Friday 17 August 2012
Wednesday 13 June 2012
Letters of Credit: A Question of Sanctions
Q.
As beneficiaries of a Letter of Credit, we have recently had a set of
documents returned by the advising bank in the UK stating that they are not
willing to handle them as there appears to be a problem within the documents
which breaches sanctions regulations. How can this have happened? What can we
do?
A. Banks are very strict these days in ensuring
that they do not breach any regulations relating to countries where sanctions
are in place . It is, without doubt, one of the areas in international trade finance which is now much more carefully controlled than it used to be in previous
years. However, even with these strict controls in place a number of major UK
banks have been found guilty of breaches of sanctions regulations, and the
fines which have been imposed have been very significant, not to mention the
damage that this causes to the bank's reputation. The consequences can be very
severe not only for the bank but also for the bank employee who has been
implicated in the sanctions breach.
Many banks use
sophisticated software in a regimented screening procedure for any documentary
presentation whether it is an Export Letter of Credit, Import Letter of Credit, Export Collection or an
Import Collection . Careful screening is carried out in
order to check that there is no connection within the documents and particular
emphasis is given to;
Any
Organisations/Entities
Countries
Individuals
Specified
goods
Banks –
including reimbursement banks – any bank mentioned.
Documents –
all the below mentioned documents and schedules are scrutinised and the above
highlighted elements are extracted and screened by the software. This
extraction is, in the main, a manual process, and requires a bank employee to
key in the required information into the screening software application relating
to:
Invoices
Bills of
Exchange
Certificate
of Origin
Transport
Documents
Insurance
Documents
Bank
schedules
Customer
schedules
If there is a
“hit” or as it is also called an "alert" this will obviously need to
be investigated,
and in many
cases these instances can be resolved quite easily. It may be that the alert
relates to the name of an organisation, but on closer scrutiny it is clearly a
different entity in a different country. In these, and many other cases the
alert can be eliminated. However, in some circumstances the alert is upheld having
referred the case to their senior compliance officials for a ruling. In these
cases the bank may make the decision to return the documents to the
client.
One of the more common “hits” is a vessel named on a
transport document which is owned by a sanctioned entity on the sanctions list.
In an attempt to get around this, vessel owners rename their ships, but the bank
software that screens the documents is updated on a regular basis.
If a bank
considers that there is a issue with the documents regarding a breach of
sanction regulations it will return the documents to the customer who presented
them and a fairly standard response will be along the lines of ;
"The
bank follows the legal requirements of the UN, EU, UK, USA and all other
jurisdictions that it operates in (this will obviously vary from bank to bank).
Consequently we screen transactions against various lists, especially those
related to the UN Security Council Sanctions, and the FATF guidance related to
Non-Proliferation of Weapons of Mass Destruction (NPWMD). The transaction in
question, when screened against the UN and other NPWMD lists that the bank
employs, includes one or more parties names on those lists. The bank's policy
is to observe these "positive result" findings and to not complete a
transaction should a positive result be found when applying the above criteria.
We trust that this explains the reason that we have declined this transaction.
All the information that we use is publicly available through, either UN or
government web sites, or from specialist companies providing aggregations of
these web sites databases".
Some banks
have added a specific clause which refers to sanctions, and this clause is
included in their terms and conditions stated on the initial advice of the
Letter of Credit to the beneficiary. There has been some suggestion that the
insertion of a "sanctions clause" in a Letter of Credit advice, may
cast doubt on the confirming/nominated bank's (acting upon their nomination)
obligations to honour a compliant documentary presentation. It is therefore
recommended that beneficiaries of Letters of Credit, who have concerns about
these issues should seek legal guidance. It is likely that most major UK banks
would refer any "hits" to their internal legal units, but it is also
likely that the bank's adherence to their policy on sanctions would override
UCP 600.
In answer to the question, it would be
a prudent step for exporters to seek any available assistance from their
freight forwarders regarding the vessel and ownership of the vessel and also
their preferred legal advisor. Should the worst happen and documents be
returned, there is little chance that an alternative bank will be found to
process/handle the transaction as they will all use similar software to screen
the documents /transactions.
It is very clear that the whole issue
of sanctions and their effect on the screening procedure carried out by banks
is still emerging and will continue to change. It is without doubt one of the
most important areas concerning the presentation of documents under Letters of
Credit.
Wednesday 30 May 2012
Letter of Credit Training: The Top 5 Reasons
During the past 2 - 3 years we have seen a huge increase in demand for training in all areas of export, particularly on 'hot topics' such as basic procedures, customs compliance and Incoterms.
From my perspective, I have never been busier as large corporate organisations around the UK and Europe seek specialist training in understanding the financial risks and costs of trading internationally.
But what are the main reasons for this sudden increase in demand for training?
1. In order to spread risk, diversify and increase margins, many companies are developing business in a range of new, challenging and emerging markets where there will be a heightened awareness of payment risk, whether related to the buyer or the political / economic environment. Letters of Credit have a major role to play in mitigating these risks, so staff at all levels, from sales to finance and shipping need to be aware of how Letters of Credit work, how to minimise costs and administration and most importantly, how to present complying documents to the bank.
2. I am seeing a trend for companies who have previously outsourced the document preparation to an external supplier such as a freight forwarder or consultant, to try to reduce costs by bringing this function 'in-house'. Staff preparing Letter of Credit documents thus require intensive and professional training in order to equip them with the requisite skills to do so efficiently and confidently.
3. As I continually state throughout my blog articles, 70 - 80% of documents presented to the bank contain discrepancies, resulting in significant costs and delays in payment. Whereas previously, many companies accepted this as a 'fact of life' and trusted buyers to take up discrepant documents, in the current financial climate there is an increased awareness of potential buyer default. Finance teams in particular are anxious to generate cash as quickly as possible and it is therefore essential that every step is taken to ensure that documents comply with Letter of Credit terms.
4. The 'Doris' or 'Albert' effect, as stated in an earlier article means that companies may be heavily reliant on one or two key individuals with the experience and expertise to consistently prepare 'clean' sets of documents against Letters of Credit. There is a definite move towards upskilling a broader range of people within a business in order to mitigate the huge operational risk associated with such experience leaving, falling ill, taking a holiday or retiring.
5. Whereas I have generally trained staff involved with the administering of Letters of Credit and associated documents, there has been a significant increase in the number of sales managers attending courses. These guys are at the 'sharp end' of negotiating export deals and it is vitally important that they understand the implications to the business of requesting Letters of Credit which may contain onerous or impossible terms and conditions.
Book a Letter of Credit Training Course
From my perspective, I have never been busier as large corporate organisations around the UK and Europe seek specialist training in understanding the financial risks and costs of trading internationally.
But what are the main reasons for this sudden increase in demand for training?
1. In order to spread risk, diversify and increase margins, many companies are developing business in a range of new, challenging and emerging markets where there will be a heightened awareness of payment risk, whether related to the buyer or the political / economic environment. Letters of Credit have a major role to play in mitigating these risks, so staff at all levels, from sales to finance and shipping need to be aware of how Letters of Credit work, how to minimise costs and administration and most importantly, how to present complying documents to the bank.
2. I am seeing a trend for companies who have previously outsourced the document preparation to an external supplier such as a freight forwarder or consultant, to try to reduce costs by bringing this function 'in-house'. Staff preparing Letter of Credit documents thus require intensive and professional training in order to equip them with the requisite skills to do so efficiently and confidently.
3. As I continually state throughout my blog articles, 70 - 80% of documents presented to the bank contain discrepancies, resulting in significant costs and delays in payment. Whereas previously, many companies accepted this as a 'fact of life' and trusted buyers to take up discrepant documents, in the current financial climate there is an increased awareness of potential buyer default. Finance teams in particular are anxious to generate cash as quickly as possible and it is therefore essential that every step is taken to ensure that documents comply with Letter of Credit terms.
4. The 'Doris' or 'Albert' effect, as stated in an earlier article means that companies may be heavily reliant on one or two key individuals with the experience and expertise to consistently prepare 'clean' sets of documents against Letters of Credit. There is a definite move towards upskilling a broader range of people within a business in order to mitigate the huge operational risk associated with such experience leaving, falling ill, taking a holiday or retiring.
5. Whereas I have generally trained staff involved with the administering of Letters of Credit and associated documents, there has been a significant increase in the number of sales managers attending courses. These guys are at the 'sharp end' of negotiating export deals and it is vitally important that they understand the implications to the business of requesting Letters of Credit which may contain onerous or impossible terms and conditions.
Book a Letter of Credit Training Course
Tuesday 20 March 2012
Letter of Credit Charges - a worked example
How much is your company paying for export Letters of Credit ?
A large UK based manufacturer exporting globally receives approximately 20 Letters of Credit p.a., each of which is confirmed by a major bank and payable at sight.
The Letter of Credit values average GBP 250,000.00 with a validity of 4 months and cover just one shipment per L/C.
Bank charges* for each L/C amount to approximately GBP 2,562.50
This includes:
1 x advising commission: GBP 75.00
2 x amendments: GBP 100.00
1 x shipment drawing (based on 0.125% of documents value): GBP 312.50
1 x presentation of discrepant documents: GBP 100.00
Confirmation fee (charged per quarter or part thereof @ 1.5% p.a) : GBP 1,875.00
Other charges (reimbursing bank charges, courier fees etc): GBP 100.00
Total annual cost (bank charges) GBP 2,562.50 x 20 L/Cs = GBP 51,250.00
*The above charges are based on the tariffs of several UK banks and are for illustrative purposes only. Confirmation fees will vary according to confirming bank's perception of issuing bank / country risk.
In addition to the above, the company will be paying costs of certain documents, such as certified / legalised Certificates of Origin.
There are also the 'intangible' costs including the time and administration associated with Letters of Credit when compared to more straightforward shipments / payment terms.
Are you accurately factoring the cost of Letters of Credit into your export sales price?
By training your key personnel, including export sales, finance and shipping administrators, the above costs can be identified and managed. Unnecessary amendment and discrepancy fees can be significantly reduced by understanding how to manage the whole Letter of Credit process from start to finish.
See what our clients say about Letter of Credit training
A large UK based manufacturer exporting globally receives approximately 20 Letters of Credit p.a., each of which is confirmed by a major bank and payable at sight.
The Letter of Credit values average GBP 250,000.00 with a validity of 4 months and cover just one shipment per L/C.
Bank charges* for each L/C amount to approximately GBP 2,562.50
This includes:
1 x advising commission: GBP 75.00
2 x amendments: GBP 100.00
1 x shipment drawing (based on 0.125% of documents value): GBP 312.50
1 x presentation of discrepant documents: GBP 100.00
Confirmation fee (charged per quarter or part thereof @ 1.5% p.a) : GBP 1,875.00
Other charges (reimbursing bank charges, courier fees etc): GBP 100.00
Total annual cost (bank charges) GBP 2,562.50 x 20 L/Cs = GBP 51,250.00
*The above charges are based on the tariffs of several UK banks and are for illustrative purposes only. Confirmation fees will vary according to confirming bank's perception of issuing bank / country risk.
In addition to the above, the company will be paying costs of certain documents, such as certified / legalised Certificates of Origin.
There are also the 'intangible' costs including the time and administration associated with Letters of Credit when compared to more straightforward shipments / payment terms.
Are you accurately factoring the cost of Letters of Credit into your export sales price?
By training your key personnel, including export sales, finance and shipping administrators, the above costs can be identified and managed. Unnecessary amendment and discrepancy fees can be significantly reduced by understanding how to manage the whole Letter of Credit process from start to finish.
See what our clients say about Letter of Credit training
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