing one or more of the following services on a regular basis (thường xuyên): receiving deposits, extending credit, and provision of payment services via accounts. L/C can be classified as extending credit or provision of payment services via accounts; and
1.2.3. Article 4.21 of the Enterprise Law 2020 provides that “doing business” (kinh doanh) means the continuous conduct (thực hiện liên tục) of one, several or all of the stages of the investment process, from production to sale of products or provision of services in the market for profits.
1.3. Despite there is a reasonable argument that an offshore L/C is not a foreign loan (see 1.1.2(c)), there remains risk that an offshore L/C is interpreted as a foreign loan and is subject to the requirement of Circular 12/2022 (including the need to register with the SBV if L/C is a mid-long term credit extension). This is because:
1.3.1. the definition of “foreign loan” under Circular 12/2022 is quite broad (i.e. “all types of loans” that are granted under the form of loan agreements, deferred payment contracts for import goods, lending entrustment contracts, contracts for financial leasing or issuing debt instrument on the international market); and
1.3.2. there is no specific provisions of Vietnamese law governing the issuance of L/C by an offshore bank.
Accordingly, the remitting bank may be reluctant to allow the Vietnamese client to remit money offshore to repay to the Offshore L/C Issuer without a specific guidance from the SBV.
This post is written by Nguyen Thu Giang and edited by Hoang Thi Thanh Thuy.