International Trade Finance

1. International Trade Finance TradeGuidelines Operations Mashreq Bank, UAE

2. International Trade Payment Mechanisms and Risks. • There are principally four payment mechanisms in International Trade namely; • Open Account • Advance Payment • Documentary Collections • Documentary Credits Choice of payment mode can be quite challenging as each payment mechanism provides a varied level of risk and security to both sides.

3. LC Cycle 6.Preparation of documents Seller Beneficiary Buyer Applicant 1.Contract 5.Shipment of goods 9.Presenting of Documents and payments 4.Advice of LC 8.2 payment 2.LC Application 7.1Presentation of documents Advising/negotiating bank Issuing bank 3.Issuance of LC 7.2 Presenting of documents 8.1 Payment

4. Documentary Letters of Credit. Letters of Credit are a time-tested instrument of international trade. They have been used effectively to expand markets for goods and services and to facilitate a variety of financial transactions, either as a method of payment or as a credit enhancement, within as well as across the borders of sovereign states. • Documentary Credits are the preferred method of payment: • Where there is a customer credit risk • Where there is country risk- (risk of political or economic factors interfering with settlement of debts) • Control (especially shortage of foreign exchange) The essence of Documentary credits is that before the seller dispatches the goods, the buyer’s bank gives its backing to the transaction by issuing: A binding undertaking to pay the seller, provided that the seller can provide specified documents representing the goods.

5. Documentary credits-advantages/risks to the buyer. Advantages to the buyer • Buyer is assured that his bank will only pay to the seller if seller’s documents comply with • all the terms & conditions of the credit. • Through the use of Banker’s Acceptances, a buyer may finance the goods until they • are marketed Risk of the buyer • In documentary credits banks deal only with documents and not with goods. • The merchandise may not be the same as represented in the documents

6. Documentary credits-advantages/risks to the seller • Advantages to the Seller • Seller’s security is prior payment undertaking given by a bank. • The seller can reduce the risk that payment for the goods might be delayed or otherwise jeopardized by political or foreign exchange problems in the buyer’s country. • The purchase or manufacture seller may be able to obtain financing for the of goods that will be shipped under the Letter of Credit. • Risks for Seller • The seller’s documents must comply strictly with the terms and conditions of the Letter of Credit to entitle the seller to payment. • The seller is exposed to the commercial risk that the bank providing its undertaking is willing and able to perform. • The seller assumes any political and foreign exchange risk affecting the issuing bank’s obligation.

7. CommercialsLetters of Credit Letters of credit can be tailored for meeting specific contractual arrangements. Some of the most commonly used LCs are; • Back-to-Back letters of credit These are typically used by an intermediary trader as a pledge to his bank in exchange for an identical credit in a lesser amount in favor of the trader’s supplier. • Transferable letters of credit These are an alternative to back-to back letters of credit and are widely used where intermediaries or middlemen need to offer secure terms to their suppliers. Under this arrangement the beneficiary of a letter of credit is allowed to transfer his right to perform under the master credit without the need for establishing another credit

8. Risk Mitigation- confirmation Confirmation of LC may be used as a means for mitigating the risk of political or economic stability of the importer’s country or even the credit standing of the issuing bank. This requires a bank (usually) in the seller’s country to provide an independent payment undertaking in addition to that given by the issuing bank.

9. Finance Opportunities Use of letters of credit provides a range of finance techniques to importers and exporters. Finance opportunities that are built in to the letter of credit mechanism; • The exporter may finance the importer by the use of a Bill of Exchange (or Deferred payment letter of credit) • The exporter may also obtain post-shipment finance by way of discount/pre-payment of the export bill under an arrangement with the nominated/issuing bank • Finance opportunities that may be available when a letter of credit is used • The letter of credit may serve as a comfort for a loan. The use of Red Clause and Green Clause letters of credit allow the importer to advance funds to the exporter. • A letter of credit may also be linked to an import loan, e.g. Loans against Trust Receipts

10. LC Screening Advising bank Issuing bank If, Yes SWIFT Screening Compliance If, no true Hit push back to Screening system If, No Core System

11. Screening in LC & Trade Documents

12. Methods used in Money laundering – TRADE BASED • Over invoicing- By misrepresenting the price of goods in the invoice and other documentation(stating it at above the true value), • the seller gains excess value as a result of the payment. • Under Invoicing- By misrepresenting the price of goods in the invoice and other documentation(stating it at above the true value), • the buyer gains excess value when the payment is made. • Multiple invoicing- By issuing more than one invoice for the same goods, a seller can justify the receipt of multiple payments. • Short Shipping- the seller ships less than invoiced quantity or quality of goods, thereby misrepresenting the true value of goods in the • documents(this is similar to over invoicing) • Over shipping-the seller ships more than invoiced quantity or quality of goods, thereby misrepresenting the true value of goods in the • documents(this is similar to under invoicing) • Phantom Shipping- no goods are shipped and all documents is completely falsified. • Deliberate Obfuscation of the type of goods- parties may structure a transaction in such ways as to avoid raising the suspicion of banks • or the third parties that become involved.

13. Red Flags • No transport documents evidencing movement of goods • Description of goods on the transport document not matching the LC terms or actual invoice • Customer resubmitting documents that have already been rejected due to financial crime or suspicion crime • Military goods • Goods such as sugar, cement,urea, precious gem stones, luxury cars, mobile phones, tobacco/cigarettes liquor and scrap metals • Dual purpose goods(i.e product and technologies normally used for civilian purposes but that have a military application) • Applicant is overly keen to waive to discrepancies • Per accepted discrepancies by the applicant • Shipment locations of the goods or shipping terms are inconsistent with LC • Request for proceeds of the transactions to be paid to an unrelated or unexplained third party. • BL describing containerized cargo but without container numbers or with sequential container numbers. • BL consigned to a ‘ to be advised party 'chosen between applicant and beneficiary

14. IMB The International Maritime Bureau is a specialized department of the International Chamber of Commerce. The IMB's responsibilities lie in fighting crimes related to maritime trade and transportation, particularly piracy and commercialfraud, and in protecting the crews of ocean-going vessels. As part of our enhanced due diligence process we refer bills of ladings to IMB on threshold basis and prior to financing, ensuring underline shipment is not fraudulent, not passing through sanction countries and to verify actual container movements. Effective 1st April 2016, Team to conduct the IMB verification for all transactions above $ 2.5 Mio, but team shall not hold the documents for receiving the IMB report. Team has to keep track of IMB reports after the transaction and if anything adverse found, team need to escalate to compliance. For Kuwait IMB to be performed for all transaction irrespective of the value

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