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Default Identification and Prevention of Frauds in International Business
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Default Identification and Prevention of Frauds in International Business

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Expanding international business offers fantastic business opportunities for all-including fraudsters. Many times the default/fraud succeeds because of the unawareness of parties involved in the …

Expanding international business offers fantastic business opportunities for all-including fraudsters. Many times the default/fraud succeeds because of the unawareness of parties involved in the trade transaction. This unawareness can be on account of inherent weakness in a document involved in the transaction or may be due to myths related to a specific payment system as proposed by the counter party . For example, many exporters consider a letter of credit as a police to the commercial transaction which is not true .
It is therefore of ultimate importance for banks , traders and all other parties to be aware of associated risks, pitfalls and the red flags etc while handling the international trade transactions.
FIEO in association with JIMS, Rohini is organizing a one day workshop to impart knowledge on all dimensions of a trade transaction so as to be able to take necessary preventive precautions. Extensive coverage will be given on technical aspects of trade transactions, alternative possibilities , applicable rules , inherent strength or weakness of a particular type of document etc. The various topics covered in the workshop will be highlighted through case studies. It also covers further the legal and practical aspects; in particular the means of asset recovery post-fraud will be dealt with.
The workshop was led by Dr.(Prof.) Ashok Bhagat Ex. Head Sales – Trade&VP Societe Generale, ICC India nominee for ICC Banking Commission Paris –India Chapter & Ex-Officio Member ICC INDIA Executive Committee and currently Dean -IB , JIMS, Rohini. Delhi.

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  • 1. www.jimsindia.org 24th April, 2014 By Dr. (Prof.) Ashok Bhagat Dean -International Business Jagan Institute of Management Studies #3, Institutional Area, Sector-5, Rohini, New Delhi-11008
  • 2. www.jimsindia.org Functions of Transport Documents FUNCTIONS: a) Receipt of Goods b) Contract of Carriage c) Document of Title of Goods (Sales of Goods Act)
  • 3. www.jimsindia.org Transport Documents 1. Consignee 2. Payment Terms 3. Guarantee cover to the transaction
  • 4. www.jimsindia.org Transport Documents 1. Bill of Lading 2. Airway Bill 3. Postal Parcel Receipt 4. Road,Rail, Inland Waterway trasport documents
  • 5. www.jimsindia.org Consignee 1. Buyer 2. Buyer’s Bank 3. To the order of Shipper
  • 6. www.jimsindia.org Types of Bills of Lading 1. Conferences Line Bills of Lading 2. Charter Party Bill of Lading 3. Seaway Bill
  • 7. www.jimsindia.org CONFERENCE LINE VESSELS “Vessel” is registered with an approved Classification Society (C.S.) as per the Institute Classification Clause and class maintained equivalent to Lloyds 100A1. Vessels are only classed with C.S. in accordance with their rules and are issued class certificates. Classification Societies are approved by the Institute of Lloyd Underwriters and incorporated in the Institute Classification Clause.
  • 8. www.jimsindia.org CONFERENCE LINE VESSELS DEALS WITH FITNESS OF THE VESSEL AND REQUIRES SURVEY OF SHIPS CONDUCTED AT REGULAR INTERVALS. IT ALSO CONFIRMS THAT HULL AND MACHINERY IS EQIVALENT TO LLOYDS 100A1
  • 9. www.jimsindia.org
  • 10. www.jimsindia.org
  • 11. www.jimsindia.org Various Payment Systems &Risks Attached 1. ADVANCE PAYMENT 2. OPEN ACCOUNT/DOC. COLLECTIONS 3. AVALISATION 4. LETTERS OF CREDIT 5. BANK PAYMENT OBLIGATION
  • 12. www.jimsindia.org
  • 13. www.jimsindia.org Risks Attached with LC transactions 1. Bank Risk 2. Country Risk 3. Documentary Risk 4. Transferred LCs 5. Stand by LCs
  • 14. www.jimsindia.org 14 Complying Presentation  CP means a presentation that is as per the - Terms and conditions of the credit - The applicable provisions of these rules (UCP 600) and - International banking and practices
  • 15. www.jimsindia.org Is there an alternative to confirmation 1. Silent Confirmation 2. No bank is ready to add the confirmation in your country. 3. Confirmation is added by another bank overseas? 4. Partial confirmation
  • 16. www.jimsindia.org FINANCING TO EXPORTER 1. Negotiation/Discounting 2. Payment
  • 17. www.jimsindia.org
  • 18. www.jimsindia.org BANK PAYMENT OBLIGATION A BPO is an irrevocable undertaking given by one bank ( Obligor Bank)to the another (Recipient Bank ) that payment will be made on a SPECIFIED DATE after a SPECIFIED EVENT has taken place . 1. This “specified event “ is evidenced by a “match “ report that has been generated by Trade Service Utility (TSU) developed , hosted and maintained by SWIFT . 2. TSU is a matching engine that matches data extracted from trade documents. 3. SWIFT has developed new ISO 20022 messaging standards for matching the data.
  • 19. www.jimsindia.org BANK PAYMENT OBLIGATION 1. The obligor bank is irrevocably bound to pay to the recipient bank according to the terms of the established TSU baseline if there are no mismatches or all involved parties accept the mismatches. 2. Documents will go directly to the buyer from seller 3. Only data will be matched 4. BPO will decide for payment of documents and not the documents will decide for payment 5. Good for countries like Japan where payment is against a Invoice and a copy of transport document
  • 20. www.jimsindia.org Interactions between a Buyer, a Seller and their respective Banks Buyer’s Bank Seller’s Bank Buyer Seller Contract Shipment & Documents NB. These flows are OUTSIDE the scope of the URBPO. Payment After the Buyer and Seller have contracted to use BPO as the method of payment, the relevant purchase order data is passed to each bank After shipment, the Seller will provide commercial and transport data to the Sellers Bank When the commercial and transport data has been matched to the purchase order data, the BPO is due and payment will follow 21
  • 21. www.jimsindia.org Interactions between Buyer’s Bank, Seller’s Bank and the TMA: Establishing a BPO where Buyer’s Bank is only Obligor Bank Buyer’s Bank = Obligor Bank Seller’s Bank = Recipient Bank BPO established BPO due TMA NB. These flows are INSIDE the scope of the URBPO. The Buyers Bank uses the purchase order data to submit a Baseline The Sellers Bank uses the purchase order data to re-submit the Baseline The Buyers Bank receives a Baseline Match Report to confirm that the two Baselines match The Data Set Match Report confirms that the invoice & transport data match the Baseline and the BPO is due The Sellers Bank receives a Baseline Match Report to confirm that the two Baselines match The Sellers Bank submits the invoice & transport data to the TMA The Data Set Match Report confirms that the invoice & transport data match the Baseline and the BPO is due 22
  • 22. www.jimsindia.org
  • 23. www.jimsindia.org Guiding principles under LC Operations 1. What credit states is what goes. 2. Banks are dealing in “CONDITIONS” and not in “FACTS”. 3. Credit is to facilitate payment and not a “POLICE” to commercial transaction.
  • 24. www.jimsindia.org 3 principles of an LC 1.LCs are separate transactions from underlying commercial contracts 2.All parties deal in documents and not in goods 3.Doctrine of strict compliance 3 Basic Principles 3 Guiding Principles 1. Be careful while drafting underlying sales contract. 2. Analyze LC conditions carefully and seek amendment for what can not be done. 3. Prepare documents carefully and also instruct associates clearly .
  • 25. www.jimsindia.org
  • 26. www.jimsindia.org LC expired on 30th Sept (Sunday) Banks were closed due to Puja holidays from 1st Oct to 6th Oct. 7th Oct (Sunday) and 8th Oct due to strike banks could not open. Docts submitted on 9th Oct.
  • 27. www.jimsindia.org Expiry Dates Article 14c – 21 days Article 36 - Force majure conditions previous working day Article 29 – Next working day for other than article 36 situations Date of shipment never gets extended
  • 28. www.jimsindia.org If a LC mentions “third party documents acceptable” ………it means that any document issued by other than beneficiary will be acceptable under the LC.
  • 29. www.jimsindia.org PARA 21 Third party documents acceptable – All documents, excluding drafts, but including invoices may be issued by a party other than the beneficiary. Article-14K allows all documents to show a shipper other than the beneficiary.
  • 30. www.jimsindia.org LC requires ‘Inspection Certificate confirming goods have been inspected at the port of shipment'. Your inspection agency fails to arrive in time for inspection and hence certificate could not be issued .
  • 31. www.jimsindia.org Article 3 - Interpretations Issuer of doct- if mentioned as “first class, qualified, etc,……doct can be issued by any body other than beneficiary.
  • 32. www.jimsindia.org You have received export LC which is restricted for negotiation with X Bank . You present complying documents to X Bank who refuses to negotiate the documents without assigning any reason. You are out of funds.
  • 33. www.jimsindia.org Once the applicant of LC takes delivery of goods( where the goods are consigned in the name of the applicant ), LC issuing bank must pay.
  • 34. www.jimsindia.org Good docts and LC containing all conditions of the sale contract will deliver proper goods to applicant whereas a badly drafted LC / bad docts will produce bad goods.
  • 35. www.jimsindia.org Documents submitted under a letter of credit must comply with all the conditions of sales contract as the LC calls for a certificate that all terms and conditions of the sales contract no …has been complied with.
  • 36. www.jimsindia.org Article 4 - Credits v. Contracts Credit is separate from sale contract even if it has been specifically referred in the LC
  • 37. www.jimsindia.org Your discrepant documents are acceptable to the applicant . He is ready to waive the discrepancies and conveys his acceptance to Issuing Bank but Issuing bank still rejects and refuses to honour?
  • 38. www.jimsindia.org
  • 39. www.jimsindia.org 40 MUST BE AVOIDED 1. Accepting a LC which requires presentation of a document which is under control of buyer.
  • 40. www.jimsindia.org Inoperative documentary credit Includes conditions over which bene has no control By issuing a pre advise only – issue of operative instructions under suspense Examples of clauses - payment will be made after goods have been cleared by customs - goods to shipped by a ship which will be named later on by an amendment - linked with issuance of performance gtee - linked with issuance of license
  • 41. www.jimsindia.org 42 MUST BE AVOIDED 2. Accepting a LC which requires passing of title of goods directly in the name buyer.
  • 42. www.jimsindia.org 43 MUST BE AVOIDED 3. Accepting a LC which is not from a reputed bank even in a good country.
  • 43. www.jimsindia.org 44 SUMMARY- Aide Memoire Exports /Local Sales Ask amendment to delete non documentary condition/ ambiguous clauses Avoid putting additional/unrelated details on documents
  • 44. www.jimsindia.org 45 SUMMARY- Aide Memoire EXPORTS /Local Sales NEVER LOOSE CONTROL OF GOODS (A)DO NOT CONSIGN GOODS FVG BUYER (B)DO NOT SEND TPT DOCTS DIRECTLY TO BYR SAME DAY DESPATCH FROM YOUR BANKER FOLLOW UP RECEIPT OF DOCTS BYLC IB AVOID TAKING BENEFIT OF 21 DAYS FOR LODGING Check the reimbursement instructions carefully
  • 45. www.jimsindia.org THANKS……… ashok bhagat