AIME USA LEGAL:
helping navigate compliance issues you didn't even know you had

  • Multiple Compliance Regimes
  • Inadequate Compliance Implementation
  • Partner Compliance
  • Money Laundering

01. PPE PURCHASE PROCESS

What is PPE?

PPE is an acronym that you've likely heard a lot in the past few weeks, particularly in terms of shortages for medical professionals. It stands for personal protective equipment, and it's one crucial way to both stop the spread of COVID-19 and other viruses and to safeguard healthcare workers, including doctors, nurses, and other caregivers, who are currently on the frontlines of the global pandemic.

02. Forms

LETTER OF INTENT (LOI)

A Letter of Intent (LOI) is a document that declares the preliminary commitment of one party to engage in business with another. This document may be used in medium to major business transactions where the chief terms of a prospective deal are outlined. While an LOI may be similar in content to term sheets, one major difference is that LOIs are presented in letter format while term sheets are listicles in nature.

Ideally, LOIs are used when two parties are initially brought together to work through major aspects of a deal before the finer points of a transaction are resolved. As a result, they typically discuss potential points of deals that have yet to be cemented. However, they are almost universally intended to be non-binding. LOIs often include provisions stating that a deal may go through only if financing has been secured by one or both parties, and/or that a deal may cease to continue if specific documentation is not executed by set dates.  

While LOIs may include Non-Circumvention Non-Disclosure Agreements (NCNDA), which contractually stipulate the components of a deal both parties agree to keep confidential, and which details may be shared publicly, AIME’s counsel strongly suggests against the denaturization of this contract.  

LOIs are deemed controversial under law, being viewed ambiguously as both binding and non-binding. In  Corbin on Contracts, a highly respected 14-volume law book updated twice yearly, the late Arthur Corbin commented on a letter of intent in the following terms: "…a letter of intent is not a useless document, but it is not, in principle, a contract except perhaps a contract to continue bargaining in good faith." Based on Merriam-Webster's dictionary definition, the term evidently arose in the context of government purchases in times of war when time was insufficient for executing contracts. The ambiguity inherent in the concept continues to be litigated today.  

With the previous paragraph in mind, AIME’s counsel may suggest that the chief utility of Letters of Intent appears to be the following:
1) to obtain a preliminary agreement on a matter before full details are worked out;
2) to establish confidentiality of elements being negotiated; and
3) to agree on how negotiations shall proceed.  

The general outlines of the deal may be included in the form of intentions, but are not binding until a Sales and Purchase Agreement (SPA) is negotiated. Thus, LOIs have psychological value in somewhat committing both parties preemptively; in other words, an agreement has been reached in principle. If made public, a letter of intent also serves as a signal to other interested or potential competing or hostile parties that an agreement has been reached. Signers of LOIs, however, continue occasionally to back out of deals, which may then lead to litigation. Courts or arbitrators are then required to settle which parts of LOIs are and are not binding.

PROOF OF FUNDS (POF)

AIME frequently receives several common questions from would-be purchasers. These questions include:
What is a POF letter?
Where do I get a POF letter?
Does my lawyer have to draft the POF letter for me?
What information does a POF letter contain?
Does a POF really guarantee the money is there?
 
Proof of Funds (POF) refers to  a document or documents that demonstrate that a potential buyer has the ability and funds available for a specific transaction. POF letters usually come in the form of a bank, security, or custody statement. The purpose of the POF document is to ensure that the funds needed to fully execute the transaction are accessible and legitimate.  

The fact is, if you are representing the buyer, you will be responsible for procuring the POF letter, while if you are representing the seller, you will be requesting the POF letter. Both scenarios entail a clear understanding of what parts comprise a POF letter, what information must be present, the wording used, and the overall design. Regardless of compliance of the above, the recipient of the POF must verify the document for legitimacy.  

AIME is governed by the rules and regulations set by our governing body as well as state and federal law alike. As such, all recipients of a POF letter must carry out the necessary checks to establish the source of funds being utilized towards a purchase. In some cases, recipients may even have to require additional information through a Know Your Customer (KYC). If a tentative buyer fails to provide POF documentation, then the transaction just simply cannot proceed. In fact, if the transaction is suspected to have been a fraudulent attempt, action will be taken towards reporting the appropriate parties.  

When providing a POF document, there is certain information that is required to be included therein. The following are some of the most common pieces of information that will need to be disclosed on a POF document:  
1) Bank's name and address: must be a large, top-tier, recognizable bank with multiple branches in the country
2) Official bank statement: verifiable by checking address online and calling bank switchboard number requesting to speak to person that executed the letter
3) Balance of funds in the checking and/or savings accounts: if funds unavailable, statement must indicate that buyer has capacity to cover an amount over the total costs contained in the Sales and Purchase Agreement (SPA)
4) Balance of total funds: may not be necessary if other information suffices
5) Signature of authorized bank personnel: readable name and position of bank official, must be verified  

If the funds you plan to use for the purchase are spread across multiple accounts or originate from various sources, a POF will be needed for all of them. Ideally, the buyer may move all funding sources into one account such as to issue one POF only once. Let it be understood that if the buyer’s source is legitimate, it is quite feasible to procure a POF letter within one or two business days from most banks. It is imperative that the POF document be kept secure at all times following its procurement since financial fraudsters often request POF letters to ascertain their concentration of efforts on an objective with significant financial worth. Therefore, it is important to ensure that POF letters are only provided to thoroughly vetted sellers.  

Lastly, lead attorneys from leading law firms may, at times, issue a variation of a POF letter. This may be issued on their law firm’s letterhead and contain all pertinent information from the issuing attorney as the seeing body. It is important to understand that this letter often stems from information the attorney was privy to as direct counsel to their client, the buyer, and that said counsel is not in charge of their client’s finances. A disclaimer often seen on law firms’ POF letters is one that states that counsel, in their capacity of legal representation to their client, have been shown sufficient documentation to attest to the presence of the specified amount of dollars in the client’s bank account but that counsel cannot guarantee the presence of such beyond the date of issuance of the POF letter.

BANK COMFORT LETTER (BCL)

A Bank Comfort Letter (BCL), sometimes referred to as an MT-799, is a document issued by the bank for its client, the buyer, to a seller in order to guarantee the seller of the financial capability and legality of the buyer in maintaining a stable trade. It is essential to note that the BCL does not declare payment, but rather assures the seller of the consistency of the buyer to fulfill their promise in support of a specific transaction. Some BCLs may be accompanied by a signed purchase order or a Sales and Purchase Agreement (SPA).  

A comfort letter should be shown in a manner such that no unplanned legal formalities or unimportant risks are joined. All the statements created by the bank should not be invalid and must bear relevant opinions and facts. Moreover, BCLs should not generate any tax liabilities. However, they should offer a disclaimer pertaining to the funds. Furthermore, the BCL should consist of a statement of awareness from the bank issuing the credit to testify as to their understanding of the set-out obligations.  

The BCL should indicate the services it intends to achieve. With that, the person officially issuing the document should not show that the letter is given as a condition precedent; it should be given as a credit facility to be issued.  

Another characteristic is that the BCL does not include an expiration date, although it expires after the provision of the stated services has been met. In continuation, or where a new service is to be rendered, an original comfort letter is given out.  

Lastly, a BCL is not a payment assurance from a bank by any means; a BCL is solely an authenticated Swift message from the buyer’s bank that asserts the buyer’s track record in terms of their financial standing. Therefore, while a BCL is only part of a series of documents required to complete a process, it does not replace due diligence on the seller’s side.

LETTER OF ATTESTATION (LOA)

Merriam-Webster defines attest  as “to show, prove, or state that something is true or real”. For AIME’s intents and purposes, a Letter of Attestation (LOA) is a letter that is written and executed by a licensed attorney to lend veracity to or bear witness to a particular affirmation. In the case of PPE, it usually means that the signing attorney certifies, thereby attesting, that they have either personally witnessed or been privy to documentation that substantiates the claim of the seller as to the seller’s capacity to either have the specified stock on hand or direct access to it.  

The components of an LOA include a title, date, the name of the recipient, body, salutation, and the signature of the sender. In an LOA issued by a legal professional, the attorney’s address is mandatory as well as their direct contact information.  

Unlike a Letter of Intent (LOI), which simply manifests an intention to engage in a business transaction provided the conditions are the right ones, an LOA is in fact a binding document that brings consequences to the authoring attorney as they, in their capacity as officers of the court, are lending out their good name in providing a guarantee that a stock of PPE in the specified amount actually does exist.  

In the last few months, AIME has witnessed a large number of failed fraudulent activities attempt to take place, all of which had LOAs properly executed by licensed attorneys from all over the globe. Whether these were negligent acts by the representing attorneys or intentional attempts at fraud, all names of relevant companies and of specially executing counsels of fraudulent LOAs were reported to the Department of Justice (DOJ) for further investigation.

NON-CIRCUMVENTION NON-DISCLOSURE AGREEMENT (NCNDA)

A Non-Circumvention Non-Disclosure Agreement (NCNDA) is an agreement used in the preliminary stages of a business transaction where the seller and buyer do not know each other but are brought into contact with each other by one or more intermediaries in order to fulfill a transaction. The purpose of such an agreement is to ensure the following:
1) the intermediaries who brought the buyer and seller together are not by-passed; and
2) the information disclosed during the negotiations is not revealed to any external or unauthorized party. These agreements are usually valid for a specified term that ranges from three years minimum to five years ideally.

The  NCNDA is divided into two sections:
Section 1:  Special Conditions, setting out the terms that are special to a particular NCNDA, and which must be determined the parties according to their particular needs.
Section 2.  General Conditions, setting out standard terms common to all contracts, including General Conditions for NCNDAs that meet the requirements of foreign and domestic laws.  

The parties that sign the NCNDA should use both Sections but should abstain from using templates or box-checking in their redaction. Remember, an NCNDA is a binding agreement with obligations and remedies in the event a violation of any of the clauses occur.  

Additional points to consider in the drafting process for NCNDAs are as follow:
- Services to be provided by the intermediary
- Exclusive rights of the intermediary; customer protection
- Undertaking not to compete
- The intermediary´s remuneration
- Confidentiality and non-disclosure obligations
- Term of the agreement
- Applicable law and arbitration clause for resolution of disputes

SALES AND PURCHASE AGREEMENT (SPA)

A Sale and Purchase Agreement (SPA) is a legally binding contract outlining the agreed upon conditions of the buyer and seller of a commodity (e.g. PPE). It is the main legal document in any sale process. In essence, it sets out the agreed elements of the deal, includes a number of important protections to the parties involved, and provides the legal framework to complete the sale. The SPA is therefore of critical importance to both seller and buyer alike.  

The SPA defines all the details of the transaction such that both parties share the same understanding. Among the terms typically included in an SPA are the purchase price, the closing date, the percentage that the buyer will place in escrow account (see Escrow Agreement (EA)), the number of days for the completion of specific tasks, and delivery dates.  

The SPA is one of the most important documents during the very brief period of business life, which is defined as the moment from which the SPA is drafted, sent to the counterparty, mutually reviewed, mutually executed, and complied with. For this reason, it should be approached carefully and rigorously, with legal experts guiding both the seller and the buyer every step of the way.

Standard Provisions in a SPA
Establish parties to the agreement
In the most complex form of a sale, where a company seeks to purchase hundreds of millions of pieces of PPE, there are only two parties to the agreement. However, additional parties may be involved when, for example, the purchasing body is a broker and is making the purchase only to sell it immediately to a third party. In these cases, the party that executes the SPA as a buyer at first will need to enter into a second SPA as a seller.  

Agreement to Buy and Sell
This is often the shortest and simplest provision in the SPA. However, it is one of the most important, as it ensures that full legal ownership or legitimate access to the specified PPE exists and that it can be properly transferred, together with all the relevant rights that attach to said goods. This provision also normally states that the goods being bought are free from any encumbrance, giving the buyer comfort that the seller has not pledged any of the goods to a third party.  

Warranties and Indemnities
Warranties are statements of facts made by a seller in the SPA relating to the condition of the goods being sold. If a warranty subsequently proves to be untrue and the condition of the PPE is reduced, the buyer may have a claim for breach of warranty. Warranties cover all aspects of the PPE being purchased, such as that products are not expired, damaged, counterfeit or any other limiting factor that would hinder buyer from completing a sale of the PPE.  

If more specific risks are identified during due diligence, it is likely that these will be covered by an appropriate indemnity in the SPA, under which the seller commits to reimburse the buyer on a pound for pound basis for the indemnified liability.  
Conditions Precedent
Simultaneous signing and completion of a deal, where the parties sign the SPA and complete the sale on the same day, is logistically impossible in PPE contracts. Conditions in the form of reviewing an SGS report (SGSr), physical inspection of goods, often referred to as Proof of Life (POL), and escrow funding as per the Escrow Agreement (EA), will create the need for a time gap between signing and completion in order to satisfy the final outstanding conditions. These are referred to as “conditions precedent.”  

Unless the parties agree otherwise, the SPA is nullified if all of the conditions specified are not satisfied by an agreed upon date. It is therefore critical that the SPA sets how to determine when the conditions precedent have been satisfied and when they are no longer capable of being satisfied. It should also specify which of the parties is responsible for satisfying each particular condition precedent. The relevant party is obliged to use reasonable endeavors to satisfy the relevant conditions precedent by the agreed upon date.  

Completion
Completion is when legal ownership of the PPE being purchased transfers to the buyer, resulting in the buyer owning the specified lots. A completion schedule in the SPA will normally list all of the documents to be signed and other actions necessary for completion to affect the deal.  

Post Completion
Following completion, the SPA continues to be an important document for reference, as it covers the condition that the PPE must be in.

INTERNATIONAL MASTER FEE PAYMENT AGREEMENT (IMFPA)

In today’s current state of affairs, we are seeing a large number of sellers represented by a sleuth of brokers, all of whom want to ensure their percentage is respected. This is where the Irrevocable Fee Protection Agreement (IMFPA) comes into play. An IMFPA is the contract of choice for most commodity transactions. It is an irrevocable and binding legal agreement between a buyer, a seller and usually a series of business brokers involved in the specific transaction.  

In an IMFPA, the objective is to reach a private agreement for the placement or purchase of a commodity that has been clearly identified and negotiated in bulk. In an average scenario, the buyer or seller offers a private business broker a fee, either as a fixed sum or as a percentage, for arranging the transaction. However, in endeavors with PPE, experience has shown that there are often many brokers on both the buyer and the seller side that contribute to making the deal to be executed a reality. As such, each of the involved parties have an agreed upon percentage, and the IMFPA guarantees that.  

Keep in mind that the commission is only paid if and when the transaction is completed and the amount to be paid is determined by stipulations in the IMFPA. Usually, the fees are automatically transferred from the buyer's bank account to the business broker when the buyer pays for the product, but particular arrangements can be reached.

ESCROW AGREEMENT (EA)

An Escrow Agreement (EA) is a financial arrangement where a designated third party, the escrow agent, holds and regulates the payment of the funds required for two parties involved in a given transaction. In terms of the designation of the escrow agent, this can be a mutually selected financial institution, or one assigned by the buyer as it is the buyer’s money that may be considered as at risk. An EA assists in increasing the security of transactions by keeping the payment in an escrow account which is only released when all of the terms of an agreement have been met, as overseen by the escrow agent.  

EAs are very useful in the case of transactions with large amounts of money involved or where a certain number of obligations need to be fulfilled before a payment is released. These could include SGS report (SGSr) review, the physical inspection of warehouses containing the PPE (Proof of Life (POL)), and lot number verification. Traditional escrow service can be quite difficult to implement and must be obtained through banks or law firms in order for the transaction to be safely carried out without risk of losing money or merchandise due to fraud. Compliance with this will allow for secure transactions with confident buyers and sellers.  

The mutually agreed upon designated escrow agent will reduce the risk of fraud by acting as a trusted third-party that collects, holds, and only disburses funds when both buyers and sellers are satisfied. EAs proceed through the following steps:
1) Buyer and seller agree to terms: either the buyer or seller begins a transaction once the parties have agreed to the terms of the transaction and who will exert the role of the escrow agent
2) Buyer pays escrow agent: the buyer submits a payment through approved payment method to secure the escrow account, the escrow agent verifies the payment, and the seller is notified that funds have been secured “in escrow”
3) Seller makes merchandise available to buyer so they may make logistical arrangements to collect the product and deliver it to the designated destination: escrow agent verifies that the buyer receives the merchandise
4) Buyer accepts merchandise: the buyer has, on average, three days to inspect the merchandise and the option to accept it
5) Escrow agent releases balance funds to the seller from the escrow account and as per the EA

KNOW YOUR CUSTOMER (KYC)

Know Your Customer (KYC) procedures are a critical function to assess customer risk and a legal requirement to comply with Anti-Money Laundering (AML) laws. Effective KYCs involve knowing a customer’s identity, their financial activities, and the risk they pose.  

KYC and AML regulation are increasing to cope with the pressing need for increased security and protection against fraud. Financial institutions and businesses are struggling to master these procedures. With various acronyms flying around, it can be confusing when trying to decipher the true meaning of these processes.  

KYC and AML compliance are mandatory procedures, required by law, to mitigate the risks of banks and companies being used as vehicles for financial crime. Consisting of various verification, monitoring, and cross-checking procedures, these policies need to be airtight to prevent malicious actors from slipping through the net. If not, entities face high non-compliance fines from regulatory bodies.  

While the two terms are often mistakenly used interchangeably, they mean different things. The main difference between KYCs and AML is that a KYC is a procedure, whereas AML is a full framework. KYCs refers to identity verification procedures used to ensure customers are who they say they are while AML is the umbrella term for the entire set of mechanisms deployed to protect against money laundering and financial crime.  

Entities are failing to fulfill all regulatory specifications for AML, falsely assuming that KYC processes are enough to pass. However, while KYC procedures aren’t enough on their own, installing full AML operations can be costly and time-consuming.  

At AIME, we have painstakingly implemented an internal AML program that is tailored to our own business needs and is capable of managing the specific risks that buyers, sellers, and brokers can represent. AML compliance programs should focus on the internal controls and systems the institution uses to detect and report the financial crime. The program should involve a regular review of those controls in order to measure their effectiveness in meeting compliance standards.

More so, AIME’s Internal AML controls extend to our own Corporate, External, & Legal Affairs collaborators, who are each aware of their own roles and responsibilities within the system, how to conduct due diligence on business interests, and how to navigate policies and procedures to ensure compliance on an ongoing basis.  

The successful implementation of KYC-AML is by far a simple concept, but when engaging in multi-billion-dollar transactions around the world, the processes of customer identity verification and customer due diligence are critical to a successful AML program. There are three components of KYC compliance.  

The first corner of the KYC-AML compliance policy triangle is the Customer Identification Program (CIP). CIP was imposed under the USA Patriot Act in 2001 to better protect the world’s financial systems in response to the September 11 attacks. The Patriot Act made it mandatory for all banks to implement written CIPs based on the bank’s size and its customer base. The act also required all banks to implement CIPs into their larger AML policies. CIPs verify the customer's identity using credentials like their name, date of birth, address, social security number, passports, driver’s license, or other documents.  
The second corner of KYC-AML compliance policy is Customer Due Diligence (CDD). CDD is primarily a KYC process in which all of a customer’s credentials are collected to verify their identity and evaluate their risk profile. It is broken down into two separate tiers: Simplified Due Diligence (SDD) and Enhanced Due Diligence (EDD). We use SDD for buyers and sellers who, upon preliminary review, are deemed to be at low risk for money laundering or terrorism funding, like standard bank accounts or low-value bank accounts. EDD is used for buyers and sellers that are at a higher risk of infiltration, terrorism financing, or money laundering. If a customer is determined to be at a higher risk, additional information collection is necessary. EDD procedures by AIME may also include law enforcement reporting when questionable data is found.  

The third corner of KYC-AML policy is Continuous Monitoring and Reporting. Checking a buyer’s or seller’s risk profile only after inconsistent information has been found is not sufficient to ensure security. Understanding how KYC-AML works is necessary to catch irregularities and eliminate risks as they arise.  

AIME is an American company 100% committed to excellence. However, the only way to achieve sustainability is to hold compliance to the highest standard. When we come up against fraudsters, we will report them and everyone else involved in the chain to the Department of Justice and the Federal Bureau of Investigations.

SGS REPORT (SGSr)

SGS is an international inspection agency that works throughout the world in the field of improving quality and productivity, reducing risk, verifying compliance, and increasing access to the market.  

Since the distance between the buyer and the seller can be very far, the seller can appoint an international inspection agency like SGS to ensure the quality of goods they are selling. At AIME, we always require inspection done by SGS with its resulting certificate of approval, referred to as an SGS report (SGSr), anytime we are involved in a purchase. This type of inspection helps us corroborate that the required parameters are being met. The seller must make the arrangements with SGS professionals to locally inspect the goods, following which SGS reviews the quality as per seller’s specifications in their Letter of Attestation (LOA) and, if met, SGS issues an SGSr on inspection.

PROOF OF LIFE (POL)

A Proof of Life (POL), also called certificate of existence, certificate of life, or letter of existence, can be in the form of a certificate produced by a trusted entity to confirm that a large stock of a specific commodity does in fact exist.  

In the current pandemic, we at AIME have borne witness to a barrage of fly-by-night companies represented by brokers who claim to have access to hundreds of millions, often billions, and every once in a while, trillions, of 3M 1860 N95 masks. Now, taking into account that by 3M Corporation’s own admission, their global yearly manufacturing capacity cap is at 1.1 billion masks, the vast discrepancy is readily visible.  

The situation above is a prime example of when the buyer must request a POL from the seller before taking further steps. A trusted document that has served as a POL in the past has been an SGS report (SGSr) that guarantees a physical inspection has been conducted and that the offered stock exists and matches the description of what was offered. It is important to keep in mind however that even SGSrs must be vetted for authenticity and tampering.