Marianne Wabnik

The ICC Commission on Banking Technique and Practice held it's fall meeting 22-23 September 2010, at the beautiful Hilton, Lake Buena Vista, Orlando, Florida.

Between the sessions we could immerse ourselves in the pool and enjoy the enchanting, resort-style accomodations. Was the concentrating on the conclusions diverted by the stunningly beautiful environment? The truth is - partly, but as a matter of fact the queries were particularly well scrutinised long before the meeting during many sleepless nights as they were available to us already in April this year. Due to Eyjafjallajökull, the April meeting in Beijing was cancelled, therefore the queries were carried over to September. The real Letter of Credit enthusiasts could even study them during the summer vacation - some did.

This meeting, subtitled "The future of Trade & Finance - challenges of Innovation and the Regulatory Environment" was attended by close to 250 people from some 45 countries.

In addition to the Letter of Credit interpretational issues resulting in official ICC opinions, a full agenda was presented, displaying an appetizing trade finance menu, a.o. breakthrough of supply chain finance, presentations of the task forces' assiduous labour on Anti Money Laundering and Forfeiting.

SWIFT strategies were presented and the ISBP Drafting Group presented its achievement up to date. The use of credit insurances in international trade and how bankers effectively should strategize the post-crisis regulatory environment was another item on the agenda.

The ISO20022 developments for Guarantees and Standbys/LC was presented and BPO as an accepted market practice.

URDG 758 has been successful so far and an online training is already in place, an URDG Master designed to meet the increased educational requirements.

An update of the ongoing ICC-ADB (Asian Development Bank) register on Trade & Finance was provided, the final public report is available on www.iccwbo.org. A press release from ICC on the register was made one week after the actual meeting - with or without palm leaves.

I really was looking forward to attend the ICC Banking Commission spring meeting taking place in Beijing, a trip to be combined with a visit in Shanghai, the SEB Branch and SEB Singapore.

As you all know the unexpected and exceptional situation in Europe, the volcanic eruption created major air space disturbances around the world. Just hours before the volcano started to spew black smoke and white steam into the air, I managed to get to Beijing - just to discover that the meeting had been cancelled.
Most European airports were closed. ICC had to face these exceptional circumstances beyond their control, all potential options were assessed by them, but eventually it was decided to cancel the meeting, much to the disappointment of us all.
Consequently the fruit of months of dedicated work by Task Forces, the Secretariat and ICC China was not possible to present.
ICC however is assuring us that their good work will continue in the coming months on the different projects.

In Shanghai and Singapore were client seminars arranged and internal information provided. In Shanghai the seminar was presented in English whereas discussions and the Q&A session was led in Chinese.
Due to the cancellation of the ICC meeting I could enjoy some additional hours in the offices, every cloyd has a silver lining.

For my it has been a real pleasure being a speaker on these occasions, an outstanding possibility to meet so many professional Trade Finance people, clients and colleagues. A really warm and welcoming atmosphere in our branches compensated for the my anxiety about the return trip - which actually could take place exactly as scheduled.

As a bonus during the trip, in Singapore and thanks to a client, I was given the chance to try the King of Fruit, the Durian fruit which is delicious but stinky. It can can best be described as having a succulent, creamy filling but smelling like stinky socks. It is banned in public places such as subways, malls and hotels. Still I enjoyed it, "the proof of the pudding is in the eating".

The summer’s impressions from Sicily still lingers in my mind, an entire island like a huge archaeological museum. Already Homer witnessed of trade, although on a small scale.

Sicily early became involved in the endless struggles of the Greek politics, being the scene of Athens' worst defeat in the fifth century BC. Trading stations played an important role on Sicily as the furthest outposts of Greek culture, some commercial bases in Sicily used for trade with Mediterranean people. Inland trade developed in medieval Europe in tandem with foreign trade which was centered in port cities in trade fairs.

Today we make the the same considerations as during ancient times:
How can products reach markets faster and more profitable?
The great modern merchant marines (national fleets of commercial ships) first appeared in the commercial revolution. The shipping companies´ punctuality, efficiency and high quality and their continuous improvement of logistic solutions are beneficial to all trading parties.
Once the exporter has placed the goods on the transporting vehicle and both the contract and the Letter of Credit’s (if any) conditions are fulfilled he might lean back and take a deep breath. When the documents’ value are honoured and his account is credited he is probably delighted or at least he is taking a sigh of relief.
Often an Exporter needs financing to acquire and process the goods. Of course he can ask his own bank for a loan, but the possibilities to advance funds out of a Letter of Credit, issued in his favour should not be overlooked. These instruments are called Red-clause Letters of Credit due to the fact that they historically were written with red ink. They allow for a partial advance payments against a simple receipt and a declaration from the exporter that goods will be delivered and the corresponding documents will be presented under the Letter of Credit. Upon said presentation a deduction of the amount previously advanced should be made.
Even where the Exporter easily would obtain a loan from his own bank, advancing out of the Letter of Credit might be advantageous as the interest rate might be lower in the importer’s country.
The importer is exposed to the risk of never receiving the goods in spite of having paid the advance amount. His risk could be mitigated by a guarantee or standby from the exporter and a requirement for a booking statement from a shipping agent evidencing a shipping space on a particular vessel, where the sailing date should coincide with the Letter of Credit’s, or a requirement for a receipt from an independent warehouse that the goods will be/have been stored.

It goes without saying that a Red Clause Letter of Credit generally would be an option provided the importer is confident in the exporter’s ability to deliver the goods.

Although asparagus is widely available year round, we think of it as an indicator that spring has arrived. There are three types of asparagus, white and green, the traditional types and purple, a newer variety which requires special techniques when cooking.
White asparagus is nothing more than green asparagus that was covered with soil during the growing season. The harvest period usually ends during Midsummer.

In a couple of months the ”crayfish indulgence” will reach it’s peak, much of it imported.

When you import food commercially, you need to know about regulations that apply to specific products and also more general rules about things such as labelling and additives. Failure to comply with hygiene and safety rules could cause delay in shipments, increase costs and require action to be taken by enforcement authorities.

Would a Letter of Credit be suitable for import of seafood?
The goods ususally is analyzed in the Exporter’s country before loading, but customs clearance at the port of discharge require an EU Health Certificate issued in the Importer’s country. These procedures in turn require the possession of a transport document, usually a Bill of Lading, and said document will not be handed out by the Letter of Credit issuing bank unless the importer has paid.
What if the goods is rejected? A real ”Catch-22” situation has occured.

The Importer must negotiate with the Exporter.
One possible way forward would be a deferred Letter of Credit and an inclusion of a condition in the Letter of Credit as
“Payment will occur [ ] days from the on board date as per the Bill of Lading or will be cancelled if an original rejection or non-approval certificate is presented by [named Health Authority in the importing country] at the latest [ ] days before the maturity date. In case of non-payment: No documents will be returned to the presenter”.

Where an Exporter has full confidence in his merchandise he should possibly accept this solution where advance payment is not an option. It goes without saying that the Exporter must have the full picture of the regulations in the Importer’s country – as far as this is possible. There always is a small, but still a risk, that during the transport new regulations are imposed in the importing country, which might cause obstacles.

It’s worth trying anyway, and it would be interesting to learn if any Importer has
an experience he or she is willing to share with us.

This suggestion has also been perused by my experienced colleague Ulf Mårtensson,
Trade Finance Specialist, Retail.

A documentary credit is an excellent payment mechanism which importers may utilize to avoid advance payment. An importer, called the applicant in the documentary credit world, should prepare himself before applying for an import documentary credit at his bank, even where he and the seller, his counterpart, called the beneficiary, are familiar to one another. Unfortunately many applications are made in a routine fashion way without considering the consequences thereof and without the reflexion that the circumstances might have changed since the latest transaction.

Before actually taking the step over the bank's threshold, the applicant must safeguard that an underlying commercial contract with the beneficiary has been established.
Rationally, the underlying contract should reflect the documentary credit application as far as possible. Said contract should satisfy both trading parties and should be workable according to ICC's rules. It should make clear whether a commercial documentary credit or a standby documentary credit is intended. A standby documentary credit is used to support payment upon default in performance, whereas a commercial documentary credit is intended to serve as a means of payment for the delivery of goods and services.
The banker will ask a number of questions which are raised out of concern of the applicant. The applicant's banker has a duty business to protect the interests of the applicant. Losing money or receving worthless goods due to negligence is terrifying both for the banker and the applicant. An applicant can obtain help and advice from the issuing bank in calling for appropriate documents to be presented.
The autonomy of documentary credit operations must be borne in mind, the so-called independence principle. It implies that sales and other contracts have nothing to do with the documentary credit transaction, which is separate. It further implies that an issuing bank's undertaking is not in anyway affected by the applicant's relationship with the issuing bank or the beneficiary. The documents stipulated in the documentary credit should provide a reasonable proof that the goods required have been delivered, and due to the autonomous nature of the documentary credit the underlying commercial agreement should have no impact of the banks' checking of the documents.
The first question your banker will raise will probably be in respect of the documentary credit amount: Is a possible deviation suitable? Commodity prices as well as freight rates, if applicable, might fluctuate. "Approximately" gives a scope for deviation, up or down, by 10%.
Validity: Most probably the issue has been scrutinized upon establishing the contract - but it's good to review it. The validity period should be sufficient for the beneficiary, enabling him to present documents. The applicant's limit is engaged during the documentary credit's duration, which includes the validity and credit period for deferred payment (if any), and the beneficiary is paying confirmation fee correspondingly - so it shouldn't be unreasonably long.
Has the beneficiary requested a confirmation from the advising bank? It should be reflected in the application form.
The payability/negotiability of the documentary credit is probably already concluded in the contract. Generally applicants prefer documentary credits payable at the issuing bank's (their housebank's) counters - but the foregoing negotiation with the beneficiary in this respect is decisive.
A vital question is whether payment should be effected at sight or at deferred basis. By nominating a bank in the documentary as the paying bank, the issuing bank authorizes said bank to effect payment at a future date indicated in the documentary credit.
The port of loading/place of destination and the transport mode should be reflected in the documentary requirement. Latest date of shipment and whether transhipment is allowed has probably already been discussed with the beneficiary. The trade terms, the INCO-terms should be aligned with the commercial contract. To keep in mind: Certain trade-terms are preferrable in case the applicant would like to exercise control of the contract of carriage, as e.g. F-terms.
Partial shipment: Is partial shipment appropriate and in tandem with your own commercial contracts towards end-users?
Unknown supplier: An inspection certificate from a neutral inspection company is recommended. Sometimes applicants require performance guarantees to safeguard
the delivery time and quality.
Banking costs: Division of banking costs related to handling the documentary credit is dependent on the bargaining between the applicant and the beneficiary, in many cases each part is taking his own banking charges in his country.
Please remember: If an importer can arrange with his bank to issue a documentary credit it can help to increase his credibility in the eyes of the exporter and where all conditions are carefully considered it will smoothen the entire transaction, being beneficial to both parties.