Trade Advance Level PDF

Module One: Global Trade Services Products and the Risk Chapter one: Risk Associated with Trade Services Products Chapter Two: Market Trends of Trade Services Products in Global Context Questions and Answer Indications Study Material on Trade_Advance Level for NCC Bank Limited 1|Page Chapter one: Risk Associated with Trade Services Products Trade services products are those services that are commonly offered from the ‘Trade Services Department’ of a bank. Broadly, trade services include the products or services related to trade payment and trade finance. In this section, the trade services practices of banks have been grouped under trade payment, trade finance, and other services. Some commonly used trade services techniques in international trade are cash in advance, open account, documentary collection, documentary credit (LC), standby LC or other bank guarantees, bank payment obligation, supply chain financing, factoring, forfeiting etc. 1.1 Cash in Advance Cash in advance is the form of settlement that offers the least risk to the seller, but a high level of risk to the buyer. In this method of payment, the buyer places the funds at the disposal of seller (exporter) prior to shipment of goods in accordance with the sales/purchase contract, which is certainly to be concluded between exporter and importer before the trade transactions. If the exporter is not sure about the buyer's credit or there are other circumstances which cast doubt on the certainty of getting paid, a last resort is to ask for cash in advance. This may be acceptable to a first-time buyer who trusts seller to deliver the goods. In the long run, however, it may not be competitive and buyers will not want to continue importing goods if they can turn to other suppliers offering better terms. Since this method of payment contains a lot of risks on the part of buyers, they may not be willing to accept such terms of payments. 1.2 Open Account Open account is the form of settlement that offers the least risk to the buyer, but a high level of risk to the seller. This method is the reverse of cash in advance. This is an arrangement between the buyer and seller (sales/purchase contract) whereby the goods are manufactured and delivered before payment is required. Open account provides for payment at some stated specific future date and without requiring the buyer to issue any negotiable instrument evidencing his legal commitment. The seller must have absolute trust that he will be paid at the agreed date. Open account trading is most commonly used when the two companies concerned have a longestablished trading relationship. Open account trading offers several advantages – particularly Study Material on Trade_Advance Level for NCC Bank Limited 2|Page which it is simple to administer and involves minimal banking fees or other costs..Though the seller can avoid a lot of banking charges and other costs, but he has no security that he will be receiving payment in due course. For this reason, the exporter may not be willing to accept this sort of mode of payment. 1.3 Documentary Collection Under a documentary collection, the seller ships the goods to the buyer in the importing country. At the same time, it hands over to its bank the shipping documents relating to the goods and their shipment. Examples of common documents are bills of lading, commercial invoices, insurance documents and certificates of origin. The bank forwards these to a correspondent bank in the buyer’s country, which is often the buyer’s bank, to handle the documents in accordance with the instructions of the seller, as instructed by the seller’s bank in its collection instruction. Under this procedure, banks manage the document-handling process, but they do not usually themselves give any payment undertaking. This solution offers the seller less security than a documentary credit, but as a consequence the costs are lower. It nonetheless gives the seller some measure of security for payment. The seller’s interest is best served where the buyer is not able to obtain possession of the goods without the documents that are sent through the banking system. The full security of a documentary collection applies only if the transport document is a negotiable bill of lading and / or if the goods are consigned to the bank in the importing country, with the consent of that bank. If the seller has agreed to supply the goods on short- term credit, it can stipulate that the documents be handed over against the buyer’s acceptance of a bill of exchange or signature on a promissory note. The seller may be able to discount the bill or note in return for an immediate payment. The international rules governing collections are the ICC Uniform Rules for Collections, ICC Publication No. 522. 1.4 Documentary Credit or Letter of Credit Documentary Credit is the method of payment in international trade that very effectively balances risks amongst buyers and sellers, and thus this classic trade payment method substantially reduces risks for both exporter and importer. The documentary credit or letter of credit is an undertaking issued by a bank on behalf of the buyer (or for its own account), to pay the beneficiary (exporter) the value of the draft and/or documents provided that the terms and conditions of the credit are Study Material on Trade_Advance Level for NCC Bank Limited 3|Page complied with. The payment conditions are about submission of certain documents in certain form. Documents must be in order to receive payment. Although one of the costliest, it is often considered the most secure because the buyer is assured that the seller will be paid only when the documents representing goods have been delivered. Conversely, the seller is assured that the buyer will receive the documents for ultimate delivery of the goods only when payment has been made. The security of the transaction is assured by one or more third parties. This is normally the buyer's bank (issuing bank), which issues the letter of credit (LC) and the seller's bank (advising/confirming bank), which informs the seller that the LC has been issued and perhaps adds its confirmation to the LC (in other words, guarantees the payment if the seller wants to be sure the issuing bank will not default). In addition to commitment of making payment by a bank to the exporter, the documentary credit provides legal security to the involved parties as it may operate within the framework of ICC’s (International Chamber of Commerce) Uniform Customs and Practice for Documentary Credits (UCP- 600). UCP-600 is an international codification of actual business practices, based on the experience of bankers, exporters and importers. It should be emphasized that the UCP rules apply when they have been incorporated by the parties in the documentary credit forms. Because of the above mentioned advantages, documentary credit is the most popular mode of payment in international trade. Different types of letters of credit are there in practice: broadly, these are divided into Revocable Credit and Irrevocable credit. A revocable credit is a credit, which can be amended or cancelled by the issuing bank at any time without prior notice to the seller or beneficiary. An irrevocable credit constitutes a definite undertaking of the issuing bank, provided that the stipulated documents are presented and the terms and conditions are satisfied by the seller. An irrevocable letter of credit cannot be amended nor cancelled without the consent of all concerned parties. In UCP 600, LC means irrevocable LC. There are some special types of credits that are in use (box 1.1). Box 1.1: Different Forms of Commercial Letter of Credit Revolving Credit: The revolving credit is one, which under the terms and condition thereof provides for restoring the credit to the original amount after it has been utilized. If the importer is a regular customer of the exporter, the parties may wish to arrange for a revolving credit. In may revolve in relation to time and value. The revolving credit may be either cumulative or noncumulative. Study Material on Trade_Advance Level for NCC Bank Limited 4|Page Confirmed Documentary Credit: This is the only type of documentary credit with double undertakings: one is by an issuing bank and another is by a confirming bank. A confirmation of a documentary credit by a bank (confirming bank) upon the authorization or request of the issuing bank constitutes a definite undertaking of the confirming bank, in addition to that of the issuing bank, provided that the stipulated documents are presented to the confirming bank or to any other nominated bank on or before the expiry date and the terms and conditions of the documentary credit are compiled with either to honour or to negotiate. Transferable Credit: A transferable credit is one that can be transferred by the original beneficiary either in full or in part to one or more subsequent beneficiaries. Such credit can be transferred once only, unless otherwise specified. Transferred credit means a credit that has been made available by the transferring bank to a second beneficiary. Back-to-Back Credit: The back-to-back credit is a new import credit opened on the basis of an original export credit in favour of another beneficiary. Under a back-to-back credit, a beneficiary uses the export LC as security for opening a second, separate import credit in favour of supplier. Red Clause Credit: A red clause credit allows pre-shipment advances to be made to the exporter at the risk and expense of the applicant. This is a credit with a special condition incorporated into it that authorizes the Confirming Bank or any other Nominated Bank to make advances to the beneficiary before presentation of the documents. 1.5 Standby LC The standby credit is to be distinguished from the other types of letters of credit in that the primary function of the standby is to serve as a security or guarantee rather than as a trade payment mechanism. Under a typical standby, the beneficiary will claim payment in the event that the contract partner has failed to perform or fulfill certain obligations. The Standby Credit is a Documentary Credit or similar arrangement, however named or described, which represents an obligation to the Beneficiary on the part of the Issuing Bank to a) repay money borrowed by the Applicant, or advanced to or for the account of the Applicant; b) make payment on account of any indebtedness undertaken by the Applicant; or c) make payment on account of any default by the Applicant in the performance of an obligation. Documentation under a standby letter of credit is usually much less complex than that for a commercial documentary credit. Given the guaranteetype nature of a standby letter of credit, all that is normally required is a sight draft and a statement issued by the beneficiary that the applicant. Other documents, such as a certificate of nonperformance from an independent assessor or a ruling from an arbitration court, may also be appropriate, depending on the underlying transaction. The risk of standby letters of credit is the unfair calling by beneficiary. But some insurance companies offer protection against some of the unfair calling risks that exporters and contractors face when providing standby letters of credit. The available different types of standby lc are given in the box 1.2: Box1.2: Types of Standby Letter Of Credit Study Material on Trade_Advance Level for NCC Bank Limited 5|Page - - A performance standby supports an obligation to perform other than to pay money and includes an obligation to pay for losses arising from a default of the applicant in completion of the underlying transaction. An advance payment standby supports an obligation to account for an advance payment made by the beneficiary to the applicant. A bid-bond, or tender bond, standby supports an obligation of the applicant to execute a contract if it is awarded a bid. A counter-standby supports the issuance of a separate standby letter of credit or other undertaking by the beneficiary of the counter standby. A financial standby supports an obligation to pay money, including any instrument evidencing an obligation to repay borrowed money. An insurance standby supports an insurance or reinsurance obligation of the applicant. A commercial standby supports the obligations of an applicant to pay for goods or services in the event of non-payment by other methods. A direct-pay standby is intended to be the primary means of payment and may or may not be linked to a default in performance or payment. 1.6 International Bank Guarantees International Bank Guarantees are availed for commercial and non-commercial purposes. Commercial guarantees are related to commercial contract between the supplier and the customer. Non-commercial guarantees are not directly related to commercial contracts but those are obligatory to be able to make a business. The demand guarantees may serve several purposes from indefinite range of payment, performance or non-performance obligation. Considering the structure, two types of guarantees are issued: direct and indirect. A demand guarantee, as defined by the URDG, involves a minimum of three parties: the principal; the guarantor and the beneficiary. Normally, the guarantor in the three-party structure is the principal’s bank and conducts business in the same country as the principal, while the beneficiary conducts business in a foreign country. Such three-party demand guarantees are known as ‘direct guarantees’, because the guarantee is issued directly by the principal’s bank and not by a local bank in the beneficiary’s country. An indirect guarantee is a four-party demand guarantee, and there is an additional contract, that is, the contract between the instructing party (principal’s bank) and the guarantor (local bank in the country of the beneficiary). This contract has two aspects: one, the mandate from the instructing Study Material on Trade_Advance Level for NCC Bank Limited 6|Page party to the guarantor regarding the instruction to issue the demand guarantee, which the guarantor as mandatory must comply with if he accepts the instruction; and two the counter-guarantee (or counter-indemnity) that the guarantor requires from the instructing party as a pre-condition for issuing the guarantee and that is distinct from the mandate. In indirect transactions the principal’s contract (mandate) is with the instructing party, not with the guarantor. 1.7 Bank Payment Obligation (BPO) BPO is a payment tool offering a level of security similar to that of a letter of credit. The BPO is an irrevocable undertaking on the part of an obligor bank (typically that of a buyer) to recipient bank (typically that of a seller) to pay a specified amount on agreed date on condition of a successful matching of electronic data according to rules adopted by the ICC. It combines some of the features of a Documentary Credit but with the intention to meet the needs of open account trade transactions. As a conditional payment mechanism, it may be issued to make immediate (sight) payments or deferred payments, based on the irrevocable undertaking of the obligor bank towards the recipient bank. The matching of trade data on an electronic matching platform triggers this irrevocable undertaking. The parties to the BPO are the buyer, obligor bank (buyer’s bank), seller (supplier) and recipient bank (seller’s bank). Post- shipment Finance under a BPO, the risk for the obligor bank is that the buyer does not make payment of the BPO amount at maturity. This risk is mitigated by buyer’s credit worthiness and the establishment of an appropriate credit facility. The risk for the recipient bank engaged in any financing under the BPO is the failure of the obligor bank to meet its obligations for whatever reason. The recipient bank needs to establish the necessary credit line for the obligor bank. The primary risk of pre-shipment finance on the basis of the established BPO baseline is the performance and credit risk of the seller, as repayment is dependent on the seller’s performance ability and its provision of trade data for a successful matching against the baseline. Mitigation of risk is provided by proven performance of the seller in a repeatable and predictable fashion. Other risks and their mitigation are analogous to those under post-shipment finance. 1.8 Supply Chain Finance Using SCF banks provide technology and other services to facilitate payments and financing within supply chain of enterprises. The services within a SCF platform include typical elements of financing for international trade (like pre-shipment and post-shipment financing, purchases and discounting of receivables, etc.) but not LCs. The objective of such a platform is to bring within a Study Material on Trade_Advance Level for NCC Bank Limited 7|Page single unit of bank financial services related to supply, storage, cross-border relations between sellers and buyers, distribution, and final sales to customers. There are often a minimum of three parties to the transaction: a company purchasing goods, the supplier of the goods and a financial institution. The process of SCF is given in Box 1.3: Box1.3: Process of SCF There are many different types of SCF transaction. A typical Approved Payables SCF transaction works like this: - A company purchases goods from a supplier. The supplier submits an invoice to the company. - The purchasing company approves the invoice. This creates an irrevocable payment obligation for the purchasing company. - Through a pre-established relationship between the supplier and the buyer’s financial institution, the supplier may request funding of the approved payable at a date before the receivable’s actual payable date. - When the official payment date of the invoice arrives, the financial institution collects the payment from the purchasing company. 1.9 Factoring Factoring is associated with handling risk in open account trade. It is the sale of assignments of short-term accounts receivable arising from an international sale of goods or services. The international factoring business involves networks similar to the use of correspondents in the banking industry. Figure 1.7: Operational Procedure of Factoring Domestic Exporter Foreign Importer Export Factor Import Factor Performance risk of the exporter and credit and payment risk of the import factor are two major risks of Export Factor (EF). The other generic risks include defective/false/fake invoices, direct Study Material on Trade_Advance Level for NCC Bank Limited 8|Page payment by the importer to exporter in spite of assignment of receivables and not to routing all invoices of exporter through the factor. Risks for Import Factor (IF) include non-payment of importer, insolvency of the importer, poor management, hidden connection between exporter and importer etc. To minimize the risks of EF, Export Factor needs to examine financial information of Import Factor, to identify any undisclosed connections exist between the importer and exporter e.g. through common ownership or directors, to understand the exporter’s line of business to ascertain whether the products are factorable, and prone to disputes and claims etc. To minimize the risks of IF, Import Factor should check payment records by types of relationship between exporter and importer, payment record of importer with the respective exporter, performance risk of the exporter, Understanding the importer’s line of business etc. 1.10 Forfaiting Forfaiting is used to denote the purchase of obligations falling due at some future date, arising from deliveries of goods and services. Factoring is suitable for financing smaller claims for consumer goods, whereas forfaiting is used to finance capital goods exports. The process of forfaiting is given in the box 1.4: Box 1.4: Process of Forfaiting - An importer accepts bills of exchange (drafts) or signs promissory notes which are guaranteed or "avalized" by a bank in the importer's country. - The exporter then endorses the drafts or notes and hands them over to the forfaiting bank, which negotiates (i.e., pays) them without recourse to the exporter. - If the documents are drawn under a letter of credit, the issuing bank or the confirming bank accepts the documents or incurs a deferred payment undertaking to mature for payment on a certain due date. - The forfaiting bank then discounts the acceptance or the deferred payment undertaking. The discounted payment to the exporter is on a "without recourse" basis, i.e., the forfaiter (or any subsequent holder) takes the payment risk at maturity, and the seller-beneficiary is under no obligation to refund the amount received by it in case payment is not made by the obligor. Study Material on Trade_Advance Level for NCC Bank Limited 9|Page Forfaiting is not free from risk. Risks associated in factoring should be indentified and mitigated by experienced trade practitioners A potential disadvantage of forfaiting is that strict documentary requirements must be adhered to, which requires the importer's participation in obtaining the necessary bank guarantee or aval. In some cases, the importer may be reluctant, for example, to instruct its bank to grant an aval which will count against the importer's credit lines, or to pay a fee for obtaining the aval. But it should be noted that an aval is not always a requirement.. The forfaiter, assumes both commercial and political risk. Should war break out or should the importer's government suddenly impose exchange controls, the forfaiter may not be able to recover payment from the importer or the importer's bank. The forfaiter assumes such risks, as well as any interest and currency rate risks. Finally, forfaiting is not exempt from the risk of fraud and money laundering. To mitigate the risks, forfaiter, bank, can obtain security, credit insurance for default by, or insolvency of the buyer. Forfaiter should review periodically KYC/AML procedures and subsequently, verify pricing of invoice and hedge currency and interest rate risk etc. 1.11 Buyer’s Credit and Supplier’s Credit Buyer credit is where the seller’s bank makes money available for the buyer to pay the seller. It can in the form of a direct loan to the buyer or a loan via an intermediary organization in the buyer’s country. This type of finance is usually without recourse to the seller, as it is the buyer that borrows the money. The seller also avoids the need to pay interest, as the loan is made to the buyer. Buyer credit facilitates benefit both parties to the transaction: the seller receives cash on delivery or acceptance of the goods or service; and the buyer has affordable medium- or long-term finance that may not have been readily available in its own country. Suppliers’ credit applies when the exporter’s bank lends the money direct to the seller. It is a form of post-shipment finance. General features of buyers’ credit and suppliers’ credit financing facility are given in the box 1.5: Box 1.5: General features of a buyer credit supplier’s credit financing facility. - There would be a minimum contract size for eligibility. There would be a minimum and maximum time period for the facility. The funds can be made available to a bank in the buyer’s and/or supplier’s country. The bank providing the finance would be protected by a guarantee in the event that the loan is not paid at maturity. The guarantee may be for the full amount, but could be for less, depending on the country concerned. Study Material on Trade_Advance Level for NCC Bank Limited 10 | P a g e - Finance, possibly for up to 85 per cent of the contract value, can be provided in several internationally traded currencies and at a favorable discount rate. Funds will be made available by a bank that has been involved in arranging a facility on the seller’s behalf and will be forthcoming when the exporter produces: bills of exchange or promissory notes with an ‘aval’ or guarantee; evidence of performance under the contract; and the bank’s facility letter, duly signed. Study Material on Trade_Advance Level for NCC Bank Limited 11 | P a g e Chapter two: Market Trends of Trade Services Products in Global Context 2.1 Trade Services/Finance Products and Market Trends in Global Context Global trade of goods and services remained relatively resilient this year despite US protectionist approach during 2018. The In 2017, global trade recovered after losing over 2015-2016., helped by a synchronized improvement of demand from major economies. In 2018, trade improved; however, the volume of global trade of goods and services is expected to decelerate in 2019 (Islam et. al, 2019)1. An escalation to a trade feud scenario could cost even more. In the global context, most trade is conducted on Open Account terms, and therefore enabled through techniques of Supply Chain Finance. Open account is an arrangement between the buyer and seller whereby the goods are manufactured and delivered before payment is required. There are also some instances of cash in advance where sellers enjoy notable bargaining power. Regarding cash in advance, the buyer places the funds at the disposal of seller (exporter) prior to shipment of goods in accordance with the sales/purchase contract. In case of cash in advance and open account, involvements of banks are generally insignificant, and traders have relatively greater freedom in handling the process in reasonably low cost. In considerable cases, international trades are facilitated by trade services of banks and financial institutions covering documentary credit (LC), documentary collection, standby LC or other bank guarantees, bank payment obligation, factoring, forfeiting. Involvements of banks are significantly higher in the trade services techniques like LC, bank guarantee, standby LC and documentary collection. Especially through LC, banks offer payment, financing and risk management services to its clients. It is a classic form of trade facilitation technique that substantially reduces risks for both exporter and importer. It is an undertaking or commitment issued generally by a bank to pay the exporter a certain amount provided that the documentary conditions of the LC are complied with. A standby LC is functionally equivalent to demand guarantee or international bank guarantee, but differs in terms of structure. International guarantees may serve several purposes from indefinite range of payment, performance or non- 1 MAHAMOUD ISLAM, ANA BOATA, LUDOVIC SUBRAN, FRANCOIS DE PANISSE PASSIS (2019) GLOBAL TRADE REPORT 2019: THE SHOW MUST GO ON: https://www.lemoci.com/wpcontent/uploads/2018/11/globaltradereport_eulerhermes_nov18.pdf. Study Material on Trade_Advance Level for NCC Bank Limited 12 | P a g e performance obligation. Documentary collection is basically a payment tool having ‘documents against payment’ and ‘documents against acceptance’ techniques that provides a means of payment whereby the exporter can ensure that the buyer should not be able to take possession of the goods until it has paid or given a payment undertaking. Some of the trade services/finance products are relatively recent development like Bank Payment Obligation (BPO), and Supply Chain Financing techniques like factoring, forfaiting, invoice financing etc. BPO is a payment tool offering a level of security similar to that of LC. It is an irrevocable undertaking on the part of an obligor bank (typically that of a buyer) to recipient bank (typically that of a seller) to pay a specified amount on agreed date on condition of a successful matching of electronic data according to rules adopted by the ICC. Using SCF, banks provide technology and other services to facilitate payments and financing within supply chain of enterprises. The objective of such a platform is to bring within a single unit of bank financial services related to supply, storage, cross-border relations between sellers and buyers, distribution, and final sales to customers. International factoring is the sale of assignments of short-term accounts receivable arising from an international sale of goods or services. The technique is associated with handling risk in open account trade. Forfaiting is used to denote the purchase of obligations falling due at some future date, arising from deliveries of goods and services. Factoring is suitable for financing smaller claims for consumer goods, whereas forfaiting is used to finance capital goods exports. Considering unavailability of uniform data, it is not easy to have precise information regarding the use of different trade payment and financing techniques. Of the payment technique, open account is the most popular form of trade payment method, followed by commercial letter of credit. Several financing products are aligned with methods of payment. Factoring is particularly linked with Open Account. Standby LCs and Bank Guarantees support trade payment and performance issues alongside so many other purposes. The use of payment methods and financing products (traditional and supply chain finance) may be captured in the following form based on the most recent ICC publication (figure 2.1). Study Material on Trade_Advance Level for NCC Bank Limited 13 | P a g e Figure 2.1 : Trade Services/ Finance Product Mix Payment Instruments Financing Instruments Traditional Products Open Account 80% Commercial LC 49% Standby LC 11% Guarantee 16% Collection 24% Supply Chain Products Commercial Letter of Credit 10% Payables Finance 28% Receivable Finance 25% Pre-shipment 6% finance Loan or Advance against receivables 15% Factoring and its variations 17% Documentary Collection & Others 10% Loan or Advance against inventory 3% Distributor Finance 2% Forfaiting 4% Note: Based on ICC Survey, 2018. It is interesting to observe that while 47% of respondents report their traditional trade finance and supply chain finance businesses were in the same business unit, survey findings show a clear focus on traditional trade finance, with 85% of respondent activities in this area, versus 15% in SCF. This is in contrast to the market: roughly 80% of trade takes place on open account – better suited to SCF solutions than traditional mechanisms (ICC, 2018). Of the different regions, Asian markets, despite the global slowdown continued to be key markets for trade finance business. The recent availability of SWIFT data demonstrate that in terms of LC business Asia-Pacific accounted significant market share for export messaging as a proportion of world LC traffic. Growth in trade finance transactions both in volume and value terms are no longer predominantly driven by China. Countries using SWIFT LCs the most for imports were: Study Material on Trade_Advance Level for NCC Bank Limited 14 | P a g e Bangladesh, South Korea, China, India and Pakistan; and countries using SWIFT LCs the most for exports were: China, Hong Kong, India, Singapore and Japan (ICC, 2018). In ICC survey, it is shown that traditional trade finance products are dominating in all regions. In North America and Latin America supply chain finance is used for 37% and 23% respectively (Figure 2.2). Figure 2.2: Regional Distribution of Traditional Trade Finance and Supply Chain Finance Regional Distribution of Traditional Trade Finance Regional Distribution of Supply Chain Finance Asia-Pacific 82% Asia-Pacific 12% Africa 82% Africa 12% Middle East 90% Middle East Central and Eastern Europe 87% Central and Eastern Europe Western Europe 89% Western Europe Latin America North America 77% 63% Latin America 10% 13% 11% 23% 37% North America Source: ICC,2018 Technology is bringing changes in the logistics, nature of products, products delivery channels, and documentation process. Regarding trade finance, according to ICC survey, there had been some digital evolution in trade finance includes detailed management dashboards, reporting capabilities and automated document preparation. In recent time, introducing of technologies such as- Block-chain, distributed ledgers technology, smart contracts, cloud computing, big data, machine-based learning and artificial intelligence etc. pushed the global banks to create consortium among the banks including fin-tech companies. Currently some are developing an open account trade finance platform powered by distributed ledger technology. The aim is to simplify trade, improve visibility into trade flows, reduce operational costs, and provide better access to credit and risk mitigation services throughout the supply chain life cycle. The ICC Banking Commission has launched a working group to coordinate all work relating to the digitalization of trade finance. The group aims to help the trade finance industry accelerate its progress towards greater digitalization. As a part of the mandate, ICC is going to revisit e compatibility of ICC rules for Study Material on Trade_Advance Level for NCC Bank Limited 15 | P a g e trade finance; and as part of that Revision for eUCP and eURC is under process. Beginning in 2017, the draft effort stalled at the ICC Banking Commission after National Committee members expressed concerns, then the ICC's Digitization Working Group formally requested a mandate from the Executive Committee, and in January 2018, the ICC Banking Commission Executive Committee announced that it would proceed with updating the existing eUCP rules (eUCP Version 1.1, 2007) and drafting new rules addressing electronic presentation for collections (eURC).2 While there have been discussions and some promising attempts to apply technology to advance the business of trade financing, especially over the last two decades or so, only 15% of respondents view transformative potential in applying technology to the opportunity to digitize and boost trade finance sales (ICC, 2018). 2.4 Cost, Risk, Regulatory and Other Implications of Trade Services Products Trade payments and financing techniques involve different advantages and disadvantages from traders, banks, and regulators’ perspectives (Figure 2.2). As methods of payment, cash in advance and open account are the simplest and cheapest, but they create the greatest possibility for opportunistic misconduct by the trading partners. LC is the costliest form of trade payment method. Documentary collection is cheaper than LC; however, sometimes it is risky for the exporter. In an LC operation, banks charge different rates of commissions/fees as issuing bank, advising bank, negotiating bank, confirming bank, reimbursing bank etc. In connection with some products, involvements of banks are significant and thus good sources of revenues; and hence costs and risks significantly vary from traders’ point of view. Regulatory issues for the trade services products are critical from the point of view of compliance and addressing trade based money laundering issues. Table 2.1: Use of Trade Finance Techniques in Different Global Region Open Account Transactions mainly between exporter and importer; risky for exporter; involvement of banks are insignificant and thus low source of revenue; 2 www.iiblp.org/icc-banking-commission-digitization Study Material on Trade_Advance Level for NCC Bank Limited 16 | P a g e relatively cheap for the traders; guided by the purchase/sale contract; limited control of the regulators; greater involvement of country risk; high ML risk. in Transactions mainly between exporter and importer; risky for importer; Cash involvement of banks is insignificant and thus low source of revenue;; Advance guided by the purchase/sale contract; limited control of the regulators; greater involvement of country risk; high Money Laundering (ML) risk. Documentary Transactions amongst exporter bank and importer; exporter has less risk Collection than open account, but still has notable risk of non-payment; banks involve at least in payment and handling of documents, and a good source of revenue; guided by the purchase/sale contract and URC 522; greater control than open account by the regulators; relatively less country and ML risk as compared to the open account. Documentary Both payment as well as a financing techniques; LC is used to offering Credit (LC) financing to the importer; special types of LCs Back-to-Back LC and Red/Green Clause LC can be used to offer financing to the exporters; in the payment process, bank itself is a party and commercial risks are welldistributed between traders and banks; banks’ involvement is significant and thus a very good source of revenue for banks; high cost for the traders; formal method guided by UCP having considerable control of the regulator; best of the payment methods from country risk and ML risk perspectives. Stand LC Stand by is conceptually same as bank guarantees; useful for any by and Bank performance issues including payment; as a risk taker involvements of Guarantees bank/financial institutions are significant; involve high cost of traders, and a good source of revenue; regulatory may have considerable control over the transactions; High Risk Level of ML concern. International The bank guarantee means a lending institution ensures that the liabilities Bank of a trader will be met. In other words, if the trader fails to settle a debt, Guarantee the bank will cover it. A bank guarantee enables the traders to acquire Study Material on Trade_Advance Level for NCC Bank Limited 17 | P a g e goods, buy equipment or draw down a loan. There are different kinds of bank guarantees, including direct and indirect guarantees. Payables Payables Finance is provided through a buyer-led programme within which Finance sellers in the buyer’s supply chain are able to access finance by means of Receivables Purchase. The technique provides a seller of goods or services with the option of receiving the discounted value of receivables (represented by outstanding invoices) prior to their actual due date and typically at a financing cost aligned with the credit risk of the buyer. The payable continues to be due by the buyer until its due date. Receivables Receivables finance unlocks the cash that is owed to the small company by finance selling the invoice. So, technically it is not lending, but an asset purchase. Factoring Factoring is a financial service in which the business entity sells its bill receivables to a third party at a discount in order to raise funds. There are various types of factoring such as recourse and non-recourse, advance and maturity, full factoring, disclosed and undisclosed, domestic and crossborder. Forfaiting Forfaiting is a form of trade and supply chain financing. It involves the purchase of future payment obligations on a “without recourse” basis. Forfaiting can be applied to a wide range of trade related and even purely financial receivables and payment instruments. Loan or Loan or Advance against receivables is financing made available to a party Advance against involved in a supply chain on the expectation of repayment from funds receivables generated from current or future trade receivables and is usually made against the security of such receivables, but may be unsecured. Loan or Loan or Advance against Inventory is financing provided to a buyer or Advance against seller involved in a supply chain for the holding or warehousing of goods Inventory (either pre-sold, un-sold, or hedged) and over which the finance provider usually takes a security interest or assignment of rights and exercises a measure of control. Study Material on Trade_Advance Level for NCC Bank Limited 18 | P a g e Distributor Distributor Finance is the provision of financing for a distributor of a large Finance manufacturer to cover the holding of goods for re-sale and to bridge the liquidity gap until the receipt of funds from receivables following the sale of goods to a retailer or end-customer. Pre-shipment Pre-shipment finance refers to the credit extended to exporters prior to the finance shipment of goods for the execution of export order. Study Material on Trade_Advance Level for NCC Bank Limited 19 | P a g e Module One: Questions and Answer Indications  Under cash in advance, Exporter’s risk is completely protected. Justify. (1.1)  Why Documentary Collection could be risky for the exporters? (1.3)  How interest of importer is protected in Open Account? (1.2)  Documentary Credit offers protection to both exporters and importers. How? (1.4)  What is the risk associated with revocable LC? (Box 1.1)  Differentiate between transferrable LC and transferred LC. (Box 1.1)  Stand by LC is related to Non-Performance. What does it mean? (1.5)  Red Clause LC is also a financing technique for the exporter. How? (Box 1.1)  What are the uses of international bank guarantee? (1.6)  What is factoring? How it is different from forfaiting? (1.8)  What is bank payment obligation? What is the objective of supply chain finance? (1.7)  What do you mean by buyer’s credit and supplier’s credit?(1.9)  What is the global trend in the Use of Trade Financing Products? (2.1) Study Material on Trade_Advance Level for NCC Bank Limited 20 | P a g e Module Two: Applicable Rules/Guidelines in International Trade Services Chapter One: Purchase/Sale Agreement and ICC Publications Associated with Trade Services Chapter Two: Domestic Regulations for International Banking in Bangladesh Questions and Answer Indications Questions and Answer Indications Study Material on Trade_Advance Level for NCC Bank Limited 21 | P a g e Chapter One: International Rules/Guidelines Applicable in International Trade Services in Global Context In performing international trade services operations, banks are required to follow both a set of domestic regulations and international rules/guidelines. Among the international rules and guidelines, International Chamber of Commerce (ICC) publications are the most relevant. The major relevant regulations followed in performing trade services activities in a country is shown in table 3.1 below. Table-1.1: International Regulations of International Trade Services Domestic Rules/Regulations:  Country specific Trade and/or Exchange Control or Foreign Exchange Management/Control Regulations;  Trade Policy Documents;  Rules/Regulations on Customs Formalities etc. Key International Guidelines/Rules:  United Nations Vienna Convention on Contract of Sale of Goods 1980  Uniform Customs and Practice for Documentary Credit (UCP 600 including e UCP); Uniform Rules for Collections (URC 522);  Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits (URR 725);  International Standard Banking Practice (ISBP 745);  International Commercial Terms 2010,  International Standby Practices [ISP-98],  Uniform Rules for Demand Guarantees [URDG 758], and  Documentary Instruments Dispute Resolution Expertise Rules (DOCDEX). Study Material on Trade_Advance Level for NCC Bank Limited 22 | P a g e 1.1 Purchase/Sale Agreement Purchase/sale agreement is the contract between exporter and importer. Though some common contents3 are expected in a purchase/sale agreement, there is no doubt that terms and conditions of purchase/sale contract would vary for different products, modes of payment or even sources of imports. In case of three methods of payments (cash in advance, open account and documentary collection), sales/purchase contract is the guiding document. 1.2 The United Nations Convention on Contracts for the International Sale of Goods [CISG] The CISG, which is popularly known as Vienna Convention provides a uniform framework for contracts of sale of goods. The CISG was developed by the United Nations Commission on International Trade Law [UNCITRAL], and was signed in Vienna in 1980. The CISG allows exporters to avoid choice of law issues, as the CISG offers acceptable substantive rules on which contracting parties, courts, and arbitrators may rely. As of early 2018, it has been ratified by 89 countries, which account for a significant proportion of world trade. Under the treaty, the parties, which come from all legal traditions, having different economies together account for over two thirds of global commercial exchanges. 1.3 Uniform Customs and Practice for Documentary Credits (UCP 600) The current version of UCPDC, UCP 600, is the collection of rules governing the issuance and execution of letters of credit in the cross border exportation and importation in the global economy. The rules of the UCP have been formulated in a manner that has almost equally protected the interests of both the exporters and importers. UCP, the popular title of UCPDC, compiles the best documentary credit practices that came into effect from July 01, 2007 and is the sixth revision of the rules since they were first promulgated in 1933. The 39 articles of UCP 600 mainly cover the liabilities and responsibilities of different parties engaged in the process of LC which is meant for traders and bankers. Article 14 of UCP permits the user to modify or exclude any of the provisions of the rules by stating on the face of the credit. It offers flexibility of accommodating local A standard purchase/sale agreement should contain name and address of applicant Name and address of applicant, the applicant’s bank/ collecting/ presenting/ buyer’s bank; Name and address of the beneficiary’s bank /nominated/ remitting/ seller’s bank; total value and full description of goods; last date of shipment, date of expiry and documents required; Payment terms: method, tenor, trade terms etc.; and warranty/ guarantee/ undertaking; Dispute settlement process (arbitration or litigation and the governing laws); Retention of title; Liquidated damage clause; and force majeure. 3 …….. They are binding on all parties thereto unless expressly modified or excluded by the credit (UCP 600, ICC, 2007). 4 Study Material on Trade_Advance Level for NCC Bank Limited 23 | P a g e regulations and necessary changes in the rules. Considering the contents, the articles in UCP 600 may be divided into seven broad heads: General Provisions and Definitions (articles 1-6); Undertakings and Liabilities (articles 7-13); Examination (article 14-16), Documents (articles 1728), Miscellaneous Provisions (articles 29-13); Disclaimers (article 34-37), Transferable and Assignment (articles 38-39). UCP 600 assigned specific articles for commercial invoice (article 18), transport documents (articles 19-25), and insurance documents (article 28). It asserts generic provisions for other documents. UCP focuses particularly on uniformity in the examination of documents by banks. Here matters of particular interest to the cross-border trade include the basic responsibilities of banks when examining documents tendered for payment under documentary credit governed under UCP 600, and the requirements pertaining to different types of documents. UCP 600 defined the term ‘Complying Presentation’5 in article 2 that obligates bankers to consider LC terms, rules noted in UCP 600 and ‘International Standard Banking Practice’ while examining documents. Article 14 also identifies some specific issues connected with standard for examination of documents. The universal acceptance of the UCP by practitioners in countries with widely divergent economic and judicial systems is a testament to the rules' success. In Bangladesh, LC can only be opened and received within the framework of UCP 600 since July 2007(summary of UCP 600 is given in appendix table-1). This electronic supplement (eUCP) came into force on April 1, 2002. The eUCP, when used in conjunction with the UCP, will provide the necessary rules for the presentation of the electronic equivalents of paper documents under letters of credit. 1.4 International Standby Practices (ISP98) ISP 98 was designed specifically as a stand-alone set of Rules for standby letters of credit. However, UCP is valid and still applies to standbys. Since ISP and UCP coexist and may be applicable to standbys by incorporation, applicant, beneficiaries, and issuers have a choice. ISP98 covers general rules for independent undertakings, recognizing that parties wishing to provide for payment of the purchase price against documents evidencing the sale and shipment of goods (summary of ISP 98is given in appendix table-5). It recognizes the critical distinction between undertakings that are ‘independent’ and ordinary promises and guarantees that are not. In performing various rules, ISP98 is advantaged by its focus on payment against all types of …….Complying presentation means a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice (UCP 600, ICC, 2007). 5 Study Material on Trade_Advance Level for NCC Bank Limited 24 | P a g e documents as distinguished from UCP’s focus on payment against documents evidencing the sale and shipment of goods. 1.5 Uniform Rules for Demand Guarantees (URDG 758) Uniform Rules for Demand Guarantees (URDG 758) is the guiding framework applicable to the demand guarantee and counter –guarantee practices. The URDG help leveling the playing field among demand guarantee issuers and users regardless of the legal, economic and social system in which they operate. URDG 758 came into force on 1 July 2010, whereupon a considerable number of demand guarantees and counter guarantees started being issued all over the world subject to the new URDG 758. The new URDG 758 do not merely update URDG 458; they are the result of an ambitious process that seeks to bring a new set of rules for demand guarantees into the 21st century: rules that are clearer, more precise and more comprehensive. 1.6 International Standard Banking Practice (ISBP 745) The ISBP is an ICC publication which provides important guidance to documentary credit examiners and practitioners relating to the examination of documents presented against Letters of Credit. It is important to note that the ISBP cannot in any way change the UCP 600 rules which apply to Letters of Credit, but the ISBP is a valuable supplementary guide to UCP.As of July 2013 International Standard Banking Practice - ISBP 2013 is the latest and the most comprehensive guide to handling and examining trade documents under letters of credit. ISBP 2013 published by ICC with the ICC Publication No. 745. The first draft was produced in May 2011 through to the 5th draft in November 2012. Approval was finally achieved for the revised publication in April 2013, with the ICC publishing the guide in June/July 2013. This revised guide is a substantial update to the former version and includes a number of new interpretations and new chapters, so it is an absolutely essential publication for anyone who is involved in Letters of Credit. There are now 15 sections/chapters in the revised version of ISBP that covers preliminary considerations, general principles, drafts and calculation of maturity date, invoices, transport documents covering at least two different modes of transport, Bills of Lading Charter Party Bill of Lading, Air Transport Document, Road, Rail or Inland Waterway Transport Documents, Insurance Document and coverage and Certificate of Origin with new sections relating to guidance on practices relating to Non-Negotiable Sea Waybill, Packing List, Note or Slip, Weight List, Note or Slip, Beneficiary’s Certificate, Analysis, Inspection, Health, Phytosanitary, Quantity Quality and Other Certificates (summary of ISBP 745 is given in appendix table-2).. Use of ISBP has significantly Study Material on Trade_Advance Level for NCC Bank Limited 25 | P a g e reduced discrepancies for documentary credits and is regularly used by banking, logistics, insurance, legal and corporate professionals and academics worldwide. 1.7 Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits (URR 725) In most cases under LC, reimbursement by the issuing bank is made using the service of a third bank known as ‘Reimbursing Bank’. And the process of making reimbursement using the service of the Reimbursing Bank is known as Bank-to-Bank Reimbursement Arrangement. It has been referred to in article 13 of UCP 600; however, the process is guided by a separate ICC set of rules titled, The Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits, (ICC publication No 725) which came into effect from October 1, 2008 containing 17 articles. To get coverage of the rules, it must be stated on the face of reimbursement authorization issued by the Issuing Bank. As in the case of UCP 600, the URR 725 permits modification and exclusion of any provision of the rules. URR suggests two ways of making reimbursements: one, simply by authorizing Reimbursing Bank to make reimbursement to the Claiming Bank; and two, by authorizing Reimbursing Bank to issue a reimbursement undertaking to the Nominated Bank. The first one is revocable whereas the second one is irrevocable. Reimbursement undertaking offers greater security to reimbursement to the Nominated Bank and thus to the exporter. The rules of URR assign liabilities and responsibilities of different parties involved in the process of reimbursement (summary of URR 725 is given in appendix table-3). 1.8 Uniform Rules for Collections (URC 522) Some of the main international rules and practices applicable to documentary collection operations have been codified by the international chamber of commerce (ICC). These are published in the form of the Uniform Rules for Collections (URC) and banks in countries across the world incorporate them by reference in collection transactions. The latest version of the URC was drawn up in 1995. To get coverage under ICC URC 522, in the operation of documentary collection, it is to be stated on the collection instruction that the payment is as per Uniform Rules for Collection 522. The URC has 26 articles that are divided under seven broad heads: General Provisions and Definitions; Form and Structure of Collection; Form of Presentation; Liabilities and responsibilities; Payment; Interest, Charges and Expenses; and Other Provisions. Different articles have asserted the provisions and requirements of the documentary collection procedure; identified Study Material on Trade_Advance Level for NCC Bank Limited 26 | P a g e different forms of documents and their release; and described roles of different parties [principal/exporter, remitting bank, collecting bank, presenting bank, drawee/importer] involved in the documentary collection process (summary of URC 522 is given in appendix table-4). 1.9 Incoterms 2020 From the 1st January 2020, the ICC’s Incoterms 2020 came into force. This is the night revision of the Incoterms Rules, with the last revision dating back to 2010. The introduction to the new 2020 rules stresses the need to use the terms appropriate to the goods, to the chosen means of transport and to whether or not the parties intend to impose additional obligations on the seller or buyer. In addition, there are Guidance Notes (and a diagram) at the front of each Incoterms Rule containing information to assist in making a choice on which Rule to use. The new Rules have been separated into two classes: Rules for use in relation to any mode or modes of transport; and Rules for sea and inland waterway transport, where the point of delivery and the place to which the goods are carried to the buyer are both ports. 1.10 Uniform Rules for Bank Payment Obligation (URBPO) This is the first ever set of rules to facilitate open account trade. URBPO has been launched as the standard for supply chain finance that is expected to facilitate international trade. The rules were developed by the ICC with a partnership established with financial messaging provider SWIFT to take into account the legitimate expectations of all relevant sectors. The URBPO provides the benefits of a letter of credit in an automated and secured environment, and enables banks to offer flexible risk mitigation and enhanced financing services to their corporate customers. 1.11 DOCDEX Rules and ICC Arbitration The purpose of the ICC DOCDEX Rules is to provide parties with a specific dispute resolution procedure that leads to an independent, impartial and prompt expert decision for settling disputes involving the UCP, URDG, URR and URC. The ICC Court is the leading international arbitration institution in the world. ICC and Committee Maritime International (CMI) offer separate arbitration rules to meet the special requirements of maritime users. A committee for revision of existing DOCDEX rule is formed in 2013. A committee for revision of the last DOCDEX rule was formed in 2013 and a new version of DOCDEX rules was finalized in April 2015 that came into effect from May 1, 2015. Study Material on Trade_Advance Level for NCC Bank Limited 27 | P a g e 1.12 Uniform Rules for Forfaiting & General Rules for International Factoring (GRIF) In the area of guiding trade services, Uniform Rules for Forfaiting (URF 800); and General Rules for International Factoring (GRIF) are relatively recent developments. ICC URF 800 details how forfaiting facilitates the provision of finance to the international trade community. ICC and the International Forfaiting Association (IFA) have joined forces to provide the business community with the first ever Uniform Rules on Forfaiting. The GRIF is a uniform set of rules and regulations issued by FCI to govern transactions amongst FCI members. It is used when transacting two factor cross-border factoring, and adopted by all members of Factors Chain International. 1.13 Laws of International Carriage of Goods International carriage has also been the subject of much discussion over the years. The world-wide nature of international trade and the necessity for efficient transport have led to a series of rules, covering carriage by sea, by road, by rail and by air. The Hague Rules of 1924, and The HagueVisby Rules of 1968, together with the Hamburg Rules 1978, now provide the basis for carriage of goods by sea. The Warsaw Rules 1929 exist for air transport and there have been variations, most notably in Montreal rules adopted in 1975. Since rail/road does not link the continents, as do sea and air transport, it should not be surprising that rail/road transports lacks a global, multilateral set of rules. Nonetheless, in Europe and in certain contiguous countries linked to European rail network, rail transport is governed by the 1980 Convention concerning International Carriage by Rail (COTIF), which entered into force in 1985 and applies in around 40 countries. Similar to the rail transport, a number of countries-mostly European- have signed CMR 1956 convention on the Contract for the International Carriage of Goods by Road. Other than these, UN Convention on the International Multimodal Transport of Goods (1980) covers multimodal transport. 1.14 The Hague Rules of 1924 The Hague Rules of 1924 (formally the "International Convention for the Unification of Certain Rules of Law relating to Bills of Lading, and Protocol of Signature") is an international convention to establish a minimum mandatory liability of carriers upon commercial carriers of goods by sea. The Hague Rules were slightly amended (beginning in 1931, and further in 1977 and 1982) to become the Hague-Visby Rules. With all the amendment, Hague-Visby Rules consists of 10(ten) articles concerning rights and responsibilities of carriers and shippers. 1.15: United Nations Convention on the Carriage of Goods by Sea, 1978 (Hamburg Rules) Study Material on Trade_Advance Level for NCC Bank Limited 28 | P a g e Adopted in Hamburg on 31 March 1978, Hamburg Rules are a set of rules governing the international shipment of goods to form a uniform legal base for the transportation of goods on ocean going ships. The convention is divided into seven parts consisting 34 (thirty four) articles. Provisions related with liability of the carrier, shipper, actual carrier, application to non- contractual claims etc., are incorporated in the convention. It also covers provisions on the contents of bill of lading, special rules on dangerous goods etc., 1.16: CMR Convention The CMR Convention, United Nations convention, focuses on various legal issues concerning transportation of cargo by road. As of February 2017, it has been ratified by 44 states. The convention consists of eight chapters with 51 (fifty one) articles. Provisions relating to liability of the carrier, carriage performed by successive carriers etc., have been included in the convention. 1.17: United Nations Convention on International Multimodal Transport of Goods 1980 Although the Convention has not succeeded in attracting sufficient ratifications to enter into force, its provisions have significantly influenced the type of legislation enacted in a number of countries/regions. The Convention applies to all contracts of multimodal transport 15 between places in two States, if the place of taking in charge or delivery of the goods as provided for in the multimodal transport contract is located in a contracting State. While the Convention recognizes the right of the consignee to choose between multimodal and segmented transport, its provisions are to apply mandatorily to all contracts of multimodal transport falling within the provisions of the Convention. 1.18: UNCTAD/ICC Rules for Multimodal Transport Documents Pending the entry into force of the UN Convention on International Transport of Goods 1980, the UNCTAD’s Committee on Shipping, by resolution 60 (XII) of November 1986, instructed the secretariat to elaborate model provisions for multimodal transport documents, in close collaboration with the competent commercial parties and international bodies, based on the Hague and Hague/Visby Rules as well as existing documents such as the FBL (FIATA Bill of Lading) of the International Federation of Freight Forwarders Association (FIATA) and the ICC Uniform Rules for a Combined Transport Document. Following this resolution a joint UNCTAD/ICC working group was created to elaborate a new set of rules for multimodal transport documents. During a series of meetings the joint UNCTAD/ICC working group completed the preparation of Study Material on Trade_Advance Level for NCC Bank Limited 29 | P a g e the UNCTAD/ICC Rules for Multimodal Transport Documents in 1991. The Rules entered into force on 1 January 1992. The key regulatory international initiatives to form a uniform legal framework may be summarized as follows (box 1.2): Box 1.2: International Rules Regarding Transport Documents Transport Name of International Rules Documents Transport by sea -International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading, 1924 (Hague Rules) -Protocol to Amend the International Convention for the Unification of Certain Rules Relating to Bills of Lading 1924, (Hague/Visby Rules) 1968 -Protocol Amending the International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading, 1924, as Amended by the Protocol of 1968, 1979 -United Nations Convention on the Carriage of Goods by Sea, 1978 (Hamburg Rules) Transport by road Convention on the Contract for the International Carriage of Goods by Road (CMR)1956 Transport by rail Uniform Rules Concerning the Contract for International Carriage of Goods by Rail (CIM), Convention Concerning International Carriage by Rail (COTIF), May 1980, Protocol to amend CIM-COTIF, 1999 Transport by air Convention for the Unification of Certain Rules Relating to International Carriage by Air (Warsaw Convention), 1929, The Hague Protocol, 1955, Montreal Protocol No. 4, 1975, The Montreal Convention, 1999 Multimodal United Nations Convention on International Multimodal Transport of Transport Goods; UNCTAD/ICC Rules for Multimodal Transport Documents Source: UNCTAD,2001 Study Material on Trade_Advance Level for NCC Bank Limited 30 | P a g e Chapter Two : Domestic Regulations for International Banking in Bangladesh 2.1: Regulatory Framework for Trade Services in Bangladesh In performing international trade services operations, banks are required to follow both a set of domestic regulations and international rules/guidelines. In this connection, our exchange control regulation i.e., Foreign Exchange Regulations Act 1947 (FERA 1947) is the key domestic regulation in regulating cross-border banking transactions. Banks are also required to follow the trade policies issued by the Ministry of Commerce of Bangladesh. Among the international rules and guidelines, International Chamber of Commerce (ICC) publications are the most relevant. The major relevant regulations followed in performing trade services activities in the country are shown in table 2.1 below. Table-2.1: Regulatory Framework of International Trade Services in Bangladesh [Key Relevant Rules/Guidelines] Domestic Regulations/Rules: - Foreign Exchange Regulations Act 1947(with latest amendment); - Bangladesh Bank Guidelines on Foreign Exchange Transactions; - Export Policy 2018-2021; Import Policy Order 2015-2018 etc. - Arbitration Act 2001 Key International Guidelines/Rules: - Uniform Customs and Practice for Documentary Credit (UCP 600); - Uniform Rules for Collections (URC 522); - Uniform Rules for Bank-to-Bank Reimbursements for Documentary Credits (URR 725); - International Standard Banking Practice (ISBP 745); - International Commercial Terms 2020. Other than the above mentioned key rules/guidelines, some other domestic regulations/acts like Customs Act 1969, Pre-shipment Inspection Act, 2002 are indirectly related. A few other ICC publications like International Standby Practices (ISP-98), Uniform Rules for Demand Guarantee Study Material on Trade_Advance Level for NCC Bank Limited 31 | P a g e (URDG 758), and Documentary Instruments Dispute Resolution Expertise Rules (DOCDEX) etc. are also relevant. Some of these relevant rules and guidelines have been summarized below: 2.1.1 Purchase/Sale Agreement in the Context of Bangladesh In the context of Bangladesh, importers are to obtain IRC to import from any sources and exporters are to get ERC6. Practically, for the three methods (cash in advance, open account, and documentary collection) banking system needs a standard format7 for purchase/sale agreement, considering the risks to protect the interests of the clients in a better manner. In case of LC, the contract may be considered as relatively less important as the terms and conditions of the contract are expected to be in the LC itself. In Bangladesh, the use of standard sales/purchase contract is not so prominent which may be due to the widespread use of documentary credit. In regard to uniform rules for the contract, the major trading partners of Bangladesh like United States, UK, members of EU, China are among the signatory countries of UN Vienna Convention. However, Bangladesh is yet to sign the treaty, and the country also does not have any national regulation/guideline to cover cross-border purchase/sale contracts. 2.1.2 Foreign Exchange Regulation (Amendment 2015) Act 1947 In Bangladesh, Foreign Exchange Regulations Act, 1947 (FERA, 1947) is the most important domestic regulation in the area of international banking. FERA, 1947 has empowered Bangladesh Bank to regulate all kinds of foreign exchange dealings in Bangladesh. Empowered by the Act, Bangladesh Bank issues Authorized Dealers licenses to the selected bank branches for conducting trade payments, financing and other international banking operations. Following the provisions of the Act, Bangladesh Bank issues circulars/guidelines from time to time to regulate trade payment, financing, remittance services etc. activities to be followed by the banks. These guidelines should complement the ICC guidelines for smooth operations of international trade payment and financing activities. The Act has 27 sections and a number of sub-sections which cover an array of issues connected with trade services and foreign exchange. It focuses on the maintenance of the proper accounting of foreign currency receipts and payments. Bangladesh Bank is responsible for 6 In practice, importers and exporters are to submit a diverse set of documents like Receipt of the deposited fees, TIN, VAT, Nationality Certificate, Bank Solvency Certificate, Trade License; Certificate from Chamber/ Registered Trade Association, Certificate from Board of Investment, Rent Receipt; Partnership Deed/ Memorandum of Association/ Article of Association, etc. to the CCI&E of the Ministry of Commerce. It is to be mentioned that government ministries do not require IRC for importation. 7 For example ICC and UNCITRAL designed formats of standard purchase/sale agreement. Study Material on Trade_Advance Level for NCC Bank Limited 32 | P a g e administration, supervision, monitoring as well as framing of different guidelines governing all the transactions denominated in foreign currencies under the Act. The authorized dealers must maintain adequate and proper records for all foreign exchange transactions and furnish the particulars in the prescribed formats in form of regular monthly submission of returns to the Bangladesh Bank. The Act has given Bangladesh Bank the authority to call for information, power to inspect and finally to draft rules based upon which Bangladesh Bank issues circulars/guidelines from time to time to regulate trade payment and international banking activities to be followed by the banks. Section 5, 8, and 12 of the FERA 1947 are specifically important and relevant for trade services by banks. 2.1.3 Guidelines for Foreign Exchange Transactions, 2018 Authorized Dealers are required to follow Foreign Exchange (FE) circulars issued by the Bangladesh Bank being empowered by FERA 1947. In this process, one cannot by-pass the policy decisions and directives of the government in the form of Export Policy and Import Policy Order issued by the Chief Controller of Export and Import of the Ministry of Commerce of the country as empowered by the Imports and Exports (Control) Act, 1950. Bangladesh Bank compiled all the FE circulars in the guideline titled GFET. The current [second edition] issue of GFET 2018 covers regulations upto September 30, 2017. The first volume offers the directives regarding the procedural modalities and the second one contains the details of monthly reporting of FE transactions. From operational banking point of view, the importance of the GFET is imperative and the officials working at different desks of trade services departments in AD branches must know these rules well. Some key regulations for trade facilitation in case of importation and exportation of Bangladesh as per GFET are pointed in box 2.1 and 2.2. There are 20 chapters in GFET volume one.  Licensing criteria and basic instructions to the ADs and Money (chapter 1,2,3 &4)  Inward and outward remittance (chapter 5, 10,11&12)  Export and Import (chapter 6,7 & 8)  Foreign Remittance and Foreign Currency Account (chapter 13 & 14)  Borrowings, Investment, Loans & Advances (chapter 9, 15 & 16)  Miscellaneous (chapter 17, 18,19 & 20) Study Material on Trade_Advance Level for NCC Bank Limited 33 | P a g e Box-2.1: Some Key Regulations/Rules for Trade Facilitation in case of Importation into Bangladesh as per GFET  The ADs must ensure that they deal only with known customers having a place of business in Bangladesh  LCAFs remain valid for remittances for one year subsequent to the month of issuance. However, LCAFs issued for import of capital machinery and spares will remain valid for remittances for 30 (thirty) months subsequent to the month of issuance.  However, approval of Bangladesh Bank will not be required for extending validity of LCAF related to import of capital machinery under long term supplier's/buyer's credit upon approval of BIDA. Revalidation of LCAF will not be required for remittances against import out of fund held in foreign currency accounts of importers maintained under general or special authorisation from Bangladesh Bank.  Import bill, unless forward cover has been taken, shall be retired at the rate of exchange prevailing on the date of lodgment in the book of AD.  The ADs will have to obtain confidential report on the exporters in all cases where the amount of LC/contract exceeds USD 10,000 (Ten Thousand) against proforma invoices issued directly by foreign suppliers and USD 20,000 (Twenty Thousand) against indents issued by local agents of the foreign suppliers.  ADs may allow remittance against discrepant documents/documents received directly by the importers after the goods have been cleared from the customs, on the basis of the relative LCAF, the authenticated copy of the customs bill of entry for consumption or customs certified invoice in the case of import by post/courier and the relative invoices.  In all cases of remittances for imports into Bangladesh, the importer must submit the relevant authenticated copy of the customs bill of entry within four months from the dates of remittances. In case of imports on suppliers' credit/buyers’ term/external credit, the prescribed period shall be calculated from the date of acceptance of import documents.  ADs may establish letter of credit in foreign currency favoring local contractor to implement work order issued by govt. authorities under international tender Source: BB Guidelines Box-2.2: Some Key Regulations/Rules for Trade Facilitation in case of Exportation From Bangladesh as per GFET  All exports, to which the requirement of declaration applies, must be declared on the EXP Form.However, EXP procedure will not be applicable for export undertaken in nonphysical form.  Before issuance of EXP Forms, ADs have to be satisfied about bonafides of the buyers/consignees abroad and their credentials etc. where necessary, Special care is to be taken in case of exportation agasint contract alone, charter party bill of lading etc. Study Material on Trade_Advance Level for NCC Bank Limited 34 | P a g e  The exporters need to submit export documents, EXP Form in particular, to the ADs so that they are able to report to BB within 14 days from the date of shipment.  In case of shipment by sea or land route (such as by road or by rail), title of the cargo (consigned field on transport document) should be drawn on ADs.  ADs may allow carrier companies to draw documents of title to cargo to the order of importer or other designated parties only if the shipment is made against full payment received in advance.In this context, designated, ADs are required to issue a certificate to the exporter in the prescribed form to be produced to the carrier company, enabling them to draw the shipping documents accordingly.  General authorisation has been accorded to ADs for allowing exports of raw jute and jute goods on upto 360(three hundred sixty) days usance.  In case of Receipts of advance remittances against exports, AD should obtain a declaration from the beneficiary on the "Advance Receipt Voucher" certifying the purpose of the remittance with report to the 'Online ARV Reporting Module'.  If shipments from Bangladesh are lost in transit for which payment has not already been received either by a direct remittance or by negotiation of bills under an LC, the AD must see that an insurance claim is made as soon as the loss is known. Source: GFET 2018 2.1.4 Import Policy Order 2015-18 The existing Import Policy Order, 2015-18, has been formulated, keeping in mind the market economy ideology for making the easy availability of the commodities to consumers at fair prices through removing the barriers to movement of goods internationally. As noted in the policy document, the major objectives are liberalization of imports in line with WTO and globalization; simplification of imports for export oriented industries; and improving quality of services to the importers. The present version of the import policy order has got nine chapters that cover relevant definitions, general rules for imports, fees related to imports, miscellaneous rules, and general rules for industrial imports, provisions related to the importers of government sector, import trade control committee, and recognized list of chamber of commerce and industry. In the Import Policy Order, twenty commodities have been kept under the restricted list. The import policy has allowed opening of LC for importing capital machinery even without IRC and other flexible measures to keep up with the momentum of rapid industrialization through ensuring required imports. The limit of import without LC has also been raised. For enhancing easy availability of industrial raw materials and consumer goods at fair prices, some commodities have been declared importable as raw materials. 2.1.5 Export Policy 2018-2021 Study Material on Trade_Advance Level for NCC Bank Limited 35 | P a g e Export Policy 2018-2021 primarily aims at encouraging production of exportable commodities and promoting new exporters and helping the existing exporters. In the policy document, strategies are mentioned to facilitate expansion of trade and taking necessary steps to modernize and simplify the country’s trade policy in accordance with WTO obligations and upholding the country’s interest. In the document, eight chapters have been included with two annexures. 2.1.6 Customs Act 2014 and Pre-shipment Inspection Rules 2002 Customs Act 2014 has consolidated the law relating to customs (the levy and collection of customs duties) and to provide for other allied matters. The Act has covered some issues connected with bill of entry and pre-shipment inspection that are related to trade services by banks. Government of Bangladesh circulated a set of rules of pre-shipment inspection known as Pre-shipment Inspection Rules 2002 under the Customs Act 1969. These rules assigned specific responsibilities8 to the importers and the banks related to pre-shipment inspection. 2.1.7 International Rules Applicable for Bangladesh In Bangladesh, ADs are advised to explicitly mention that UCP 600 shall apply for all LCs to be opened from July 1, 2007. And for export, using LCs, the ADs must ensure that the terms of the LCs are in conformity with the rules of UCP 6009. But in some cases our domestic requirements are needed to be adjusted with UCP 600 articles and that must be adjusted at the time of issuance of an LC. Major such conflicts are shown in the box (2.6). Besides this UCP 600, other ICC regulations, URR725, URC522, URDG, ISP 98 etc. are also followed in the country, though there is no explicit circular of the central bank on these publications. But these guidelines are not prohibited to use. Incoterm 2010 has been included in Trade Policy 2015-18 (Box 2.5). - - Box 2.5: Incoterms and Domestic Regulations In case of exportation from Bangladesh, ADs are allowed to use any of the terms as EXW, FCA, FOB, FAS, CFR, CIF, CPT and CIP provided those are stipulated in the relevant LCs or sales contracts Goods can be imported by using other Incoterms except DDP, CIF and CIP 8 Importer must get information about the requirement of PSI for a product and name of the PSI agencies appointed for the purpose for different regions. According to the rules, Issuing Bank must add condition related to (where applicable) pre-shipment inspection in the LC; and must send an attested copy of the LC, insurance cover note, TIN certificate and VAT certificate to the concerned inspection office at Dhaka. In case of import through LCAF (without LC) the copy of the LCAF along with other documents must be sent (PSI Rules 2002). 9.FE. Circular No. 01, June 25, 2007 Study Material on Trade_Advance Level for NCC Bank Limited 36 | P a g e - Unless there is specific provision in the relevant loan agreement or project agreement concluded with the foreign donors for import on CIF or CIP basis, no import shall be allowed on CIF or CIP basis without prior approval from the Ministry of Commerce; - Any expatriate Bangladeshi with income earned abroad and any foreign inyestor with his share of equity can send capital machineries & raw materials on CIF or CIP basis - Goods from foreign countries free of cost or gift goods are importable on CIF or CIP basis; - Food goods can be imported by Ministry of Food and Ministry of Relief and Rehabilitation Management on CIF or CIP basis Source IPO 2015-18 Incoterms 2020: ICC has launched Incoterms 2020 in September 2019 with some changes in sellers’ and buyers’ obligations in delivery of the goods. The broad changes made by ICC in the Inctoerms Rules 2020 in the box 6.6. Box 2.6: Changes Made by ICC to the Incoterms 2010 rules in the Incoterms 2020 rules: a) Bill of Lading with an On-Board Notation and FCA Incoterms Rule b) Costs, where they are listed c) Different Levels of Insurance Cover in CIP & CIF d) Arranging for Carriage with the sellers’ or buyer’s own means of transport in FCA, DAP, DPU & DDP e) Change in the Three-Letter Initials for DAT to DPU f) Inclusion of Security related requirements within carriage obligations and costs g) Explanatory Notes for the Users Source: ICC Incoterms 2020 Study Material on Trade_Advance Level for NCC Bank Limited 37 | P a g e Banks in the country are to comply with domestic regulations which are above all. Here are some examples which are needed to be complied with in spite of deviations from international standard banking practice (box 2.7). Box 2.7 : Adjustment of Some Provision under Domestic regulation with UCP 600 - As per UCP 600, commercial invoice need not to be signed but in Bangladesh signed invoice is required while opening Letter of Credit. - After giving discrepancy notice, bankers cannot make payment without ensuring the Bill of Entry. But if importer gives waiver and it is acceptable to the issuing bank, payment must be made according to the payment terms of LC. - Under back to back LC, payment can be made only after receiving Bill of entry. But after complying presentation, banks need to make payment according to UCPDC. - For payment under acceptance, banks have to perform due diligence in determining bonafide business, whereas in UCP, banks deal with document not with goods. - According to UCP 600, issuance date of a document may be dated prior to the issuance date of the credit, but must not be dated later than its date of presentation. But in Bangladesh shipment date must be after the issuance date of credit except few cases. Source BB Guidelines Study Material on Trade_Advance Level for NCC Bank Limited 38 | P a g e Module Two: Questions  Write down the international regulations available for trade facilitation. (1.1)  What is purchase/sale agreement? (1.1)  Explain the rationale behind CISG. (1.2)  What is reimbursing bank? (1.3)  Point out international rules regarding transport documents. (1.13)  Write down regulatory framework of international trade services in Bangladesh. (2)  Point out some key terms to be included in a standard sales/purchase contract. (2.1)  What is the rationale behind FERA & GFET? (2.1.3)  Explain some key regulations/rules for trade facilitation in case of importation and exportation of Bangladesh as per GFET. (2.1.3)  What is the implication of trade policies for trade services by banks? (2.1.4)  What are cases in which import against LCA Form without opening of Letter of Credit (LC) is permitted? (2.1.4)  What is the validity of shipment for goods after issuance of LCAF? (2.1.4)  Which documents are required to be submitted along with LCA Form for opening LC in case of both public and private sector importers? (2.1.4)  Which incoterms are not allowed for exportation and importation in trade services in Bangladesh? (2.1.4)  Point out applicable law some provisions under domestic regulation with UCP. (2.1.7) Study Material on Trade_Advance Level for NCC Bank Limited 39 | P a g e Module Three: Documentation and Examination Process in Trade Services by Banks Chapter One: Documents in Trade Facilitation- Global Context Chapter Two: Documents in Use and Examination Procedure of Documents in Trade Facilitation in Bangladesh Questions and Answer Indications Study Material on Trade_Advance Level for NCC Bank Limited 40 | P a g e Chapter One: Documents in Trade Facilitation- Global Context 1.1 Documents Commonly in Use in Trade Facilitation Foreign trade documents are important for the exporter or importer establishments, in terms of preparing according to the preferred qualities aware of customs, exportation and importation regulations and prevention of all the sides, led by exporters/importers, being wronged. The documents incomplete, faulty or not given to the authorities on time may give rise to some risks in the products’ delivery or during collection of the product costs. This will generate a prudential risk for the bank’s business. Considering the need globally documents are categorized in five groups (table- 1.1). Table- 1.1:Documents in International Trade Transactions Category Why we need it Examples of Documents Transport Evidence of shipment Bill of Lading, Airway Bill, Truck Documents Receipt, Courier Receipt etc Insurance Cover against risk to the Insurance Policy, Insurance Documents goods during their carriage Certificate, Declaration under open Cover etc Financial Evidence of financial claim Bill of Exchange, Cheque, Documents Promissory Note etc. Commercial Describing the goods Commercial Invoice, Inspection Documents Certificate, Packing list, Weight List Official Documents Evidencing compliance with Certificate of Origin, Legalized the requirements of the Invoice, Export License etc. country of export or the country of import In documentary collection and documentary credit payment methods, banks are directly related with documents. Under documentary collection, documents are two types; Commercial Documents and Financial Documents. Under financial documents, documents which show the financial claim are included like Bill of Exchange, Cheque, and Promissory Note etc. And under commercial documents all documents except the financial documents are included like Bill of lading, Insurance Policy, Commercial Invoice, Certificate of Origin etc. On the other side in documentary credit, documents are divided in four groups; Transport Documents, Commercial Invoice, Insurance Documents and Other Documents. The requirements and nature of documents Study Material on Trade_Advance Level for NCC Bank Limited 41 | P a g e depend upon purchase/sale agreement. In case of LC, these documentary requirements are noted in the LC itself. 1.1.1 Commercial Invoice The invoice/commercial invoice, in ultimate sense, is the seller’s bill for the merchandise. Invoice shows the description of shipped goods. Commercial invoice cannot be replaced by pro-forma invoice or provisional invoice, as these two show the description of offered goods. The importer may require several copies of the invoice to satisfy his own needs and also those of customs and other authorities in his country. The authorities may also require the invoice to bear other details such as the name of the vessel/carrier, the ports of dispatch and destination, freight, insurance, origin of goods etc. There is no standard form for commercial invoice. Each exporter designs its own commercial invoice form. A basic requirement of an invoice is explained in table 1.2. Table-1.2: Basic Requirements of an Invoice as per UCP 600 and ISBP 745 Issuer An “invoice” is to appear to have been issued by the beneficiary or, in the case of a transferred credit, the second beneficiary. When the beneficiary or second beneficiary has changed its name, and the credit mentions the former name, an invoice may be drawn in the name of the new entity provided that it indicates “formerly known as (name of the beneficiary or second beneficiary)” or words of similar effect. Issued to whom Must be made out in the name of applicant (except as provided in subarticle38(g)) Title When credit requires presentation of an “invoice” without further description, will be satisfied by any type of invoice presented except proforma invoice and provisional invoice. Currency Must be made out in the same currency as the credit Sign and Date Need not to be signed and dated Goods description Must correspond with that appearing in the credit but not the mirror image Advance Payment, An invoice may indicate a deduction covering advance payment, Discount, Charges, discount, etc., that is not stated in the credit. Additional charges and Cost costs, such as those related to documentation, freight or insurance costs, are to be included within the value shown against the stated trade term on the invoice. Trade Terms Invoice must reflect the trade term mentioned in the LC. Source of trade term is also important. If it is mentioned in LC, invoice must reflect it. Study Material on Trade_Advance Level for NCC Bank Limited 42 | P a g e 1.1.1.1 Forms of Invoice Some other forms of invoice are in use in global trade transactions. These include Consular Invoice, Customs Invoice, Certified Invoice, Tax Invoice, and Legalized Invoice. Consular Invoice: Consular Invoice is required by some countries for their imports. It is made out on a prescribed format certified by the consulate of the importing country stationed in the exporter’s country. It serves the purpose of authenticating the particulars of the goods that are to be imported into their country. But in some cases it is also seen that exporter’s own invoice are authenticated by the embassy or consulate (instead of issuing consular invoice), then these invoices are to be called ‘Legalized invoices’. Customs Invoice: Some countries require custom invoices. These are the specific forms supplied by the consular office of the respective importer, duly filled and signed by the shipper and serve the purpose of making easy entry of the merchandise into the importing country usually at preferential tariff rates. Certified Invoice: An importer may require a certified invoice, which an invoice, bearing a signed statement by someone in the importer’s country who have inspected the goods and found them in accordance with those specified in the contract. Legalized Invoice: It is issued by the beneficiary/ exporter, in terms similar to a commercial invoice and in terms of the documentary credit. In addition, the invoice must show that it has been legalized by the embassy or consulate of the country of import in the country of export or as specified in the documentary credit, or notarized by a notary public. Tax Invoice: A tax invoice is an invoice issued by a registered dealer to the purchaser, showing the amount of tax payable. 1.1.2 Transport Documents Transport documents give proof of shipment/carriage of goods from port of loading/place of receipt to port of discharge/place of destination. Usually, transport documents are the documents of title of goods and act as the evidence of contract for the carriage or transportation of the goods Study Material on Trade_Advance Level for NCC Bank Limited 43 | P a g e between the shipper and the carrier. A full-fledged transport document should carry certain information that noted in box 1.1. - Box 1.1: Common Contents of a Transport Document Name of the carrier and be signed On board notation Place of receipt, port of loading, port of discharge and place of delivery Description of goods consistent with that in the credit Identifying marks and numbers (if any) The name of the carrying vessel or the intended carrying vessel The names of shipper, consignee (if not made out `to order') and the name and address of any `notify' party. Whether freight has been paid or is still to be paid. The number of originals issued to the consignor if issued in more than one original. Terms and conditions of the carriage Date of issuing the documents. 1.1.2.1 Types of Transport Documents Usually a transport document assumes the form of either: -Single Modal Transport Document -Multimodal /Combined Transport Document. The former is that type of transport document which is normally applicable to a carriage of goods only by one mode (such as air, rail, waterway etc.). The Multimodal Transport document is applicable for the carriage of goods by more than one mode of transport. This document may indicate either dispatch or taking in charge of the goods or loading on board as the case may be. Transshipment is normally allowed for multimodal transport document. The various forms of Single Modal Transport Documents are the following:- Marine/Ocean B/L - Charter Party B/L - Air Transport Document - Road, Rail or Inland Waterway Transport Document - Courier and Post Receipts. Some documents commonly used in relation to the transportation of goods, namely, Delivery Order, Forwarder’s Certificate of Receipt, Mate’s Receipt etc. do not reflect a contract of carriage and are not transport documents according to UCP-600 rules (19-25). 1.1.2.2 Determination of Shipment Date- Rationale and Process Study Material on Trade_Advance Level for NCC Bank Limited 44 | P a g e One must be very careful about the date of issuance of transport document/ date of shipment which is very important for a number of reasons, namely. - To determine the acceptability of insurance documents, that must be dated not later than the date of shipment (Article 28e, UCPDC). - To meet the requirements that the documents must be presented to the banks within 21 days after the date of shipment but not later than expiry date of L/C (Article 14c UCPDC). - To determine the date of shipment within the stipulated latest date for shipment in the credit, if date of issuance of transport document is taken to be the date of shipment. The date of shipment in case of various transport documents is determined in the following ways as per UCP 600 (table 1.2). Table-1.2: Determination of Date of Shipment as per UCP 600 Name of TD Date of Shipment Multimodal /Combined TD (Art.19) Date of dispatch /Taking in Charge/ Shipped on Board, otherwise date of issuance. Bill of Lading (Art. 20, 21, 22) On Board Notation date, otherwise date of issuance Air Transport Document (Art. 23) A specific notation of actual date of shipment, otherwise date of issuance RRI Transport Document (Art. 24) Either Indicate the date of shipment or the date goods have been received for shipment/dispatch/carriage, otherwise date of issuance. Courier Receipt (Art. 25) Date of pick-up or receipt Post Receipt/Certificate of Posting Stamped as signed date evidencing receipt of goods (Art. 25) for transport If the presentation consists of more than one TD (same means of conveyance and same journey, and same destination, but different dates of shipment), the latest date of shipment is the date of shipment. (Art. 31) If the expression “on or about” is used in regard to date of shipment, it indicates shipment is to be made during a period of five calendar days before to five calendar days after the specific date, both start and end days included. (Art. 3) 1.1.2.3 Transshipment Transshipment generally means transfer and reloading from one mode of transport to another mode of transport or from one vessel to another vessel within the same mode of transport. The UCP definition of transshipment for various transport documents are stated below in table 1.4: Study Material on Trade_Advance Level for NCC Bank Limited 45 | P a g e Table-1.4: Transshipment of Different Transport Documents under UCP 600 Transport Document Transshipment Combined/Multimodal T/D From one means of conveyance to another means of conveyance whether or not in different modes of transport. Bill of Lading From one vessel to another vessel Charter Party B/L No mention Air Transport Document From One aircraft to another aircraft RRI T/D From one means of conveyance to another means of conveyance within the same mode of transport. Courier /Postal Receipt No mention A transport document indicating that the goods will or may be transshipped is accepted provided that the entire carriage is covered by one and the same T/D. Moreover, even after prohibiting transshipment under B/L, a transshipped B/L is acceptable, if the goods are shipped in a container, trailer or LASH barge. 1.1.2.4 Examinations of Documents: Common discrepancies in Transport Documents  Late shipment;  Late presentation;  Ports of loading / dispatch / taking in charge are not as per the documentary credit;  Ports of discharge / final destination are not as per the documentary credit;  Transport document shows an intended vessel / intended port of loading but an on-board notation does not additionally evidence the named vessel or actual port of loading;  Transhipment is effected when the documentary credit specifically prohibits it and excludes sub-articles 20(c)(ii), 21(c)(ii) or 23(c)(ii);  Absence of an on-board notation on the bill of lading;  On-board notation is not dated;  Goods are shipped on deck;  Full set of transport documents not presented as required by the documentary credit; Study Material on Trade_Advance Level for NCC Bank Limited 46 | P a g e  Claused bills of lading presented, showing defective condition of the packages or goods;  Transport documents do not identify the name of the carrier;  Not signed in accordance with the respective UCP article;  Bills of lading made out to order of shipper or to order and not endorsed in blank;  Data content in conflict with that shown on other stipulated documents;  Unauthenticated alteration to the transport document;  Goods covered by more than one set of bills of lading;  Notify party details are incorrectly shown. 1.1.3 Insurance Document International trade is very much risk ridden. So, it is necessary to insure the goods against the risks of loss or damage. Insurance is a contract whereby the insurer is undertaking to indemnify the assured to the agreed manner and extent against fortuitous losses. Insurance is, therefore, a contract of indemnity. The document is which contract of indemnity (or, insurance) is embodied is called a policy. The man (or firm) who undertakes to insure is called insurer. When the insurer will subscribe his name in the policy then he will be called an underwriter. The owner of the goods (which are insured) is called assured. The thing or property insured is called the subject matter of insurance. The interest which the assured has in the subject matter is known as his insurable interest. The payment for which insurer undertakes to indemnify is termed as premium. An insurance document should carry certain information that is noted in box 1.2. - Box 1.2: Certain Contents of Insurance Documents the name of the insurer or his agent, the name of the ship/carrier, the name of assured, the subject matter of insurance, the time and/or voyage insured, the peril(s) insured against, the date and subscription, the valuation, Coverage date Coverage journey the stamp etc. Study Material on Trade_Advance Level for NCC Bank Limited 47 | P a g e Examination of insurance documents by the bankers is relevant under LC process. Major requirements of insurance documents (according to UCP 600 and ISBP) under LC operations are shown in table-1.5. Table 1.5: Major Requirements of Insurance Documents under UCP 600 and ISBP 745 Appropriate According to UCO 600 there are three documents. - Insurance policy Document - Insurance Certificate - Declaration under open cover Insurance policy is the superior document. Cover note is not an insurance policy under UCP 600. - Insurance company Signing capac

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