EXPORT FINANCE
a Five-Day Course
Buddy Baker
+1-847-830-3038
Day 1: Export Risks and Risk Mitigation Techniques
I. The perils of cross-border sales
A. What might go wrong
1. commercial risks (default, bankruptcy,f contract repudiation, abusive drawing of bid &
performance bonds, etc.)
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2. political risks (coups, war, government regulations on foreign payments, etc.)
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3. transfer/economic risks
4. foreign exchange rate fluctuation risks (direct and indirect risks)
B. When it might go wrong: pre-shipment vs. post-shipment impact
C. Impact of exporting on DSO, A/Rs, cash flow
II. The spectrum of credit/payment terms
A. Extended terms, installment notes
B. Open account, clean drafts
C. Time draft (D/A)
D. Consignment/retention of title
E. Sight draft (D/P, C.A.D.)
F. Cash against goods, C.O.D.
G. Advised letter of credit: sight & time
H. Confirmed letter of credit
I. Cash in advance
III. Considerations
A. Competition
B. Industry practice
C. Country practice
D. Custom-made vs. off-the-shelf products
E. Freight costs
F. Profit margin
G. Amount and frequency of shipments (high credit)
H. Cash flow
IV. Risk protection mechanisms (& gaps)
A. Letter-of-credit-related techniques
1. unconfirmed L/C
2. confirmed L/C
3. “silent L/C confirmation”
4. assignment of L/C proceeds
5. transferable L/C
6. standby L/C
B. Guarantees (and how they differ from standby L/Cs)
1. independent/demand guarantee
2. accessory/contract guarantees
C. Documentary-draft-collection-related techniques
1. sight draft, “documents against payment”
2. avalized drafts and forfaiting
D. Protection for open account sales
1. factoring
2. non-recourse sale of receivables
3. credit insurance
4. credit derivatives
E. Protection from foreign exchange fluctuations: FX forwards & options
V. Credit Policy Matrix Exercise
VI. An Extended Look at Standbys
A. Using standbys in export transactions
1. credit line back-up (instead of commercial L/Cs)
2. bid bonds (exporter is applicant)
3. performance bonds (exporter is applicant)
4. advance payment bonds (exporter is applicant)
B. Using standbys to arrange local guarantees
C. ISP vs. UCP
D. Standby loopholes
1. court injunctions
2. bankruptcy
a) of the issuing bank
b) of the applicant (preferential payments)
3. abusive drawings
E. Tips, tricks, & facts regarding standbys
VII. Risk Management Case Studies
Day 2: Export Letters of Credit
I. Choosing Credit/Payment Terms
A. The perils of cross-border sales
1. What might go wrong
a) commercial risks (default, bankruptcy, contract repudiation, abusive drawing of bid &
performance bonds, etc.)
b) political risks (coups, war, government regulations on foreign payments, etc.)
c) transfer/economic risks
d) foreign exchange rate fluctuation risks (direct and indirect risks)
2. When it might go wrong: pre-shipment vs. post-shipment impact
3. Impact of exporting on DSO, A/Rs, cash flow
B. The spectrum of credit/payment terms
1. extended terms, installment notes
2. open account, clean drafts
3. time draft (D/A)
4. consignment/retention of title
5. sight draft (D/P, C.A.D.)
6. cash against goods, C.O.D.
7. advised letter of credit: sight & time
8. confirmed letter of credit
9. cash in advance
II. Basic Mechanics and Principles of Letters of Credit
A. Structure and flow
1. 3 parties: applicant, beneficiary, issuing bank
2. 3 contracts: contract of sale, L/C application, L/C
B. Principles
1. independent
2. documentary
C. Risk mitigation
1. commercial risks: bankruptcy, slow payment, contract repudiation, contract dispute
2. documentation risk remains
III. Confirmed Letters of Credit
A. Adding a 4th party to the structure
1. rights of a confirming bank
2. confirming bank must be authorized to confirm
B. Additional risk mitigation
1. political risks
2. transfer risks
3. FX risks (direct & indirect)
4. documentation risk still remains
C. Problems with confirming banks
1. the confirming bank is chosen by the issuing bank
2. the confirming bank has a monopoly position (a/k/a a license to steal)
3. the confirming bank may be an affiliate of the issuing bank
4. the confirming bank can be enjoined from making payment
IV. International Letters of Credit
A. Adding an advising bank
1. role of the advising bank
2. responsibilities of the advising bank
B. Adding a nominated bank
C. How letters of credit are available
D. Rights of a negotiating bank
1. L/C must call for drafts
2. L/C must be available by negotiation
3. L/C must be available with negotiating bank
E. Negotiation with recourse
1. only available from a relationship bank
2. similar to depositing a check with recourse
3. speed up cash flow
4. centralize international banking needs with one bank
F. The value of receiving “freely available” letters of credit
G. Discrepancy identification and resolution
H. Adding a reimbursing bank
V. Dissecting a Typical L/C in the SWIFT Format
VI. Managing Your Export Letters of Credit
A. Benefits of centralizing collection of letter of credit payments
1. fees based on volume
2. one-stop information
3. consistency
4. responsiveness, communication, service
5. expedited funds availability
6. shipper's indemnities
B. How to centralize
1. Stop asking for confirmed L/Cs
2. Stop asking for L/Cs to come through a particular bank
3. Start asking for freely available L/Cs
C. Replacing confirmation
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1. reasons for having L/Cs confirmed
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2. how confirming banks get chosen
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3. what the exporter wants vs. what the exporter often gets (i.e. “the shaft”)
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4. advantages (and disadvantages) of “silent confirmation”
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5. “elective confirmation”
D. Using a document preparation service
VII. Usance Letters of Credit
A. L/Cs with time drafts vs. deferred payment L/Cs
B. Significance of whom drafts are drawn on
1. obligations of the drawee
2. fixing maturity
C. Discounting accepted drafts
D. L/C re-financing vs. time drafts
E. Effect of “discount charges for buyer” clause
VIII. L/C Quiz
IX. Rules and Regulations to Be Aware Of
A. The Uniform Customs & Practice for Documentary Credits (“UCP”)
B. The Uniform Commercial Code, Article 5
C. International Standard Banking Practice for the Examination of Documents under
Documentary Credits (“ISBP”)
D. The “eUCP” (rules for electronic presentation of documents)
E. The International Standby Practices (“ISP98”)
F. The Uniform Rules for Demand Guarantees
G. The International Commercial Terms (“Incoterms”)
H. Antiboycott regulations
I. Office of Foreign Assets Control (“OFAC”) sanctions
J. The USA PATRIOT Act and Anti-Money Laundering regulations
X. A Look at the UCP600
A. What the UCP is
B. Major changes from the UCP500
C. Selected articles
XI. Examining L/C Documents (Common Discrepancies)
XII. Quoting an L/C Sale (an L/C Instructions Form)
Day 3, Part 1: Effective and Innovative Uses for Credit Insurance
I. What Is Trade Credit Insurance?
A. Insures receivables against nonpayment by buyers
B. Involves risk sharing
C. Does not cover disputes
II. How Credit Insurance Works
III. Major Providers
A. Private insurers
B. ECAs
IV. Risks Covered
A. Commercial risks
1. insolvency
2. protracted default
B. Country risks
1. transfer risk
2. government moratorium/exchange controls/discharge of debt
3. contract frustration
4. civil turmoil
C. Risks that are not covered
1. contract disputes and contract repudiation
2. abusive bond drawings
3. currency fluctuations
4. exclusions, like war between the major powers
V. Primary Characteristics
A. Credit limits
B. Named-buyer coverage (“European-style” coverage)
C. Discretionary credit limits & deductibles (“American-style” coverage)
VI. Common Types of Policies
A. “Whole turnover”
B. Key-account
C. Single-buyer
VII. More Exotic Types of Policies
A. Political-only
B. Contract frustration
C. Pre-export financing (“vendor financing”)
D. Abusive drawing
E. Tender exchange risk indemnity (“TERI”)
F. Securitization (“triple-trigger” w/ liquidation shortfall)
G. Bank policies
1. trade finance (purchase of receivables)
2. bank L/C
3. framework
VIII. Principles
A. Insured must have an “insurable interest”
B. Trade credit insurers may not issue financial guarantees
C. Underwriters insure themselves with large re-insurers
IX. Policy Variables
A. Cancelable or non-cancelable limits
B. “Risk attaching” or “loss occurring”
C. Insured percentage
D. Annual deductible
E. Non-qualifying loss amount
F. Individual buyer limits
G. Discretionary limit
H. Insurer’s maximum policy liability
I. Covered terms of sale
X. Benefits of Credit Insurance
A. Protect against catastrophic events
B. Enhance credit management
C. Increase sales
D. Improve financing
1. borrowing against receivables
a) reduce concentration risk
b) increase the pool of “eligible” receivables
c) increase advance rates
d) reduce interest rates
e) strengthen client relationships
2. selling insured receivables
3. loss payee vs. joint insured
XI. Key Policy Points
A. Insurance does not cover disputes
B. Watch the reporting requirements
C. Watch the claims filing deadlines
D. Do not “ship into a past-due”
E. All policies have exclusions
F. The policy may contain specific limitations
G. Pay the premium on time
XII. Case Studies
A. Catastrophic loss
B. Credit management
C. Increase sales
D. Enhance borrowing
XIII. Risk Mitigation Alternatives
A. Commercial letters of credit
B. Standbys and demand guarantees
C. Forfaiting
D. Sale of receivables
E. Credit derivatives
Day 3, Part 2: Managing Foreign Exchange Risks
I. What Is Foreign Exchange?
A. The Act: The conversion of one currency into another
B. The Thing: All claims to another nation’s currency, payable abroad, whether these are funds
held abroad, bills, checks, or other financial instruments.
C. Exchange Rates: The equalizing prices linking different currencies (purchasing power parity)
II. How FX Rates Affect Country Economies
A. Exporting creates jobs
B. Exporting leads to a positive balance of payments, giving a country purchasing power
C. Low exchange rates increase exports and decrease imports, spurring domestic consumption
D. In general, volatility is considered negative
E. As a result, many governments try to control exchange rates
III. Exchange Rate Control Systems
A. Gold Standard
B. Bretton Woods Agreement
C. Smithsonian Agreement
D. The Eurozone
E. Present-day exchange control regimes
1. Peg
2. Crawl or band
3. Float
IV. Market Volatility
A. Size
B. Speculation
C. Liquidity
D. Computer trading
E. Ease of transfer
F. Policy uncertainty
V. Types of FX Exposure
A. Transaction exposure
B. Operating exposure
C. Translation exposure
D. Examples
VI. The Foreign Exchange Market
A. Function
1. Not an organized trading place
2. Global communications system
3. Banks natural intermediaries
4. Establishes unitary prices
5. Operates around the clock
6. “Depth” fluctuates
7. Local peculiarities
B. Banks vs. exchanges
C. Money Centers
1. London
2. New York
3. Tokyo
D. Speculators vs. hedgers
E. Market makers vs. market takers
F. Participants
1. Banks
2. Central banks
3. Corporations
4. Individuals
5. Governments and their agencies
6. Brokers
VII. Spot Transactions
A. For “immediate” delivery
B. Transaction/value date
C. 2 business days for settlement
D. “Good” days on both sides
E. Exceptions: e.g., Canada
VIII. Illustration: A Peso Devaluation
IX. Quoting Rates
A. Direct quotation (European quotation) vs. indirect quotation (American quotation)
B. Big figure & points
C. Bid/ask spread (two-way quotes)
D. Cross rates
E. Data in a contract
X. Counterparty Risks
A. Position (fluctuation)
B. Settlement
XI. Bank Risks
A. Cover risk
B. Overnight position
C. Hold position
D. Credit
XII. Forward Contracts
A. Agreed amount, settlement date, delivery locations, and exchange rate
B. Forward rates & interest rates
C. Covered carry trades
D. Calculating the forward rate: discounts & premiums
E. Quoting forward rates (distinguishing discounts from premiums)
F. Unwinding a forward contract: when & why
XIII. Futures
A. Trade with an exchange
B. Fixed amount, fixed maturity, set location, margin requirement
C. Differences between futures & forward contracts
D. Unwinding a futures contract
XIV. Non-deliverable forwards
A. Notional amount, agreed maturity, contract rate and spot rate source
B. No actual settlement in foreign currency, just in USD
XV. FX swap contracts
A. How swaps are priced
B. Swaps vs money-market hedges
C. When to use swaps
XVI. FX Options
A. Puts & calls
B. Buyers & writers
C. American vs. European style
D. How options are priced: intrinsic value and time value
XVII. When to use what type of hedge (table/exercise)
XVIII. Hedging an export sale in a foreign currency
A. Forward contract
B. Borrow FX, hold dollars
C. Buy a put option
D. Sell the receivable
E. Change the billing currency
F. Increase the sales price
G. Risk sharing
H. Netting (maturity profiles)
I. Operational (“natural”) hedges
XIX. Measuring FX Exposure
A. Notional amounts
B. Potential loss (VaR)
Day 4, Part 1: Standby Letters of Credit and Bank Guarantees
I. Basic Mechanics and Principles of Letters of Credit (Revisited from Day 1)
A. Structure and flow
1. 3 parties: applicant, beneficiary, issuing bank
2. 3 contracts: underlying contract, L/C application, L/C
B. Principles
1. independent
2. documentary
C. Risk mitigation
1. commercial risks: bankruptcy, slow payment, contract repudiation, contract dispute
2. documentation risk remains
II. Confirmed Letters of Credit
III. How Standby Letters of Credit Differ from Commercial Letters of Credit
A. Definition
B. Characteristics
C. Uses
1. secondary means of payment for goods (if buyer fails to pay directly)
2. bid bond (seller is applicant)
3. performance bond/warranty (seller is applicant)
4. advance payment guarantee (seller is applicant)
5. loan repayment
6. direct loan repayment (bond enhancement)
7. etc., etc., etc.
IV. How Standby L/Cs Work
V. Capital Adequacy Regulations and Letters of Credit
A. Commercial (intended means of payment for goods or services)
B. Performance Standby (underlying obligation is to perform an action)
C. Financial Standby (underlying obligation is to pay or repay money)
VI. Standbys vs. Guarantees & Bonds
A. Types of guarantees
1. independent/demand guarantee
2. accessory/contract guarantees
B. US banking regulations governing guarantees
1. 12CFR7.1016 (Safety & Soundness)
2. 12CFR7.1017 (authority to issue accessory guarantees)
VII. Competing Rules for Standbys
A. Uniform Customs and Practice for Documentary Credits (“UCP600”)
1. What UCP rules don’t apply to standbys?
2. What UCP rules need modification when applied to standbys?
B. The International Standby Practices (“ISP98”)
C. The Uniform Rules for Demand Guarantees
VIII. The Law Governing Standby Letters of Credit
A. Uniform Commercial Code, Article 5
1. model for state law
2. major variations
B. The UN Convention on Independent Guarantees and Stand-By Letters of Credit
IX. Arranging Local Guarantees (How Counter-Guarantees Work)
X. Standby L/C Issues
A. Non-documentary conditions
B. Automatic extensions
C. Extend-or-pay drawings
D. Return of original L/C for cancellation
E. Abusive drawings
F. Court injunctions
G. Failure of the issuing bank (FDIC disaffirmation)
H. Bankruptcy of the applicant (preferential payments)
1. preferential payments
2. the lease cap
XI. The ISP98 Model Forms
A. Form 1: Model Standby Incorporating Annexed Form of Payment Demand with Statement
B. Form 2: Model Standby Providing for Extension and Incorporating Annexed Form of
Payment Demand with Alternative Non-Extension Statement
C. Form 3: Model Standby Providing for Reduction and Incorporating Annexed Form of
Reduction Demand
D. Form 4: Model Standby Providing for Transfer and Incorporating Annexed Form of
Transfer Demand
E. Form 5: Simplified Demand Only Standby
F. Form 6: Model Counter Standby with Annexed Form of Local Bank Undertaking
G. Form 7: Model Standby Requiring Confirmation
H. Form 8: Model Confirmation of Standby
XII. Tips, tricks, & facts regarding standbys
XIII. Recap: When Might a Standby L/C Not Be Paid?
Day 4, Part 2: Alternatives for Financing Export Sales
I. The Life of a Trade Transaction (a/k/a the “Supply Chain”)
II. Why Foreign Customers Want Financing from Their U.S. Suppliers
A. Looks better on the balance sheet than bank debt
B. May be tapped out with their bankers
C. Lower rates than available from their bankers
D. May not be allowed to borrow locally in dollars
E. Arbitrage opportunity
III. Impact on Exporters of Offering Financing
A. Increases risk
B. Increases DSO
C. Impairs balance sheet ratios
1. reduces corporate cash and/or
2.increases debt
D. Increases costs
1. direct: financing costs money
2. indirect: worsened balance sheet may cause overall corporate borrowing to cost more
E. But… increases sales!
IV. Picking a Financing Structure
A. What are the exporter’s objectives?
1. I’ve got cash and I’m willing to take the risks—I’ll match whatever anyone else is
offering
2. I don’t have excess cash but I need to compete—I need new ways to fund foreign
receivables
3. I need to compete but I’m concerned about my balance sheet—I’m interested in ways to
get my foreign receivables off my books
4. I want to expand my exports but I don’t want to increase my risks
B. Major variations in financing structures: buyer’s perspective
1. How long before the buyer pays?
2. Rule of thumb: Financing should not exceed the time for the goods to generate cash for
the buyer—anything more is a straight loan
3. Does the buyer have to get his bankers involved?
a) L/Cs
b) guarantees (avals)
4. Does the buyer have to sign anything?
a)time drafts
b)promissory notes
C. Major variations in financing structures: exporter’s perspective
1. considerations
a) Where will the funding come from?
b) What will the funding cost?
c) Will the financing be on-balance-sheet or off?
d) Can the remaining risks be reduced or eliminated?
e) How much work is involved, both up-front and ongoing?
2. alternatives
a) carry it internally (cash rich)
b) use the receivable as collateral in order to borrow (still on the books)
c) sell the receivable (off the balance sheet)
(1) non-recourse
(2) limited recourse
V. Building Blocks of Trade Finance
A. Security interest laws
1. assignment of rights in trade receivables
2. assignment of proceeds of letters of credit
B. “True sale” accounting standards
C. Negotiable instruments
1. What does “negotiable” mean?
a) Title transfers by endorsement and delivery
2. requirements for negotiable instruments
a) sum certain
b) payable on demand or at a fixed maturity
c) unconditional
d) signed
e) payable to order or to bearer
3. holders’ rights
a) recourse (for dishonor)
b) holder-in-due-course rights (in the case of disputes)
4. examples of negotiable instruments
a) checks
b) promissory notes
c) trade acceptances
d) bankers’ acceptances
D. Letters of credit
1. commercial
2. standby
E. Credit insurance
F. ECA programs
VI. Financing Documentary Collections
A. How sight drafts work
B. How time drafts work (getting the buyer’s signed promise to pay)
C. Avalized drafts and forfaiting (adding a bank guarantee)
D. How “export bills financing” works
VII. Financing Letters of Credit (Revisited)
A. Basic mechanics and principles of letters of credit
1. structure and flow
3 parties: applicant, beneficiary, issuing bank
3 contracts: contract of sale, L/C application, L/C
2. principles
a) independent
b) documentary
3. objective: shift the risk from the buyer to the buyer’s bank
B. International letters of credit
1. adding a nominated bank
2. how letters of credit are available
3. rights of a negotiating bank
a) L/C must call for drafts
b) L/C must be available by negotiation
c) L/C must be available with negotiating bank
4. negotiation without recourse (“silent confirmation”)
5. negotiation with recourse
a) only available from a relationship bank
b) similar to depositing a check with recourse
c) speed up cash flow
d) centralize international banking needs with one bank
6. the value of receiving “freely available” letters of credit
7. using shippers’ indemnities
C. Usance letters of credit
1. L/Cs with time drafts vs. deferred payment L/Cs
2. significance of whom drafts are drawn on
a) obligations of the drawee
b) fixing maturity
3. discounting accepted drafts
4. L/C re-financing vs. time drafts
5. effect of “discount charges for buyer” clause
VIII. Financing Open Account Sales
A. Asset-based borrowing
B. Factoring
C. Sale of individual receivables (“Delcredere”)
D. Sale of receivables covered by standby L/Cs
E. Sale of insured receivables
F. Bankers’ acceptances not under L/Cs
1. What are bankers’ acceptances?
2. What are bankers’ acceptances used for?
3. How does “clean” B/A financing work?
IX. Rules and Regulations to Be Aware Of
A. The Uniform Commercial Code, Article 9
B. The Uniform Commercial Code, Article 3
C. The Bills of Exchange Act (United Kingdom)
D. The Geneva Convention on Bills of Exchange
E. SFAS 140
X. Structures
A. Buyer obtains a bank guarantee
1. usance L/Cs
2. negotiation of L/C documents
3. avalized time drafts (traditional forfaiting)
B. Buyer signs a promise to pay
1 time drafts (“trade acceptances”)
2. insured trade acceptances
3. export bills financing
C. Buyer signs nothing
1. sale of individual receivables (“Delcredere”)
2. sale of receivables covered by standby L/Cs
3. sale of insured receivables
4. factoring
5. B/As not under L/Cs
6. asset-based borrowing
D. Structured trade finance
1. Exim- and SBA-guaranteed working capital loans (pre-export)
2. purchase order financing (including back-to-back L/Cs)
3. securitization of receivables
4. ECA- and multilateral-guaranteed/insured post-export/post-import loans
a) supplier credits
b) buyer credits (“FIBCs”)
5. privately insured medium-term installment notes
XI. Another Way to Slice It (What Is the Customer Trying to Finance?)
A. Post-export, short-term financing
1. negotiation of L/C documents
2. export bills financing
3. sale of selected receivables
4. sale of insured receivables
5. asset-based borrowing
6. asset-backed securitizations
B. Post-export, medium- to long-term financing
1. forfaiting
2. ECA and multilateral guarantees
3. medium-term insurance
C. Pre-export financing
1. purchase order financing
2. Exim and SBA working capital guarantees
3. insured pre-export financing
D. Buyer Financing
XII. Exercise: Structuring an A/R Purchase to Pay for Itself
XIII. Sources of Export Funding
A. Commercial banks
1. Asset-Based Lending Dept.
2. Trade Finance Dept.
3. Asset-Backed Securitization Dept.
B. Factors & finance companies
C. Hedge funds
D. Forfaiters
E. ECAs and multilaterals
Day 5, Part 1: Rules & Regulations Pertaining to Export Finance
I. Overview of Rules and Regulations Pertaining to Exports
A. Rules
1. the International Commercial Terms (“Incoterms”)
2. the Uniform Customs and Practice for Documentary Credits (“UCP”)
3. International Standard Banking Practice for the Examination of Documents under
Documentary Credits (“ISBP”)
4. the eUCP
5. the International Standby Practices (“ISP98”)
6. the Uniform Rules for Demand Guarantees
7. the Uniform Rules for Collections
B. Laws and Conventions
1. the Uniform Commercial Code, Articles 3, 4, and 5
2. the U.N. Convention on Contracts for the International Sale of Goods (“CISG”)
C. Regulations
1. export licensing (e.g., the Export Administration Regulations (“EAR”) and International
Traffic in Arms Regulations (“ITAR”))
2. FX controls
3. sanctions against “enemy” countries (e.g., the Office of Foreign Assets Control and U.N.
sanctions)
4. antiboycott regulations
5. anti-money laundering regulations (e.g., the USA PATRIOT Act)
6. anti-corruption regulations (e.g., the Foreign Corrupt Practices Act)
D. Which of these pertain to banks?
E. What are banks required to do?
1. block any assets of parties located in sanctioned countries and of “Specially Designated
Nationals” of those countries coming under control of the bank
2. block any assets of “Designated Terrorists and Terrorist Organizations” and “Designated
Drug Traffickers and Kingpins” coming under control of the bank
3. not “implement” any letter of credit containing prohibited boycott language
4. report every letter of credit containing reportable boycott language
5. conduct due diligence on all “account relationships” of the bank
6. report “suspicious activities”
II. Incoterms 2010
A. Introduction to Incoterms
1. what are Incoterms?
2. why Incoterms needed to be defined
3. history of Incoterms definitions
4. difference between Incoterms, American Foreign Trade Definitions, and UCC trade terms
B. Incoterms 2010 Definitions
1. current list of defined Incoterms
2. modes of transportation for which each term can be used
3. point of transfer of responsibilities of parties in each term
a) point up to where a party is responsible for cost of freight
b) party responsible for insurance of goods
c) point up to where a party is responsible for risks involved in carriage
d) who would be responsible for export and import clearance?
4. typical documents required against each Incoterm
5. other duties of buyer and seller against each term
a) delivery of goods
b) nomination of carrier
c) contract for carriage
d) export clearance
e) loading charges
f) import clearance
g) unloading charges
h) receipt of goods
i) custom and other regulatory issues
C. Chart of Incoterms 2010
D. Transfer of title
1. not covered in the Incoterms
2. when there is a title document, title transfers with endorsement and delivery unless
retained by legal arrangement
3. if there is no title document, transfer of title should be specified in the contract of sale
4. if not covered in the contract of sale, but the contract of sale is covered by the
U.N. Convention on the International Sale of Goods, title transfers when goods are
“delivered”
III. Sanctions
A. What are sanctions?
1. definition
2. purpose
B. U.N. vs. U.S. sanctions (vs. the Arab boycott of Israel)
C. How sanctions work
D. Who and what is OFAC?
E. To whom do OFAC regulatons apply?
F. What are banks required to do?
1. impose sanctions against imports and exports of goods and services, and transfer of funds,
and other benefits to:
a) Specially Designated Nationals (SDNs)
b) Specially Designated Terrorists (SDTs)
c) Specially Designated Narcotics Traffickers (SDNTs)
d) Foreign Terrorist Organizations (FTOs)
e) blocked Persons including vessels, and
f) sanctioned countries
2. list of currently sanctioned countries
3. block or freeze property or funds transfer or transactions intended for these entities
4. report all ‘blocks’ and identified ‘rejects’ to OFAC within 10 days of occurrence
5. have in place an OFAC compliance program
6. penalties for failure to comply
G. What do banks actually do?
1. check the names and addresses of all parties and the routing instructions in all letters of
credit (import, export, standby) against the OFAC lists and various lists of “bad people,”
like the list of Denial Orders, and Politically Exposed Persons; refuse to issue or advise
L/Cs that involve any such people
2. check the names and addresses of all parties and actual routing of goods in the letter of
credit documents against the OFAC lists and the lists of “bad people”
3. block both funds and documents if any people or countries from the OFAC lists show up
in the documents
IV. Antiboycott Regulations
A. History of antiboycott regulations
B. Laws and regulations enforcing antiboycott (two sets of regulations)
C. Antiboycott provisions oppose any type of boycott or support to a boycott based on race, religion, sex, or national origin
D. Penalties for failure to comply
E. Structure of boycotts:Boycotting is OK; trying to get foreign suppliers to participate is not
1. primary boycott
2. secondary boycott
3. tertiary boycott
F. Boycotts authorized due to their nature and reasons behind them, e.g.:
1. Taiwan boycott of China
2. Pakistan boycott of India
3. USA boycotts various countries (such as Myanmar, Iran, Cuba, North Korea, etc.)
G. Specifics of the Department of Commerce regulations
1. The prohibition against “implementing” letters of credit
2. Prohibited conduct
a) refusal to do business with a boycotted country or company
b) discrimination based on race, religion, sex, or nationality
c) furnishing information about anyone’s race, religion, sex, or nationality
d) furnishing information about business with boycotted countries or companies
e) furnishing information about support of charities that support a boycotted country
3. Reporting requirements
4. What the regulations concerning letters of credit accomplish
H. What are banks expected to do?
1. Create procedures for letters of credit
2. Train employees to identify potential violations
a) documentary vs. nondocumentary conditions
b) negative vs. positive certifications
c) blacklists & whitelists
d) vessel eligibility clauses
e) using a checklist
3. How the regulations apply to documentary collections and check processing
4. How the regulations apply to reimbursement authorizations
5. How to handle prohibited language in letters of credit
6. How to handle prohibited language in letter of credit documents
7. Reporting violations to the Department of Commerce
8. Nominating antiboycott compliance officers
9. What to expect from a compliance examination
I. What do banks actually do?
1. read every export L/C before advising it to catch boycott language; obtain amendments
when necessary before advising and file reports when required
2. examine documents presented under export L/Cs for prohibited and reportable language;
refuse documents with prohibited language (get the language removed); file reports when
necessary
J. Specifics of the Treasury Department Regulations
1. Differences from the Department of Commerce regulations
2. Reporting violations to the Treasury Department
3. Penalties
K. Checklist for possible boycott language (handout)
L. Antiboycott quiz (handout)
V. USA PATRIOT Act/Bank Secrecy Act (Anti-Money Laundering)
A. What is money laundering?
1. description
2. examples of activities that generate the need for money laundering
B. What is the USA PATRIOT Act?
C. What are banks expected to do?
D. Penalties for failure to comply
E. Elements of an Anti-Money Laundering Compliance Program
1. a Customer Identification (Know Your Customer)/Enhanced Due Diligence Program that
provides for identification of clients at account opening or inception of a business
relationship
2. a process to identify high risk customers for on-going transaction monitoring and
enhanced due diligence
3. procedures to identify and report suspicious transactions to government authorities
4. staff training throughout the financial institution to increase money laundering awareness
5. internal control functions such as internal reviews of AML policies & procedures by the
business areas and an independent audit function
6. designation of AML Compliance Officers responsible for coordinating and monitoring
day-to-day compliance
F. When is customer identification required?
1. before a “relationship” is established with any new client
2. “relationship” is not defined in the regulations, but can be taken to involve some formality
a) new credit facilities always require approval
b) new depositary accounts always require approval
c) repetitive or large transactions may justify approval
G. “Increased risk” clients require Enhanced Due Diligence (“EDD”)
H. Applicability to Global Trade Services Departments at banks
1. trade transactions, by definition, involve 2 parties
2. a bank will not usually deal directly with both parties, but with one party and the other
party’s bank
3. for the purposes of KYC, there are 2 potential customers in a trade transaction, the
domestic corporation and the foreign bank
4. who is considered the customer depends on the type of transaction
5. although the bank must know their own customer, it is not necessary to know the
customer’s customers
I. Who is the customer in a trade transaction?
1. GENERAL RULE #1: In transactions involving an extension of credit, the customer is
the party to which credit is being extended.
2. GENERAL RULE #2: In transactions involving a depositary account, the customer is the
party with the depositary account.
3. in all other transactions, the bank’s AML Policy Compliance Guidelines should be
consulted in order to determine which party may be treated as the customer
4. in some cases, it is possible that either party may be treated as the customer
a) example: A bank may receive a letter of credit to advise because they’ve been
marketing their services to the issuing bank or because the beneficiary asked for the
L/C to be advised through the bank.
5. note: In a few cases, BOTH parties must be KYC-approved customers.
a) This happens when the bank is selling services to an exporter based on an extension of
credit to the importer’s bank
6. exceptions to the General Rules
a) There are 3 non-relationship, one-off transaction types where limited transactions may
be processed even though no party in the transaction has been KYC-approved.
(1) advising a letter of credit without confirmation
(2) collecting payment under a letter of credit that was advised without confirmation
(3) advising and handling documents under a letter of credit transfer effected by
another bank
b) in each of these cases, large or repetitive transactions will require that additional
measures be taken to identify either the issuing bank or the beneficiary
J. What do banks actually do?
1. make sure a KYC due diligence review has been conducted on the parties with whom an
“account relationship” seems to exist (most banks use the IFSA guidelines as to what
constitutes an account relationship under a letter of credit)
2. report all “suspicious transactions,” e.g., where the value of the goods seems out of line or
the type of goods seems out of character for the business the buyer and/or seller appear to
be in.
3. the IFSA Guidelines for USA PATRIOT Act Compliance in the Trade Services
Department
K. Suspicious activities
1. red flags for suspicious activities
a) geography:
(1) drug-producing nations
(2) drug transshipment countries
(3) drug-using countries
(4) secrecy jurisdictions and tax havens, particularly those that grant off-shore banking
licenses
(5) countries identified by FATF as Non-Cooperative Countries and Territories
(“NCCTs”)
(6) countries with a high degree of public corruption
(7) countries linked to terrorist financing
b) industries:
(1) sellers of big-ticket items
(2) cash-intensive businesses
c) Politically Exposed Persons (“PEPs”)
d) some characteristics of suspicious trade transactions
L. What to do
1. Notwithstanding compliance with specific procedures, all employees processing trade
transactions should be expected to exercise good judgment.
2. It may be appropriate to obtain additional details about a transaction before proceeding.
3. Occasionally, the decision regarding handling the transaction should be escalated to
senior management.
4. When in doubt, refuse the transaction.
5. In some cases, Suspicious Activity Reports will need to be filed.
Day 5, Part 2: Supply-Chain Finance and the Path to Electronic Documents
I. Supply-Chain Finance
A. Purchase of receivables from suppliers of a single buyer, based on the credit of the buyer
B. Involves getting something signed by the buyer to signify “acceptance” of invoices
C. Buyer cannot sign a credit agreement
D. Other names: “Reverse factoring,” “single-buyer A/R purchasing,” “approved payables
finance”
E. Why are importers interested in supply-chain finance?
F. Evolution out of import L/Cs
G. Payables extension programs
H. Prime Revenue and other structures
I. “P.O. matching” services (TradeCard, the SWIFT Trade Utility, and others)
J. Issues
1. the SEC comment on bank debt vs. accounts payable
2. the buyer’s obligations are unsecured
3. security interests on assets of foreign suppliers
4. AML KYC on a customer’s suppliers
5. The missing element: pre-export financing (“packing credit”)
K. Trade acceptances (revisited)
L. “Authorities to Pay”
M. The current playing field
1. domestic programs
2. purchase order-invoice matching applications
3. Bank Payment Obligations (“BPOs”)
4. on-line trade acceptances
5. value-dated payment orders/payable-through drafts
N. ECA and MDB support
1. Exim’s Supply-Chain Finance Program
2. IFC’s Supply-Chain Finance Program