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Advance payment-related regulatory compliance risks

20 April 2022 12:00 (UTC+04:00)
Advance payment-related regulatory compliance risks

Before agreement on the advance payment, businesspeople need to consider it not only as a contractual risk but also from a regulatory compliance perspective.

Regulatory framework

Under the Regulations on “currency operations of residents of the Republic of Azerbaijan in foreign currency, and non‐residents in national and foreign currencies”, approved by the Decision of the Central Bank of the Republic of Azerbaijan, dated 28 November 2016, in case of an advance payment a document confirming import of the goods into the country (customs declaration) or a document confirming provision of the services (handover and acceptance certificate) need to be submitted to the bank. If these documents are not submitted to the bank within 2 years from the moment of the payment, or the pre-paid amount has not been repaid, then the bank must submit all documents related to such advance payment to the Central Bank.

In accordance with Article 430.4 of the Code on Administrative Offences, if within the specified periods relevant goods have not been imported into the country, works have not been performed or services have not been rendered in consideration of the currency paid in advance, for non-refund of the pre-paid currency from a foreign country, officers are subject to a penalty from 10 % to 20 %, legal entities are subject to a penalty from 20 % to 30 % of the pre-paid amount.

Real-life examples

A local company in Azerbaijan entered into an agreement with its foreign counterparty and made a pre-payment in the amount of 100.000 USD without a bank guarantee. During the pandemic, both parties agreed in writing to terminate the agreement due to force-majeure and the foreign company undertook to repay 100.000 USD to the local company. Because of a failure to repay the pre-paid amount, an Azerbaijani company filed a claim in the courts of the foreign jurisdiction where its claim was fully granted against the foreign company.

Thereafter, during the enforcement phase, the officer of the foreign entity was subject to a penalty due to failure to enforce the court decision.

So, Azerbaijani company has never received its money back. In addition to its contractual risk Azerbaijani company faced a regulatory compliance risk where the regulatory authority issued a protocol on administrative offence and submitted the same to the respective court. There was a penalty risk of up to 30 % of the pre-paid amount.

Judicial practice

Although the formal wording of the above provisions does not envisage circumstances in which a person is excluded from the liability, the Constitutional Court interpreted (which interpretation is binding in nature) Article 430.4 of the Code on Administrative Offences and in its Decision dated 28 February 2020 stated that import of the goods or provision of services may be subject to delay for the reasons out of control of a person (for instance, force-majeure, accidents, customs control/inspection etc.). Therefore, the courts should take into consideration all circumstances of the case that may exclude the liability of a person.

Recently, we represented our client in the court on the same subject matter where our objection was fully granted and the court terminated the proceeding on the administrative offence.

Conclusion and our recommendations

To sum up, an advance payment without a bank guarantee is double-risky. It creates not only contractual, but also regulatory compliance risks. To avoid this risk, it is advisable to make an advance payment only based on a bank guarantee in an equal amount, so in case of any contractual breach, a suffering party could be able to fully receive its money back. We also recommend engaging a professional lawyer in case the regulatory authority commences an administrative offence proceeding.

About the author: Fuad Gashamov is a professional lawyer with over 12 years of experience in consulting industry. He mainly specializes in dispute resolution, real estate, contracts, regulatory, intellectual property and compliance. He is the founding partner at Legalize Law Firm. He is a member of the Bar Association since 2014. For more information about the author please see the following link: https://legalize.az/en/team/fuadgashamov

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