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INTERNATIONAL PAYMENTS
(BANK COLLECTION &
LETTERS OF CREDIT)
Michelle Rodet, Master of Law, J.D.
French bar, New York bar
CREDIT RISK IN INTERNATIONAL SALES
• The risk of Seller not receiving its payment from the
buyer
BANK COLLECTION, TRADE FINANCE,
& LETTERS OF CREDIT
REDUCE
CREDIT
RISK
BANK COLLECTION, TRADE
FINANCE & LETTERS OF
CREDIT
BANK COLLECTION
• The process by which the
international banking
system is used to effect
payment in a
documentary sale
• ...
TRADE FINANCE &
LETTERS OF CREDIT
• The process by which banks
and financing institutions
guaranty that the seller will be...
BANK COLLECTION & TRADE
FINANCE
• Bill of Exchange/Draft-definition
• Negotiation
• Documentary Draft & Bank
Collection Pr...
THE BILL OF EXCHANGE / DRAFT
DEFINITION:
• An unconditional order in writing
• Addressed by one person to
another one (the...
THE BILL OF EXCHANGE / DRAFT
NEGOTIATION:
• Negotiability:
• Allows the draft to act as
substitute for money
• Negotiation...
DOCUMENTARY DRAFT
BANK COLLECTION PROCESS:
• Sight Draft:
• To be paid upon presentation or
demand
• Is sent « for collect...
DOCUMENTARY COLLECTION
Exportfinance navigator.gov.au
DOCUMENTARY COLLECTION
HOW RISKY IS IT?
DOCUMENTARY DRAFT
IN TRADE FINANCE:
• Documentary draft can serve as an important
financing or credit device for sellers a...
DOCUMENTARY DRAFT
BANKER’S ACCEPTANCE & ACCEPTANCE FINANCING:
• A time draft drawn on and accepted by a bank
• Bank stamps...
CREDIT RISK
IN ACCEPTANCE
FINANCING:
• Rights of the Holder in Due
Course (HDC)
• A rule by which the purchaser
of a negot...
CREDIT RISK
IN FACTORING
ACCOUNTS RECEIVABLE:
Account receivable:
• A contract right to receive for Seller
to receive futu...
LETTERS OF CREDIT
LETTERS OF CREDIT
ISSUES
• Definition
• Types of L/Cs
• Documentary L/C defined
• Parties to the transaction
• Legal natur...
LETTERS OF CREDIT
DEFINITION & USAGES:
• An obligation of a bank issued
on behalf of customer
promising to pay a sum of
mo...
DOCUMENTARY LETTER OF CREDIT
(L/C)
DEFINITION OF DOC. L/C
• Definite undertaking of a bank
• Issued in accordance with the...
DOCUMENTARY LETTERS OF CREDIT
Parties to the transaction:
• Applicant= Buyer
• Issuing bank= Buyer’s bank or bank issuing ...
DOCUMENTARY LETTERS OF CREDIT
The Independence Principle of L/Cs::
• An underlying sales contract between Seller and Buyer...
DOCUMENTARY LETTERS OF CREDIT (L/C)
THE PROCESS:
• Buyer applies to L/C with issuing bank,
and provides instructions and
c...
LETTERS OF CREDIT
CONFIRMED LETTERS
OF CREDIT:
• Seller may want L/C to be
confirmed by another bank
• Second bank (in Sel...
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  • Confirmed L/C are asked by Sellers because: uncertain re the soundness of the issuing bank; the integrity of the banking system or stability of government in Buyer’s country
  • Transcript of "Documentary collection letters of credit"

    1. 1. INTERNATIONAL PAYMENTS (BANK COLLECTION & LETTERS OF CREDIT) Michelle Rodet, Master of Law, J.D. French bar, New York bar
    2. 2. CREDIT RISK IN INTERNATIONAL SALES • The risk of Seller not receiving its payment from the buyer
    3. 3. BANK COLLECTION, TRADE FINANCE, & LETTERS OF CREDIT REDUCE CREDIT RISK
    4. 4. BANK COLLECTION, TRADE FINANCE & LETTERS OF CREDIT
    5. 5. BANK COLLECTION • The process by which the international banking system is used to effect payment in a documentary sale • Documentary draft used WHAT IS? The Wall Street Bull
    6. 6. TRADE FINANCE & LETTERS OF CREDIT • The process by which banks and financing institutions guaranty that the seller will be paid for its goods, and provide financing to their clients • Documentary drafts used in trade finance WHAT IS?
    7. 7. BANK COLLECTION & TRADE FINANCE • Bill of Exchange/Draft-definition • Negotiation • Documentary Draft & Bank Collection Process • Documentary Draft in Trade Finance • Credit risk: • Acceptance • Financing: • Factoring Accounts Receivable ISSUES:
    8. 8. THE BILL OF EXCHANGE / DRAFT DEFINITION: • An unconditional order in writing • Addressed by one person to another one (the seller to the buyer or buyer’s bank) • Signed by the person giving it • With the requirement that the person to whom it is addressed pay on demand or at a fixed or determinable future date • A sum certain in money, and • To or to the order of a specified person , or to the bearer • Upon delivery of the goods or presentation of shipping documents • Involves three (legal) parties: • Drawer, party writing the bill of exchange/ draft and signing it • Drawee, party who has to pay it • Payee, beneficiary • Seller both drawer and payee • Called Documentary Draft when used in bank collection • It is a negotiable instrument
    9. 9. THE BILL OF EXCHANGE / DRAFT NEGOTIATION: • Negotiability: • Allows the draft to act as substitute for money • Negotiation: • Transfer of the draft (or other instrument) from one party to another so that the transferee (Holder) takes legal rights to the instrument • Bearer draft, transferred through delivery • Order draft, transferred through endorsement and delivery
    10. 10. DOCUMENTARY DRAFT BANK COLLECTION PROCESS: • Sight Draft: • To be paid upon presentation or demand • Is sent « for collection », i.e., documentary collection • Draft, documents, and collection letter, sent by the seller to the buyer • Documentary collection: • « Cash against documents » • « Documents against payment »
    11. 11. DOCUMENTARY COLLECTION Exportfinance navigator.gov.au
    12. 12. DOCUMENTARY COLLECTION HOW RISKY IS IT?
    13. 13. DOCUMENTARY DRAFT IN TRADE FINANCE: • Documentary draft can serve as an important financing or credit device for sellers and buyers • Time Draft: • To be paid at a future date or after a specified period • Are sent (with shipping documents) by Seller to Buyer for Acceptance via banking channels • Acceptance: • Stamping « Accepted » on the face of the draft, name and signature of drawee (buyer) • Buyer has created a trade acceptance • After acceptance, draft returned to Seller. Buyer gets the shipping documents and may collect the goods • »documents against acceptance » • Seller may hold it until maturity or sell it to bank or commercial lending institution for cash (at a discount) The « City », London ‘s financial center
    14. 14. DOCUMENTARY DRAFT BANKER’S ACCEPTANCE & ACCEPTANCE FINANCING: • A time draft drawn on and accepted by a bank • Bank stamps « Accepted » on the face of draft, signs it, creating an acceptance, i.e., an obligation to pay the amount indicated on it to its holder on the date specified • Holder can convert it to cask immediately at a discounted rate, or hold it until maturity • A short term financing device for both Sellers and Buyers Shangai financial center
    15. 15. CREDIT RISK IN ACCEPTANCE FINANCING: • Rights of the Holder in Due Course (HDC) • A rule by which the purchaser of a negotiable instrument (draft or acceptance) takes it free from most disputes between the drawer and drawee – the parties to the underlying transaction • Ensures free transferability of commercial paper in international commerce HOLDER IN DUE COURSE STATUS: • One who purchases the instrument: • For value • In good faith • Without any notice that it is overdue or has been dishonored, and • Without notice that it contains an unauthorized signature or has been altered
    16. 16. CREDIT RISK IN FACTORING ACCOUNTS RECEIVABLE: Account receivable: • A contract right to receive for Seller to receive future payment • Can be assigned to another party Factoring Agreement: • A contract by which the seller (assignor) assigns its right to collect the account receivable to financial institution (assignee) in return for cash • Assignee « steps into the shoes of assignor » and acquires only assignor’s rights under the contract: • = A payment or a breach of contract action Shangai Financial Center
    17. 17. LETTERS OF CREDIT
    18. 18. LETTERS OF CREDIT ISSUES • Definition • Types of L/Cs • Documentary L/C defined • Parties to the transaction • Legal nature of the L/C • Law applicable to L/Cs • The Independence Principle of L/Cs • The L/C transaction • Confirmed L/Cs • Standby L/Cs Wall Street, New York
    19. 19. LETTERS OF CREDIT DEFINITION & USAGES: • An obligation of a bank issued on behalf of customer promising to pay a sum of money upon happening of certain event(s) • Can be used: • In transactions for the sale of goods (Documentary credit), or • To guaranty performance of contracts or repayment of loans (Stand-by L/C) Wall Street, New York
    20. 20. DOCUMENTARY LETTER OF CREDIT (L/C) DEFINITION OF DOC. L/C • Definite undertaking of a bank • Issued in accordance with the instructions of its customer (applicant) • Addressed to, or in favor of, the beneficiary • By which the bank promises to pay a certain sum of money (or to accept or negotiate the beneficiary’s draft up to that sum) in a stated currency • Within the prescribed time limit • Upon the complying presentation • Of the required and conforming documents Charlie Chaplin during a rally at Wall Street in 1918 Inside the New York Stock Exchange
    21. 21. DOCUMENTARY LETTERS OF CREDIT Parties to the transaction: • Applicant= Buyer • Issuing bank= Buyer’s bank or bank issuing the L/C • Beneficiary= Seller Law Applicable to L/Cs: • UCC Article 5, US, domestic L/Cs US • Uniform Customs and Practice for Documentary Credits (UCP) 600, international L/Cs Legal Nature of the L/C: • Not a contract • Not a negotiable instrument • Not a third- party beneficiary contract • A promise ( « a definite undertaking ») by which an issuing bank promises to pay to a beneficiary • Gives the beneficiary a statutory right to enforce the L/C against the issuing bank
    22. 22. DOCUMENTARY LETTERS OF CREDIT The Independence Principle of L/Cs:: • An underlying sales contract between Seller and Buyer • An agreement between Buyer and Issuing bank • The Issuing bank’s resulting « undertaking » to pay Beneficiary provided certain documents required by Buyer are conform with the terms and conditions of the L/C: • Except if L/C is fraudulent, forged, or fraud in the transaction in the underlying sales contract • Issuing bank not concerned with quality or condition of goods • Issuing banks have no obligation to inspect goods • Issuing banks have the obligation to inspect documents
    23. 23. DOCUMENTARY LETTERS OF CREDIT (L/C) THE PROCESS: • Buyer applies to L/C with issuing bank, and provides instructions and conditions for bank to pay • Once L/C issued, sent to Seller’s bank (advising bank) who advises Seller of L/C • Seller must then comply with Buyer’s requirements re manufacturing and producing documents according to L/C • Presentation of Seller’s documents within 21 days of date of shipment • Seller’s documents examined using the Rule of Strict compliance • If documents conform to L/C requirements, issuing bank will pay • If documents do not comply, issuing bank will reject them , using the UCP guidelines for rejecting or dishonoring a presentation • Discrepancies may be cured or waived by Buyer. If not , issuing bank will not pay Danske Bank
    24. 24. LETTERS OF CREDIT CONFIRMED LETTERS OF CREDIT: • Seller may want L/C to be confirmed by another bank • Second bank (in Seller’s country) will purchase documents and honor draft on same terms as original issuing bank STANDBY LETTERS OF CREDIT: • Issuing bank obligated to pay beneficiary upon presentation of documents indicating default of applicant re payment of a debt or performance of a contract • Used to: • Guaranty performance of a service or construction contract • Guaranty repayment of a loan, or as • Security for contract or other obligation
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