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8/8/2019 Trade Finance Documentation Framework
http://slidepdf.com/reader/full/trade-finance-documentation-framework 1/24
Export DocumentationAn Overview
Compiled by Ca V.V.S. Rao, Bangalore, [email protected]
Compiled by Ca V.V.S. Rao, Bangalore, [email protected]
8/8/2019 Trade Finance Documentation Framework
http://slidepdf.com/reader/full/trade-finance-documentation-framework 2/24
I hear and I forget
I see and I remember
I do and I understand
Confucius(551 BC ² 479 BC)
The great Chinese Thinker & Philosopher
8/8/2019 Trade Finance Documentation Framework
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Exporter Importer
1. Sale Contract sent
4. Submits
Documents for
Collection
Remitting Bank/
Exporter¶s Bank 5. Documents forwardedPresenting Bank/
Importer¶s Bank
6.Documents
Presented
DOCUMENTARY COLLECTIONS
3. Ships the Goods
2. Contract accepted
Goods Delivered
against Documents
7.Payment/
Acceptance
8. Payment Forwarded
Payment credited
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TRADE CYCLE
Seller Buyer
Goods
Payment
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TRADE OBJECTIVES
Seller Buyer
Immediate/Preferably Advance PaymentQuick Return on InvestmentAssured Payment Mechanism
Easy, extended credit termsGoods to meet Quality standardsConvenient Payment Mechanism
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RISKS ASSOCIATED WITH TRADE
RISKS ASSOCIATED WITH TRADE
Seller er
Payment made without Receipt of Desiredquality/quantity of Goods
Payment made without Receipt of Desiredquality/quantity of Goods
XX
Possession of Goods given up without Receiptof Payment
Possession of Goods given up without Receiptof Payment
Parties are located in different countries Different legal systems
Different Regulations and Restrictions Different Currencies Exchange rate Fluctuations Political Instability Unpredictable Natural Disasters Unpredictable Financial Market Disasters
Parties are located in different countries Different legal systems
Different Regulations and Restrictions Different Currencies Exchange rate Fluctuations Political Instability Unpredictable Natural Disasters Unpredictable Financial Market Disasters
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Exporttransaction
Exportorder
Production
Pre-shipment
documents
ShipmentPost-
shipmentdocuments
Dispatch of documents
Realizationof payment
Export ² Operation Cycle
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International tradepresents a spectrum of risk, causing ««««
International tradepresents a spectrum of risk, causing ««««
ExportersExporters
Any sale is a gift until paymentis received
Any sale is a gift until paymentis received
Exporter wants payment assoon as possible
Exporter wants payment assoon as possible
Preferably before goods are shippedPreferably before goods are shipped
ImportersImporters
Any payment is a donationuntil goods are received
Any payment is a donationuntil goods are received
Wants goods as soon aspossible
Wants goods as soon aspossible
Delay payment as long aspossible
Delay payment as long aspossible
Preferably until after goodsare resold to generate cash
flows
Preferably until after goodsare resold to generate cash
flows
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Various Methods of PaymentVarious Methods of Payment
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Cash-in-AdvanceCash-in-Advance
Exporter
Avoid credit risktotally
Wire transfers and credit
cards are commonly used
May loose business tocompetitors
Importer`
Least attractive option -likely cash flow
problems
Face the risk of goodsnot being sent by seller
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11
An arrangement by means of which a Bank (Issuing Bank)An arrangement by means of which a Bank (Issuing Bank)
Acting a the request of a Customer (Applicant)Acting a the request of a Customer (Applicant)
Undertakes to pay / Accept & Pay (Undertakes to pay / Accept & Pay (HonourHonour))
To the Beneficiary of LCTo the Beneficiary of LC
A predetermined amount ( LC amount)A predetermined amount ( LC amount)
Before a given date (LC Expiry date)Before a given date (LC Expiry date)
According to agreed stipulations (Terms) against presentationAccording to agreed stipulations (Terms) against presentationof stipulated documentsof stipulated documents
@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@
An arrangement by means of which a Bank (Issuing Bank)An arrangement by means of which a Bank (Issuing Bank)
Acting a the request of a Customer (Applicant)Acting a the request of a Customer (Applicant)
Undertakes to pay / Accept & Pay (Undertakes to pay / Accept & Pay (HonourHonour))
To the Beneficiary of LCTo the Beneficiary of LC
A predetermined amount ( LC amount)A predetermined amount ( LC amount)
Before a given date (LC Expiry date)Before a given date (LC Expiry date)
According to agreed stipulations (Terms) against presentationAccording to agreed stipulations (Terms) against presentationof stipulated documentsof stipulated documents
@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@
Letter of creditLetter of creditLetter of creditLetter of credit
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Exporterhands over the documents
to his Banker
Exporter·s Bankwill forward the
documents to Buyer·s banker
Buyer·s bank
will present documents to buyer against payment /
acceptance
Buyer
will make paymentagainst documents andthen take delivery of
goods
Buyer·s bank
will remit the funds toexporter·s bank
Exporter·s bank
will pay to exporter
Export CollectionsExport Collections
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An open account transaction means that the goods are shipped and
delivered for a payment to be made later or earlier.
Obviously, this is the most advantageous option to the importer in cash flow
and cost terms
It is consequently the highest risk option for an exporter.
Due to the intense competition for export markets buyers often press exporters
for open account terms
Therefore, exporters who are reluctant to extend credit may face the
possibility of the loss of the sale to their competitors.
However, by using export credit insurance and other techniques exporter
can offer open competitive account terms
An open account transaction means that the goods are shipped and
delivered for a payment to be made later or earlier.
Obviously, this is the most advantageous option to the importer in cash flow
and cost terms
It is consequently the highest risk option for an exporter.
Due to the intense competition for export markets buyers often press exporters
for open account terms
Therefore, exporters who are reluctant to extend credit may face the
possibility of the loss of the sale to their competitors.
However, by using export credit insurance and other techniques exporter
can offer open competitive account terms
Open AccountOpen Account
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Types of Documents
CommercialDocuments
Principal
Bill of Exchange,
Commercial Invoice,
Packing list, ,
Bill of lading,
Insurance Policy,
Certificate of Inspection,
Certificate of OriginShipment Advice
Auxiliary
Shipping instructions,
Insurance declaration,
Intimation for inspection,
Shipping order,
Mate's receipt etc
Regulatory
Documents
Exchange Control Documents,
Freight Payment Certificate,
Gate Pass,
Shipping Bill
ARE
Vehicle Pass etc
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Aligned Documentation SystemAligned Documentation System
The standardized Preshipment export documents
ADS is based on the use of UN Layout Key
Uniform and standardized paper size & specification
Documents are aligned to one another in such a way that common
items are given in the same slots
Prepare all other documents from the same Master document using
masking technique.
Ensures economy, speed, accuracy and convenience
Facilitates expeditious checking
The standardized Preshipment export documents
ADS is based on the use of UN Layout Key
Uniform and standardized paper size & specification
Documents are aligned to one another in such a way that common
items are given in the same slots
Prepare all other documents from the same Master document using
masking technique.
Ensures economy, speed, accuracy and convenience
Facilitates expeditious checking
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According to Article 5 of UCP 600
´Banks deal with documents and not with goods, services or
Performances to which the documents may relateµ
According to Article 5 of UCP 600
´Banks deal with documents and not with goods, services or
Performances to which the documents may relateµ
Postshipment DocumentsPostshipment Documents
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Global surveys indicated that, because of discrepancies,
approximately 70% of documents presented under letters of credit
were being rejected on first presentation.
This obviously had, and continues to have, a negative effect on theletter of credit being seen as a means of payment
If unchecked, could have serious implications as means of
settlement in international trade.
The introduction by banks of a discrepancy fee has highlighted the
importance of this issue .
Global surveys indicated that, because of discrepancies,
approximately 70% of documents presented under letters of credit
were being rejected on first presentation.
This obviously had, and continues to have, a negative effect on theletter of credit being seen as a means of payment
If unchecked, could have serious implications as means of
settlement in international trade.
The introduction by banks of a discrepancy fee has highlighted the
importance of this issue .
Extracts from Introduction to UCP 600Extracts from Introduction to UCP 600
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ne of the structural changes to the UCP is theintroduction of articles covering definitions (article 2)and interpretations (article 3).
In providing definitions of roles played by banks andthe meaning of specific terms and events, UCP600 avoids the necessity of repetitive text to explaintheir interpretation and application.
Similarly, the article covering interpretations aims totake the ambiguity out of vague or unclear languagethat appears in letters of credit and to provide adefinitive elucidation of other characteristics of theUCP or the credit.
One of the structural changes to the UCP is theintroduction of articles covering definitions (article 2)and interpretations (article 3).
In providing definitions of roles played by banks andthe meaning of specific terms and events, UCP600 avoids the necessity of repetitive text to explaintheir interpretation and application.
Similarly, the article covering interpretations aims totake the ambiguity out of vague or unclear languagethat appears in letters of credit and to provide adefinitive elucidation of other characteristics of theUCP or the credit.
Interpretations & Definitionsof Various terms used in documents
Interpretations & Definitionsof Various terms used in documents
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Article 3 Interpretations
Where applicable, words in the singular include the plural and inthe plural include the singular.
A credit is irrevocable even if there is no indication to that effect.
A document may be signed by handwriting, facsimile signature,perforated signature, stamp, symbol or any other mechanical or electronic method of authentication.
Terms such as "first class", "well known", "qualified","independent", "official", "competent" or "local" used to describethe issuer of a document allow any issuer except the beneficiaryto issue that document.
Article 3 Interpretations
Where applicable, words in the singular include the plural and inthe plural include the singular.
A credit is irrevocable even if there is no indication to that effect.
A document may be signed by handwriting, facsimile signature,perforated signature, stamp, symbol or any other mechanical or electronic method of authentication.
Terms such as "first class", "well known", "qualified","independent", "official", "competent" or "local" used to describethe issuer of a document allow any issuer except the beneficiaryto issue that document.
An example of importance of wording in the documentsAn example of importance of wording in the documents
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Facts of the case:
To finance the shipment of 6,000 metric tons of heavy melting steel
scrap, the M/s BUY Ltd obtained a letter of credit for US$ 750,000. Among terms of the letter of credit issued by ISS Bank, one of thedocuments required is the presentation of an "original insurance policy´
After presentation, the NEG Bank paid to the beneficiary and forwardedthe documents to ISS Bank
The Issuer rejected the presentation, noting the following discrepancies: "Insurance policy not marked original" As a result, the NEG Bank sued ISS Bank for wrongful dishonour
and the M/s BUY brought suit to prevent payment.........contd
Facts of the case:
To finance the shipment of 6,000 metric tons of heavy melting steel
scrap, the M/s BUY Ltd obtained a letter of credit for US$ 750,000. Among terms of the letter of credit issued by ISS Bank, one of thedocuments required is the presentation of an "original insurance policy´
After presentation, the NEG Bank paid to the beneficiary and forwardedthe documents to ISS Bank
The Issuer rejected the presentation, noting the following discrepancies: "Insurance policy not marked original" As a result, the NEG Bank sued ISS Bank for wrongful dishonour
and the M/s BUY brought suit to prevent payment.........contd
Case LawCase LawBased on
Kredietbank Antwerp v. Midland Bank P1997 Nos. 609 & 123 (31 July 1997) UK
Based on
Kredietbank Antwerp v. Midland Bank P1997 Nos. 609 & 123 (31 July 1997) UK
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Two policies had been presented, the first produced by a wordprocessor on high quality paper containing a water-mark and theblue logo of the insurance company, and the second a photocopy
of the first on plain paper.
Both were signed, and the later was marked "duplicate".
Both policies contained the following statement:
"This policy is issued in original and duplicate, one of which to beaccomplished, the other to stand void."
Two policies had been presented, the first produced by a wordprocessor on high quality paper containing a water-mark and theblue logo of the insurance company, and the second a photocopy
of the first on plain paper.
Both were signed, and the later was marked "duplicate".
Both policies contained the following statement:
"This policy is issued in original and duplicate, one of which to beaccomplished, the other to stand void."
Facts of the case (...contd)
"Insurance policy not marked originalµ
Facts of the case (...contd)
"Insurance policy not marked originalµ
Case Law («..contd)Case Law («..contd)
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UCP Article 20 of UCP 500says all "originals" had to be stamped "original³ Article 20 applied if the policy was either produced, or appeared to be
produced by a computerized system.
As neither document in this presentation was marked ³original´, ISS Bankand BUY argued that the presentation did not meet the "original"requirement.
They also argued that the word processor upon which the policy wasproduced was not a "computerized system³
The ISS Bank and BUY argued that only a stamp or title of "original"
could fulfil this requirement. NEG Bank, however, argued that the obvious characteristics of
being an original displayed by the policy were enough.
UCP Article 20 of UCP 500says all "originals" had to be stamped "original³ Article 20 applied if the policy was either produced, or appeared to be
produced by a computerized system.
As neither document in this presentation was marked ³original´, ISS Bankand BUY argued that the presentation did not meet the "original"requirement.
They also argued that the word processor upon which the policy wasproduced was not a "computerized system³
The ISS Bank and BUY argued that only a stamp or title of "original"
could fulfil this requirement. NEG Bank, however, argued that the obvious characteristics of
being an original displayed by the policy were enough.
Litigation proceedingsLitigation proceedings
Case Law («..contd)Case Law («..contd)
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While noting that many courts had equated "international standardbanking practice" with strict compliance, the court stated that "a bank hasto be careful to steer between too literal or rigid an approval, on the onehand, and on the other, applying a version of reasonableness, equity,
good faith and so on, which could only in the end lead to uncertainty.³ Additionally, the court stated that ambiguities should be resolved in favour
of "giving effect to the overall purpose of the transaction.³ The court noted that it ³ISS Bank could not escape from the conclusion
that a document produced by a word processor is a document producedby a computerized system.
The court held that the blue logo, the watermark, the clause which statedthe policy was issued in one original and one duplicate, and the fact thatthe bank received two copies with one clearly marked "duplicate" allcombined to meet the "marked as original" requirement of Article 20.
Accordingly, the court ruled that there was no discrepancy based on the"original³ issue.
While noting that many courts had equated "international standardbanking practice" with strict compliance, the court stated that "a bank hasto be careful to steer between too literal or rigid an approval, on the onehand, and on the other, applying a version of reasonableness, equity,
good faith and so on, which could only in the end lead to uncertainty.³ Additionally, the court stated that ambiguities should be resolved in favour
of "giving effect to the overall purpose of the transaction.³ The court noted that it ³ISS Bank could not escape from the conclusion
that a document produced by a word processor is a document producedby a computerized system.
The court held that the blue logo, the watermark, the clause which statedthe policy was issued in one original and one duplicate, and the fact thatthe bank received two copies with one clearly marked "duplicate" allcombined to meet the "marked as original" requirement of Article 20.
Accordingly, the court ruled that there was no discrepancy based on the"original³ issue.
Case Law («..contd)Case Law («..contd)
Court·s decisionCourt·s decision