Business

BoU Speaks Out On LCI Bike Scandal

Below is the verbatim statement.

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Bank of Uganda has noted with concern that some media reports relating to the ongoing proceedings of the Parliamentary Committee on Public Service and Local Government have created the impression that through omission or commission, more about we did not fully discharge our duties and obligations in the issuance of a Letter of Credit (LC) for the supply of 70, information pills 000 bicycles to Local Councils, leading to loss of public funds.

In line with our core values of transparency and public accountability, we wish to inform the public of the events and processes relating to the issuance and general management of the said bicycle LC.

Issuance of the LC for the Supply of 70,000 Bicycles for Local Council officials

On December 23, 2010, the Ministry of Local Government (MoLG) requested Bank of Uganda to open a Letter of Credit (LC) worth US$ 4,298,636.46 (US Dollars four million two hundred ninety eight thousand six hundred thirty six) in favour of M/S Amman Industrial Tools and Equipment Ltd. for the supply of 70,000 bicycles. The terms of the LC were as follows:

? Forty percent (40%) of the value of the LC was to be paid to the supplier on presentation of documents confirming shipment of the goods. Sixty percent (60%) would be remitted on presentation of an Original Acceptance Certificate issued by MoLG and an Original Delivery Note signed by the authorised agent of the Ministry.

? The Permanent Secretary of MoLG was the Consignee (i.e. to whom the goods in the LC would be sent).

? Citibank New York was appointed as the confirming/advising/negotiating/transferring bank.

? Partial shipment was not allowed.

? The port of loading was indicated as any port in China.

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? The bicycles were to be delivered to named parishes and village councils in Uganda.

? The LC was transferable (i.e. the beneficiary could, on the basis of the original LC, instruct Citibank to open another LC in favour of another party)

Four days after receiving MoLG’s request to open an LC as per the above terms and conditions, Bank of Uganda, on December 27, 2010, received another request from MoLG to make the following amendments to the initial (above) terms of the LC:

? Move the advising/negotiating/transferring roles from Citibank, New York to Stanbic Bank (U) Ltd. Citibank would however remain the confirming bank.

? Waive the condition disallowing partial shipment of goods to allow for partial shipment.

? Change the port of loading from China to India.

? Change the Consignee from the Permanent Secretary, Ministry of Local Government to M/S Amman Industrial Tools and Equipment, the supplier of bicycles.

BoU effected the above amendments apart from the one changing the Consignee from the Permanent Secretary MoLG (the purchaser) to M/S Amman Industrial Tools and Equipment (the supplier). MoLG therefore remained the consignee. In our view, we found it unusual for the bicycles to be consigned to the supplier (Amman), instead of the buyer (MoLG), as Amman would effectively retain the title to the items, while at the same time being paid for the same items.

On February 28, 2011, BoU received documents from the supplier, Amman Industrial Tools and Equipment, through Stanbic Bank (U) Ltd, claiming payment of USD 1,842,000.00, following the shipment of bicycles. In line with Article 14 (a) of UCP600 (Uniform Customs Practice & Documentary Credits, Version 600), BoU examined the documents and noted several discrepancies. After establishing that the documents were not in strict compliance with the terms of the Letter of Credit and in accordance with Article 16 (b) of UCP600, BoU on March 2, 2011 advised the Ministry of Local Government of the discrepancies and sought guidance on whether payment for a bill amounting to USD 1,842,000.00 should be processed.

On March 3, 2011, the Permanent Secretary, Ministry of Local Government responded confirming the delivery of goods in the agreed quantity and quality and waiving all discrepancies raised in BoU’s letter of March 2, 2011. The Ministry further requested BoU to pay 40% of the Letter of Credit value amounting to USD 1,719,454.58. Basing on the Permanent Secretary’s letter that waived the discrepancies advised by BoU and confirmed delivery of the bicycles in the right quantity and quality, BoU proceeded to request Citibank New York to honour a claim for a bill amounting to USD 1,719,454.58 from Stanbic Bank (U) Ltd, which was the negotiating and claiming bank for M/S Amman Industrial Tools and Equipment, the supplier. 3

On April 28, 2011 (nearly two months after confirming delivery of bicycles), the Permanent Secretary, Ministry of Local Government wrote to BoU requesting for an investigation into the delayed delivery of 70,000 (seventy thousand) bicycles! As the Ministry had earlier waived all discrepancies pointed out by BoU and confirmed the delivery of bicycles vide letter dated March 3 2011, the Bank advised the Ministry to contact the supplier directly to ascertain the existence and location of the goods. The Bank also advised the Ministry to consider enforcing its rights under the performance guarantee submitted to them by the supplier. It should be noted that under Article 5 of UCP600, banks only deal with documents, and not goods to which the documents relate.

From the foregoing, the following should be noted:

? To protect and advance public interest, Bank of Uganda declined to change the consignee from the Permanent Secretary, MoLG (the purchaser) to M/S Amman Industrial Tools and Equipment (the supplier). This was in spite of MoLG’s insistence that the change be effected as the supplier was required to deliver the bicycles to the different named parishes and villages.

? Bank of Uganda performed its role of scrutinizing the documents for compliance with the LC terms and conditions, and duly advised MoLG of the discrepancies that had been detected in the documentation.

? The Permanent Secretary MoLG confirmed the delivery of bicycles in the right quantity and quality, and cleared BoU to pay in spite of the discrepancies.

? Bank of Uganda did not, and indeed banks that issue LCs, do not, should not and ought not to play a role in the selection and vetting of suppliers. It was the responsibility of the MoLG to vet and do a thorough and comprehensive background check on Amman, or any other potential supplier. To the best of our knowledge, that is not a shared responsibility with one’s bankers.

? As earlier advised, MoLG should consider enforcing its rights under the performance guarantee.

? An LC guarantees payment to a supplier upon submission of the required documentation in line with the requirements and conditions spelt out in UCP600. In international trade finance, all banks that open LCs are bound by UCP600, and a bank’s role and obligations under UCP600 cannot be waived by domestic considerations. It is international best practice, and indeed, MoLG requested BoU to open the LC under UCP600.

? BoU charges a commission on the LCs it opens. During the committee hearings, a senior MoLG official accused BOU of not vetting the bicycle supplier and yet BoU had been paid nearly UGX 100 in commission. We wish to make it clear that the LC commission

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is not meant to facilitate BoU to vet Government suppliers. There is a Memorandum of Understanding between BoU and Government (Ministry of Finance), which among others covers LC commissions.

? There were also some reports stating that BoU was at fault for releasing funds without an audit release from the Accountant General. Under UCP600, an issuing or confirming bank is obliged to pay once the documentation submitted by the advising/negotiating bank is in order. It is completely untenable for a bank to argue that it cannot pay because an audit release has not been issued. Furthermore, in the instant case, an audit release was not one of the documents that were required before payment.

In conclusion, we wish to reiterate that we diligently carried out our duties and obligations, in line with our procedures and the UCP600. Vetting competence of Government suppliers is outside the BOU mandate. We therefore take no responsibility for the apparent delivery and then actual non-delivery of the bicycles.

Management

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