Frances Hsieh/Benjamin K. J. Li
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According to Article 32 of the Banking Act, a bank should not extend unsecured credit to interested parties unless otherwise permitted by law. Said interested parties include enterprises in which the bank holds three percent (3%) or more of the total paid-in capital, the responsible person, staff or major shareholders of the bank, or any interested party of the bank's responsible person or staff in charge of credit extensions. Based on the above, since the foreign bank's Taiwan branch and its oversea head office belong to the same legal entity, and the foreign bank's overseas sub-branches should fall within the concept of enterprises in which the foreign bank holds three percent (3%) or more of the total paid-in capital, if the foreign bank's Taiwan branch extends credit to the foreign bank's overseas sub-branch, theoretically, such financing should fall within the concept of credit extended to interested parties and should be subject to said restrictions under Article 32 of the Banking Act.
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The competent authority has issued rulings which provide exemptions from the aforesaid restrictions under Article 32 of the Banking Act, for example:
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The letter issued by the Ministry of Finance dated 19 May 1993 (Reference Number: Tai-Tsai-Rung-Tz-821143861): Interbank call loans are not subject to the restrictions under Article 32 of the Banking Act.
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The letter issued by the Financial Supervisory Commission ("FSC") dated 21 September 2004 (Reference Number: Jin-Quan-Yin-I-Tz-0938011606): Except for credit extended for forward import bills, letter of credit for triangular trades in which the goods are not actually imported or import bills not using cargo documents as pledge, credit extended for import/export bills may be exempted from the restrictions regarding unsecured credit under Articles 32 and 33-2 of the Banking Act, while the amount thereunder should be counted towards the limited and aggregate amount for secured credit in accordance with Article 33 of the Banking.
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In practice, however, a financial institution usually needs to, for and on behalf of other financial institutions which belong to the same financial group, disburse funds to clients of those financial institutions. For example, a foreign bank's Taiwan branch whose oversea head office has an overseas subsidiary bank which offers trade finance service to clients, in practice, the foreign bank's Taiwan branch will advance the trade finance amount to such clients on behalf of the foreign bank's overseas subsidiary bank. In this regard, a question would arise as to whether such case would be exempted from Article 32 of the Banking Act. The FSC therefore issued a ruling on 27 August 2012 (Reference Number: Jin-Quan-Yin-Fa-Tz-10100240090) according to which Article 32 of the Banking Act applies in such circumstances for the following reasons:
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First, the counterparty of the foreign bank's Taiwan branch is the foreign bank's overseas subsidiary bank, not clients using the trade finance service, so the ruling issued by the FSC dated 21 September 2004 (Reference Number: Jin-Quan-Yin-I-Tz-0938011606) does not apply.
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Second, since the financing from the foreign bank's Taiwan branch to the foreign bank's overseas subsidiary bank does not fall within the concept of interbank call loan, the ruling issued by the Ministry of Finance dated 19 May 1993 (Reference Number: Tai-Tsai-Rung-Tz-821143861) does not apply.
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Therefore, based on the aforementioned ruling issued by the FSC dated 27 August 2012, if the foreign bank's Taiwan branch extends credit to the foreign bank's overseas subsidiary bank, such financing should fall within the concept of credit extended to interested parties and should be subject to the restrictions regarding unsecured credit under Article 32 of the Banking Act.
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