Professional Documents
Culture Documents
International Trade Finance
International Trade Finance
Trade Guidelines
Operations
Mashreq Bank, UAE
1
International Trade Payment Mechanisms and Risks.
Choice of payment mode can be quite challenging as each payment mechanism provides a varied
level of risk and security to both sides.
LC Cycle
6.Preparation of documents
1.Contract
Seller Buyer
Beneficiary 5.Shipment of goods Applicant
9.Presenting of
4.Advice of LC
8.2 payment Documents and
2.LC Application payments
7.1Presentation of documents
3.Issuance of LC
Advising/negotiating 7.2 Presenting of documents Issuing
bank 8.1 Payment bank
Documentary Letters of Credit.
Where there is country risk- (risk of political or economic factors interfering with settlement of debts)
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.
Documentary credits-advantages/risks 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
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.
Commercials Letters of Credit
Letters of credit can be tailored for meeting specific contractual arrangements. Some of the
most commonly used LCs are;
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.
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
Risk Mitigation- confirmation
Use of letters of credit provides a range of finance techniques to importers and exporters.
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
LC Screening
Advising bank
SWIFT If, Yes
Issuing bank Screening Compliance
If, no true Hit push back to
If, No Screening system
Core System
Advise to
Bene,Via
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.
Red Flags
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
Thankyou