Understanding Regulators Impact

on Project SCM
Lecture 4
Ali Zaki
 Lecture Outline
• Customs Clearing Process
• Customs Terminology
• Payment Modes
• SBP Foreign Exchange Manual
• Shipping Documents
• Contracts & Contracts Management
• Procurement Closing
 WCO (World Customs Organization)
The World Customs Organization (WCO), established in
1952 as the Customs Co-operation Council (CCC) is an
independent intergovernmental body whose mission is to
enhance the effectiveness and efficiency of Customs
administrations.

WCO represents 182 Customs administrations across the

globe that collectively process approximately 98% of
world trade. As the global center of Customs expertise,
the WCO is the only international organization with
competence in Customs matters and can rightly call itself
the voice of the international Customs community.
 WCO & HS
The Harmonized Commodity Description and
Coding System generally referred to as "Harmonized
System" or simply "HS" is a multipurpose
international product nomenclature developed by
the World Customs Organization (WCO).

It comprises about 5,000 commodity groups; each

identified by a six digit code, arranged in a legal and
logical structure and is supported by well-defined
rules to achieve uniform classification.
 WCO & HS
The system is used by more than 200 countries and
economies as a basis for their Customs tariffs and
for the collection of international trade statistics.
Over 98 % of the merchandise in international trade
is classified in terms of the HS.

The HS contributes to the harmonization of

Customs and trade procedures, and the non-
documentary trade data interchange in connection
with such procedures, thus reducing the costs
related to international trade.
Role of Customs – Cargo Clearance
Supply chains are governed by Customs regulations
under the World Customs Organization (WCO)
– Supply chains undergo imports & exports
– Supply Chains undergo cargo clearance
– Supply chains pay duties and taxes

Importance of Electronic Cargo Clearance:

– Reduce dwell time
– Save logistic operational costs
– Integrate government agencies responsible for clearance
 Cargo Clearance Terminology
Import Policy Order (IPO): A regulatory Code on import status of a particular product,
issued by Ministry of Commerce, Islamabad.

Import License: to bring merchandise into a country from another country or overseas
territory.

Imports: to bring merchandise into a country from another country or overseas

territory.

Import General Manifest (IGM): A Import General Manifest (IGM) is a document to be

filed in prescribed form with the Customs by the carriers of the goods i.e., the Steamer
Agent or Airlines. This document indicates the details of all the goods to be unloaded
at the Port from a vessel (ship) or Aircraft.

Import Declaration: (Import GD – Goods Declaration) A formal statement made to the

Collector of Customs at a port of import declaring full particulars about goods being
imported.
 Cargo Clearance Terminology
Export Policy Order (EPO): A regulatory Code on import status of a particular product,
issued by Ministry of Commerce, Islamabad.

Export License: A governmental permit required to export certain products to certain

destinations.

Exports: to send goods to foreign country or overseas territory.

Export General Manifest (EGM): An Export General Manifest (EGM) is a document to

be filed in prescribed form with the Customs by the carriers of the goods i.e., the
Steamer Agent or Airlines. This document indicates the details of all the goods to be
loaded on to a vessel (ship) or Aircraft at the port.

Export Declaration:(Export GD – Goods Declaration) A formal statement made to the

Collector of Customs at a port of exit declaring full particulars about goods being
exported.
 Cargo Clearance Terminology
Warehousing: Performance of administrative and physical functions
associated with storage of goods and materials. These functions
include receipt of cargo, its identification, inspection, verification,
inventorization, retrieval for issue, and de-inventorization etc.

Bonded Warehouse means

– a common bonded warehouse,
– a manufacturing bond,
– a private bonded warehouse or
– a public bonded warehouse

-licensed by the Collector under Sections 11,12 & 13 of Customs act

1969.
 Cargo Clearance Terminology
Customs bonded warehouse: Any secured facility supervised by Customs
authorities, where dutiable landed imports are stored pending their re-
export, or release on assessment and payment of import duties, taxes, and
other charges. Also called Customs warehouse. Managed by Terminal Operator.

Customs Authorities authorize bonded warehouses for

– storage,
– or Manufacture

of goods on which:
– payment of duties is deferred
– until the goods enter the Customs Territory.

The goods are not subject to duties if re-shipped to foreign points.

 Cargo Clearance Terminology
Inbond: A term applied to the status of merchandise admitted
provisionally into a country or overseas territory.

Exbond: Release of imported goods on payment of duties and taxes to

the extent of those goods from the Customs bonded warehouse.

Transshipment: means the transfer of transshipment goods without

payment of Customs duties and taxes at Karachi Port Trust to carrier
for carriage to another Customs port or stations.

Transshipment Goods: means goods brought into Pakistan which are

to be transported from Karachi Port Trust to another to another
customs ports or stations;
 Cargo Clearance Terminology
Bonded carrier: The bonded carrier shall posses a fleet of minimum twenty five
registered vehicles in his name or company or are leased by them and
transshipment shall only be then allowed. The Customs staff shall verify the
registration of all vehicles used by the bonded carrier for transshipment of
consignments, specifically the road worthiness of the vehicle and registration
number and other particulars of the vehicles.

Examples:
– Pakistan Railways,
– National Logistic Cell (NLC)

Customs Port: A cargo clearance area notified under Section 9 of Customs Act
1969.

TerminalOperator: Under Section 14 of Customs Act, the port authority (may be

a private commercial entity) is bound to manage Customs Port and facilitate
Customs authorities for cargo clearance. Dry Port, Sea Port etc.
 Cargo Clearance Terminology
Web-Based One Customs (WeBOC): is used for import / export Customs
clearance. In WeBOC we need to fill declaration form online which is called
GD (Goods Declaration), Once declared form filled in the Customs system
(WeBOC) and your clearing agent successfully cleared your cargo from
Customs examination then Customs allows you to load your container on the
vessel and release your GD which will be used for issuing B/L.

E-IGM (Electronic Import General Manifest): Import General Manifest (IGM)

is electronically sent by carrier of goods to Customs Department before the
arrival of goods to inform about importing country, and details of goods
arrived to such customs location. Once the goods arrive, the carrier then files
details of cargo about shipper, consignee, number of packages, kind of
packages, description of goods, airway bill or bill of lading number and date,
flight or vessel details etc. with Customs department through Goods
Declaration.
 Cargo Clearance Terminology
Electronic Import Form (EIF): State Bank of Pakistan has set out rules related to payments against
import of goods into Pakistan. In order to facilitate stakeholders and strengthen monitoring of
import payments from Pakistan, SBP and Pakistan Customs started a joint project for issuance of
EIF. The EIF is filled at the time of payment and is linked with the GD. The EIF for any import
remains open for a period of 3 months.

Examination: Physical verification of goods by opening the container.

Assessment/Appraisement: Valuation of goods as pert heir international market price at the rate
of duties and taxes mentioned in Customs Tariff.

Goods Declaration (GD): It`s a Customs online declaration form which mentions complete details
(i.e. Quantity, Unit Price, Payment Terms etc.) of Goods that we want to import or export from a
country.

WEBOC RMS (Risk Management System):

– Green Channel
– Yellow Channel
– Red Channel
Methods of Payment

Cash in Advance
Letter of Credit
Advised // Confirmed

Documentary Collections/
CAD (Cash Against
Documents)
Open Account
 SWIFT
SWIFT stands for the Society for Worldwide
Interbank Financial Telecommunication. It is a
messaging network that financial institutions use to
securely transmit information and instructions
through a standardized system of codes.

SWIFT assigns each financial organization a unique

code that has either eight characters or 11
characters. The code is called interchangeably the
bank identifier code (BIC), SWIFT code, SWIFT ID, or
ISO 9362 code.
 Cash in Advance
Telegraphic Transfer TT/ Cash in Advance
Cash in Advance/Prepayment occurs when a buyer sends payment in
the agreed currency and through TT (Telegraphic Transfer) to a seller
before the product is manufactured and/or shipped. Upon receipt of
payment this seller then ships the goods and all the necessary shipping
and commercial documents directly to the buyer.

A telegraphic Transfer (TT) is an electronic method of transferring

funds; it is utilized primarily for overseas wire transactions. These
transfers are used most commonly in reference to CHAPS (Clearing
House Automated Payment System) transfers in the banking system.
Telegraphic Transfers are also known as Telex Transfers, abbreviated
TT; TTs can also refer to other types of transfers.
 Letter of Credit
The Letter of Credit (L/C) is a well-established financial instrument, used in
international trade for many years, offering security to both buyer and seller.
Commercial L/Cs are governed by Int’l Chamber of Commerce rules (UCP 600, latest revision)

“Import L/C”: The buyer is the importer.

The Issuing Bank issues the LC on behalf of the buyer (extending credit to buyer) and
promises to pay on the presentation of documents/drafts, if they comply with L/C terms.
“Export L/C”: The seller is exporting and is named the “Beneficiary” of the L/C issued.

The Advising Bank is the sellers bank.

The Confirming Bank is adding its “promise to pay” to that of the issuing bank, reducing
the credit risk associated with the issuing bank.

The Issuing Bank is the buyers Bank.

Commercial L/Cs are based on the presentation of documents

 When to Use Letters of Credit
To mitigate risk –credit risk, economic risk, political risk
• New or less-established trade relationships (potential credit/performance risk)
• Buyer is in an unstable country – (economic / political risk) today’s credit
environment is a concern for many international transactions.
To facilitate a “fair transaction” - risk is reduced for both seller and buyer
• Seller knows he/she will get paid, provided he delivers the order
• Buyer knows he/she will get the goods, per the order, or he does not pay

In some countries, buyer can only get FX (US$), if he has L/C to

document purchase
Facilitates payment – upon or after shipment (payment
terms)
Strict rules apply (to protect all parties)
 Mechanics of a Commercial
Letter of Credit
1. Applicant (Buyer) completes a contract with Seller (P.O.,
Pro-forma invoice, etc.)
2. Applicant then submits a completed L/C application to
Issuing Bank for approval.
3. Issuing Bank approves the application, then sends the L/C
to the Advising Bank (the seller’s bank).
4a. Advising Bank (Seller’s Bank) authenticates L/C and
sends the Beneficiary (seller) the details by courier or
fax.
4b. Beneficiary (Seller) examines the details of the L/C to
make sure that all L/C conditions can be met. [If need
be, seller contacts the buyer to ask for amendment (s).]
5. (Right-hand Diagram) Beneficiary, once satisfied with the
conditions of the letter of credit (L/C), ships the goods
and presents the documents to the advising bank.
6. Advising Bank examines the documents against the terms of the L/C. If the
details are correct, advising bank sends the docs to Issuing Bank for
payment (or acceptance). [If the details are not correct, the advising bank
tells the beneficiary and waits for corrected documents or beneficiary may
instruct advising bank to send documents on.]
7. Issuing Bank examines documents sent from the advising bank, and If
the documents are in order, pays the money promised; “at sight”, or at a
future date. [If documents are received but not correct, Issuing Bank
contacts buyer for authorization to accept documents. If buyer accepts,
Issuer pays the money as/when promised. If buyer rejects, issuing bank
notifies the advising bank.]
8. Buyer receives the documents from Issuing Bank (and can now collect the
goods), and a debit/settlement advice (notification).
9. Advising Bank receives the payment
10. Seller is notified by the advising bank that payment has been made.
 Types of LC
Irrevocable LC. This LC cannot be cancelled or modified without consent of the
beneficiary (Seller). This LC reflects absolute liability of the Bank (issuer) to the other
party.

Revocable LC. This LC type can be cancelled or modified by the Bank (issuer) at the
customer's instructions without prior agreement of the beneficiary (Seller). The Bank
will not have any liabilities to the beneficiary after revocation of the LC.

Stand-by LC. This LC is closer to the bank guarantee and gives more flexible
collaboration opportunity to Seller and Buyer.The Bank will honour the LC when the
Buyer fails to fulfill payment liabilities to Seller.

Confirmed LC. In addition to the Bank guarantee of the LC issuer, this LC type is
confirmed by the Seller's bank or any other bank. Irrespective to the payment by the
Bank issuing the LC (issuer), the Bank confirming the LC is liable for performance of
obligations.

Unconfirmed LC. Only the Bank issuing the LC will be liable for payment of this LC.
 Types of LC
Transferable LC. This LC enables the Seller to assign part of the letter of credit to other party(ies).
This LC is especially beneficial in those cases when the Seller is not a sole manufacturer of the
goods and purchases some parts from other parties, as it eliminates the necessity of opening
several LC's for other parties.

Back-to-Back LC. This LC type considers issuing the second LC on the basis of the first letter of
credit. LC is opened in favor of intermediary as per the Buyer's instructions and on the basis of
this LC and instructions of the intermediary a new LC is opened in favor of Seller of the goods.

Payment at Sight LC. According to this LC, payment is made to the seller immediately (maximum
within 7 days) after the required documents have been submitted.

Deferred Payment LC. According to this LC the payment to the seller is not made when the
documents are submitted, but instead at a later period defined in the letter of credit. In most
cases the payment in favor of Seller under this LC is made upon receipt of goods by the Buyer.

Red Clause LC. The seller can request an advance for an agreed amount of the LC before
shipment of goods and submittal of required documents. This red clause is so termed because it
is usually printed in red on the document to draw attention to "advance payment"term of the
credit.
 Documentary Collections – CAD
Cash Against Documents
CAD (Cash Against Documents)
A payment arrangement in which an exporter instructs a bank to hand over shipping and title
documents (see document of title) to the importer when the importer fully pays the accompanying bill
of exchange or draft. Also called documents against payment.

The cash against documents is a management and payment tool for international transactions. Its
purpose is for the vendor to get the amount owed by a customer from a bank against delivery of
documents (invoices, bill of lading...etc.).

Documents are delivered to the customer only against payment or acceptance of a bill of exchange. In
this last case, the bill of exchange may be guaranteed by a bank, which provides the supplier with a
significantly higher payment security. Obtaining documents allow the buyer to take possession of the
goods and to clear the shipment at customs.

Discounting Documents/Drafts
Documents that have been accepted for payment at a future date can be purchased at a
discount price
Discount price is based on current interest rates (Libor for the period of discount, plus 2% to
4% p.a.), plus a small arrangement fee ( ½% - 1%, $150 minimum)
 CAD Process
CAD Process
– Conclusion of the contract between the customer / supplier and
importer / exporter.
– Shipment of goods and forwarding of documents to the
remitting bank.
– Sending documents to the presenting bank. The supplier's bank
(remitting bank) transmit these documents to the customer's
bank, and asked to return them to the client, either against
payment or against acceptance.
– Delivery of documents to the client. The presenting bank
delivers the documents to the client (buyer) either against
payment or against acceptance in accordance with instructions
received from the remitting bank. The customer can take the
goods.
– Payment of the remitting bank and the supplier.
CAD Process
 Open Account (OA)
Open Account (OA)
Trade transactions can be also accomplished on an O/A basis. The
characteristics of OA are as follows;
– Under this approach, the vendor ships the goods and expects the
buyer to remit payment according to the agreed terms.
– Supplier offers credit to buyer with no bank guarantee of payment
– Less formal structure for disputes or missed payments
– Risk shifts from buyer to supplier in a transaction
– The exporter relies fully on the financial creditworthiness, integrity
and reputation of the buyer.
– As might be expected, this method is used when the vendor and buyer
have a great deal of trade experience with each other.
– The O/A payment method is intended for trading parties who know
and trust each other and are comfortable with the commercial and
country risks associated with the transaction
 SBP Foreign Exchange Manual
FE Manual Chapter 13 - Imports

Clause 5 Terms of Imports.

Subject to the provisions of this chapter, imports can be made on FOB
basis, CFR liner terms basis or CFR free out basis.

Clause 30 Advance Remittances Sub Clause (ii)

Further, in order to facilitate importers to cater to their genuine small import
needs, Authorized Dealers may process the requests of the importers for
advance payment up to US$ 10,000/-, or equivalent thereof in other foreign
currencies, per invoice for import of all eligible items without the
requirement of L/C or Bank Guarantee from the supplier.

http://www.sbp.org.pk/fe_manual/pdf/2016/Chapter-13.pdf
 Shipping Documents
1. AWB (Airway Bill)/ BL (Bill of Lading)
2. Packing List
3. Commercial Invoice
 Shipping Documents
AWB (Airway Bill) or air consignment note is a
receipt issued by an international airline for
goods and an evidence of the contract of
carriage, but it is not a document of title to the
goods. Hence, the air waybill is non-negotiable.
 Shipping Documents
Bill of Lading (B/L) is a Document issued by a
common carrier to a shipper for the receipt for
the goods delivered to the carrier. The B/L
defines the terms of the contract of carriage and
acts as a title to the goods contained therein
 Bill of Lading (B/L)
The principal use of the bill of lading is as a
receipt issued by the carrier once the goods
have been loaded onto the vessel. This receipt
can be used as proof of shipment for customs
and insurance purposes, and also as commercial
proof of completing a contractual obligation,
especially under Incoterms.
 Bill of Lading (B/L)
You are required to use the Bill of Lading when;
• The goods are being traded/sold in transit.
• The letter of credit terms require that a
negotiable document to be used.
• The laws and regulations of a country demand
the production of a paper Bill of Lading.
 Bill of Lading (B/L)
Bill of Lading: The single most important
transportation document
• It originates the shipment
• Provides all the information the carrier needs to
accomplish the movement
• Stipulates transportation Contract terms
• Acts as a receipt for goods the shipper gives to
Carrier
• Shows certificate of title to the goods
 Types of B/L
i) Straight Bill of Lading:
– Non-negotiable instrument
– Carrier does not require presentation of its
– original copy to effect delivery
– Carrier must simply deliver the goods to person as
consignee
 Types of B/L
2) Order Bill of Lading:
– Negotiable instrument
– Shows certificate of title to the goods it names
– Consignor retains security interest in goods.
– Consignee must pay goods’ invoice value to obtain
original copy that must be presented to
– Carrier for delivery, if arranged as such.
 Seaway Bill
A Sea Waybill is used in lieu of a Bill of Lading for straight
consignments whenever a letter of credit or similar
banking arrangement is not involved in the sale of goods.
You can use a Sea Waybill when;
– The recipient of the cargo is known,
– Cargo will not be traded/sold during transport.
– Payment of goods is made under an open account or there
is a high degree of trust between the importer and
exporter and
– where a negotiable transport document is not required
under a letter of credit.
– Not specifically a Title Document
 Freight Bill
Freight Bill: Carrier’s Invoice for charges the
Carrier incurs in moving a given shipment
• It lists the shipment, origin & Destination
• It lists the consignee & consigner
• It lists the items, total weight
• It lists the total charges
 Freight Bill
Freight Bills may either be for:
– Prepaid Shipment- Carrier presents freight bill on
effective day of shipment
– Collect Shipment – Carrier presents freight bill on
effective day of delivery
 Differentiation based on Issuer

• House AWB/BL
Issued by Freight Forwarder

• Master AWB/BL
Issued by Airline/Ocean Liner Operator
 Freight Claims:
Freight Claims: A document (with no prescribed
form) that a shipper files with the carrier to
recoup monetary losses resulting from;
– Loss
– Damage
– Delay
• Claim within 9 months of delivery
• Released Value by Shipper-less liability by
Carrier
 Shipping Documents
Packing List (also known as a bill of parcel,
unpacking note, packaging slip, (delivery)
docket, delivery list, manifest or customer
receipt, shipping list) is a document which
details the contents, and often dimensions and
weight, of each package or container.
 Shipping Documents
Commercial invoice is a customs document. It is
used as a customs declaration provided by the
person or corporation that is exporting an item
across international borders.
 Contracts & Contracts Management
Contract: An agreement enforceable by law,
between two or more persons to do or to
abstain from doing, some act or acts.

Functions of a Contract
– Specifying terms and conditions
– Detailing required outcomes
– Detailing responsibilities
– Planning
– Task allocation
– Risk allocation
 Contracts & Contracts Management
Essentials of a Valid Contract
– Offer & Acceptance
– Legal Obligation
– Lawful Consideration
– Capacity of Parties
– Free Consent
 Contracts Management
Dispute Resolution
LITIGATION IN COURTS OF LAW
ALTERNATE DISPUTE RESOLUTION
– NEGOTIATION
– MEDIATION
– CONCILIATION
– FACILITATION
– ARBITRATION
ALL THE CONTRACTS MUST COVER THE
– JURISDICTION OF COURTS/TRIBUNAL ETC
– LAW WHICH WILL GOVERN THE MAIN CONTRACT AND DISPUTE
RESOLUTION CLAUSE
RECOGNITION AND ENFORCEMENT OF JUDGEMENTS AND AWARDS.
 Contract Discharge
When the rights and obligations arising out of a contract come to an end, the contract is said
to be discharged or terminated. A contract may be discharged in any of the following modes:

– Discharge by performance
• Actual Performance
• Tender
– Discharge by Agreement
• Novation
• Alteration
• Rescission
• Remission/Extension in Time
• Waiver
– Discharge by subsequent impossibilities
• Destruction of Subject Matter
• Failure of Purpose
• Death or Personal Incapacity
• Change of Law
• Declaration of War
– Discharge by lapse of time
– Discharge by operation of law
• Insolvency
• Merger
• Material Alteration
– Discharge by breach of contract
• Actual Breach
• Anticipatory Breach
 Types of Contracts
Fixed price or lump sum: involve a fixed total price for a well-defined product
lot or service.
Cost reimbursable: involve payment to the seller for direct and indirect costs.
– Cost plus incentive fee (CPIF)
– Cost plus fixed fee (CPFF)
– Cost plus percentage of costs (CPPC)
Unit price contracts: require the buyer to pay the seller a predetermined
amount per unit of product or service.
 Types of Contracts
Spot Contracts One-time purchases based on who offers the best deal at the
time of the purchase. No long-term relationship.
Regular Trading Repeated spot purchases from one or more suppliers.

Rate contracts are mutual agreements between the buyer and the seller to
operate a set of chosen items, during a given period of time, for a fixed price
or price variation.

Under this system the rates are fixed and at times even the quantity of the
selected items. As and when the need arises the buyer issues a Purchase
order directly on the basis of the rate chart available on the supplier who in
turn supplies the items.
– Minimum Quantity Concept
– Minimum Value Concept
 Contracts
Contract Of Guarantee
A Contract to perform the promise, or discharge the liability, of a third
person in case of his default is called Contract of Guarantee.
A guarantee may be either oral or written. The person who gives
the guarantee is called the Surety. The person on whose default
the guarantee is given is called the Principal Debtor.

Contract of Indemnity
Indemnity is compensation for damages or loss. Indemnity in the legal
sense may also refer to an exemption from liability for damages. The
concept of indemnity is based on a contractual agreement made
between two parties, in which one party agrees to pay for potential
losses or damages caused by the other party.
 Contracts & Contracts Management
Performance Bond A performance bond is issued to one party of a contract as a guarantee
against the failure of the other party to meet obligations specified in the contract. It is also
referred to as a contract bond. A performance bond is usually provided by a bank or an insurance
company to make sure a contractor completes designated projects.

Provisional Acceptance Certificate (PAC)

A Provisional Acceptance Certificate (PAC) is an owner's acceptance certificate to contractor
when the contractor achieves the requirements of provisional acceptance (PA) criteria in
accordance of the contract terms and conditions.
– Deemed PAC Clause in Contracts

Defect Liability Period

A defects liability period is a set period of time after a job has been completed during which a
supplier/contractor is liable to remedy the defects. A typical defects liability period lasts for 12
months.

Warranty Bond A Warranty Bond is a contract between an owner, a contractor/supplier, and a

surety company. Warranty bonds guarantee that any defects found in the original service/supply
will be fixed during the warranty period. If the contractor can't fix the defects, the owner will be
repaid.
 Contracts & Contracts Management
Important Clauses in a Contract
– Applicable Law
– Jurisdiction
– Dispute Resolution
– Force Majeure
– Merger
– Modification
– Assignment
– Termination
– Void-ability/ Breach
Procurement Mgt Process- Recap
Procurement Close-out