INTERNATIONAL PAYMENTS(BANK COLLECTION &LETTERS OF CREDIT)

Michelle Rodet, Master of Law, J.D.

French bar, New York bar

CREDIT RISK IN INTERNATIONAL SALES

• The risk of Seller not receiving its payment from the buyer

BANK COLLECTION, TRADE FINANCE, & LETTERS OF CREDIT

REDUCE CREDIT RISK

BANK COLLECTION, TRADE FINANCE & LETTERS OF CREDIT

BANK COLLECTION

• The process by which the international banking system is used to effect payment in a documentary sale

• Documentary draft used

WHAT IS?

The Wall Street Bull

TRADE FINANCE & LETTERS OF CREDIT

• The process by which banks and financing institutions guaranty that the seller will be paid for its goods, and provide financing to their clients

• Documentary drafts used in trade finance

WHAT IS?

BANK COLLECTION & TRADE FINANCE

• Bill of Exchange/Draft-definition

• Negotiation

• Documentary Draft & Bank Collection Process

• Documentary Draft in Trade Finance

• Credit risk:

• Acceptance

• Financing:

• Factoring Accounts Receivable

ISSUES:

THE BILL OF EXCHANGE / DRAFT

DEFINITION:

• An unconditional order in writing

• Addressed by one person to another one (the seller to the buyer or buyer’s bank)

• Signed by the person giving it

• With the requirement that the person to whom it is addressed pay on demand or at a fixed or determinable future date

• A sum certain in money, and

• To or to the order of a specified person , or to the bearer

• Upon delivery of the goods or presentation of shipping documents

• Involves three (legal) parties:

• Drawer, party writing the bill of exchange/ draft and signing it

• Drawee, party who has to pay it

• Payee, beneficiary

• Seller both drawer and payee

• Called Documentary Draft when used in bank collection

• It is a negotiable instrument

THE BILL OF EXCHANGE / DRAFT

NEGOTIATION:

• Negotiability:

• Allows the draft to act as substitute for money

• Negotiation:

• Transfer of the draft (or other instrument) from one party to another so that the transferee (Holder) takes legal rights to the instrument

• Bearer  draft, transferred through delivery

• Order draft, transferred through endorsement and delivery

DOCUMENTARY DRAFT

BANK COLLECTION PROCESS:

• Sight Draft:

• To be paid upon presentation or demand

• Is sent « for collection », i.e., documentary collection

• Draft, documents, and collection letter, sent by the seller to the buyer

• Documentary collection:

• « Cash against documents »

• « Documents against payment »

DOCUMENTARY COLLECTION

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DOCUMENTARY COLLECTIONHOW RISKY IS IT?

DOCUMENTARY DRAFT

IN TRADE FINANCE:

• Documentary draft can serve as an important financing or credit device for sellers and buyers

• Time Draft:• To be paid at a future date or after a specified period

• Are sent (with shipping documents) by Seller to Buyer for Acceptance via banking channels

• Acceptance:• Stamping « Accepted » on the face of the draft, name and

signature of drawee (buyer)

• Buyer has created a trade acceptance

• After acceptance, draft returned to Seller. Buyer gets the shipping documents and may collect the goods

•  »documents against acceptance »

• Seller may hold it until maturity or sell it to bank or commercial lending institution for cash (at a discount)

The « City », London ‘s financial center

DOCUMENTARY DRAFTBANKER’S ACCEPTANCE & ACCEPTANCE FINANCING:

• A time draft drawn on and accepted by a bank

• Bank stamps «  Accepted » on the face of draft, signs it, creating an acceptance, i.e., an obligation to pay the amount indicated on it to its holder on the date specified

• Holder can convert it to cask immediately at a discounted rate, or hold it until maturity

• A short term financing device for both Sellers and Buyers

Shangai financial center

CREDIT RISK

IN ACCEPTANCE

FINANCING:

• Rights of the Holder in Due Course (HDC)

• A rule by which the purchaser of a negotiable instrument (draft or acceptance) takes it free from most disputes between the drawer and drawee – the parties to the underlying transaction

• Ensures free transferability of commercial paper in international commerce

HOLDER IN

DUE COURSE STATUS:

• One who purchases the instrument:

• For value

• In good faith

• Without any notice that it is overdue or has been dishonored, and

• Without notice that it contains an unauthorized signature or has been altered

CREDIT RISKIN FACTORING

ACCOUNTS RECEIVABLE:

Account receivable:

• A contract right to receive for Seller to receive future payment

• Can be assigned to another party

Factoring Agreement:

• A contract by which the seller (assignor) assigns its right to collect the account receivable to financial institution (assignee) in return for cash

• Assignee « steps into the shoes of assignor » and acquires only assignor’s rights under the contract:

• = A payment or a breach of contract action

Shangai Financial Center

LETTERS OF CREDIT

LETTERS OF CREDIT

ISSUES

• Definition

• Types of L/Cs

• Documentary L/C defined

• Parties to the transaction

• Legal nature of the L/C

• Law applicable to L/Cs

• The Independence Principle of L/Cs

• The L/C transaction

• Confirmed L/Cs

• Standby L/Cs

Wall Street, New York

LETTERS OF CREDIT

DEFINITION & USAGES:

• An obligation of a bank issued on behalf of customer promising to pay a sum of money upon happening of certain event(s)

• Can be used:

• In transactions for the sale of goods (Documentary credit), or

• To guaranty performance of contracts or repayment of loans (Stand-by L/C)

Wall Street, New York

DOCUMENTARY LETTER OF CREDIT (L/C)

DEFINITION OF DOC. L/C

• Definite undertaking of a bank

• Issued in accordance with the instructions of its customer (applicant)

• Addressed to, or in favor of, the beneficiary

• By which the bank promises to pay a certain sum of money (or to accept or negotiate the beneficiary’s draft up to that sum) in a stated currency

• Within the prescribed time limit

• Upon the complying presentation

• Of the required and conforming documents

Charlie Chaplin during a rally at Wall Street in 1918

Inside the New York Stock Exchange

DOCUMENTARY LETTERS OF CREDIT

Parties to the transaction:• Applicant= Buyer• Issuing bank= Buyer’s bank or bank issuing the L/C• Beneficiary= Seller

Law Applicable to L/Cs:• UCC Article 5, US, domestic L/Cs US• Uniform Customs and Practice for Documentary Credits (UCP) 600, international L/Cs

Legal Nature of the L/C:• Not a contract• Not a negotiable instrument• Not a third- party beneficiary contract• A promise ( «  a definite undertaking ») by which an issuing bank promises to pay to a beneficiary• Gives the beneficiary a statutory right to enforce the L/C against the issuing bank

DOCUMENTARY LETTERS OF CREDIT

The Independence Principle of L/Cs::• An underlying sales contract between Seller and Buyer• An agreement between Buyer and Issuing bank• The Issuing bank’s resulting « undertaking » to pay Beneficiary

provided certain documents required by Buyer are conform with the terms and conditions of the L/C:• Except if L/C is fraudulent, forged, or fraud in the transaction

in the underlying sales contract• Issuing bank not concerned with quality or condition of goods• Issuing banks have no obligation to inspect goods• Issuing banks have the obligation to inspect documents

DOCUMENTARY LETTERS OF CREDIT (L/C)

THE PROCESS:

• Buyer applies to L/C with issuing bank, and provides instructions and conditions for bank to pay

• Once L/C issued, sent to Seller’s bank (advising bank) who advises Seller of L/C

• Seller must then comply with Buyer’s requirements re manufacturing and producing documents according to L/C

• Presentation of Seller’s documents within 21 days of date of shipment

• Seller’s documents examined using the Rule of Strict compliance

• If documents conform to L/C requirements, issuing bank will pay

• If documents do not comply, issuing bank will reject them , using the UCP guidelines for rejecting or dishonoring a presentation

• Discrepancies may be cured or waived by Buyer. If not , issuing bank will not pay

Danske Bank

LETTERS OF CREDIT

CONFIRMED LETTERS

OF CREDIT:

• Seller may want L/C to be confirmed by another bank

• Second bank (in Seller’s country) will purchase documents and honor draft on same terms as original issuing bank

STANDBY LETTERS

OF CREDIT:

• Issuing bank obligated to pay beneficiary upon presentation of documents indicating default of applicant re payment of a debt or performance of a contract

• Used to:

• Guaranty performance of a service or construction contract

• Guaranty repayment of a loan, or as

• Security for contract or other obligation