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The International Credit Transfer, 1992

Recent years have seen considerable growth in cross-border and overseas banking activities. On the one hand, banks are increasingly seeking to ascertain subsidiaries, or atleast offices, in countries apart from their own. On the opposite hand, the commercial activities of banks, specifically funds transfers, have expanded tremendously. This growth has occurred in terms of both the quantity of individual payments and also the total amounts "moved" from one entity to a different entity. The United Nations Commission on International Trade Law (UNICITRAL) was formed in 1966 by the United Nation's General Assembly.

However, the Model law on International Credit Transfer was adopted by the United Nations Commission on International Trade Law (UNICITRAL) in 1992. The Model law was made as a response to a major change in the means by which funds were being transferred internationally. The change mainly involved two elements, that is, the switch from paper based payment orders (through the collection of cheques and other similar instruments) to more use of payment orders sent through electronic means and the switch from generalized use of debit transfers to generalized use of credit transfers.

The Model law is the most useful document of modern times as it offers opportunity to unify the law of credit transfers by adopting a text that is drafted in order to meet the needs of modern funds transfer techniques. The 1992 document principally revolves around the rules governing the credit transfer done internationally and all the payment undertakings by the banks and insurance companies to back up the obligations of their customers arising under cross-border transactions. The underlying purpose of these instruments is solely to improve payment systems and thereby facilitate trade between two or more states.

Prior To The 1992 Document:

Until the mid-1970s, a person who wished to transfer funds internationally to waive off his/her obligation or to provide funds to someone in the foreign country had limited options. Most of these ways involved paper based transactions like cheques, bills of exchange and other similar instruments. Furthermore, collection of international bank draft was also one of the most used ways to transfer funds overseas. However, it was soon realized that such transmission was time consuming, expensive and slow. Therefore, need for introduction of other methods of payment was felt internationally and as a result appropriate steps were taken.

In mid 1970s, introduction of telex transfers and computer-to-computer interbank telecommunication came into picture and it proved to be cost efficient, speedy and more accurate. It overcame all the shortcomings of the earlier used methods. Both of these methods were also preferred because in these methods it is the originator of the fund transfer who initiates the banking procedures by issuing a payment order to its own bank to debit its account and then to credit the account of the beneficiary. Hence, the use of other methods of funds transfer decreased drastically.

However, the situation began to change when in 1975 the first international inter-bank computer-to-computer message system came into service. Simultaneously, electronic funds transfer system for businesses and for consumer use started to appear in a number of different countries.

Since, the rules to be applied on electronic funds transfer were not uniform everywhere, UNICITRAL started doing efforts in the direction of unification of laws in order to make uniform rules for all the countries to follow since there were a lot of differences in the legal rules governing such international transactions. Hence, it is often said that Model law arose out of the development of electronic credit transfer systems. The Model law is wider is not limited to banks only and hence, is wider n scope. This is so because in many countries non-banks operate a credit transfer services which are directly competitive with the services offered by the banks.

Credit Transfer:

The UNICITRAL Model law by its own terms only applies to credit transfers and not debit transfers. Debit transfers do not form part of the Model law even after they are made electronically. One of the critical factors with regards to the application of the UNICITRAL Model law is that the credit transfer must be international in nature. The term credit transfer is defined as the series of operations, beginning with the originator's payment order, made for the purpose of placing funds at the disposal of a beneficiary.

It includes any payment order initiated either by the originator's bank or any intermediary bank with an intention to carry out the said payment order. Credit transfers are basically the fund transfers developed by the paying party, who by issuing a payment order procures the push of funds to the beneficiary through the banking system. Credit transfer may be made by individuals for personal reasons or by business houses for commercial reasons.

Many credit transfers require the services of the originator's bank and the beneficiary's bank. However, it is possible that sometimes the transactions demand the services of not only these two banks but also the services of an intermediary bank. The major difference between debit and credit transfer is that in the latter case it is the beneficiary who initiates the fund transfer by the paying party.

The UNICITRAL Model law on The International Credit Transfers, 1992 is often considered as the most significant instrument on the subject of international credit transfers as it influences the development of national practices and laws and rules governing international credit transfers. However, it is in public knowledge that the growth of credit transfers systems on international level brought the need of UNICITRAL Model law.

The criterion set out in Model law to know whether a credit transfer is international and deals with cross-border transactions consequently subject to the Model Law, is whether any sending bank and any receiving bank in the credit transfer are in different States or not. Once it is established that the sending and the receiving bank are in different States, every aspect of the credit transfer falls within the scope of the Model Law. The credit transfer is said to be completed when the beneficiary bank accepts the payment order issued by the payer's bank for the benefit of the beneficiary.

Further, the term acceptance is broadly defined in the Model law but it may form part of different definitions when the acceptance is made not by the beneficiary bank but by the receiving bank. But the Model law is silent on the effect of the payment of funds by the beneficiary's bank to the beneficiary being 'final and not conditional upon the funds being transferred by the sender.

Model law is not mandatory a mandatory law. One of the key provisions of Model law is that the concept of party autonomy applies here too. The parties under the Model law are free to negotiate their rights and obligations among themselves by agreement. If the agreement is silent on such issues then the law of state of the receiving bank shall apply. However, this provision (Article Y) was deleted from the main text of the Model law at the 1992 UNCITRAL session but it is there as a footnote for the states that wish to adopt this.

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