Foreign guarantees

A bank guarantee is a surety or a guarantee issued by the bank on behalf of its customer for the benefit of a domestic or foreign beneficiary, with which the bank as the guarantor undertakes financial responsibility. A foreign bank guarantee refers to a guarantee issued for the benefit of a foreign beneficiary. An exporter or an importer can ask for a bank guarantee from its foreign trade partner to guarantee the fulfilling of all the contractual obligations. It is advisable for the exporter and the importer to make sure with the help of one's bank that the guarantee is valid and binding. A foreign guarantee can be issued as a surety or a guarantee on first demand. A bank guarantee is issued by the bank on behalf of its customer, for the benefit of a domestic beneficiary is usually directly enforceable and accessory to the principal obligation. In other words, the beneficiary has the right to claim its due receivables either from the company or directly from the guarantor bank. The bank is then able to present the same claims to the beneficiary. In case of a surety, the bank is entitled to restrain payment to the beneficiary until the company's obligation to pay on the basis of a contractual relationship has been established. Sureties are governed by the Act on Guaranties and Third-Party Pledges (19.3.1999/361).

Elements Of A Bank Guarantee

Guarantees usually involve a minimum of three parties:

The beneficiary the person in whose favour the guarantee has been issued, who requires security against the risk of the principals non-performance or default under the primary contractual obligation. The beneficiary is the person who has authority to draw on the bank guarantee in the event that the banks client fails to make payment. The beneficiary is named specifically on the bank guarantee, and can claim the full value of the bank guarantee at such time as he or she makes proper claim that they have not received payment for the provision of goods or services.

The applicant applies for the issue of a guarantee which covers a particular performance by him. The applicant can expect to be informed in writing why and how he is in breach of contract.

The guarantor the bank or party that issues the guarantee on behalf of the applicant. The guarantor is usually the applicants bank which is situated in the same country as the applicant. The issuing bank is the bank which is providing the guarantee to the beneficiary, on behalf of their client. The issuing bank is legally required to make full payment on the bank guarantee if the conditions laid out in the bank guarantee are met.

Types of Bank Guarantee . There are two main types of bank guarantee. The first of these is a Direct Bank Guarantee. A direct bank guarantee is a guarantee which will result in payment directly to the beneficiary. The second type of bank guarantee is an Indirect Bank Guarantee. An indirect bank guarantee is payable not directly to the beneficiary, but to the beneficiarys bank.

Direct guarantee

The bank will issue adirect guarantee specifically in behalf of the beneficiary, thus establishing an immediate legal relationship between the guarantor bank and the beneficiary

Indirect guarantee

In the case of an indirect guarantee, another bank is involved. The principals bank will issue an indirect guarantee (a counter guarantee) made in behalf of the other bank, based upon which the latter will issue its guarantee in behalf of the beneficiary.

In case the other banks guarantee is eventually used by the beneficiary, acounter-guarantee serves to provide security to the other bank that is based upon an irrevocable abstract commitment by the bank to pay adefined amount upon the first written demand of the other bank in case of performance under the guarantee.

Indirect guarantees are mostly used in special territories (such as Arab countries), where local regulations prevent acceptance of guarantees issued by foreign banks.

Commonly used guaranteesPerformance Bond

The most common type of guarantee

Usually required for the duration of a contract, plus a grace period to allow the beneficiary to make a demand in the event of non-performance of the obligations covered by the guarantee.

Tender Guarantee/Bid Bond

Often called for in support of contract tenders, particularly in international trade situations

Provides the beneficiary with a financial remedy if the applicant fails to fulfill any of the tender conditions.

Advance Payment Guarantee

Used where the applicant calls for the provision of a sum of money at an early stage of the contract

The beneficiary can recover the amount paid in advance, or part thereof, if the applicant fails to fulfil their underlying contractual obligations.

Facility GuaranteeEnables an applicant to secure banking facilities for a subsidiary, associate company or personal account in other countries.Bank Guarantee UsageBank guarantees can be used in a variety of ways to cover different trading scenarios. The following are different types of guarantee usage which range from being so common as to be standard practice in international trading.Payment GuaranteeA payment guarantee is simply an assurance provided by the buyer to the seller that payment will be made upon shipping of goods. This is the most common form of bank guarantee usage in the global trading, and buyers can expect most sellers to request a bank guarantee for the purpose of securing payment in the case of the buyer defaulting on the contract.Performance Bond GuaranteeA performance bond guarantee is a bank guarantee which is issued by the seller and given to the buyer. If the seller fails to meet the terms of the contract, then the buyer is entitled to claim payment on the bank guarantee, which is normally around ten percent of the total value stipulated on the contract. It is standard practice for the seller to issue the buyer a performance bond guarantee.Advance Payment GuaranteeIf the seller has requested an advance payment, then the buyer can request a bank guarantee to cover the advance payment in the event that the seller fails to fulfill its obligations as stipulated in the contract. This is rarely needed in sugar trading, as payment is usually made by a letter of credit, under which payment is only made to the seller in the event that the conditions of the contract are fulfilled.Guarantee on first demand

Guarantees on first demand are widely used in international trade. They are payable on demand, and the bank cannot refuse payment if it has received a claim that is formally valid. In case of a guarantee on first demand, the bank is obliged to pay the beneficiary on the grounds of the claim that is presented according to the provisions of the guarantee obligation without further examining whether the beneficiary has the right to receive the payment.Standby letter of credit

Standby letter of credit is a guarantee in a form of a letter of credit. It is an independent obligation in relation to the main contract and subject to the ICC Uniform Customs and Practice for Documentary Credits by the International Chamber of Commerce or to International Standby Practices Rules (ISP98).

Assigned guarantee

Usually a bank guarantee is a direct guarantee between the contract partners, in which the bank issues the guarantee directly for the benefit of the foreign beneficiary. However, in some countries the legislation, currency regulations or the general customs of trade are against accepting guarantees from foreign banks. In such cases, a guarantee can be arranged through our correspondent bank as an assigned guarantee. We request the correspondent bank to issue a guarantee to your company's contract partner and oblige to reimburse the correspondent bank for all payments that it may have to make to the beneficiary on the basis of the guarantee.

Guarantees for export trade

A bid bond, also known as tender guarantee, compensates the damages if the exporter reverses the tender, refuses to sign the contract after the tender has been accepted or fails to arrange the performance bond presumed by the contract. Usually, the bid bond covers 25% of the value of the tender. The bid bond is valid from the submitting of the tender until its acceptance.

The contract partners may agree on a part of the contract price to be paid in advance. Advance payment bond or guarantee ensures that the buyer recovers the advance payment if the delivery is not accordant with the contractual obligations or if the delivery is not realised.

Performance bond or guarantee compensates the losses for the buyer in the event of non-performance of the performance obligations in the contract. The guarantee is valid from the signing of the contract until the delivery.

The exporter gives a warranty guarantee (also known as maintenance guarantee or retention money bond) when the delivery or the performance has been effected. The guarantee compensates the losses for the buyer if the exporter fails to reimburse the possible deficiencies or defects within the guarantee period.

Guarantees for import trade

A guarantee securing the payment of the purchase price is one of the most common guarantees associated with import trade. When the foreign seller gives the Finnish importer payment time after the delivery, the collateral is usually arranged either as a separate guarantee concerning a single transaction, as an aval, i.e. a guarantee for a bill of exchange accepted by the importer, or as an overdraft facility guarantee limit. Bank guarantee for a bill of exchange, also known as aval, is an international guarantee term. In Finland, it usually refers to a guarantee specified in the bill of exchange.

Other types of guarantee

In addition to the aforementioned forms of guarantee, guarantees can be issued to secure various contractual obligations (for instance exclusive sales, leasing or rent agreement), or to fulfil some obligations to officials provided by the law or orders of the authorities (for instance customs guarantee). There are also many guarantees associated with financing.

Bill of lading guarantee is sometimes needed in import trade, for example when the products spoil quickly or have high storage costs in customs. If the original bills of lading are not yet at the importer's disposal, the importer can claim the product against the guarantee.

A customs guarantee is needed, for instance, when the importer requests temporary exemption from duty or a position as a charge customer from the customs authorities. A guarantee given for the community's customs procedure is comparable to a customs guarantee. The guarantee is given to Finnish authorities but it covers customs duties and other payments throughout the EU area that the customer has to pay.

Counter-obligation for a bank guarantee

A Company and the bank agree upon the issuance of a bank guarantee through a counter-obligation. The counter-obligation means that the company obliges to reimburse the bank for all payments that it may have to make on the basis of the bank guarantee. The counter-obligation also includes provisions on the guarantee fee charged on the bank guarantee and other terms and conditions between the company and the bank.

Guarantee limit

The company can also be granted a guarantee limit that makes it easy to order bank guarantees from the bank without signing any separate counter-obligation. An order can also be submitted to the bank by Web services.

Prospects of Bank Guarantee:

The request for bank guarantees in support of contractual obligations has become common practice in the market and different forms of guarantees have evolved to cater for the diverse types of commercial and financial transactions.

A guarantee is a written undertaking issued by a bank in favour of the receiver of the goods or services, whereby it pledges to make certain payments on behalf of its client, if the latter fails to make a payment or to carry out specific functions in terms of the commercial contract. The banks commitment is legally independent of the underlying commercial contract.

A guarantee (bond or suretyship, as it is sometimes called) supports commercial contracts by providing trading partners with the flexibility to reduce credit and performance risk. It is a supplementary agreement or form of collateral or security relating to a specific transaction, for example:

A seller may not be able to assess a buyers ability to pay for goods or a service rendered and wants protection against non-payment.

The buyer questions the sellers financial capability, resources and ability to perform under the commercial contract and needs protection against non-performance.

Business benefits of bank guarantee.

Bank guarantee Create stronger business relationships - provides the security of knowing that payment has been guaranteed by one of the worlds strongest financial institutions to the customers and supplier.

Reduction of risks inherent in transaction

A bank guarantee is a reliable security instrument in both international and domestic trade

It provides security for various types of risk:

limitation of risk related to your business partners potential insolvency or unwillingness to pay

limitation of risk related to breach of contractual obligations

security for risks even beyond the realm of trade and services (e.g. provision of ready cash in case of judicial bail, auction security and the like)

Cost savings: Bank guarantees are quite cost-saving as compared with bank loans

Positive impact on your companys cash flow

Guidelines

URDG 758 which came into effect in 2010, are the most reasonably balanced code of practice available for international independent guarantees, and were endorsed by UNCITRAL in 2011. The ICC Uniform Rules for Demand Guarantees (URDG) reflect international standard practice in the use of demand guarantees and balance the legitimate interests of all parties.

Since their first adoption in 1991,ICC's URDG have gained international acceptance and official recognition by bankers, traders, industry associations and international organizations including UNCITRAL, FIDIC and the World Bank. The current edition,URDG 758, was officially endorsed by the UN Commission on International Trade Law (UNCITRAL) at its 44th annual session in Vienna from 27 June 8 July 2011.

More than an update of the existing rules, the revised URDG 758 is a new set of rules for the twenty-first century that came into effect on 1 July 2010. URDG 758 contains significant changes practitioners will need to know, including:

New definitions and interpretation rules for greater clarity and precision;

The treatment of non-documentary conditions, incomplete presentations, and many other contentious practices;

A comprehensive coverage of advice of guarantees, amendments, electronic documents, transfers and more;

A provision on force majeure that triggers an extension of a guarantee for thirty calendar days;

The replacement of reasonable time with fixed periods for the examination of demands, the extension of guarantees and the suspension of payments;URDG 758 applies to the Demand Guarantee or Counter Guarantee that expressly indicates it is subject to them.They are binding on all parties to the demand guarantee and counter guarantee except so far as the demand guarantee or counter guarantee modifies or exclude them.Demand guarantee or counter guarantee issued on or after July 01, 2010 subject to the URDG means subject to URDG 758.Where, at the request of a counter guarantor, a demand guarantee is issued subject to the URDG, unless the counter guarantee exclude the URDG. However, a demand guarantee does not become subject to the URDG, merely because the counter guarantee is subject to the URDG.Where a demand guarantee or counter-guarantee issued on or after 1 July 2010 states that it is subject to the URDG without stating whether the 1992 version or the 2010 revision is to apply or indicating the publication number, the demand guarantee or counter-guarantee shall be subject to the URDG 2010 revision.This revision of ICC Uniform Rules for Demand Guarantees (URDG 758) creates a new set of independent guarantee rules for the twenty-first century. The new URDG are clearer, more precise and more comprehensive than their predecessor, URDG 458.The present revision uses language consistent with that in ICCs universally accepted Uniform Customs and Practice for Documentary Credits (UCP 600).It contains new provisions that practitioners will need to know:

New Definitions and interpretation rules to provide greater clarity and precision;

The solution to non-documentary conditions, asymmetrical guarantees and counter-guarantees, incomplete presentations, and many other contentious practices;

A comprehensive coverage of advice of guarantees, amendments, electronic documents, transfers, and other innovative aspects in guarantee practice;

A clear layout of the examination of demand process;

A step-by-step road map to handling extend or pay demands and force majeure; and

A checklist of drafting recommendations and ready-to-use model forms.

First adopted by ICC in 1991, the URDG reflect international practice in the use of demand guarantees while at the same time balancing in the most reasonable way the legitimate interests of the beneficiary, the applicant and the guarantor. International organizations and professional federations have endorsed the URDG, lawmakers have used them as model for national statutes, and banks and businesses apply them across the world in their way to day to day guarantee business.

Bangladesh Bank Guideline: Bangladesh Bank provides some guideline in Chapter 16 from paragraph 8 to14 about foreign bank guarantee.8.Guarantees on behalf of residents in favour of non-residents:ADs may furnish guarantees to non-residents on behalf of residents only within the authority set out in the following paragraphs:i)ADs may issue bid bonds/performance bonds on behalf of suppliers in Bangladesh in favour of international agencies inviting tenders for supply of goods/services. In such cases ADs should ensure genuineness of the tender/supply contract/work order etc. before issuing of bond/guarantee.

ii) Minor GuaranteesADs may freely give guarantees on behalf of their customers in their ordinary course of business in respect of missing documents, authentication of signature, release of goods on Trust Receipts and defects in documents negotiated under LC or otherwise.

iii) Export guaranteeADs may furnish performance bonds or guarantees in favour of overseas buyers on account of Bangladeshi exporters without prior approval of the Bangladesh Bank subject to usual banking norms and the following conditions:(a) the tender floated by the foreign buyer calls for bank guarantee/ performance bond;(b) the tenderer is a bonafide importer/user/trader of the commodity/product concerned;(c) there is no export ban in Bangladesh on the commodity/product to be supplied;

(d) the past performance of the exporter is considered satisfactory by the AD.The remittance, if any, to the beneficiary as a result of invocation of the bond or guarantee can be made subject to report to the Bangladesh Bank.9. Repayment guarantees against suppliers' creditsADs have to take prior permission from Foreign Exchange Policy Department, Bangladesh Bank before issuing any guarantee on behalf of industrial concerns under public/private sector favouring foreign suppliers towards repayment of suppliers' credits.10. Guarantee on behalf of non-residents in favour of residents in BangladeshADs have to take prior permission from Foreign Exchange Policy Department, Bangladesh Bank before issuing any guarantee on behalf of industrial concerns under public/private sector favouring foreign suppliers towards repayment of suppliers' credits.(a) Subject to such conditions as may be imposed by Banking Regulations and Policy Department from time to time, ADs may issue Taka guarantees on behalf of foreign or foreign controlled companies/firms operating in Bangladesh in favour of residents in Bangladesh: (i) against 100% cash deposit and/or where the guarantee is required to be submitted with tender documents in lieu of earnest money deposit, subject to the condition that validity of the guarantee issued in lieu of earnest money will be limited to the period within which the decision regarding acceptance or rejection of the tender is taken, (ii) against adjustment of the amount from the overdraft limit, if any, allowed to the company/firm concerned.(b) An AD may without prior approval of Bangladesh Bank, issue guarantee, bid bond or performance bond in foreign currency on behalf of a non-resident firm/company favouring residents in Bangladesh provided a back to back guarantee covering the guaranteed amount from an overseas correspondent or other bank abroad is held by the AD. The AD should satisfy itself about the bonafides of the overseas guarantee before issuing its own guarantee/bid bond/performance bond there against.(c) In all other cases not specified above prior approval of the Bangladesh Bank is required for issuing guarantees on behalf of non-residents in favour of the residents in Bangladesh. Applications for these cases should be made by letter in duplicate giving full particulars of the guarantee/bond, the period, purpose and the method by which the AD will be reimbursed in the event of the guarantee/bond being invoked.

11. Guarantee favouring local project authorities on behalf of residents.

ADs may issue, on behalf of residents, bid bonds/performance bonds/guarantees in foreign currency in favour of local project authorities against goods/services procurement tenders financed by international/foreign donor agencies, on the condition that in case the guarantee is invoked the claim there against would be paid only in Taka equivalent and not in any other currency.

12. Guarantee favouring a non-resident on behalf of another nonresidentNon-resident international agencies may demand bank guarantees from non-resident contractors against supply of materials/down payment for the ongoing projects in Bangladesh financed by them. Such guarantee on behalf of a non-resident contractor in favour of the non-resident beneficiary may be issued by an AD against 100% counter guarantee from a reputed international bank abroad, or against 100% cash collateral in foreign exchange received from abroad through banking channel.13. Guarantees and pledging of collateral in favour of overseas bank branches and correspondentsADs may not, without prior approval of Bangladesh Bank, furnish guarantees to or hold collaterals on behalf of overseas bank branches or correspondents in respect of credit facilities or guarantees to be extended by them or for any other purpose. All applications to Bangladesh Bank should be made by letters giving details of the purpose for which guarantee is to be furnished or collateral deposited. Prior approval is not however, necessary in cases where the ADs are satisfied that the amount of the fixed deposit or other collateral held by them represents funds remitted to Bangladesh through normal banking channel from the country of residence of the borrower.14. Renewals of loans ,overdrafts and guaranteesIn cases where the extension of loans or overdrafts or guarantees requires prior approval of the Bangladesh Bank, the renewal of such loans, overdrafts or guarantees shall also require prior approval of the Bangladesh Bank.Practice in Pubali Bank Limited

At Pubali Bank Limited we have extensive experience of bank guarantees, together with a worldwide network of correspondent banks to meet domestic and international needs. Pubali Bank Limited is providing foreign guarantees with attractive terms. Pubali Bank Limited is providing valuable support for international business. Pubali Bank Limited is arranging following types of guarantees to cover many other kinds of risk.Performance Bank Guarantee: Sometimes Pubali Bank Limited issues Performance Bank Guarantee. For Example: Unicredit S.P.A,Millano (Corresponding Bank) has requested Pubali Bank Limited to issue a Bank Guarantee (Performance Guaranty) for EURO 7,318.00 in favour of Deputy Director, Government Printing Press,Tejgaon(beneficiary) under the request of Smyth Srl,Regione Formica,Italy (Principal) against the counter guarantee for the same amount issued by Unicredit S.P.A,Millano. Smyth Srl,Regione Formica, Italy (Principal) has entered into a contract with Deputy Director, Government Printing Press, Tejgaon(beneficiary) for the supply of SM20 Semi Automatic Book Binding Machine .After receiving swift Message from Unicredit S.P.A,Millano International Division of Pubali Bank Limited authorize their Principal Branch to issue a Bank Guarantee (Performance Guaranty) for EURO 7,318.00 in favour of Deputy Director, Government Printing Press,Tejgaon. Pubali Bank Limited commits to pay to the beneficiary the guaranteed sum, in the case that the supplier does not fulfill his contractual obligations within the expiry date of guarantee.Then Pubali Bank Limited will claim to Unicredit S.P.A,Millano bank to repayment of the guaranteed sum.

Foreign Counter Bank Guarantee: Pubali Bank Limited also issues Foreign Counter Bank Guarantee. For Example : Pubali Bank Limited has issued a Foreign Counter Bank Guarantee for Saudi Arabian Riyal 1.00 lac EQvt.to tk 22.86 lac (approx.) against 10% our bank FDR coverage favouring our Saudi Correspondent Bank Al Bilad, Jeddah,Ksa for providing corresponding BG For 360 days favouring NAJD GROUP CO. for Umrah Services ,Jeddah,Saudia Arabia on Account of M/s.columbia Travels International..Bank Guarantee Pitfalls .These are some common pitfalls which can easily cause problems when applying for or accepting bank guarantees .Correct Beneficiary Details It sounds easy enough to get right, but if the details on the bank guarantee do not match the beneficiarys actual details, then the bank guarantee may be void.Correct Date Bank guarantees only come into effect at a certain date, and they also have expiry dates. It should be ensured that there is a reasonable period of time in which one can draw on the bank guarantee, if someone are receiving one, or that the seller will have enough time to draw on the bank guarantee, if someone are sending one. .Correct Contract Details The contract which the bank guarantee refers to will be referenced in the bank guarantee. It should be ensured that the details provided on the bank guarantee match the contract. Essentially, we must check and double check that all details listed on the bank guarantee are correct, otherwise the bank guarantee could have no value whatsoever.

Preventing Bank Guarantee Fraud

The prospect of bank guarantee fraud is a scary one, because it potentially involves the loss of millions of dollars. However, the good news is that you can keep yourself safe by following some common sense procedures when it comes time to obtaining a bank guarantee, or accepting one.First, a warning. If you are given a bank guarantee that you suspect is false, it is not a good idea to take it to a bank to have it checked. Doing so is rather akin to walking into a police station with a suitcase full of cocaine to ask them if it is the real thing. Many people have been arrested in banks after simply trying to authenticate fraudulent bank guarantees. If you suspect there is a problem with a bank guarantee, have your attorney deal with the issue.Listed below are some common forms of bank guarantee fraud that have been encountered in the sugar trading industry.

Since there is a lack of legislative regulation for demand guarantee in Bangladesh, and because of their highly international in nature, the available international rules,such as the URDG,make it a natural choice for local banks to use. It has ever been accepted by the world bank as the rules for its standard guarantees. At present Bangladesh banks are not generally issuing demand guarantees subject to the URDG. It is recommended that banks investigate the possibility of making the URDG part of their current practice. As ICC is currently in the process of reviewing the existing URDG, banks should start to appoint the appropriate teams so that they can study the revised URDG when it becomes available.This will enable banks to determine whether or not they should issue demand guarantees subject to it.It will also place them in a position to adequately advise their customers on whether they should issue or accept demand guarantees that are made subject to it. The URDG govern demand guarantees and ISP98 govern standby letters of Credit. Although the demand guarantee and the standby letter of credit are essentially same in character, they are still different products, and therefore they need different rules to apply them. It is recommended that the banks use the international rules of the ICC. By incorporating the URDG into the demand guarantees and the ISP98 into standby letters of credit, it will be easier for banks, lawyers and courts to interpret them and to learn about their exact use, as they will provide them with some form of international standard to which they can compared.

Demand Guarantees: Direct

Exporter[Principal]

Bank [Guarantor]

Importer [Beneficiary]

Underlying Contract

Reimbursement Contract

Payment Guarantee

Demand forPayment

Demand Guarantees: Indirect

Exporter[Principal]

Bank [Exporter's]

Importer [Beneficiary]

Underlying Contract

Reimbursement Contract

Payment Guarantee

Counter Guarantee

Bank [Guarantor]