international trade finance
DESCRIPTION
Overview of legal and financial risk-management considerations in financing international business transactions. In other words, "How to Get Paid, or Get what you Pay For in International Business".TRANSCRIPT
Jim ChesterJim ChesterCowles & Thompson, PC
Dallas, Texas
INTERNATIONAL INTERNATIONAL TRADE FINANCETRADE FINANCE
Presented by:
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Key principal in all business transactions:
- maximize sales & profits while simultaneously managing risk & reducing exposure
Risks in international transactions include:
- legal risk
- political risk
- marketing risk
- financial risk
International Business International Business TransactionsTransactions
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Risk in international trade finance:- non-payment- inadequate or incorrect goods received- currency issues
Most financial risk can be minimized/or eliminated with good contracts and planning
International Trade FinanceInternational Trade Finance
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1. Private Banks & Thrifts- LCs- Financing- Wire Transfers
2. Private Equity Firms & Individuals- Loans- Trade finance/PO finance
• Public and International institutions
- Trade/PO financing- Other assistance
Sources of International Trade FinancingSources of International Trade Financing
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1. Private Banks & Thriftsa. OFAC Sanctions and Frozen Assets (See http://www.treas.gov/offices/enforcement/ofac/sanctions)
b. Avoid dealing with "Bad guys”1. Denied Parties List - BIS
2. Specially Designations Nationals and Narcotics Traffickers - OFAC
3. Entity List - BIS
4. Debarred Parties List – State
5. Unverified List – BIS
(See http://www.treas.gov/offices/enforcement/ofac/sdn)
c. Anti-boycott laws
d. Be mindful of other rules governing financial transfers
(e.g., PATRIOT Act, foreign rules, currency limits, etc.)
Sources of International Trade Financing:Sources of International Trade Financing:
Legal ConcernsLegal Concerns
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Methods of Payment
A. Advance/Post Payment1. Cash
2. Check
3. Wire
B. Letters of Credit (LC)
1. Documentary LC
2. Stand-by LC
3. Back-to-back LC
International Trade FinanceInternational Trade Finance
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Wire Transfers Trivia--Every day in the USA, roughly 2 trillion dollars are transferred via Fedwire and the Clearing House Interbank Payment System (CHIPS);
-- Every 2 -4 days, the total gross national product of G-10 countries turns over on the wires.
WireWire
- Initiated by Buyer pursuant to the underlying contract
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Reasons for Using LC
A. Parties do not know each other.
B. A means to avoid risk of default by the other party.
C. Shift risks to other parties.
Letter of CreditLetter of Credit
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What is a LC?
- A promise issued by a bank to another party which states the bank will pay the seller a specified amount when certain conditions are met.
- Can be continuous/revolving or for a single transaction
Letter of CreditLetter of Credit
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Parties Involved in a LC Transaction:
A. BuyerB. Issuing BankC. SellerD. Receiving Bank (seller’s Bank)
A. Can be “Confirming Bank”
E. Freight ForwarderF. CarrierG. Insurance Company
Letter of CreditLetter of Credit
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Governing Law of LC:1. LC is by nature a matter of contract; the rules of letters of credit are
embodied in the terms of the contracts themselves.
2. Parties may choose the governing law in the LC document/contract.
3. UCP 600: Standards developed by the ICC; if incorporated into the LC, it is binding in case of dispute.
4. UCC Article 5: If the UCP 600 is not incorporated into the LC, and there is not other choice of law provision, the UCC might be a gap-filler.
Letter of CreditLetter of Credit
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Documentary Letter of CreditDocumentary Letter of Credit
Fundamental Principles of LC
- The responsibility of banks to deal with documents only.
- The rule of independence: LC is considered independent from the sales contract between the parties.
- The rule of strict construction: terms and conditions of the LC are strictly adhered to.
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Diagram of Letter of Credit Diagram of Letter of Credit TransactionTransaction
Issuing Bank (foreign)Confirming Bank (US)
Foreign BuyerUS Seller
ProductsProducts
$
Docs$
$
Docs
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Documentary Letter of CreditDocumentary Letter of Credit
Documentary LCStep 1: Forming the Sales Contract
- The basis of all transactions- Provisions for the LC
Step 2: Arranging Financing- Buyer & its bank signs an independent loan agreement- Issuing bank is not privy to the Sales Contract- LC & credit worthiness of Buyer- Seller’s Bank either confirm or deny LC- If confirmed, Seller ships goods.
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Documentary Letter of CreditDocumentary Letter of CreditStep 3: Shipping of the Goods
- The Seller engages a Freight Forwarder (“FF”)- Seller gives instructions and documents to FF- Common Shipping Documents include:
- Packing List- Commercial Invoice- Certificate of Origin- Certificate of Inspection
- Seller transports goods to Carrier’s pier for Dock Receipt.- When goods loaded to the vessel, Carrier issues a
“negotiable bill of lading.” - Seller arranges for insurance for the goods during transport.
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Documentary Letter of CreditDocumentary Letter of CreditStep 4: Payments for the Goods
1.The Seller draws a draft on the Issuing Bank2.The Seller presents draft and required documents to confirming bank for payment.
- Common Documents include:- Negotiable bill of lading- Insurance Certificate- Packing List- Certificate of Inspection- Commercial Invoice- Certificate of Origin
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Documentary Letter of CreditDocumentary Letter of CreditStep 4: Payments for the Goods (cont)
3. The Confirming Bank honors the draft and pay Seller in return for the documents tendered.
4. The Confirming Bank forwards the documents to Issuing Bank for payment.
5. Issuing Bank presents the Documents to Buyer on Credit or upon payment.
6. Buyer presents the bill of lading to Carrier for the release of goods.
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Standby Letter of CreditStandby Letter of CreditWhat is it?
--US equivalent of a performance bond issued by US banks.
--A guarantee and not a way to make payment.
--It allows buyers to collect payment if the buyer shows the seller has not met certain promises dictated in the contract.
--The party putting up the standby letter of credit does not have to deposit any money or release any money unless the other party demands payment on the standby letter of credit.
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Back - to - Back Letter of CreditBack - to - Back Letter of CreditWhen/How to Use?
-- Often used if Seller needs capital to obtain resources form a Supplier to fill Buyer’s order
-- Seller executes LC with a bank FBO the Supplier, using the primary LC (i.e., the Buyer’s LC) as “collateral”
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Regulatory ConsiderationsRegulatory ConsiderationsAnti-Boycott Laws-- Do not allow impermissible terms to appear in LC’s
Foreign Corrupt Practices Act (FCPA)-- Beware of improper commissions or other payments
Other Trade Laws affecting Payments-- OFAC, PATRIOT Act, etc.
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Questions?Questions?
Email [email protected]
Direct 214.672.2114
Toll Free 1.877.34.World