INTERNATIONAL TRADE FINANCE I

Lecture 1. Peruvian banking system

2024-2
 Professor Presentation

• Name
• Profession
• Work
• Studies
• Professional Experience
• Experience Teaching

2
A few rules
On a virtual Class: “Camera on” is mandatory.
Active participation counts.
When homerwork is assigned: Groups of 4 Max.
Class in English and not an English class

Contact:
Ricardo Ortega
rortega@gammacargo.com
rmortega@ulima.edu.pe

Punctuality Tolerance: 10 minutes

¿End of session?
Absences / PARTICIPATION
Representative
Blackboard

NO CELLULAR
 Plagiarism according to:
Reglamento general de estudios
Universidad de Lima

Art. 62 ° Constituyen faltas graves:

d) Cometer o permitir el plagio, o cualquier otro análogo, durante las evaluaciones académicas o
en la elaboración de trabajos.

Art. 65 ° Las sanciones disciplinarias aplicables son:

a) Amonestación escrita.
b) Suspensión académica.
c) Separación definitiva.

Todas las evaluaciones de este curso serán pasador por 3 diferentes detectores de plagio, en
caso que este sea mayor al 10% tendrán automáticamente “cero” en toda la Tarea Académica y
serán enviados al tribunal de disciplina por lo que podrían ser separados (expulsados)
A recommendation to be taken into account

Pay attention to the boiled frog

syndrome…

5
 A recommendation to be taken into account
"If you catch a toad, you put it in a pot of water and you
take that pot to the fire, you will observe something
interesting: the toad adapts to water temperature,
remains within, and continues to adapt to the increase
in temperature.
But when the water reaches the boiling point, the toad
that would like to jump out of the pot, cannot because
he is too weak and tired due to the efforts he has made
to adapt to the temperature.
Some would say that what killed the toad was the water
boiling... Actually, what killed the toad was his inability
to decide WHEN to jump.
So, stop "adapting" to situations, misguided
relationships, abusive relationships, parasitic friends,
and many other things that "turn you on".
If you continue adapting, you run the risk of "dying"
inside.
Jump as soon as you can!
Author: Peter Senge
6
 International Trade Finance Evaluation

EC
1 Quiz 10% Week 3

Quizzes 20% 2 Quiz 10% Week 6

Presentation 15% Week 1 through 6

Continuous activities 20%
Class participation 5%
Exam 1 20% Week 4

Exam 2 20% Week 7

Final work 10%

Final work 20%
Work defense 10% Week 15 through 16

Total EC 100%
 Structure and Objectives for the Course

• Objective: Learn to apply the available

financial tools related to doing Trade in a
business environment.

• General subjects to be covered:

Banking systems (domestic +international),
Banking, Interest Rates,
Risks in International Business,
Means of Payment,
Trade Finance Lines of Credit,
guarantees, Transport & Export insurance,
other banking and financial instruments.

8
Contents

General
Frame

Means of Trade Financing

Payment Finance

Other
Instruments

Guarantees

9
Contents
Int’l Trade Fin I Int’l Trade Fin II

General
Frame
Revision
ST
Means of Trade Financing
Payment Finance MT

Other
Intro Revision
Instruments

Intro

Guarantees Revision

10
 Peruvian Financial System
Ministry of Economy
& Finance - MEF
Regulator Regulator
Superintendence of Regulator Superintendence of
Central Bank - BCRP Banking & Insurance the Stock Market
SBS (CONASEV) - SMV

Money Market Securities Market

Formal Informal NGOs

Supervised Unsupervised Unsupervised Superintendence of
the Stock Market
(CONASEV) - SMV
Banking Non-Banking

Financial Specialized
Banks
Institutions companies
Banco de Investment
CMACs
La Nación Banks
Insurance
COFIDE CRACs
Companies

EDPYMEs Service Bureaus

Loans & Savings

Cooperatives 11
Peruvian Financial System
REGULATORS
1. Central Bank (Banco Central de Reserva del Perú – BCRP)
Regulate currencies & Credits in the financial system by:
• Making sure Interest Rates are freely determined by competition.
• Controlling the flow of currencies – Exchange rates
• Supervise Liquidity & Credit
• International reserves Administration (RIN)
• Issuance of Notes & Coins.
• Bank of Banks International Public Finances
Environment
Monetary Exchange
Policies: rate Economic
Reference Activity (GDP
Interest Rate &
Interest breach with
Rate Inflation
Liquidity potential
Management Liquidity & product)
Instruments Credit
Inflation
Expectative

Financial Demand Offer

Shocks Shocks Shocks
12
 Peruvian Financial System
2. Superintendence of Banking, Insurance & AFPs (SBS).-
551 Institutions Supervised
• Incl. the Financial Intelligence Unit (Unidad de Inteligencia Financiera)
Directory of Supervised Institutions

COMPLEMENT
• Banks (17 + 3, BN, AGROBANCO y COFIDE)

SERVICES
• Finance Institutions (10) • Funds Transfer Institutions (5)
• Savings Banks - (Cajas Rurales de Ahorro y Crédito) (5) • General Deposit Warehouses (2)
• Savings Banks - Government owned (Cajas Municipales) • Armored Transportation Services(2)
FINANCIAL
SYSTEM

(12+1=13) • Electronic Money Issuers (4)

• Credit companies (6)
• Guarantee Issuance Institutions (1)
• Trust Funds Administration Services Company (3)

UNIONS
AFPs &
• Leasing Institutions (0) • Pension Funds Administrators (4)
• Mortgage management companies (1) • Cooperatives National Federation (2)
• Investment Banks (1) • Savings & Loans Cooperatives (Unions) (257)
• Government Mortgage Fund (Fondo MiVivienda) (1)
• Insurance companies (16)
INSURANCE

SERVICES
SYSTEM

• AFOCAT (Private funds for auto insurance programs as OTHER • Cajas y Derramas (Pension Funds from Institutions
protection against car accidents) (Asoc. de Fondos such as the Army or Police, Teachers)(3)
regionales /provinciales contra accidentes de tránsito): • Factoring companies (119)
• Authoriz. to issue CAT (39) • Foreign Bank Representative Offices (18)
• Not authoriz to issue CAT (19)

Source: SBS, as of Jul 2024 13

Peruvian Financial System
REGULATORS
2. Superintendence of Banking, Insurance & AFPs (SBS) (HC18)
FOREIGN BANKS - REPRESENTATIVE OFFICES
1 ASB Bank Corp. (Credicorp en Panama)
2 BANCO GENERAL S.A. (Panama)
3 BANCO LATINOAMERICANO DE COMERCIO EXTERIOR S.A. (Panama)
4 BANCO MERCANTIL C.A.S.A. (Banco Universal) (Venezuela)
5 BANCO SABADELL (España)
6 BANK OF AMERICA NATIONAL ASSOCIATION (U.S.)
7 BNP PARIBAS (France)
8 CAIXABANK S.A. (España)
9 COOPERATIEVE RABOBANK U.A. (Netherlands)
10 GOLDMAN SACHS & CO. LLC (U.S.)
11 HSBC BANK USA, NATIONAL ASSOCIATION (U.K.)
12 ITAÚ CORPBANCA (Chile / Brasil)
13 JP MORGAN CHASE BANK ASSOCIATION (U.S.)
14 MORGAN STANLEY & CO LLC . (U.S.)
15 MUFG Bank, Ltd. (Japon)
16 NATIXIS (France)
17 SOCIETE GENERALE (France)
18 SUMITOMO MITSUI BANKING CORPORATION (Japon)

Source: SBS 14
Peruvian Financial System
REGULATORS
2. Superintendence of Banking, Insurance & AFPs (SBS)
Financial Services Providers (Assets as of March 2024)

11.01%

49 multi-operating institutions own

assets for almost S/. 591,000 million

15
Peruvian Financial System
REGULATORS
2. Superintendence of Banking,
Insurance & AFPs (SBS)

Financial System: Direct Loans by Type

Source: SBS Reporte SF-0003-mar2024 16

 Peruvian Financial System

Direct Credits by Credit Type of Credit and Company

April 2024 (Thousands of Soles)

Empresas de

de la Nación
Financieras

Municipales

Agrobanco
Empresas

Créditos
Rurales
Múltiple

Banco
Banca

Cajas

Cajas

Total
Tipo de Crédito

Corporativos 86,188,118 3,257 151,765 943 3,476 - - 86,347,559

Grandes empresas 50,921,342 26,169 46,768 1,100 164,161 - - 51,159,539
Medianas empresas 49,818,253 243,750 1,897,695 18,412 642,230 - 446,052 53,066,392
Pequeñas empresas 21,972,819 3,937,223 18,503,068 397,574 511,874 - 189,623 45,512,182
Microempresas * 3,373,139 3,256,041 6,953,623 267,216 166,736 - 222,149 14,238,903
Consumo 72,881,252 6,933,254 7,520,851 724,466 1,046,536 9,249,533 - 98,355,891
Hipotecarios para Vivienda 64,382,026 312,131 1,571,289 52 226,269 654,284 - 67,146,052
TOTAL CRÉDITOS
349,854,924 14,711,825 36,645,059 1,409,763 2,761,283 9,903,816 857,824 416,144,494
DIRECTOS

Fuente:
SBS
Peruvian Financial System

REGULATORS
2. Superintendence of Banking, Insurance & AFPs (SBS)

Delinquent credits as a % of Direct Loans

18
Peruvian Financial System
REGULATORS
2. Superintendence of Banking, Insurance & AFPs (SBS)

Source: SBS 19
Peruvian Financial System
REGULATORS
3. SUPERINTENDENCE OF THE STOCK MARKET (FORMERLY CONASEV).
OTHER INSTITUTIONS
4. BANCO DE LA NACIÓN
• Financial Agent for the government
• Banker for the public sector.
• Correspondent for the Banking System Important
5. BANCA COMERCIAL / BANCA MULTIPLE / BANCA UNIVERSAL concept
6. FOREIGN BANK BRANCHES / REP OFFICES
7. FINANCE INSTITUTIONS :
CREDISCOTIA CONFIANZA COMPARTAMOS CREDINKA
EFECTIVA PROEMPRESA MITSUI AUTO FINANCE OH! QAPAQ
8. CAJAS MUNICIPALES DE AHORRO Y CRÉDITO: A few examples:
1. Caja Municipal de Ahorro y Crédito de Cusco
2. Caja Municipal de Ahorro y Crédito de Piura
3. Caja Municipal de Ahorro y Crédito de Maynas
9. EMPRESAS DE CREDITO :
ALTERNATIVA VOLVO FINANCIAL SERVICES VIVELA
INVERSIONES LA CRUZ SANTANDER CONSUMER TOTAL SERVICIOS FINANCIEROS
10. CAJAS RURALES : A few examples:
1. Caja Rural de Ahorro y Crédito Incasur
2. Caja Rural de Ahorro y Crédito Los Andres
3. Caja Rural de Ahorro y Crédito Prymera

20
Peruvian Financial System
11. SPECIALIZED COMPANIES
a. LEASING COMPANIES
• None in existence
• All those that existed in the past have been incorporated into the
banking system to minimize costs and maximize profits
b. EMPRESAS AFIANZADORA Y DE GARANTIAS
• Insurance Companies: they issue garantees called “Pólizas de Caución.
• FOGAPI – Fondos de Garantía para la Pequeña Industria: Authorised
by SBS to issue guarantees called “Cartas Fianzas”.
c. TRUST FUNDS ADMINISTRATORS
• Most of the existing companies, owned by banks, have become
incorporated as Units within the banks Except for:
• La Fiduciaria (owned by a few banks).
• TMF Fiduperu
• CORFID
d. FACTORING COMPANIES
• 119 companies that mostly do domestic factoring.
• Examples:
• Arowana
• IMONEY PERU
• Scania Services 21
 Peruvian Financial System
UNAUTORIZED INSTITUTIONS • Fondo Nacional de Crédito
Peruano
• IMarketslive • Corpoandes Perú S.A.
• M21 Element • Oferta de gran rentabilidad por • Crediaval Perú • Oferta de préstamos
• 22-08-2019
• Financika la entrega de dinero • Financiera Unión fraudulentos a través de • 28.02.2018
• Poloinvest • Concredito Internet
• Inkacréditos • Créditos YaPerú
• Créditos Perú • Corporación Crediticia
• Financréditos Perú Peruana
• Oferta de préstamos
• Corporación Comercio • 22-08-2019 • Oferta de gran rentabilidad
fraudulentos a través de Internet • Financika • 28.02.2018
• Financiera Coopemec o Copemeec por la entrega de dinero
• Préstamos Perú • Créditos Andina
• Préstamos Personales • Crediconfianza SA
• Opera sin estar inscrita en el • Oferta de préstamos
• Uniperu SA
• Coopyme Finangroup Lima LTDA Registro de Cooperativas de • 10-06-2019 fraudulentos a través de • 08.11.2017
• Corporación Inka SAS
Ahorro y Crédito Internet
• Enticréditos
• Oferta de gran rentabilidad por • Credibank SA
• IMarketslive • 12-03-2019
la entrega de dinero • Bitshare
• Coopcreasocial • Bit Global Bank / Bit Global
• Mi Financiera Peruana Cash
• Oferta de préstamos • Oferta de gran rentabilidad
• Sociedad Crediticia del Perú • One Coin • 11.09.2017
fraudulentos a través de Internet por la entrega de dinero
• Unión Latina • Coin Space
• Créditos y Préstamos • 05-11-2018 • MMM Global / MMM Perú
• Coopebank Perú • Seven Opportunity
• Oferta de gran rentabilidad por
• Kuvera • 11.09.2017
la entrega de dinero
• Airbit Club • Pay Diamond • Esquema piramidal • 11.05.2017
• Agencia Bancaria • 15.08.2016
• Corpcreditos • Oferta de préstamos
• Financiera del Perú
• Créditos en Perú • Oferta de préstamos fraudulentos a través de • 16.03.2017
• 03-07-2018 • Macrofinanciera SAS
• Fincomer fraudulentos a través de Internet Internet.
• Financredito Perú • Global Intergold • 15.08.2016
• Financial Bank • Esquema piramidal.
• Emgoldex • 18.02.2015
• Financiera Lima • Intermacional de
• Credilatino • Oferta de gran rentabilidad • 15.08.2016
Franquicias Elite
• Credifinanciera S.A. • Oferta de préstamos
• 02-04-2018 • Telar de Mujeres / Telar de
• Compañía Financiera del Perú fraudulentos a través de Internet
los Sueños / Flor de la • Esquema piramidal • 07.07.2016
• Financiera Internacional del Perú y/o
Internacional del Perú
Abundancia 22
Peruvian Financial System
Most important events in the history of Peruvian Banking:

Structural Reforms adopted during the period 1990 – 1997 (mainly banking related):
• Liberalization of Interest Rates & establishment of the minimum Legal Reserve for
banks.
• Opening to Foreign Investments.
• Liquidation of development banks and Privatization of state banks and BVL.
• New Banking Act which introduced the concept of multiple banks and facilitated the
entry of new domestic and foreign banks.
• New Organic Law for the Central Reserve Bank that conferred autonomy and set as
objective to defend price stability.
• Elimination of the single market exchange rate / MUC.
• BCRP is prohibited to grant financing to the public sector.
• Introduction of institutional investors like pension fund managers.
• Development of Central Risk Institutions.
• The Deposit Insurance Fund (Fondo de Seguro de Depósitos - FSD) was created.
• Significantly limited the discretion of SBS, strengthening the framework of preventive
regulation.
• Import liberalization. Elimination of virtually all non-tariff barriers and modification of the
tariff structure.
23
Peruvian Financial System
Deposit insurance
(Fondo de Seguro de Depósitos)

24
 Peruvian Financial System
Deposit insurance
(Fondo de Seguro de Depósitos)

Year Quarter Amount Year Quarter Amount Year Quarter Amount

1991 2,500.00 1998 I 13,016.00 2017 Dic. 2016 - Febrero 2017 97,644.00

1992 4,307.00 II 13,459.00 Marzo - Mayo 2017 97,586.00

III 13,587.00
1993 I 6,750.00 Junio a Agosto 2017 97,604.00
Octubre-Noviembre 13,836.00
II 6,750.00 Setiembre – Noviembre 2017 97,552.00
Diciembre 62,000.00
III 6,750.00 1999 Enero-Febrero 62,000.00 2018 Dic. 2017 - Febrero 2018 97,529.00
Marzo-Mayo 62,822.00 Marzo - Mayo 2018 98,205.00
IV 9,000.00
Junio-Agosto 63,702.00
1994 I 9,252.00 Junio a Agosto 2018 98,894.00
Setiembre-Noviembre 64,209.00
II 9,441.00 Diciembre-Febrero ´00 65,163.00 Setiembre – Noviembre 2018 99,372.00

III 9,626.00 2000 Marzo-Mayo 65,718.00 2019 Dic. 2018 - Febrero 2019 100,864.00
IV 10,151.00 Junio-Agosto 66,359.00 Marzo - Mayo 2019 99,949.00
1995 I 10,225.00 Setiembre-Noviembre 66,872.00 Junio a Agosto 2019 100,432.00
Diciembre-Febrero '01 67,874.00
II 10,598.00 Setiembre – Noviembre 2019 100,698.00
2001 Marzo-Mayo 68,178.00
III 10,815.00 Junio-Agosto 68,174.00 2020 Dic. 2019 - Febrero 2020 100,123.00
Setiembre-Noviembre 67,422.00 Mar – May 2020 100,123.00
IV 10,948.00
2023 Marzo - Mayo 2023 125,714.00
Diciembre-Febrero '02 66,782.00
2024 Marzo – Mayo 2024 122,420.00
25
 Peruvian Financial System barriers

Importance of a National Strategy of Financial Inclusion and the identification of the 4 most
important Access barriers and to find solutions for them:
1. Physical Infrastructure Last estimate: approx. $117,000MM (plus Long-Term gap that amounts to
S/ 363,452 million (2019-2038)). According to the Finance Minister.
2. Documentation (consumers lack of it stops the demand)
3. Costs (Very high Operating costs in rural areas)
4. Alternative channels development (we still need to spread knowledge of how to take advantage
of mobile phones and other digital solutions)

IMPORTANCE OF FINANCIAL INCLUSION:

ONLY AROUND 50% OF ADULTS DECLARE THAT HAVE A BANKING / FINANCIAL
ACCOUNT (MOSTLY IN CAPITAL CITIES IN PROVINCES)
26
Peruvian Financial System
Evolución de los Indicadores de Intermediación e Inclusión Financiera del Sistema Financiero 1/

Source: REPORTE DE INDICADORES DE INCLUSIÓN FINANCIERA DE LOS SISTEMAS FINANCIERO, DE SEGUROS Y DE PENSIONES
SBS, BCRP e INEI Last Available: December 2022 27
Peruvian Financial System
Evolución de los Indicadores de Intermediación e Inclusión Financiera del Sistema Financiero 1/

Source: REPORTE DE INDICADORES DE INCLUSIÓN FINANCIERA DE LOS SISTEMAS FINANCIERO, DE SEGUROS Y DE PENSIONES
SBS, BCRP e INEI Last Available: December 2022 28
Banking

https://www.youtube.com/watch?v=W3diU6_DuiU

The role of banks in the

economy

https://www.youtube.com/watch?v=NXzAAcbMydY

29
Banking: Understanding the Basics

What is a Bank?
A bank is defined by Merriam-Webster’s dictionary as ‘‘an
establishment for the custody, loan, exchange, or issue of
money, for the extension of credit, and for facilitating the
transmission of funds.’’
‘‘Banking’’ can be defined as ‘‘the business of banking,’’ a business that
continually evolves to meet the latest financial needs and economic
conditions.

Banking’s role in society:

• Playing a key role in financial intermediation
• Creating financial products and services that benefit businesses
and consumers
• Driving a thriving financial system regulated by state and federal
governments
• Facilitating the creation of money
• Being involved in the transfer of funds
• Reinventing the financial future of banking
30
Banking System

https://youtu.be/fTTGALaRZoc

31
Banking Operations in relation to the Balance Sheet

Bank
Balance Sheet
* Local Guarantees
Assets Liabilities * Avals
* Collections Means of payment
Out of the Balance * Letters of Credit in Foreign Trade

Active Operations Passive Banking

(Assets) Operations Services
Loans (Liabilities) Factoring
Clearing Deposits Leasing
Investments Interbank Loans Underwriting
Fixed Assets Rediscount Trust Funds
Securitization
Funding with
Correspondents 32
32
Role of Banks

33
Banking & Financial Intermediation

Individuals,
Lending Deposits
Credit Banks & Institutions &
Solicitors Financial Companies
Institutions with Cash in
Lending Rate Deposit Rate
Excess

Superavitary Agents
Deficitary Agents
(Borrowers)
Financial (Savers)

• Working Capital Intermediary • Current Accounts

• Saving Accounts
• Medium Term
• Term Deposits
• Discounts
• Cts
• Trade Finance

Financial systems perform the essential

economic function of channeling funds
from units who have saved surplus funds
to units who have a shortage of funds. 34
 It's A Wonderful Life Bank Run

https://youtu.be/iPkJH6BT7dM
35
Companies Objective

OBJECTIVE

Sales =
$1M
Sales =
$100M

¡GROWTH!!!!!
36
Sources for Financing: intermediation

37
Banking & Financial Intermediation

• Financial intermediaries exist to solve or reduce market imperfections, such

as: differences in the preferences of lenders and borrowers (in terms of size,
maturity, liquidity, risk), presence of transaction costs, shocks in consumers’
consumption and asymmetric information (which gives rise to both adverse
selection and moral hazard).
• Several theories have been developed to explain how financial
intermediaries reduce/solve these market imperfections. They are the
theories of:

• asset transformation: Differences in the preferences of

lenders and borrowers (in terms of size, maturity, liquidity, risk)
• transaction costs reduction: Presence of transaction costs
• liquidity insurance: Shocks in consumers’ consumption
• informational economies of scale and delegated monitoring:
Adverse selection & Moral hazard.

38
Banking & Financial Intermediation -
Asset transformation
• Asset transformation is the easiest way to explain intermediation as satisfies both
borrowers’ needs for long-term capital and the desires lenders for high liquidity in their
assets.
• Financial intermediaries undertake four main transformations:
1. Maturity transformation: the liabilities of financial intermediaries generally mature more quickly
than their assets. The traditional role of banks is to make long-term loans and fund them by
issuing short term deposits, a process commonly referred to as ‘borrowing short and lending
long’. Also ‘capturing long term deposits to lend short term’
2. Size transformation: the amounts lenders make available are on average smaller than the
amounts required by borrowers. Financial intermediaries collect the small amounts made
available by lenders and parcel them into the larger amounts required by borrowers.
3. Liquidity transformation: Deposits are contracts that offer high liquidity and low risk while
Loans are illiquid and a higher risk. Banks usually hold liabilities and assets of different liquidity
features in their balance sheet through diversification of their portfolios to avoid default
probability.
4. Risk transformation: intermediaries transform risks to reconcile the need of Savers to regard
his deposits as absolutely safe with the ability to transform risky loans into virtually riskless
deposits (liabilities).
39
Objective of the Financial intermediation

– Link between Depositors & Creditors

○ Term conversion:

○ Amount conversion:

○ Risk Mitigation:

40
Term Conversion

360 DAYS 180 DAYS

TERM DEPOSIT PERSONAL LOAN

BANK

“Capture long term deposits to lend short term”

41
Amount Conversion

SAVINGS ACCOUNT DEPOSIT

USD 1,000.00

TERM DEPOSIT
USD 5,000.00
MORTGAGE
CURRENT ACCOUNT DEPOSIT USD 70,000.00
USD 2,000.00 BANK

“Small Deposits & Big Loans”

42
Risk Mitigation

LOAN 1

LOAN 2

DEPOSIT LOAN 3

LOAN 4

BANK
LOAN 5

“Each deposit is placed with several Credit Takers”

43
Risk Mitigation (Risk Transformation)

What determines the ability of banks to transform risky

loans (assets) into virtually riskless deposits (liabilities)?
Banks do this in three ways:
a. Screening loan applications: this enables the risk of loss on each individual loan
to be minimized: the use of credit scoring is one technique banks can use to select
only the good borrowers (i.e. good income/earnings or good record on repaying debt).
b. Diversifying risk: the spread of risks is achieved by lending to different types of
borrowers. Banks try to avoid a heavy concentration in any single branch of economic
activity or any single area of the country, and to restrict the maximum size of any
single loan.
c. Pooling risks: the presence of a large number of loans, reduces the variability of
losses. The large number of loans does not reduce the expected loss in the portfolio of
loans overall, but it is does give considerably improved predictability and limits the
maximum loss for which the intermediary has to allow.

44
Banking & The Creation of Money

https://www.youtube.com/watch?v=wPnMWModBWo
45
Banking & The Creation of Money

Mr. Perez (1) $1,000

(Depositor) Deposit

Bank C Bank A 20%

Reserve

(7)
(2) $800 can
$640 be loaned
deposit Initial $1,000 has
out
generated $1,440
Home “new” money in the
Mr. Plumber
Furniture Co system

(6) $640 for (3) $800

furniture for
plumbing
Mr. Gomez supplies
Plumbing
(Borrower) Supplies Co.
20%
Reserve
(5) $640 can
(4)
be loaned out Bank B
$800
deposit

46
Banking Risks

Solvency

Transferability Liquidity

Convertibility Profitability Market

Inflation Systemic

Devaluation

47
Cost of Lending: how is it calculated?

Provisions for Risk = Loan Repayment Lending rate

Lending Probability (Tasa Activa)

Return on Invested
Bank’s Profit Capital
Operative & Get reduced by volume
Administrative
& Efficiency
Costs
Determined by
Clearing
Regulators
Deposit rate
Bank’s Funding (Tasa Pasiva)

48
Maximum Cost of Lending?

Gestion warned of credits granted by internet at annual rates of more tan

5,600% in electronic platforms called fintech where you can get loans in just
15 minutes, but at a very high cost. Growing number estimated in more tan
80,000 users last year. 49
Bank Structure

BANK

Retail Wholesale Capital S

Banking Banking Markets T
A
Banking Services F
(Channels, Processes) F

50
Bank Structure

BANK

Retail Wholesale Capital S

Banking Banking Markets T
A
Banking Services F
(Channels, Processes) F

RETAIL BANKING
• Small Business Banking & Individuals
• Private & VIP Banking
• Credits through Private Branding &
Retail Outlets
• Marketing
• Market Research

51
Bank Structure

BANK

Retail Wholesale Capital S

Banking Banking Markets T
A
Banking Services F
(Channels, Processes) F

WHOLESALE BANKING
• Corporate & Commercial Banking
• Institutional Banking
• Trade Finance & Correspondent
Banking
• Corporate Finance

52
Bank Structure

BANK

Retail Wholesale Capital S

Banking Banking Markets T
A
Banking Services F
(Channels, Processes) F

CAPITAL MARKETS
• Stockbrokers, Mutual Funds & Trust
Funds Administration
• Treasury (Money Desk & Exchange
Desk
• Custody
• Market & Portfolio Risk

53
Bank Structure

BANK

Retail Wholesale Capital S

Banking Banking Markets T
A
Banking Services F
(Channels, Processes) F

BANKING SERVICES
• Channels Administration: Branches
network, ATM’s, Internet Banking,
movile Banking, etc.
• Central Processes Administration;
clearing, Bills for Collection, Cash, etc.

54
Banking & Financial Intermediation:
Transactional Model

Government Exports

Company AYZ S.A.

Local Suppliers

Distributors

Local Sales
Employees

Imports

55
 Banking System: Main Trends

● Alternative Channels: Internet, ATM,

mobiles, Agents)
● Risk Control (Basil II & III)
● Data warehousing / Middleware
● Client Segmentation
● Clients Domicile
● Information availability / Transparency
● New actors (Peru)

56
 NOMBRE DE LA DEPENDENCIA O CARRERA
HASTA DOS LÍNEAS

INTERNATIONAL TRADE FINANCE I

Lecture 6. Documentary Collections
2024-2
Oscar Melo Vega Ángeles
Antonio Esquivel Delfín
Let’s review the last class

2
 Documentary Collections

The Exporter provides instructions to their Bank,

who acts as remitter of documents to another
bank, in a foreign country, to collect the
payment from the importer under certain
conditions.

Remittance of
Export
documents to a
Collection
foreign country
Documentary
Collections
Reception of
Import
documents from a
Collection
foreign country
3
Documentary Collections

Actors in the Transaction

EXPORTER
(Drawer)

IMPORTER
COLLECTING BANK
(Drawee)

REMITTING BANK

Presenting Bank ?
4
 Documentary Collections
 Subject to ICC’s URC 522
 Banks DO NOT COMMIT FOR PAYMENT nor review
documents.
 Parties:
 Drawer
 Drawee
 Remitting Bank
 Collecting Bank
 Will the documents be consigned to the bank? AWB & B/L.

 The Collecting Bank might:

 return documents after 60 days, if no response is
received.
 add their aval
 protest drafts according to the availability.
 Collecting Bank will only follow the instructions received from
the Drawer through the Remitting Bank. 5
 Documentary Collections
 Types of Collections according to the Terms of payment:
1) Sight or D/P = Documents against Payment
2) At term or D/A = Documents against Acceptance
3) Clean collection - a bank just presents a Bill of
Exchange - (sight or term) to the importer for payment

Types of collection as per the set of documents:

 Documentary Collection: commercial & financial
documents.
 Simple Collection (Clean Collection): financial
documents.
 Avalized Collection: documents that include a bill of
exchange to be avalized by the Collecting Bank.

6
Documentary Collections

Risks for the Seller if:

The Buyer refuses the documents.
The Buyer accepts documents but doesn’t pay at
maturity.
Risks for the Buyer if:
The Seller doesn’t ship the merchandise on time.
The Seller doesn’t fulfill the agreed terms &
conditions specified in the contract.

7
 Module: Collections

What if the buyer refuses to pay or accept the Bill of Exchange

at maturity?
the banks can take actions to protect the seller's interests as
per their instructions (IF INSTRUCTED): note or protest.
Both procedures are recognized by many jurisdictions:
prepare the way for later legal action in the buyer's country.

8
 Documentary Collections

Why use Collections

Why Sellers use Collections

Cannot obtain a Letter of Credit from the buyer
Continue historical relationship
Use banking system to retain control of title documents
Considered less expensive than Letters of Credit
Facilitate parent / subsidiary trade
Why Buyers agree to Collection Terms
Requires fewer restrictions on buyers than Letters of Credit
Can refuse to pay or accept
Can delay payments or acceptance until shipment arrives
Less expensive than Letters of Credit
Cannot qualify for credit (Letters of Credit)
9
Documentary Collections

1. Merchandise
Exporter Importer
Drawer Drawee

6. Debit to the account

8. Payment
2. Documents

4. Notice of Arrival

5. Acceptance
of Documents

of documents
3. Documents

Remitting 7. Money Transfer Collecting

Bank Bank
10

Presenting bank! 10
 Module: Collections

Parties
The bank that presents the
documents to the buyer and
collects payment will be
referred as Presenting bank.

Any bank other than the

exporter's (Remitting) bank
may also be referred to as a
Collecting bank.

The Remitting bank will not always send the collection directly to the Presenting
bank.

The collection may be sent through another bank in the buyer's country -
perhaps a correspondent of the Remitting bank.

This bank is known as a Collecting bank.

11
 Module: Collections

Document Flow in a Usance Case

12
 Documentary Collections

To be taken into account:

 It is indeed a very useful payment method provided that

the parties understand the related risk.

 Simple process allows Buyer & Seller to adopt it without

need to major knowledge.

 For the Exporter: less complicated than the L/C & safer
than selling in Open Account.

 For the Importer: It is a cheaper alternative than the L/C.

There is the option to select when to pay or not a
collection.
13
 Module: Collections

Parties

Let's check that you have understood this:

Acme Products have sent documents plus a Bill of Exchange to their customer, Zenith for
collection.

The documents plus collection order were given to Acme's bank, North Bank.

North Bank sent it all to their correspondent, Global Bank. Global Bank passed the
collection on to East Bank, who have Zenith as their customer.

East Bank contacted Zenith, handed over the documents after the acceptance; and
Received payment after 30 days
14
 Module: Collections

Parties

Who is the Remitting Bank? North Bank

ONE
There is only one Presenting bank: East Bank.
Two
Both Global Bank and East Bank are Collecting banks

15
 Module: Collections

Parties

ACME. D.
All the banks in a collection act for the exporter or principal. A collection is at the risk of the exporter. No bank gives any
This is the case even for East Bank, whose customer is the payment undertaking.
buyer. So, there is no bank exposure (unless a bank has lent money
to the Exporter in advance of the proceeds of the collection).

16
 Documentary Collections

MODALITIES IN DOCUMENTARY COLLECTIONS

COLL
CLASIFICATION:

BY TYPE OF
COMMERCIAL FINANCIAL DOCUMENT

• D/P • Clean Collection BY TERMS OF

• D/A PAYMENT

BY
IMPORT EXPORT DOCUMENTS
ORIGIN

DIRECT REGISTER DIRECT REGISTER

MODALITIES

AVALIZED

TO BE SEEN IN ITF2

17
 Avalized Collections: scenarios

I’m an exporter. The buyer has accepted to receive the documents for
collection through their bank, but requests to pay at term, 60 days from
the B/L. I am concerned about not being protected since according to
the rules for collections the bank is not obliged to effect payment. They
are only in charge of trying to collect at maturity.

The Exporter includes

among the documents a
Through the Avalized Bill of Exchange to be paid
at term. The Aval is instrumented
Collection, the buyers through a SWIFT message,
goodwill to pay is
accompanied by the AVAL where the Importer’s bank
confirms to the Exporter’s
commitment of his bank to Before the aval in the Bill of bank his payment
pay at a certain date in the Exchange is added, the undertaking at maturity.
future. buyer will have to approach
his bank and request an
Import Aval Line of Credit to
be approved (subject to
credit evaluation) . 18
 Documentary Collections
Example of Aval via SWIFT - format FIN 499:

Please note that today, as per your directions, we have placed our aval on the
following Promissory Note / Bill of Exchange / Draft:

Payer (Obligor): XYZ Ltd.

Payee: Banco Peruviano, Peru
No:
Dated:
Face Value:
Maturity Date:

We have also endorsed the Promissory Note / Bill of Exchange / Draft as follows:
"Endorsed to the Order of The Bank ZZZZZZZZZ"

At Maturity (DATE) we promise to pay you Principal + Interest (at SOFR + x.xx% p.a.).

The instrument will remain in our Safekeeping until Maturity when we’ll pay you.

19
Bill of Exchange

Acceptance

Aval

20
Avalized Collection: process

EXPORTER 1. MERCHANDISE IMPORTER

5. ACCEPTANCE OF BILL &

REQUESTS AVAL IN BILL
2. DOCUMENTS

7. PAYMENT
4. NOTIFICATION
9. PAYMENT

3. DOCUMENTS

REMITTING 6. CONFIRMS AVAL COLLECTING

BANK BANK
8. REIMBURSEMENT
21
Documentary Collections

Exporter

Collection Commission
Docuuments
Base: Flat

0.20%

At Sight Acceptance /
Collection Commission Deferred Payment
< 100M - 0.50% Min US$ 80.
USD82.00
> 100M - 0.50% Min US$150.
Base: Flat
AVAL: 3% p.a. (if avalised)
* Other commissions may apply.

Importer
22
Documentary Collections - Imports

23
Documentary Collections - Exports

+ Courier (if aplicable)

24
Documentary Collections

Cases….

25
 NOMBRE DE LA DEPENDENCIA O CARRERA
HASTA DOS LÍNEAS

INTERNATIONAL TRADE FINANCE I

Lecture 5. Introduction to Means of Payment
2024-2
Oscar Melo Vega Ángeles
Antonio Esquivel Delfín
Let’s review the last class

2
 To bear in mind…..

¿Are there a 100% secure

Trade Transaction?

¡NO!
Nevertheless, we can
mitigate risks through:

Rating the Supplier/

Buyer Terms in the Advance Payments
Means of Payment
Contract (buying or selling) 3
Differences between a Domestic Sale and
an International Sale

DOMESTIC SALE INTERNATIONAL SALE

Parties located in same country Parties located in different country

Parties communicate in same language Parties communicate in different language

Parties most of the time do not know each

Parties most of the time know each other
other

Same Law rule each other Different Laws might be applicable.

Same currency is applicable for the Transaction most likely will require Foreign
transaction Exchange for one of the parties

Terms and conditions are usual and standard Terms and conditions need to be agreed

The transaction usually might not require

Generally there is at least one Bank involved
Bank intervention

Use & practice is common Use & practice is not common

4
The different interest of the parties…

SELLER BUYER

¿¿TRUST??
- SELLING - RECEIVE GOODS
- COLLECT FASTER - PAY LATER 5
 PURCHASE AND SALE AGREEMENT

Vienna Convention Chapters

1 Goods Description

2 Delivery Terms

Payment Terms
3 (Sales Conditions &
Means of Payment)
Moment
4 Applicable Law & venue & Mean of
Payment

6
A-7 PAYMENT CONDITIONS (Art. 5)
 Payment on Open Account (art. 5.1) To be
Time for payments (if different from art. 5.1 _____ days from data of invoice. Other _____
 Open Account backed by Demand Guarantee or Standby Letter of Credit (art. 5.6)
covered
 Payment in advance (art. 5.2)
on ITF2
Date (if different from art. 5.2): ______ Watch out if
 Total price
 _____ % of the price, remaining amount ______ % to be paid at ________ you are the
 Payment in advance backed by Advance Payment Bond buyer
 Documentary Collection (art. 5.4)
 D/P Document against Payment
 D/A Document against Acceptance
 Irrevocable Documentary Credit (art. 5.3)
 Confirmed
 Unconfirmed
Place of Issue (if applicable) ______ Place of Confirmation (if applicable) ______
Credit available: Partial Shipments: Transhipment:
 At sight __ Allowed __ Allowed
 By deferred payment at ___ days __ Not Allowed __ Not Allowed
 By acceptance of drafts at ___ days
 By negotiation
Date on which the documentary credit must be notified to seller (if different from art. 5.3
______ days before date of shipment __ other: _________
 Irrevocable Bank Payment Obligation (art 5.5)
 Settlement by Payment
 Settlement by Deferred Payment Undertaking and payment at maturity. Deferred payment term
______ days after sight or after date of ______
Date on which the Bank Payment Obligation must be notified to seller (if different from art. 5.3)
______ days before date of shipment __ other: __________
 Other: ________
(e.g. cheque, bank draft, electronic funds transfer to designated bank account of seller)
Seller’s Bank Details IBAN / bank account number ______ BIC/Swift code 7
 Identifying the methods of Payment that can be used
Characteristics
TRADITIONAL BANK INSTRUMENTS Documentary or not documentary
• Letters of Credit (L/C) Internationally accepted
• Documentary Collections (D/P o D/A). International Rules (ICC)
• Open Account through Int’l Transfer (T/T) Costs & procedures well defined
• Draft / Bank Check (Issued by a Bank) Apply to any type of good / service
• Personal Check NOT ADVISABLE
(especially if you are the seller)

ELECTRONIC
• Credit Cards
• Paypal Characteristics
• Escrow, • Newly used
• Digital Wallets (apple pay, google pay, etc.) • Limits on amounts
• Mercado Pago • Banking and not banking
• Ali Pay (Ali Express) • Offer other services like Currency Exchange
• IberPay
• etc.

8
 Methods of Payment identified by Peruvian Customs Authorities

According to the document, “INFORME N.º 000047-2023-SUNAT/340000”, issued as a reply to a consultation

referring to the requirement of the use of means of payment provided for in the text of Law No. 28194 in a
foreign trade operation:
• Article 5 of the TUO of Law No. 28194 prescribes that the means of payment to be used through companies in
the financial system are the following:
 account deposits,  Int’l Transfer
credit cards issued,  Credit Card?
 drafts,  Bank’s Cheque
 checks,  Personal Cheque
 funds transfers,  Int’l Transfer
 remittances and  Int’l Transfer or Collection?
 payment orders,  Int’l Transfer
 letters of credit.  Letter of Credit
 debit cards issued in the country,  Debit Card?

• Regarding the obligation to pay, articles 54 and 59 of the Vienna Convention state that the buyer must pay
the price in accordance with the requirements set by the contract, the laws or the regulations, on the date set
or on which he can determined in accordance with the contract and the Convention.
• In turn, subparagraphs a) and c) of numeral 4.1 of literal C of Instructions DESPA-IT.00.04 specify that when
credit payment (deferred payment) is declared, the means of payment that will be used is recorded……..
(those mentioned above)
TUO = Texto Único Ordenado 9
Let’s take a look at the following…

10
Another example…..

11
¿What are they talking about?

12
¿What are they talking about?

13
14
15
$178/pc
Min Order 100 pcs

16
Delivery: 25 days

17
Identificar el medio de pago

18
Moment for payment…

¿Cash?
Advance Credit
Sight Term

Shipment
DOCUMENTS DOCUMENTS
AGAINST AGAINST

PAYMENT ACCEPTANCE

DEFERRED PAYMENT

19
 MEANS OF PAYMENT: 4 OR JUST 3?

Less Risk More

Cash Terms
Buyer (Imp) Perspective Seller (Exp) Perspective
Favor
• Open Account • Advance Payment Seller
• Documentary Collection • Letter of Credit
• Letter of Credit • Documentary Collection Terms
Greater
• Advance Payment • Open Account Favor
Risk Less Buyer
Cash

Seller & Buyer have different priorities & desires!

Advance Payment
IT IS NOT A MEAN OF PAYMENT
(no documents have been generated and
therefore there is no export YET!!!!!
20
Payment in Advance – NOT A MEAN OF PAYMENT!!!!!!!!
(or Advance Payment)

Advantages to Buyer Advantages to Seller

• Has use of funds prior to shipment

• None • May not ship goods

• Able to establish conditions

Risks to Buyer Risks to Seller

• Loss of use of funds
• Supplier may not ship the goods
• Possible impact of political /
country risk • None
• Possible impact of commercial risk
• Possible transit risk implications

21
 Payment in Advance – NOT A MEAN OF PAYMENT!!!!!!!!
(done through International Transfers)

5. Merchandise &
Beneficiary documents
Applicant
(exporter) (Importer)

1. Payment Instructions
4. Credit Benef.

2. Debit Applicant’s
Account

Account
Correspondent Banks

Receiving Issuing
Bank 3. Payment Order Bank
Message (MT103) 22
 How to select the Method for Payment

+ TRUST / CONFIDENCE -
+
LETTERS OF
CREDIT
Collection

DOCUMENTARY
COLLECTIONS
Safe

OPEN ACCOUNT

- (Int’l Transfers)

- Transaction Costs +
23
 Open Account through International Transfers

To be taken into account:

 The T/T is the easiest & cheapest way to pay a supplier.
 The use implies:

confidence between the parties.

 Int’l transfers can be used to effect payments in
advance or payments for Open Account sales:
 In the case of advance payments, the applicant should bear
in mind the risk involved.
 In the case of payments in Open Account, the beneficiary
should also bear in mind the risk involved.
 In spite of the simple process, if the applicant doesn’t provide
clear & correct instructions, he might face delays, problems
and over costs.

24
Open Account through International Transfers

It is required to indicate:

 Full information on the applicant and beneficiary (name,

address, account number).

 Full Information on the banks, from both the applicant’s as

well as the receiving and intermediaries (if applicable).

 SWIFT codes as well as the codes for the payment system to

be used: ABA, IBAN, CA (accordingly).

 The currency to be used for the payment and a definition of

who will assume the expenses (OUR, BEN, SHA).

 Value date will depend upon the paying banks policies.

25
Open Account through International Transfers

Advantages to Buyer Advantages to Seller

• Can obtain control of the goods
prior to payment
• Can refuse to pay or delay
payment
• Has ability to generate cash • None
from sale before effecting
payment
• No banking fees except for
issuance of funds transfer

Risks to Buyer Risks to Seller

• Lack of control over the goods
• No control over buyer’s
payment

• Very few • May incur in political / country

risk
• May need to borrow until
payment is received
• May incur FX risk
26
Open Account (through International Transfers)

1. Merchandise &
Beneficiary documents
Applicant
(exporter) (Importer)

2. Payment Instructions
5. Credit Benef.

3. Debit Applicant’s
Account

Account
Correspondent Banks

Receiving Issuing
Bank 4. Payment Order Bank
Message (MT103) 27
 International Transfers: The MT 103 Format
Biodata GMBH. order Union Bank of Switzerland, Zurich, to pay 1,958,47 euros to
ABN Amro Bank, Amsterdam, for credit to the account of H.F. Janssen.

Applicant
Biodata GmbH
Zurich
50a
Explanation Format
Sender UBSWCHZH80A
Type of message 103
Receiver ABNANL2A
Message Text
Issuer UBS, Issuing Bank Reference :20:494931/DEV
Zurich Code for Bank operation :23B:CRED
Value Date/ currency / amount :32A:020528EUR1958,47
MT
Applicant :50K: BIODATA GMBH
ZURICH
MT 103
Beneficiary :59:/502664959
H.F. JANSSEN
LEDEBOERSTRAAT27
Beneficiary’s
AMSTERDAM
Bank ABN Amro Bank Expenses :71A:SHA
Amsterdam
End of Text/ Message Trailer

Beneficiary
H. F.
59a Janssen
Amsterdam

28
 International Transfers: The MT 103 Format
(and the Reimbursement Process)
MT103 = Single Customer Credit Transfer
MT202 = interbank order from a Correspondent bank
MT910 = Confirmation of Credit or
MT950 = Statement Message

29
 International Transfers: Used for Remittances
(Not only for Goods or Services Trade)

• Indispensable source of income for many

people (mainly low & middle-income
economies).
• Total global remittances 2021 = $796 billion
• Total global remittances 2022 = $840 billion
in 2022 (rise by 5.6%).
• Leading countries in 2022:
• India received $111 billion, Mexico $61
billion, China $51 billion, Philippines $38
billion, France $34 billion.
• Remittance inflows played a significant role
in the economies of certain nations:
• Tajikistan (53% of GDP), Tonga (45%),
Samoa (34%), Yemen (31%), and the
Kyrgyzstan Republic (28%)

bit.ly/3GUtLwU
30
Types of payments in USD

CHIPS FEDWIRE

USD

BOOK CHEQUE

31
 Types of payments: Book to Book

These are payments within accounts of the same bank

Applicant Issuing Bank Beneficiary’s Bank Beneficiary

(same as Issuing Bank)

32
 Cash Compensation/Settlement most common systems

Real-Time Gross Settlement system (RTGS) Network System

Processing • Real time • Real time
• Based on individual payments • Based on individual payments
• The purpose of payment is against • The purpose of payment is against
balances or credit lines prefunded balances and reciprocal
flows (multilateral network)
Liquidation • Real time (balance stays in Central Bank) • Net position at the end of the day
(through RTGS)
Operator • Mainly, Central Banks • Mainly, private associations owned by
banks
Example • Fedwire ($) • CHIPS ($)
• TARGET2 (€) • EBA Euro1 (€)
• LBTR in Peru (S/. or US$) • CCE in Peru (S/. or US$)

33
 Types of payments: FEDWIRE (ABA)

• Federal Reserve System (FED)- It is the

Central Bank of the U.S.
• Formed by 12 Federal Districts.
• The different Federal Districts comprise a
group of States:

FEDWIRE
Definition System for High Value Payments (HVP) LBTR
Domestic Payment system in real time among banks in USD
Owner Belongs & it is administered by the 12 Federal Districts
Operating Starts at 21:00 EST (Day before value date)
Hours Closes operations at 18:00 for payments to customers
Closes all types of operations at 18:30 EST value date)
Details Average volume per day: 534,000 transactions for $2.7
trillion (*)
More than 9,500 US connected participants
(*) 2009 figures

LBTR = SISTEMA DE LIQUIDACIÓN BRUTA EN TIEMPO REAL

(REAL TIME LIQUIDATION SYSTEM) 34
Types of payments: FEDWIRE (ABA)

35
 Types of payments: CHIPS
Definition The Clearing House Interbank Payments System is a private payment
system on real time CCE
Cross border & Domestic payments in USD among banks (mostly used
for cross border)
Owner CHIPS is owned by 10 U.S. Banks.
Operating Starts at 21:00 EST (Day before value date)
Hours Closes operations at 17:00 for day of the value date)
Details Average volume per day: 363,000 transactions for $1.8 trillion (*)
41 Participants: (as of Jun 2023)
Opening funded by the FED & closed with a payment to the FED
95% of international payments go through CHIPs & 50% of domestic
(*) 2010 figures

Senders (payors), called originators in the ACH world, provide their banks
ODFIs (originating depository financial institutions) with payment
instructions. Unlike high-value systems, there are usually multiple payments
in each instruction sent to the ODFI. The ODFI processes the instructions and
sends a file of all customer instructions to its ACH Operator. The ACH
Operator then distributes all of the payments in all of the batches to the
appropriate RDFIs (receiving depository financial institutions) which then
credit the individual receivers (payees).

CCE = CÁMARA DE COMPENSACIÓN ELECTRONICA

(ELECTRONIC COMPENSATION CHAMBER) 36
 41 participants for CHIPS

Banco Bilbao Vizcaya, S.A. Spain Deutsche Bank AG Germany The Northern Trust Company United States
Banco do Brasil S.A. Brazil Deutsche Bank Trust Co Americas United States PNC Bank United States
Bangkok Bank Public Company Limited Thailand Fifth Third Bank United States Societe Generale France
Bank of America, N.A. United States Habib American Bank United States Standard Chartered Bank England
Bank of China China HSBC Bank USA United States State Bank of India India
Bank of Communications China Industrial and Commercial Bank of China China State Street Bank and Trust Company United States
MUFG Bank, Ltd. Japan Intesa Sanpaolo S.p.A. Italy Sumitomo Mitsui Banking Corporation Japan
Barclays Bank PLC England Israel Discount Bank of New York United States The Bank of New York Mellon United States
BNP Paribas New York France JPMorgan Chase Bank, N.A. United States Truist Bank United States
Brown Brothers Harriman & Co. United States KBC Bank N.V. Belgium UBS AG Switzerland
Manufacturers and Traders Trust Company United
China Merchants Bank China States Valley National Bank United States
Citibank, N.A. United States Mashreqbank psc United Arab Emirates Wells Fargo Bank NY INTL. United States
Commerzbank AG Germany Mega Int’l Commercial Bank Co. Taiwan Wells Fargo Bank, San Francisco United States
Credit Agricole Corporation and Investment Bank France Mizuho Bank, Ltd. – NY Japan 37
CHIPS: Annual statistic

2023

38
 Compensation Systems in Europe

The IBAN - Your New Best Friend (English)

(IBAN = International Bank Account Number)
http://www.youtube.com/watch?v=emuRGroIMVQ 39
39
 Types of payments in EUR
EBA = Euro Banking TARGET2 = Trans-European
Association Automated Real-time Gross
CHIPS / CCE ABA/ LBTR Settlement Express Transfer
System

EBA/EUR1 TARGET2

EUR

BOOK CHEQUE

40
Compensation Systems in EURO
TARGET 2
Definition Liquidation system for high value payments in real time
Cross Border & domestic payments in euros LBTR
Owner Property of the European Central Bank
Operated as “SSP“ (Single Shared Platform) by Central Banks in
Europe
Operating Hours Starts at 7:00 C.E.T (Central European Time) and ends at 18.00 CET

Details Average volume per day: 350,000 transactions (*)

Participants: 930 direct & 3,687 indirect (*)
More than 50.000 BICs
Based on FIN service by SWIFT

EBA/EUR1
Definition Private high value payments system on real time
Cross Border & domestic payments in Euros CCE
Owner Belongs to a Compensator: EBA (ABE CLEARING S.A.S, Paris)
The compensator EBA is owned by 67 European shareholders
Operating Hours Starts at 7:30 CET and ends at 16:00 CET
Detalles Average volume per day: 230,000 transactions (*)
Participants: Direct 67 & 59 Indirect (*)
 Access to more than 25.000 BICs (*)
Based SWIFTs FIN service
Starts funding their position with a payment via Target2 & closes
returning a payment also via Target 2
(*) www.ebaclearing.eu 41
 International Transfers: Identification Banking Codes

INFO YOU NEED TO BEAR IN MIND WHEN SENDING A P/O

SWIFT CODE 8 to 11 Characters
ABA/FEDWIRE ABA = American Bank Association . FEDWIRE : It is a payment and message system
(9 digits ) operated by the Federal Reserve. LBTR
Clearing House Interbank Payments Systems. (Interbank payment compensation) It is
CHIPS ( 6 digits)
an electronic payment system used for U.S.Dollar transfers among banks in New York
Identification Bank Account Number . Banking Account number for the beneficiary in
CCE
IBAN
Europe. i.e.: Spain, Sweden: the accounts use 24 digits / France, Greece, Italy: 27
Or EBA / TARGET CODE
SC -Sort Code (
Great Britain
6 digits)
BLZ ( 8 digits) Germany / GERMAN BLZ - BANKLEITZAHL
CA ( 9 digits) Canada -CA / Canadian Payments Association
SIC ( 5 digits) Switzerland . Swiss Interbank Clearing

42
 Price Options

32 12102011USD797000
50 Applicant

Characteristics 53 /04XXXXXX

• Claims from intermediary bank 56 Issuing Bank

are absorbed by the final 57 Beneficiary’s Bank
BEN beneficiary
59 Beneficiary
• Transferring Banks claim +
70 Payment Details
those from intermediaries'
banks are deducted from 71 BEN
payment 72

Example:

Applicant Issuing Deutsche Bank Beneficiary’s Beneficiary

Bank Bank.

MT103 MT103
BEN

$1000 $980
$1000 $990

$10 $10

43
 Price Options

32 12102011USD797000
50 Applicant
Characteristics
53 /04XXXXXX
 Claims from intermediaries
OUR banks are absorbed by the 56 Issuing Bank
issuing bank 57 Beneficiary’s
Bank
59 Beneficiary
70 Payment Details
71 OUR
72

Example:

Applicant Issuing Deutsche Bank Beneficiary’s Beneficiary

Bank Bank

MT103 MT103
OUR

$1000 $1000 $1000 $1000

$10 $10
44
 Price Options

SHA

Deduct from Proceeds (DFP)= Bene deduct

 It starts with the codes SHA
 Base Price, Price by Levels, Price by % rebates
 Available for commercial or treasury payments (MT103 & MT202)

$50
Applicant Issuer DB Benef. Bank Beneficiary
MT103 MT103
$1000 $970 $1000 $950

$30

45
 What do I need to send an International Transfer?

• To have an account in the Financial System

• Your Financial Institution has to offered the wiring service
• You will find the option within your Banks electronic platform.
• Otherwise, there is still the option in certain Banks to do it manually:

46
What do I need to send an International Transfer?

How do I get
this
information?

Ask the beneficiary!!!!!!!! 47

What do I need to receive an International Transfer?

• To have an account in the Financial System

• Provide the person sending the wire with:
• Your Bank’s SWIFT Code
• Your Banks full name and location
• Your Account Number
• Your full name, address and Phone number

THAT’s it.

48
 International Transfers
Send (OUTGOING)
Receive (INCOMING)

49
 Payment in Advance – NOT A MEAN OF PAYMENT!!!!!!!!
(done through International Transfers)

5. Merchandise &
Beneficiary documents
Applicant
(exporter) (Importer)

1. Payment Instructions
4. Credit Benef.

2. Debit Applicant’s
Account

Account
Correspondent Banks

Receiving Issuing
Bank 3. Payment Order Bank
Message (MT103) 50
 Open Account (through International Transfers)

1. Merchandise &
Beneficiary documents
Applicant
(exporter) (Importer)

2. Payment Instructions
5. Credit Benef.

3. Debit Applicant’s
Account

Account
Correspondent Banks

Receiving Issuing
Bank 4. Payment Order Bank
Message (MT103) 51
International Transfers

Cases….

52
 NOMBRE DE LA DEPENDENCIA O CARRERA
HASTA DOS LÍNEAS

ICC International Maritime Bureau (IMB)

INTERNATIONAL TRADE FINANCE I

Lecture 4. Introduction to Trade
2024-2
Oscar Melo Vega Ángeles
Antonio Esquivel Delfín
Let’s review the last class

2
Buying & Selling process

CONTRACT

BUYER GOODS SELLER

PAYMENT

Quantity Quality

Means of Payment ¿Different places? Terms of Payment

Time to deliver ¿Different languages? ¿Advances?

3
 Difficulty for X to verify
Fx regrettably will payment capacity of their
always benefit only 1 M must insist on a Pre
foreign buyers. Risk of non Inspection Certificate
of the parties. Easiest payment, late payment or
solution: set the Price fraud.
in your own currency.
If not possible due to Payment Term
the weakness of the Commercial Risks
Non Payment / + Marketing of
currency procure
protection with
Fraud Products
derivatives such as complicate the
forwards or Options. export context
due to additional
Greater Distances + investments as a
load changing hands
+ long storage = risk RISKS result of changes
in the market

Investment
of damage, lost or conditions (i.e.

Risk
robbery. X / M must unstable
IN
related risks

understand their
Transport

Exchange rate).
rights in respect to X / M would like
carriers and to impose the
insurances.

Misunderstanding
TRADE application of
their country
law. One way
can arise from Legal out: abide by the
international
transactions due to
political ICC clause for
solution of
the fact that parties
disputes – Int’l
come from different Unforeseen court of
cultures & express Circumstances arbitrage.
themselves with
differentiated A strike, natural catastrophe or a war can
vocabulary. hinder a delivery. Provisions Force Majeure. 4
 DEEPENING IN RISK TYPES
COUNTERPARTY RISK
Although there is sometimes a direct relationship between buyer and seller, cross‐border (i.e., international)
trade demands first‐hand information of the trade partner. Can be summarized as the possibility that the
counterparty is insolvent or defaulting for one or more of the following reasons:
• Does not pay for the goods or services received • Does not pay claims
• Wrongly enforces a guarantee • Arbitrarily suspends or revokes the order
• Does not withdraw goods even if the goods conform to the original demand
Bank can help its client trading with a foreign company with an assessment by providing a safer means of
payment, such as a documentary credit, a payment guarantee, or a promissory note endorsed by a leading
foreign bank. It could also offer credit insurance, if possible, or international factoring or leasing.
PRODUCTION RISK
Particularly relevant in the supplies of machinery and industrial plants. The preparation of the delivery lasts
for months and has the seller committed to significant investments that are not easily resalable to third
parties in case of order cancellation. In these trade agreements, the buyer usually requires the supplier to
communicate the date of shipment well in advance of the goods’ shipping date. Only in front of a receipt of
the information (typically by fax) will buyers open the letter of credit with their bank. This deal exposes the
manufacturer to the risk of a possible suspension/revocation of the order without sufficient guarantees.
GOODS RECEIVING RISK
Occurs in all transactions where against a shipment of goods or services, there is no guaranteed payment.
This is the case when the vendor’s domestic bank has taken neither the trade counterparty credit risk nor the
country/foreign bank risk. A bank can offset this type of risk from the buyer by offering a payment guarantee.
5
 DEEPENING IN RISK TYPES

TRANSPORTATION RISK
The way in which goods are shipped and delivered influences the selection of the most appropriate payment form. Tax
implications, insurance, and legal disputes must not be underestimated.
Banks can cover their clients’ risks suggesting the prescriptions provided by the International Commercial Terms, or
“Incoterms.” The rules have become the standard in international business rules setting. They help traders avoid costly
misunderstandings by clarifying the tasks, costs, and risks involved in the delivery of goods from sellers to buyers.
Incoterms are accepted by governments, legal authorities, and practitioners worldwide for the interpretation of most
commonly used terms in international trade.

GUARANTEE RISK
The exporter wants to hedge the risk of undue enforcement of sureties presented to participate in auctions or tenders,
get advances, or guarantee the performance of the contract. The bank can help by issuing a policy that directly covers
its credit exposure toward the exporter for which the guarantee was issued.

CONTRACT RISK
The sale to a counterparty residing or established in a different country from the trade counterparty’s presents the
problem of concluding a contract for international sale.
The bank can advise its client during the process of formalizing the relevant contractual terms, which are generally
those related to the entry into force of the contract, its duration, the applicable law, the jurisdiction/arbitration, the
early termination clauses, the terms of delivery of goods, and (especially) the payment terms.
6
 DEEPENING IN RISK TYPES

COUNTRY RISK
Country risk is a concrete event for an exporter when the authorities of a foreign country do not allow, for political or
practical impossibility, the performance of the obligations assumed by an entity that is subject to that local authority. The
failure to perform can be caused by economic and financial reasons as well as political and social ones. Country risk,
therefore, is represented by the presence of credit risk (resulting from default of the country) and/or transfer risk (as a result
of restrictive measures on the movement of funds imposed by local authorities).
Even though the commercial risk of the foreign borrower is fairly low, it must be considered increased to the level reached
by the country risk of its own country.

Within country risk can be distinguished the following:

• Sovereign risk occurs where the debtor or guarantor is the local government of a given country. Public risk is the risk
represented by the commission of a state property for which an explicit government guarantee is missing.
• Currency transfer risk includes those measures that prevent, irrespective of the willingness of the trading counterparty,
to transfer due payments or capital/income into convertible currency.
• Political risk includes the decisions and the laws of a country that for their nature inflict injury or damage to the foreign
investor or exporting firm (expropriation, nationalization, and confiscation). Including: internal social conflicts, civil
friction, and wars.
• Economic and financial risk includes factors such as the economic policy of the country, the balance of payments and
trade, inflation, foreign exchange reserves, external debt and its relations with the International Monetary Fund (IMF)
and the World Bank, trend of the gross domestic product (GDP), and the degree of openness of the domestic economy.
7
 DEEPENING IN RISK TYPES

https://datosmacro.expansion.com/ratings 8
 DEEPENING IN RISK TYPES

FINANCE RISK: FOREIGN EXCHANGE (FX) RISK

The typical activity that generates foreign exchange risk is making a purchase or sale in foreign currencies that are adjusted at a later time.
The uncertainty related to fluctuations of the exchange rate causes uncertainty regarding the final amount that will actually be
paid/received.
The management of foreign exchange risk passes through the use of financial products that allow the company to transfer the risk to a third
party―typically a financial services provider (e.g., a bank) that has the characterisIcs and skills to manage it. The instruments are divided
into products that can completely eliminate the risk (e.g., contracts) or limit the risk to acceptable levels (e.g., foreign exchange options).
FINANCE RISK: INTEREST RISK
For transactions with short‐term (i.e., 12‐month) payment terms, which comprise the majority of those in trade finance, this form of risk
rarely constitutes a concern.
DIGITAL RISK:
Cumbersome, labour‐intensive, expensive. These are just a few of the
epithets levelled at paper trade documents in the push to modernise
centuries‐old trade finance practices. While the focus has been on
adopting digital methods, what attention has been paid to the
potential side effects of doing away with paper?
A fully‐fledged digital trade environment is likely still many years away,
because beyond bills of lading, letters of credit and invoices, many
documents and processes– particularly those mandated by customs
authorities – are only in the foothills of digitisation

9
 Main Contracts in Trade

SELLING BUYING
PURCHASE/SALE
INTERNATIONAL CONTRACT
1. QUOTATION /PROFORMA

2. PURCHASE ORDER
3.ACEPTANCE = P/O or Signature

INTERNACIONAL TRANSPORT
TRANSPORT INSURANCE
CONTRACT CONTRACT

OTHER CONTRACTS
(CUSTOMS BROKER, BANK,
ETC.)

10
International Purchase & Sale Agreement

Vienna Convention Chapters

1 Goods Description

2 Delivery Terms

Payment Term &

3
Conditions

Place of application of
4
laws and jurisprudence

11
International Purchase & Sale Agreement

• Becomes important in International Negotiations in 1980 due to the

Vienna Convention
• Subscribed by Peru in 1999 and active January 01st, 2000.
• Objective:
•Establish common principles
•For the exchange of goods
•Between individuals / companies
•In different countries.

• Contracts can be:

•Informal: verbal agreement or simple exchange of documents
(Common Practice)
•Formal: written & complete contracts (advisable).

• Informality means risks: possibility to carry trouble.

• There are important clauses that should not be levied, i.e. applicable
Law and Jurisdiction.
12
If formal, what are the Standard Clauses?

 Preamble  Default, Termination and

 Parties Expiration
 Definitions  Assignment of rights
 Offer and acceptance  Opt out Options
 Obligations  Intellectual Property Rights
 Conditions  Confidentiality and Non-
 Indemnification & Exoneration compete
 Environmental responsibilities  Penalties and Liquidated
 Required forms & Documents Damages
 Security  Delay, non-waiver clause
 Delivery  Notice Clause
 Insurance, Risk of Loss  Publicity clause
 Price and Payment terms  Language clause
 Expedite Bonus & Late Fees  Merger and "Four Corner"
 Price and Currency indexes Clauses
 Force Majeure and hardship  Choice of law and Venue
clause
13
If Informal, what should be considered?

 Exporter Info (Name, address, Phone, Fax, etc.)

 Importer Info (Name, address, Phone, Fax, etc.)
 Contact details (Name & position)
 Reference: Proforma / quote Nbr., Quote date
 Merchandise Description (de way it should go on the Invoice)
 Unit: units, kg, lt, Lbs, etc.
 Quantity - Currency – Unit Price – Total Price
 INCOTERM: FOB, CIF, DAP, CFR, FAS or any other (incl. city, port,
airport or delivery place).
 Payment conditions: Terms, Mean of Payment
 Delivery term / manufacturing term
 Quotation validity
 Wrapping & Packaging
 Signature (s)
 Others to be considered: generally, at client's request:
 Harmonized Tariff Code, Net / Gross weight or volume
 Origin declaration and / or Value Declaration
14
A-7 PAYMENT CONDITIONS (Art. 5) Means of Payment
 Payment on Open Account (art. 5.1)
Time for payments (if different from art. 5.1 _____ days from data of invoice. Other _____ 1)
 Open Account backed by Demand Guarantee or Standby Letter of Credit (art. 5.6)
 Payment in advance (art. 5.2) Moment to pay
Date (if different from art. 5.2): ______ 6)
 Total price
 _____ % of the price, remaining amount ______ % to be paid at ________
 Payment in advance backed by Advance Payment Bond
 Documentary Collection (art. 5.4)
 D/P Document against Payment 2)
 D/A Document against Acceptance
 Irrevocable Documentary Credit (art. 5.3)
 Confirmed 3)
 Unconfirmed
Place of Issue (if applicable) ______ Place of Confirmation (if applicable) ______
Credit available: Partial Shipments: Transhipment:
 At sight __ Allowed __ Allowed
 By deferred payment at ___ days __ Not Allowed __ Not Allowed
 By acceptance of drafts at ___ days
 By negotiation
Date on which the documentary credit must be notified to seller (if different from art. 5.3
______ days before date of shipment __ other: _________
 Irrevocable Bank Payment Obligation (art 5.5)
 Settlement by Payment 4)
 Settlement by Deferred Payment Undertaking and payment at maturity. Deferred payment term
______ days after sight or after date of ______
Date on which the Bank Payment Obligation must be notified to seller (if different from art. 5.3)
______ days before date of shipment __ other: __________
 Other: ________
(e.g. cheque, bank draft, electronic funds transfer to designated bank account of seller)
5)
Seller’s Bank Details IBAN / bank account number ______ BIC/Swift code 15
 International logistics & Supply Chain

Many people and functions play a

role in the international supply chain.
The graphic shown summarises the
key s takeholders and their role in
the international trade transaction.

International logistics is one element of a

supply chain. To better understand logistics
and where it fits in, it is also important to
understand the other flows and activities that
are involved in an international supply chain.

16
Delivery Terms

Transportation Methods

• MARITIME:
• Cheaper, Bigger capacity, Less frequent
• Document: B/L
• AIR:
• More expensive, Less Capacity, More frequent
• Document: AWB – Airway Bill
• TERRESTRIAL:
• Ideal for door to door, Medium Capacity
• Document: Transport Bill – CMR (CONVENTION RELATIVE AU
CONTRAT DE TRANSPORT INTERNATIONAL DE MARCHADISES
PAR ROUTE) (also Roadway Bill)
• RAIL:
• Big volumes, low costs
• Document: Railroad Bill – COTIF (CONTRAT DE TRANSPORT
INTERNATIONAL FERROVIAIRE) (also Railway Bill) 17
Delivery Terms
Accidents? Do they occur?

Ship with 600 containers sank in

the port of Kaohsiung in Taiwan

18
 Delivery Terms
Accidents? Do they occur?
Baltimore Key Bridge Tragedy

Yang Ming container ship explosion at Ningbo‐Zhoushan

port (one of China's largest logistics hubs)

https://www.youtube.com/watch?v=WR5szXR2IKU

19
 Pirates in the 21st Century? Captain Philips?

Yes, piracy is still a problem in the 21st century, particularly in certain regions of the
world. According to the International Maritime Bureau's (IMB) Piracy Reporting
Centre, there were 120 incidents of piracy and armed robbery against ships in
2023, with the majority of incidents occurring in the Gulf of Guinea off the coast of
West Africa. This represents an increase from the 115 incidents reported in 2022.
The IMB is a specialized division of the ICC that has been monitoring piracy and
armed robbery against ships since 1991. You can find more information on their
website at https://www.icc‐ccs.org/piracy‐reporting‐centre.
It's worth noting that not all incidents of piracy are reported, so the actual number of incidents may be higher than what is
reported to the IMB. Additionally, the definition of piracy can vary from country to country, so statistics on piracy may differ
depending on the source.
Reports highlights Southeast Asia as an area where pirate attacks keep increasing, with attacks particularly targeting small
tankers that are more difficult to trace on the black market.
Indonesia’s waters, particularly the area close to Singapore, are usually the most targeted. Similar attacks were on the rise
along the coast of Bangladesh and in Nigeria waters, too.
East Africa and around Somalia in particular are usually reported incidents.
The IMB emphasises the importance of incident reporting and knowledge sharing to monitor and tackle piracy.
Information sharing and co‐ordinated action between concerned coastal states is crucial in responding to this threat.

20
Pirates in the 21st Century? Captain Philips?

21
Pirates in the 21st Century?

22
Delivery Terms
Transport Insurance
 Branch of the Insurances that covers the risks of loss or damage to
the merchandise, but never loss or damage caused by delay or bad
habit, normally found in the insured merchandise.
 POLICY:
o Individual (specific shipment) or
o Global / Floating / Open: Hired for certain period & for all the
shipments in that period (each w/ Certificate of Insurance).
 It should determine covered risks as they are too diverse & complex.
 Guidance is given by the Institute of London Underwriters (Main
center for development of policies)
 The International Cargo Clauses (ICC):
o ICC (A): Maritime
o ICC (B): Maritime
o ICC (C): Maritime
o ICC (Air): by air
ICC = International Cargo Clauses 23
 Delivery Terms

The ICC - International Cargo Clauses

ICC “A”, “B” & “C” are current since 1982 when they substituted the old
“all risks”, “with average” and “free of particular average”.
The Policy:
 ICC (A) includes all risks except those that are specifically excluded.
 ICC (B) includes besides
 earthquake, washed by sea, wet, total loss during loading or unloading
...
 ICC (C) includes basic covers such as
 fire, sinking, General Average (avería gruesa) (load sacrifice),
unloading damages …

24
Delivery Terms
Transport Insurance
COBERTURAS DEL SEGURO MARITIMO BRITANICO
Claúsula Claúsula Claúsula
Tipo de siniestro A Claúsula B Claúsula C de Guerra de Huelga
1.- Incendio o Explosión
2.- Varadura, hundimiento, zozobra
3.- Vuelco, descarrilamiento de un vehículo
4.- Colisión de buque
5.- Descarga en un puerto de abrigo
6.- Sismo, erupción volcánica, rayo
7.- Sacrificio por avería gruesa
Siniestros

8.- Medidas protectoras

9.- a) Lanzamiento por la borda
b) Arrastre por las olas
10.- Entrada de agua de mar, de lago o de río
11.- Pérdida total del embalaje durante la manipulación
12.- Robo, saqueo, falta de entrega
13.- Daños debidos a la condensación o al calor
14.- Contaminación por otras mercancías
15.- Escapes
16.- Rotura y otras averías particulares
1.- Negligencia del asegurado
2.- Desgaste normal, envejecimiento
3.- Embalaje insuficiente o inadecuado
Exclusiones

4.- Indole o defectos intrínsecos de las mercancías

5.- Retrasos y demoras
6.- Insolvencia del armador
7.- Utilización de armas atómicas
8.- Actos Ilícitos
9.- Guerra
10.- Huelgas

25
Delivery Terms
Transport Insurance

26
Delivery Terms
Incoterms 2020

27
Incoterms 2020

https://youtu.be/7g7IC4IzjDM (6min)

https://youtu.be/bYnCQtgjY‐k (9min)

28
Delivery Terms
Incoterms 2020
• INternational COmmercial TERMS (Publication 723E)
• Rules for the interpretation of the more used commercial terms in international
trade:
• Applicable to diverse commercial practices
• Standardization of practices and terminology
• To avoid uncertainties in trade
• To diminish litigations
• Referred to merchandise Transport contracts
• Published by the ICC (Int’l Chamber of Commerce) in:
• 1936, 1953, 1967, 1976, 1980, 1990, 2000, 2010 and 2020
• Main characteristics:
• Optable--Identifiable--Equal--Flexible
• Aspects regulated (to sellers & buyers):
• Rights, Obligations and Responsibility in the process
• Documents and expenses.
• Risk Transfer, Moment and place for delivery.
29
Delivery Terms

Incoterms: ¿What are they for?

• Only for merchandise – not for services
• Mainly International Sales
• Rights & Obligations for the parties are in Purchase & Sale Agreement
• Not applicable to other contracts although they might influence them
• They clarify roles in regard to:
• Costs & Expenses Distribution
• Place for delivery
• Who is in charge of transport, Who is in charge of Insurance
• Who is responsible to carry Customs process
Incoterms: ¿What are not they for?
• Do not cover:
• Transmission of property rights over the merchandise
• Consequences for non-compliance of contract
• Exemptions in case of unexpected circumstances
• The above has to be solved by definitions within the contract or
applicable law

30
 Delivery Terms

INCOTERMS -Classificacions
Group Sea & Inland Waterway Transport

GROUP w/o Main F FAS Free Alongside Ship

Transport Payment FOB Free On Board

GROUP w/ Main CFR Coste and FReight

C
Transport Payment CIF Cost, Insurance and Freight
Group for Any Mode of Transport
Departure E EXW Ex Works

GROUP w/o Main F FCA Free Carrier

Transport Payment

GROUP w/ Main CPT Carriage Paid To…

C
Transport Payment CIP Carriage and Insurance Paid to…
DAP Delivered At Place
Arrival w/Main
D DPU Delivered At Place Unloaded
Transport Payment
DDP Delivered Duty Paid
31
Delivery Terms

Structure of the obligations

A - THE SELLER'S OBLIGATIONS B - THE BUYER'S OBLIGATIONS

A1 General Obligations of the seller B1 General Obligations of the buyer
A2 Licenses, authorizations, security B2 Licenses, authorizations, security
clearances and other formalities clearances and other formalities
A3 Contracts of carriage and B3 Contracts of carriage and
insurance insurance
A4 Delivery B4 Taking delivery
A5 Transfer of risks B5 Transfer of risks
A6 Allocation of costs B6 Allocation of costs
A7 Notices to the buyer B7 Notices to the seller
A8 Delivery document B8 Proof of delivery
A9 Checking - packaging - marking B9 Inspection of goods
A10 Assistance with Information and B10 Assistance with information and
related costs related costs

32
 INCOTERMS 2020
TYPES OF USED QUOTATIONS
(By Delivery Place)

EXW FCA FAS FOB DAP DDP

CPT
Un
Unloading,
Production + Export Load & stow
CIP Warehousing +
Documentation + Taxes & Stow Bank Expenses +
Packing + Taxes Customs DPU Import Taxes &
Docs.
Dock Customs Docs.,
Dock
Expenses, Customs Broker
* Warehousing CIF
Expenses,
Unload &
& Handling CFR Handling
Transport
Transport Cost Transport Docs. Cost & Load
+ Loading + Freight +Taxes
+Insurance
+(Insurance)

ONLY SEA ANY TIPE

EXPENSES AT ORIGIN TRANSP. TRANSP. EXPENSES AT DESTINATION
33
INCOTERMS 2020 www.incodocs.com

34
 Delivery Terms

Incoterms delivery at origin Incoterms delivery at destination

Seller has
Seller has Group F merchandise at Group D
Group E Grupo C
merchandise Freight Collect buyers Arrival
Depart. Freight Prepaid
at buyers disposal:
disposal: +
Insurance
in Seller’s
premises EXW

at agreed
on agreed DDP
FCA destination
transport CPT CIP

alongside on board
ship FAS DAP
the Vessel

on board
the Vessel FOB CFR CIF at Terminal DPU

export
import

35
Delivery Terms

Payment of the Freight

• Freight prepaid (CPT, CIP, CFR, CIF)

• freight paid
• freight prepaid
• freight collected

• Freight due (EXW, FCA, FAS, FOB)

• freight due
• freight to be paid
• freight collect
• freight payable at destination

36
Delivery Terms

Ocean Traffic in containers

with FCA, CPT, CIP

Group E: Buyer risk

Group F: Buyer risk
Group C: Buyer risk
Group D: Seller risk

Seller Buyer

37
Delivery Terms

Comparing FCA/CPT/CIP & FOB/CFR/CIF

Seller Carrier Buyer

Transfer point for risks/costs in

FCA FOB
CPT CFR
CIP CIF

S B

Group C Group F
Transport contract between Transport contract between
Seller & Carrier Buyer & Carrier

38
Delivery Terms
Traditional Ocean Traffic with FOB, CIF, CFR
Seller Buyer
Insurable interest Insurable interest

Seller risk Buyer risk

Seller Insurance Buyer Insurance

S B

Delivery to carrier

Seller Buyer
Insurable interest Insurable interest

Seller risk Buyer risk

no insurance Insurance warehouse to warehouse aditional

S B

FCL LCL
Delivery to carrier
39
Delivery Terms

Ocean Traffic in containers

with FCA, CPT, CIP
Buyer
Insurable interest

Buyer risk

Buyer insurance

S B

Delivery to carrier

40
Delivery Terms

The Golden Rules

• Always include de notation Incoterms 2020®
• Use the publication "Incoterms 2020® " from ICC
• Only use the 11 approved Incoterms 2020:
• CFR, no C&F o C+F o CAF
• For Containers and multimodal transportation:
• EXW, FCA, CIP, CPT, DAP, DPU, DDP
• For merchandise deliver alongside ship or on vessel:
• FAS, FOB, CFR, CIF, DAP, DPU
• In Group "C" as in group "F": delivery is in origin
• In group "D“: delivery is at destination

41
Case Study:

“El Limonero” ……….

42
 NOMBRE DE LA DEPENDENCIA O CARRERA
HASTA DOS LÍNEAS

INTERNATIONAL TRADE FINANCE I

Lecture 3. SWIFT and AML
2024-2
Oscar Melo Vega Ángeles
Antonio Esquivel Delfín
Let’s review the last class

2
Subjects for Discussion

¿Is there any sort of Banking

Superintendence to regulate
the Int’l Banking System?

¿What type of Banks do we

need to do Trade Finance
(and Investments abroad)?

¿How can a domestic bank

reach out the international
Banking System?

3
SWIFT : Society for Worldwide Interbank Financial
Telecommunication

SWIFT is a global, member-owned cooperative, and the world’s

leading provider of secure financial messaging services

200+ 11k+ 23
countries Institutions offices
4
SWIFT : Society for Worldwide Interbank Financial
Telecommunication
• Establishes:
– A common language for financial transactions
– A shared Data Process System
– A Worldwide Telecom Network

• Defines:
– Fundamental Operation Procedures
– Rules to define responsibilities
– Standardization

Bank A Bank B
SWIFT Network

5
SWIFT : Society for Worldwide Interbank Financial
Telecommunication

Industry standards for Trade Finance

Developed by international standardisation bodies

• Trade Finance instruments

(UCP600, URDG758, URC 522, URBPO, …)

• MT standards
(for L/Cs, Demand Guarantees, Collections)

• ISO 20022 standards

• ISO 9362 Business Identifier Code (BIC)
• ISO Country codes, Currency codes, …

Industry standards are industry-owned and technology-neutral.

They coherently address legal and operational aspects.

6
SWIFT : Society for Worldwide Interbank Financial
Telecommunication
Different
The Role of Standards Channels

+
Different formats:
Costing
Implementation

Costing
Maintenance

Costing
Misinterpretation

7
 SWIFT : Society for Worldwide Interbank Financial
Telecommunication
The structure of the SWIFT BIC code

The SWIFT BIC code is composed of exactly 8 or 11

alphanumeric characters structured as followed:

• For instance, the swift address from:

Banco Interamericano de Finanzas, Lima (BanBIF) BIFSPEPL

Banco Santander Perú, Lima BSAPPEPL
Banco de Crédito del Perú, Lima (BCP) BCPEPEPL
Banco Internacional Del Peru (INTERBANK) BINPPEPL
Standard Chartered Bank, New York SCBLUS33
Mega International Comm Bank, Osaka ICBCJPJTOSA
Banco Bilbao Vizcaya, Madrid BBVAESMM
Banco Bradesco, Sao Paulo BBDEBRSP
BIC Directory: www.swift.com 8
SWIFT’s Community

IMI=Internal Market Information System 9

SWIFT messages we will cover in the course

CATEGORY 1 – CUSTOMER PAYMENTS & CHEQUES

CATEGORY 2 – FINANCIAL INSTITUTION TRANSFERS
CATEGORY 3 – TREASURY MARKETS – FOREIGN
EXCHANGE, MONEY MARKETS &
DERIVATIVES
CATEGORY 4 – COLLECTIONS & CASH LETTERS
CATEGORY 5 – SECURITIES MARKETS
CATEGORY 6 – TREASURY MARKETS – PRECIOUS
METALS & SYNDICATIONS
CATEGORY 7 – DOCUMENTARY CREDITS & GUARANTEES
CATEGORY 8 – TRAVELLERS CHEQUES
CATEGORY 9 – CASH MANAGEMENT & CUSTOMER STATUS
10
What is Money Laundering?
Legitimization (laundering / washing) of illegally obtained money to hide its
true nature or source (typically drug trade or terrorist activities but also
kidnapping, piracy, smuggling, financing of terrorism, illicit arm sales,
extortion, corruption, bribery, tax evasion and more…).
Money laundering is achieved, by passing it surreptitiously, through legitimate
business channels: by means of bank deposits, investments, or transfers from
one place (or person) to another.
Often linked in legislation and regulation…..

Money Terrorist
Laundering Financing

Source vs. Use

…..but are different concepts 11

 Definition

Money laundering is an illegal way to “clean” dirty money that was acquired from criminal activity such as
drug-related crimes, embezzlement and terrorist funding, by running it through legitimate businesses. In that
way, financial criminals try to avoid detection by disguising their dirty money as legal profit.

By estimates of the UNODC money laundering amounts to:

EUR 715,000’.000.000 to 1,870”000,000’000.000 per year

3% to 5% World GDP per year

(around 6% of Latam GDP)

IMF and World Bank estimate that Money Laundering

could be the World's Third- Largest Business - with 3-5%
of total GDP which accounts up to 4 trillion USD annually

Source: US Dept of State

May 2024 12
 How is it done?

• Money laundering is a huge issue.

• The most common businesses involved in money laundering include those that handle large amounts of
cash, such as restaurants, nightclubs, charity trusts and casinos. Others deal with inventory that is difficult
to value, like art or jewelry.
• Creating a shell company, one that has no real business purpose, is another way to make cash look as if it
came from a legitimate source when it really comes from financial crime. In reality, though, almost any
type of business can be used in the money laundering process.

The 7 most common money laundering activities include the

following:
•Real-Estate Laundering
•Casino Laundering
•Bank Laundering
•Trade-Based Laundering
•Layering
•Laundering Money Through Cash Businesses
•Structuring

Source: United Nations Office on Drugs and Crime – UNODC

13
Anti-Money Laundering has Global Regulatory Attention

United States European Union

Department of the Treasury
 European Commission
 Office of the Comptroller of the Currency  Bank for International Settlements
 Financial Crimes Enforcement Network
 Office of Foreign Asset Control

United Nations Country Specific Examples

 Security Council Sanctions Committees  Monetary Authority of Singapore
 The People’s Bank of China
http://financialregulatorsgateway.com/  Attorney’s General Department (Australia)
 Council of Financial Activities Control (Brazil)
 Financial Monitoring Committee (Russia)
 Financial Intelligence Centre (S. Africa)
 Hong Kong Monetary Authority
14
Sanctions Risk | AML Program – Overview

Money Laundering Sanctions

A measure to exert pressure

Moving illegally gained money to change activity that is
through the financial system in unacceptable to the
order to make it look legitimate international community

Money deposited and Can be violated with a single

subsequently moved through a transaction or customer
number of different stages - interaction
seldom one single trxn

Unusual or suspicious activity Prohibited activity must be

is identified and reported after identified and prevented
it occurs or it is attempted

15
Sanctions Framework | Types of Sanctions

Targeted (List Based)

o Targeted prohibitions in dealings with persons and entities listed
under the Regulations (“Designated or Listed Persons”)

Sectoral (List Based)

o Targeted prohibitions in dealings in new debt or new
equity with targeted entities from specific sectors

Trade Based
o Restricted or prohibited trade with a country

Comprehensive
o Broad restrictions prohibiting the provision of financial services
and/ or investments with or benefiting specific countries

16
History Cost of Non-Compliance

17
17
Sanctions screening over SWIFT

18
 Public Sanctions Lists available
AU - Australia Department of Foreign
Affairs and Trade SG - Singapore MAS - Investor Alert
AU - DFAT Countries Embargoes List
AU - DFAT Iran Specified Entities List CH - Switzerland Secretariat d'Etat a
CA- Canada Foreign Affairs and I'Economie
International Trade CH - SECO Countries Embargoes
CA - FAIT Countries Embargoes UK - Her Majesty's Treasury

35 CA - Office of the Superintendent of UK - HMT Countries Embargoes

Financial Institutions UK - HMT Ukraine Restrictive
CA - OSFI - United Nations Act Measures
Sanctions UN - United Nations
CN - People's Republic of China - UN - UN Countries Embargoes https://sanctionssea
Public Ministry of Public Security US - Office of Foreign Assets Control
EU - EUROPE Countries Embargoes SDN list rch.ofac.treas.gov/
Sanctions EU - European Official Journal US - OFAC Palestinian Legislative
Council
Lists supported EU - Ukraine Restrictive Measures
FR - Journal Officiel frangais US - OFAC Part 561 list
(through SWIFT) HK - Hong Kong Monetary Authority US - OFAC Foreign Sanctions Evaders
US - OFAC Sectoral Sanctions
HK - HKMA Countries Embargoes
JP - Ministry of Finance Identifications
NL - Frozen Assets List - Dutch US - Financial Crimes Enforcement
Government Network
NZ - New Zealand Police US - OFAC Countries Embargoes

Organization Website
Global Affairs Canada(GAC) www.international.gc.ca/sanctions
Office of the Superintendent of Financial www.osfi-bsif.gc.ca/Eng/fi-if/amlc-
Institutions(OSFI) clrpc/snc/ https://ofac.treasury.gov/sanctions
Office of Foreign Assets Control(OFAC) www.treasury.gov/resource- -programs-and-country-
center/sanctions information
United Nations Security Counsel www.un.org/sc/suborg 19
U.S. Department of the Treasury
Office of Foreign Asset Control - OFAC

OFAC Country Iran

Sanctions Iraq
Programs Ivory Coast
Afghanistan Korea del Norte
Balkans(Ex Lebanon
Yugoslavia: Serbia, Liberia
Croatia, Bosnia, Libya
Macedonia, Mali
Montenegro, Nicaragua
Slovenia) Rusia
Belarus Somalia
Burma (Myanmar) Sudan
Congo Syria
Cuba Venezuela
Ethiopia Yemen
Zimbabwe

20
The KYC Registry

KYC Registry is a centralized repository of KYC records

21
 Banks – Knowing your customer

KYC
Know Your …an ongoing process throughout the client relationship
Customer

Client Internal Risk

Periodic On-boarding Periodic Review
Assessments
Review & Risk
Assessment  Customer Identification  Does the customer  Does the client conduct
Program: operate in high-risk business as expected?
Transaction Sanctions  Is this a legitimate
Screening geographies?  Have the senior officers
Monitoring customer?
or beneficial owners
 What business are they in?  Is the customer’s industry changed?
 Who are the senior considered high risk?
officers  Do they operate in new
 Enhanced Due Diligence and/or high-risk
 Were proper corporate
 Risk Rating Methodology countries?
documents provided?
 What is the controlling  Was an AML Call Report  Have they expanded into
ownership structure? prepared? new business lines?
 Are any officers Politically
 Is the AML Call Report
Exposed Persons (PEP)
current?
or have OFAC sanctions?
 Negative News Search
22
Know Your Customer
As a general rule, banks must ensure that clients (individuals, Companies,
Institutions or Banks) utilizing their trade products and services have met the
applicable customer identification program and KYC requirements

Who the client is will vary by transaction type:

Trade Product Client
Export L/C Issuing Bank or Exporter
Import L/C Importer/Applicant
Standby L/Cs & Guarantees Issued Applicant
Export Documentary Collection Exporter
Import Documentary Collection Importer
• This can be further complicated by co-applicants and other named parties
• Is each co-applicant obligated to reimburse for drawings under the L/C?
• Is the other named party affiliated or unaffiliated?

23
Banks – Know your customer
Which of the following customers would be classified as a Normal Risk Customer
and which one as a High Risk Customer (if any)?
CASE 1
Leticia Jimenez has been a customer of Bank A for 10 years. She uses
her Small Company account to make business deposits for the sale of
cosmetics. As average, Leticia deposits from $1,000 to $1,500 per
month. She also works from her house as a secretary, 3 times a week
for a well-known private company. She also has a personal account
where her payroll is deposited. Her accounts have accumulated a high
amount of money that will help her when she decides to retire.
NORMAL RISK HIGH RISK

CASE 2
Jose Garcia lives in the Caribbean and operates a family-owned
supermarket that sells home products and dry food. He also owns a
Cafeteria within the supermarket where he sells daily prepared food.
As average, the supermarket generates monthly cash deposits
between $50,000 to $60,000 and the coffee shop between $10,000 to
$20,000 cash deposits.
25 NORMAL RISK HIGH RISK

24
Banks – Knowing your customer
Which of the following customers would be classified as a Normal Risk Customer
and which one as a High Risk Customer (if any)?
CASE 3
Julio Delgado owns a Retail Company that sells construction supplies.
Mr. Delgado often deposits between $10,000 to $15,000 and most of
his deposits are with Checks. He has a very profitable operation, and
the construction supply company is one of the most important in the
country.
NORMAL RISK HIGH RISK

CASE 4
Tina Rodriguez and Maria Alvarado operate a retailer and wholesaler
company for the sale of jewels and precious metals. They own 4
stores situated in high traffic areas of the city. They wish to open an
account with Bank A with the purpose to receive payments for their
sales (Domestic and International). Their sales have been growing due
to a high demand of these products and they project that their
deposits will be around $50,000 per month.
25

NORMAL RISK HIGH RISK

25
 High Risk Businesses - Examples.
• These are businesses likely to use trade services/finance products, perhaps for illicit purposes
• They may, of course, be involved in legitimate trade transactions
o But a combination of red flags - from the earlier lists plus the type of business - may be sufficient
to raise suspicion and warrant additional investigation and/or reporting
• Such a listing needs to be developed and implemented by each bank on its own

• Here are some examples used by Citibank's procedures:

o Commodities middlemen
o Import/export and trading companies
o Gem/jewel/precious metal dealers
o Scrap metal dealers
o Wholesalers, distributors, and retailers of consumer electronics
o Real estate brokers/agents
o Car/boat/plane dealers brokers
o Leather goods stores
o Travel agencies
o Telemarketers
o Textile businesses
o Hedge funds
o Art and antique dealers
o Military/defense contractors

• Related to the above, banks should further ascertain that the parties to a trade transaction - both
importer and exporter - deal in the type of goods as mentioned in the L/C or collection
26
 ICC & Wolfsberg Trade Finance Principles
1. Trade Finance can be described as the provision of finance and services by FIs for the movement of goods
and services between two points, either within a country or cross border. Both FIs and Trade Bodies (such
as the ICC & BAFT), as well as Governments are critical in promoting international commerce and free
trade. ICC = International
Chamber of
2. There is a perception that Trade Finance is a “higher risk” area of business from a financial crime Commerce
perspective, therefore, all FIs involved in Trade Finance should have risk policies and controls which are
appropriate for their business.

3. Trade Based Money Laundering (“TBML”) covers Trade Finance, but also transactional activities across
current and deposit accounts and payments for example, which are not in the purview of Trade Finance BAFT = Bankers
operations of FIs. The detection of unusual and potentially suspicious activities across transactional Association for
activities, should take place via whatever transaction monitoring systems and processes an FI has in Finance and
place, be it manual or automated. Trade
4. The majority of world trade is carried out under “Open Account” terms, whereby the buyer and seller
agree to the terms of the contract and goods are delivered to the buyer followed by a clean or netting
payment through the banking system. Under such Open Account terms, unless the FI is providing credit
facilities, the FI’s involvement will be limited to the clean payment and it will not generally be aware of FI’s = Financial
the underlying reason for the payment. As the FI has no visibility of the transaction, it is not able to carry Institutions
out anything other than the standard anti-money laundering (AML) and sanctions screening on the
clean or netting payment. If the FI is providing credit facilities in relation to the trade transaction there
may be more opportunity to understand the underlying trade process and financial movements.
27
 Monitoring Trade Transactions
Red flags
Banks must also perform a review of all trade transactions
to determine if there are any risk indicators ("red flags")
present that are typically associated with money
laundering, terrorist financing, economic sanctions,
Screening
bribery, or other illicit activity
A bank's trade operations must screen its
transactions against the applicable SDN and
This may involve manually comparing each item to:
sanctions lists (SDN = "Specially Designated
• AML Examination Manual Trade Finance
Nationals“).
• Red Flags List
• Financial Action Task Force
This includes not just the content of SWIFT
• Trade-Based Money Laundering Typologies
messages received, but all the related
• Wolfsberg Trade Finance Principles
documents, too—the individuals, entities,
• Proprietary red flag listings
goods, vessels, etc. Listed therein
o High risk businesses
o High risk products
o High risk countries
A red flag analysis is the minimum amount of due diligence required before a transaction may be
executed; trade personnel should always be encouraged to use their expertise and experience to
evaluate each transaction on its merits and to escalate any potential concerns
28
 Examples of Trade Red Flags - General categories.
Wolfsberg - Trade Finance
• Over invoicing - where the invoice
misrepresents the value of the goods to a
higher value and the seller gains excess value as
TBML - Trade-based Money Laundering a result of the payment
TBML is a complex form of money • Under invoicing - where the opposite occurs
laundering that exploits the international and the buyer gains excess value through the
trade system. It involves the manipulation payment
of trade transactions to disguise the illicit • Multiple invoicing - where more than one
invoice is issued for the same goods and the
origins of funds.
seller can justify the receipt of multiple
payments
• Short shipping - where the seller ships less than
Typologies the invoiced quantity or quality of goods,
• Over and under invoicing of goods and misrepresenting the true value of goods in
services those documents
• Multiple invoicing of goods and services • Over shipping - where the seller ships more
• Over and under shipments than the invoiced quantity or quality of goods,
misrepresenting the true value of the goods in
• Falsely described goods and services
the documents
• Phantom shipping - where no goods are
shipped at all and the documentation is
completely falsified
29
Examples of Trade Red Flags

30
 Trade-Based Money Laundering (TBML)
Among Biggest Banking Risks
• There are several TBML schemes, but most use a variation of falsified shipping documents and invoices.
• For example, consider a fictional case of money generated through piracy and kidnapping:
o A Somali pirate, who is also a businessman, receives $50,000 in cash from a kidnapping ransom.
o He cannot put the money into his local bank, because he knows it will question the deposit.
o Instead, he uses the cash to purchase 50 luxury watches worth $1,000 each.
o Now, with a simple transaction, he can ship the goods to a buyer in the United States and ask for a wire deposit
into a U.S. bank, which can either be wired back to Somalia linked to a legitimate transaction, or it can wait in
the United States for another trading purchase.

• Additional complications in trading arrangements exist because there are often multiple criminal
transactions occurring on both sides of the buyer-seller relationship.
• For example, consider a Somali national living in the UK who wants to finance a piracy operation by
sending £10,000 to his brother, who will pay bandits to hijack ships.
o His brother is also a trader, so they arrange for a shipment of goods valued at £10,000 to be made from Africa
to the UK.
o The invoice, however, falsely reports that the shipment is worth £20,000.
o The UK based partner then uses a British bank to wire £20,000 (£10,000 for the goods and £10,000 for the
piracy venture) to a Somali bank account.
• Another variation on this theme is the use of "ghost shipments," where proper-
looking paper-work documents financial transfers for trades that never actually occur.
In short, the buyer and seller collude to fraudulently use the financial system
31 to
facilitate criminal activity. 31
Examples of Trade Red Flags
Even when multiple red flags are present, a qualitative review of a transaction may
allow it to proceed.

• A jeweler (high risk business) located in Kuwait (high risk country) buys diamonds
(high risk goods) from a diamond district jeweler (high risk industry) in New York
City
• An initial review of this trade transaction yields at least four red flags, as noted
above
• However, upon further review, it is determined through publicly available
information that the Kuwaiti jeweler is a well known and reputable retailer who is
legitimately purchasing diamonds for wealthy clients, in reasonable amounts, from a
licensed wholesale jeweler in the US who banks with [Citi/B of A/JPM]
• This further due diligence sufficiently mitigates the red flags, with the residual risk
considered low enough to process the transaction

General guideline: Do not escalate for a single red flag (e.g., country, product,
value) unless the transaction is obviously suspicious. If several or more red flags
are present, without mitigating qualitative factors, then escalate

If several red flags are present, without mitigating qualitative factors, then escalate

32
 And, in Peru, what is going on…….?
LEGAL FRAME

https://www.sbs.gob.pe/prevenc
ion-de-lavado-activos/normas-
de-aplicacion-general-en-
materia-de-laft

Decreto Legislativo 1106-2012

Se tipifica al delito de lavado de activos como un delito autónomo. Hoy NO
se requiere probar el delito precedente al lavado de activos como son:
18/04/2012
minería ilegal, el tráfico ilícito de drogas, el terrorismo, los delitos contra la
administración pública, el secuestro, el proxenetismo, etc.
33
 And, in Peru, what is going on…….?
RESOLUCION SBS Nº 496-.2008 de fecha 5 marzo 2008 RESOLUCION SBS Nº 02351-2023
Entities Obliged to Supervision by the Financial Inteligence Modif. Norma Prevención Lavado Activos
Unit - LEY Nº 29038 Entities Obliged to Supervision by the Financial Inteligence
Unit - LEY Nº 29038
1. Beneficiario Final: Redefine persona natural / personas jurídicas /
Foreign Currency Brokers entes jurídicos“

Gambling Places & Casinos 2. Oficial de Cumplimiento (#OC): Precisan requisitos y reglas de
designación, remoción y vacancia.
Antiquities Brokers
3. Conocimiento de #Clientes (#KYC): Si el Sujeto Obligado no tiene
capacidad de cumplir medidas de debida diligencia con un cliente,
Lending Institutions & Pawn Shops debe
(i) no iniciar relaciones, ni efectuar la operación y/o terminar
Showbusiness Companies relación
(ii) enviar un reporte de operaciones sospechosas (ROS).
Real Estate Companies
4. Conocimiento de Trabajadores.
Companies that trade in jewels, metals & Precious
Stones, coins, Art 5. Préstamo / empeño y compraventa de divisas: Elimina exigencia
de autorización municipal. Precisa divisas como monedas de
Car, Truck, Ships & Planes dealers curso legal, por lo que exceptúa #criptoactivos y #criptomonedas.

6. Estudios legales y contables: Incluidos en alcances de la Norma.

34
Definición

35
35
Some videos…….

Money Laundering a Hypothetical Guide Part 1: The Basics (2min)

https://www.youtube.com/watch?v=1ObJPaSZxCs

Money Laundering... What you need to know (5min)

https://www.youtube.com/watch?v=KIRrld4TGZ0&ebc=ANyPxKqgmlOc3q-
L_oeTeORfKz4xSBdXJUUEcFqsjnQV6pEfPbxsqWnUkkg4PtKigo_5ZixrxB0eyy7eOaYjAQ
fJGozlJglnEA

The Two Most Common Ways Criminals Launder Money (2min)

https://www.youtube.com/watch?v=XOJKiOw8Xqo

36
https://group.atradius.com/publications/trading-briefs/risk-map.html

37
 NOMBRE DE LA DEPENDENCIA O CARRERA
HASTA DOS LÍNEAS

INTERNATIONAL TRADE FINANCE I

Lecture 2. International Banking System
2024-2
Oscar Melo Vega Ángeles
Antonio Esquivel Delfín
Let’s review the last class

2
Subjects for Discussion

¿What role do banks have in

the economy?

¿Is it possible to have

development in a country
without banks?

¿What is the relation

between Financial
institutions and Foreign
Trade?
3
Banks and Banking – Short History

https://www.youtube.com/watch?v=fTTGALaRZoc

4
 International Financial System
Organismos Mundiales Asociaciones Internacionales Otras Organizaciones
Corporación Financiera Internacional (IFC) Federación Internacional de las Bolsas de Valores Asian Development Bank
Agencia de Garantías de Inversiones Multilaterales (MIGA)
Directorio de los Bancos Centrales Asia-Pacific Economic Cooperation (APEC)
Asociación de Naciones del Sudeste Asiático (ASEAN)
Banco de Pagos Internacionales (BIS)
Organismos de Estados Unidos Banco de Desarrollo de América del Norte (BDAN)
Sudamérica Consejo de la Reserva Federal Banco de Desarrollo del Caribe (BDC)
Bolsa de Comercio de Buenos Aires Bolsa de Valores de Nueva York Banco Interamericano de Desarrollo (BID)
Bolsa de Valores de Lima Nasdaq Comunidad Andina de Naciones (CAN)
Bolsa de Valores de Río de Janeiro Comunidad del Caribe (CARICOM)
Bolsa de Comercio de Santiago Federación Int'l de Bolsas de Valores Norteamérica Conferencia de las NNUU sobre Comercio y Desarrollo
(UNCTAD)
American Stock Exchange Corporación Financiera Internacional (CFI)
Europa Bolsa Mexicana de Valores European Bank for Reconstruction and Development
Amsterdam Exchanges N.V Chicago Board Options Exchange, Inc European Investment Bank
Barcelona Stock Exchange National Association of Securities Dealers, Inc Grupo de los Siete
Bolsa de Madrid New York Stock Exchange G-20 Group of Twenty
Deutsche Börse Ag Stock Exchanges Bourse de Montreal G-24 Intergovernmental Group of Twenty-Four on
International
Helsinki Exchanges Vancouver Stock Exchange Instituto de Relaciones EuropeoLatinoamericanas
Italian Stock Exchange The Toronto Stock Exchange Monetary Affairs
London Stock Exchange G-30 Group of Thirty
Oslo Bors Otras Organizaciones Latinas G-77 Group of 77
Sbf-París Bourse Area de Libre Comercio de las Américas North American Development Bank (NADBANK)
Swiss Exchange Asociación Latinoamericana de Integración Organización de Estados Americanos (OEA)
The Stock Excahnge of Hong Kong Ltd. Centro de Información para la Integración Regional Organización de las Naciones Unidas (ONU)
Comisión Económica para América Latina y el Caribe (CEPAL) Org. de las NNUU para la Agricultura y la Alimentación
(FAO)
Organismos de Europa y Asia Instituto para la Integración de América Latina y el Caribe Organización Internacional del Trabajo (OIT)
Banco Europeo de Inversiones Mercado Común del Sur Organización Mundial de Comercio (OMC)
Easdaq Red de Estudios de la Economía Mundial Org. para la Cooperación y el Desarrollo Económico
(OCDE)
Asia-Pacific Economic Cooperation (APEC) Sistema Económico Latinoamericano Unión Europea
World Economic Forum
Asia Otras Instituciones Financieras World Trade Organization
Jakarta Stock Exchange, Inc. ABN Amro
Korea Stock Exchange BNP Pacífico
Tokyo Stock Exchange Bank of America Australian Stock Exchange Ltd.
Stock Exchange of Singapore Ltd. Bank of Nova Scotia New Zealand Stock Exchange
Taiwan Stock Exchange Corporation Bilbao Vizcaya
The Tel-Aviv Stock Exchange Ltd. Citibank
The Stock Exchange of Thailand JP Morgan 5
Tokyo-Mitsubichi A sample of thousands of Institutions…
The Global Financial System

GOVERNMENT SUPERVISORY
TREASURIES AUTHORITIES

ACCOUNTING
CENTRAL
STANDARD
BANKS
CURRENCIES BODIES

INTERNATIONAL EXCHANGE COMMERCIAL MULTINATIONAL

COMMERCIAL BKs & RATES BANKING ENTERPRICES
INSTITUTIONS (MNE)

FINANCIAL
INVESTMENT MARKETS INSTITUTIONAL
BANKS INVESTORS

SOVEREIGN RATING
FUNDS AGENCIES

6
 The Global Financial System – Main Participants
• Commercial banks are at the centre of global financial • Investment banks are in the business of raising
system since any financial transaction involves them. capital for companies. They sell securities to
• Systemick risk is intrinsic and that is why it is the most public investors to raise cash & the securities can
regulated sector! come as stocks or bonds.
• Institutional Investors refer to a variety of entities that • Full-service investment banks usually provide
intermediate savings: insurance companies, pension both advisory and financing banking services,
funds, mutual funds, hedge and speculative funds, etc. sales, market making, & research on an array of
They manage huge pools of money and have no less financial products as equities, credit, rates,
influence than banks. currency, commodities, and their derivatives.
• They invest in all kinds of assets, from real estate to the • The biggest full service investment banks include
most complex financial instruments. Bank of America, Barclays Capital, Citigroup,
• They play a vital role in capital markets as they diversify Credit Suisse, Deutsche Bank, Goldman Sachs,
portfolios across asset classes, economic sectors, JPMorgan Chase, Lazard, Morgan Stanley,
countries, and regions. Nomura Securities, UBS, Wells Fargo Securities.
• Central banks are major actors in financial markets as • Sovereign Wealth Funds are special state-owned
they create money & regulate the amount of liquidity in investment funds.
the system and in systemic crisis they can help avoid a • They hold and manage the wealth accumulated by a
liquidity crunch by providing cheap money to banks. country through its central banks’ activity, balance
• Approaches differ from central bank to central bank. i.e. of payments or state-owned entreprises.
there is a major difference between the FED, whose
mandate includes the objective of supporting economic
growth, and the ECB, that targets inflation (less than 2%)
7
and also charged with banking supervision (e.g. in UK).
International Financial Organizations
• International financial organizations, like the World
Bank (WB) and the Int’l Monetary Fund (IMF),
provide liquidity to countries with temporary or
structural problems and hence may influence financial
markets.

• The WB issues AAA-rated bonds in order to finance

projects in developing countries (long term
financing).

• The IMF supports countries with liquidity problems

due to a worsening of the BoP (Balance of Payments)
and helps prevent or resolve financial crises
(short terms or emergency financing).

• The IMF supervises economic and financial policies

around the world and is the true guardian of financial
and exchange rate stability.

• It has intervened in almost every recent financial

crisis episode, but it failed to predict the Great Crisis.

8
The Bank for International Settlements

• Bank for International Settlements (BIS): often referred as the bank of

central banks.
• Established on May 17, 1930 at the Hague Convention. It’s the oldest int’l
monetary organization.
• It does not do business with individuals or corporations; only with central
banks & int’l institutions.
• The head office is in Basel, Switzerland.
• Its role is fostering int’l monetary cooperation but also addresses issues
such as:
1. the growth of offshore financial centres (OFCs),
2. highly leveraged institutions (HLIs),
3. large and complex financial institutions (LCFIs),
4. deposit insurance &
5. the spread of money laundering & accounting scandals.

9
International Settlement (Int’l Compensation)
 Definition
“International settlement” refers to the
transfer of money through banks to
compensate accounts, debts and demands
in different countries.

What type of banks would be

necessary to support these
operations???

10
 Other Settlement Attempts
More and more countries seek to stop paying their trade in dollars
Countries such as China, Russia, Brazil, India, Indonesia, Argentina and South Africa, are looking for ways to avoid
the US dollar as the main currency of exchange, and are increasingly looking to the Chinese currency, the yuan,
as a currency to pay their exchanges and integrate their reserves. The governments of these states want to use
the currency of a country that does not confiscate their reserves in case of conflict
The Brazilian government announced an agreement
ASIA / 26-07-23 / with its Chinese counterpart to carry out
BY FELIX THOMPSON transactions in Yuan and Reais
India and Bangladesh launch rupee settlement
scheme for trade transactions
https://www.gtreview.com/news/asia/india-and-bangladesh-launch-
rupee-settlement-scheme-for-trade-transactions/

Russia has agreed with Beijing to accept the yuan as payment for oil and other commodities supplied
to the Asian giant.

The BRICS group (Brazil, Russia, India, China and South Africa) is also advancing towards the creation of a new currency to replace the US
dollar. New members since January 2024: Iran, Egypt, Ethiopia, and the United Arab Emirates joined the organization on 1 January 2024
11
Risks
• A BANK faces several risks but among the main ones are five: Credit risk, Market risk (price or volatility of assets & liabilities),
Interest rate risk (adverse change in spreads & profitability), Liquidity risk (bank cannot meet a demand for cash or fund
obligations) and Operational risk (inadequate internal processes).
• Interest rates vary per the risk embedded in financial assets. The higher the risk for the lender or the investor to get his money
back, the higher the interest rate that he demands.
• INTERNATIONAL INVESTORS face all kinds of risk but besides:
• Exchange rate risk: when investing in an asset denominated in a foreign currency, the exchange rate prevailing at the end of
the investment period is going to affect significantly the final return.
• Country risk: the risk that a country may default (totally or partially) on its foreign obligations due to economic, political or
social problems.
• Systemic Risk: is the risk that a crisis may involve an entire region or even the global economy.
• A systemic crisis can originate in a single country (or region) and spill over to the entire system through various financial
and real channels (‘contagion’ or ‘domino’ effect).
• The financial system with its multiple links is a major channel of transmission of shocks.
• In a systemic crisis rational behaviour – like running away from too risky assets or countries – may be heightened by
irrational components (herding or panic).
• Financial globalization has hightened systemic risk.
• Large financial institutions (like Lehman Brothers) may be ‘too large to fail’ and hence be classified as ‘systemically’ important.
• INDIVIDUALS AND INVESTORS are normally risk adverse. Two fundamental ways to cope with risk.
1. Diversification: an international investors has additional opportunities compared to a domestic investor as he can diversify
his portfolio over a much larger number of assets, countries and regions of the world.
2. Hedging (especially against ex. rate risk): special types of contracts designed to enable investors as well as importers and
exporters to cover the risk of unexpected changes in exchange rates. 12
 OTHER RISKS ASSOCIATED WITH TRADE

4 Ungoverned AI
 OTHER RISKS ASSOCIATED WITH TRADE

5 Axis of rogues
1 The United States vs. itself The world’s most powerful rogue
states have been working to
strengthen their cooperation
Since Russia invaded Ukraine

6.

4 Ungoverned AI
Breakthroughs in artificial
intelligence are moving 7. No China recover?
much faster than
governance efforts
Regulatory Environment
• Banking industry is highly regulated not only by local government but
also by global regulatory authorities
• Regulations require banks to comply to certain capital, leverage, and
liquidity ratios in order to control risk
• Regulations also require banks to monitor for illegal transactions
and to provide consumer protection
• Changes in regulations can significantly influence a bank’s profitability
and operations
• 2008 Financial Crisis resulted in the introduction of many new
regulations aimed at protecting consumers and increasing
accountability
• Dodd-Frank Wall Street Reform and Consumer Protection Act in the US
• Independent Commission on Banking in the UK
• Basel III global banking standards (Capital adequacy)

15
International Accounting Standards
• Accounting Standards are an important variable in the context of financial
crises, as they may contribute to the spread of financial instability depending
on the way assets are valued in financial statements.

• Recording assets at their ‘historical’ values may not reflect over time their true
value.

• Using the ‘mark-to-market’ principle (i.e. the market price or quotation),

however, introduces ‘instability’ in financial statements.

• During financial/liquidity crises, application of the mark-to-market principle

may trigger a downward spiral: assets prices go down, financial statements
worsen and this may lead to more asset sales.

• This spiral was certainly at work during the recent crisis, and has hit especially
banks.

Economists and accountants are debating on how to mitigate the undesired

effects of the mark-to-market principle.

16
Ratings
• Ratings help assess the creditworthiness of firms, banks & countries (government bonds) when they
operate internationally. They are a measure of the ‘quality’ of credits.
• The 3 giants of Ratings are: Standard&Poors (US), Moody’s (US) and Fitch (France) are the best known
international rating agencies but there are a lot more, such as DBRS (Canada), R & I (Japan), Dagong
(China), etc.
• Ratings go from AAA of Std&Poors (Aaa for Moody’s & Fitch) to Bbb or ‘C’ (junk bonds.) Assets with a
rating above BBB are known as ‘investment grade’.
• Bank regulations rely significantly on ratings (Basle Accord)
• Institutional Investors also rely on ratings in their investment decisions. Fund managers may set a
threshold rating below which investment has to be dismissed.
How reliable are rating agencies?
• There is a serious debate on the validity of ratings, and their methods. Rating agencies are accused of:
- setting often the wrong ratings (e.g. subprime loans – 2008 Crisis)
- failing in predicting financial/corporate crises thus issuing downgrades when it is too late (see Lehman
Brothers)
- aggravating financial or corporate crises due to the wrong timing of downgradings (see the recent
downgrading of several European countries during the euro crisis)
- being in a conflict of interest as they are paid by the firms that ask to be rated.
Yet, it is difficult to imagine a world without ratings!
17
 DEEPENING IN RISK TYPES

https://datosmacro.expansion.com/ratings 18
Revenue & Cost Composition Revenue Composition
• The primary component of a bank’s
revenue comes from Net Interest
Income (NII), which is the interest earned
from the bank’s earning assets (loans,
advances, securities), minus the interest
paid on the bank’s liabilities (customer
deposits, bank borrowings)
• Second largest component of revenue
comes from Fees which the bank charge on
financial transactions and services

Cost Structure
• A bank has two primary expenses:
– Interest expense, which
comprises of the interest paid on
the bank’s liabilities such as
customer deposits and other debt
– Employee salaries and benefits

19
INTERNATIONAL
BANKING
SERVICES

20
International Banking Services
• International banks characterized by the types of services they provide & distinguished from
domestic banks:
• Facilitate imports and exports of their clients by arranging trade financing.
• Arranging for foreign exchange necessary to conduct cross-border transactions and make
foreign Investments. Banks often assist their clients in hedging exchange rate risk in
foreign currency receivables and payables through forward and options contracts.
• They generally also trade foreign exchange finance products for their own account.
• Large international banks borrow and lend in the Eurocurrency market among others.
• Frequently become members of international loan syndicates, participating with other
international banks to lend large sums to MNCs (Multi National Companies) needing
project financing and sovereign governments needing funds for economic development.
• They participate in the underwriting of Eurobonds and other foreign bonds.
• Banks that both perform traditional commercial banking functions and engage in investment
banking activities are often called merchant banks.
• International banks frequently provide consulting services and advice to their clients.
• Banks that do provide a majority of previously mentioned services are commonly known as
UNIVERSAL BANKS or FULL SERVICE BANKS (also MULTIPLE BANKS).

21
 International Banking Services
Why may a bank establish multinational operations?
Rugman and Kamath (1987) provide a more formal list:
1. Low marginal costs: knowledge developed at home can be used abroad with low marginal costs.
2. Knowledge advantage: Subsidiary can draw on parent’s knowledge for use in that foreign market.
3. Home country information services: more complete market info about the subsidiary’s country.
4. Prestige: high perceived prestige, liquidity & deposit safety can be used to attract clients abroad.
5. Regulation advantage: Multinational banks are often not subject to regulations as domestic banks: reduced need to
publish financial information, lack of required deposit insurance & reserve requirements & the absence of territorial
restrictions.
6. Wholesale defensive strategy: Banks follow their multinational customers abroad to prevent the erosion of their clientele
to foreign banks.
7. Retail defensive strategy: Multinational banking operations help a bank prevent the erosion of its travelers, tourists and
foreign business markets.
8. Transaction costs: By maintaining foreign branches & currency balances, banks may reduce transaction costs & forex risk on
currency conversion if government controls can be circumvented.
9. Growth: Growth prospects in a home nation may be limited by a market largely saturated with the services offered by
domestic banks.
10. Risk reduction: Greater stability of earnings is possible with international diversification. Offsetting business & monetary
22
policy cycles across nations reduces the country-specific risk of any one nation.
Types of International Banking Offices / Relations

What would a bank

do to have
international
reach?

Banking
Institution

Correspondent Representative Foreign Subsidiary & Edge Act Offshore

Bank Office Branches Affiliate Banks Banks (only U.S.) Banks

23
International Banking Facilities
Correspondent Banking
1.Definition:
• a bank located elsewhere that provides a service for another bank, sometimes the 2 banks maintain
deposits with each other. For example, a large New York bank will have a correspondent bank account
in a London bank, and the London bank will maintain one with the New York bank.
• The large banks in the world will generally have a correspondent relationship with other banks in all the
major financial centers in which they do not have their own banking operation.
• Correspondent banking allows a bank’s MNC client to conduct business worldwide through his local
bank or its correspondents.
2.Main function: to provide financing for affiliates of MNCs.
3.Advantages of Correspondent Banking
a) Low cost market entry
b) Minimal staffing expense
c) Multiple business sources
d) Local banking opportunities
e) Network of local contacts

4.Disadvantages of Correspondents
a) U.S. customers may be given lower priority
b) Some credit forms prohibited
c) Irregular, not extensive credit results

24
International Banking Facilities
Representative Offices
1.Definition
• A representative office is a small service facility staffed by parent bank personnel that is
designed to assist MNC clients of the parent bank in dealings with the bank’s
correspondents.
• It is a way for the parent bank to provide its MNC clients with a level of service greater
than that provided through merely a correspondent relationship. Representative offices
also assist MNC with information about local practices, economy & credit evaluation of
the MNC’s customers.

2.Functions:
• to provide advisor services
• to speed up services
• to help loan generation
• not authorized to directly accept deposits/make loans

3.Advantages of Representative Offices

a) Low-cost market entry
b) Efficient delivery
c) Attracts additional business
d) Maintains existing business

4.Disadvantages of Representative Offices

a) Inability to more effectively penetrate markets
b) Expensive
c) Qualified personnel difficult to attract
25
International Banking Facilities
Foreign Branches
1.Definition
• A foreign branch bank operates like a local bank but is legally part of the parent.
• Subject to both the banking regulations of home country and foreign country.
• Can provide a much fuller range of services than a representative office.
• Branch Banks are the most popular way for U.S. banks to expand overseas.
• True international presence
2.Functions:
• Same as rep. office
• Authorized to accept deposits/make loans
3.Advantages of Foreign Branches
a) Greater control over foreign operations
b) Greater ability to offer direct, integrated customer services
c) Better customer relations
4.Disadvantages of Foreign Branch
a) High-cost
b) Difficult and expensive to train managers.

Subsidiary and Affiliate Banks

• Subsidiary: locally incorporated bank wholly or partly owned by a foreign parent.
• Affiliate: partly owned but not controlled by the parent.
• U.S. parent banks like foreign subsidiaries because they allow
U.S. banks to underwrite securities.

26
International Banking Facilities
Edge Act and Agreement Corporations
1.Definition
• U.S. bank subsidiaries that may carry on international banking activities
• Edge Act banks are federally chartered subsidiaries of U.S. banks that are physically
located in the U.S. that are allowed to engage in a full range of international banking
activities.
• The Edge Act was a 1919 amendment to Section 25 of the 1914 Federal Reserve Act.
2.Precisions:
a)Physically located in U.S.
b)Authorized to handle only international business
c) Customers: foreign or U.S.
d)Authorized to accept foreign currency deposits/make loans.

“Shell” Branches
 Shell branches need to be nothing more than a post office box.
 The actual business is done by the parent bank at the parent bank.
 The purpose was to allow U.S. banks to compete internationally without the expense of
setting up operations “for real”.
27
International Banking Facilities
Offshore Banking Centers
• An offshore banking center is a country whose banking
system is organized to permit external accounts beyond
the normal scope of local economic activity.
• The host country usually grants complete freedom from
host-country governmental banking regulations.
• Operate outside the jurisdiction of most industrialized
countries
• Are subject to very few regulations
• Are located in tax havens
• The IMF recognizes
• the Bahamas
• Bahrain
• the Cayman Islands
• Hong Kong
• the Netherlands Antilles
• Panama
• Singapore
as major offshore banking centers
28
 International Banking Facilities
Offshore Banking Centers (OBC)
• An individual or company will maintain an offshore account because it provides financial and legal
advantages, such as:
• greater privacy (due to bank secrecy) And Money Laundering?
• little or no taxation (i.e. tax havens)
Elusion? Evasion?
• easy access to deposits (at least in terms of regulation)
• protection against local, political, or financial instability.
• The term originates from the Channel Islands being "offshore" from the United Kingdom
• Although most offshore banks are located in island nations to this day there are some banks in
landlocked such as Switzerland, Luxembourg and Andorra also "offshore banks".
• Offshore banking has often been associated with the underground economy and organized
crime, via tax evasion and money laundering.
• Personal income tax of many countries makes no distinction between interest earned in local banks and
those earned abroad. Persons subject to US income tax, for example, are required to declare, on penalty
of perjury, any foreign bank accounts which may or may not be numbered bank accounts
• OBC operate as branches /subsidiaries of the parent, usually the largest and most reputable
international banks.
• OBC was spawned in late 60’s when Fed. Reserve authorized U.S. banks to establish ‘shell’ branches.
• Hong Kong & Singapore have developed into full service banking centers that now rival London, New
York, and Tokyo. 29
International Banking Facilities

Tax havens countries

30
Types of International Banking Offices
Major OFC:
• Bahamas: a considerable number of registered vessels.
• Bermuda: market leader for captive insurance, offshore funds and aircraft registration.
• British Virgin Islands: the largest number of offshore companies.
• Cayman Islands: the largest value of assets under management in offshore funds & the strongest
presence in the U.S. securitization market.
• Jersey: the most international of the British Crown dependencies and has a high concentration of
professional advisers including lawyers and fund managers.
• Luxembourg: the market leader in Undertakings for Collective Investments in Transferable
Securities (UCITS) and is believed to be the largest offshore Eurobond issuer
• Mauritius: used for inward & outward investment platform for Asian, African & European
countries. Has the effective commercial & legal infrastructure required to support the
development of a global network: a number of double taxation agreements, listed on the OECD
list of jurisdictions with internationally agreed tax and transparency standards.
• Panama: is a significant international maritime center. It is second in volumes of incorporations
• New Zealand: well positioned for the Asian market but retains close ties to Europe.
• Dominica: has the largest number of offshore companies formed in recent years.
• Switzerland: taxes in Switzerland are levied by the Swiss Confederation (cantons & municipalities).

31
Types of International Banking Offices
Major OFC: Why Delaware Is considered a Tax Shelter?
• And DELAWARE????? INVESTOPEDIA
A tax shelter is any method of reducing taxable income that results
in a reduction of tax payments. In the U.S., is defined as any method
that recovers more than $1 in tax for every $1 spent within a four-
year period. The specific methodology varies but a tax shelter can be
created by either an individual or a corporation.
Incorporation in Delaware affords companies numerous benefits:
• Businesses might not have to disclose officers and directors
when they file documents at the time of a company’s formation.
• Furthermore, if the business does not conduct its operations in
Delaware, the state’s corporate income tax may not apply.
Instead of paying that income tax, those Delaware corporations
instead pay a much lower franchise tax.
• Delaware also has business-friendly usury laws, which allow
banks and credit card companies to have much more freedom to
charge higher interest rates on loans.
• No Sales Tax in the state.

32
Tax avoidance: Exemplification

33
Tax avoidance: Exemplification

Tax avoidance: Benefits

Lincoln belge gets a tax deduction
Old Abe gets a tax free interest income 34
Correspondent Banking Relations

• FI relationships are defined as Customer Relationship (“Correspondent Bank”):

• The Wolfsberg Group definition is: “the provision of a current or other liability account, and related
services, to another financial institution, including affiliates, used for the execution of third party
payments and Trade Finance, as well as its own cash clearing, liquidity management and short-
term borrowing or investment needs in a particular currency.
• Payments can be made by the Respondent Bank via an account held with the Correspondent Bank,
on the instructions of the Respondent Bank's customers. This type of activity poses a potential
risk, as there is reliance on the Respondent Bank initiating payment to have policies and
procedures that articulate appropriate levels of due diligence relating to payment initiators.

35
Correspondent Banking Relations
• Key to International Banking Operations.
• Frame for funding & Trade Financing.
• Forex & Accounts Receivable or Accounts Payable
Hedging (forwards & options).
• Investment services.
• Allow access to markets & currencies.
• Money Market
• And other services not related necessarily to
Lending.

Requirements to establish a relationship:

1. Exchange of Control documents
• Before: Signature Register and Telegraphic test keys
• Today: SWIFT Key for authentication
• Exchange of Terms & Conditions
2. Correspondent Banking agreements
• Referral agreements
• Nostro and/or vostro accounts
• Documentary Controls (FFSS, AML forms, etc.)
• Reimbursement agreements
• Other 36
Prime Banks Ranking - The World’s Largest Banks
Banks by Total Assets (as of end of 2023) Banks by Country (as of end of 2023)

Source: Wikipedia - Relbanks statistics 37

 Prime Banks Ranking -
The World’s Largest
Banks

Banks by Total Assets (as of end of 2023)

– Graphic View

38
Prime Banks Ranking – LatAm (Brand Value)

Most valuable financial brands in Latin America 2024

(by brand value), and their market capitalization

39
Prime Banks

Circulares Vigentes / List of Prime Banks.

https://www.bcrp.gob.pe/docs/Transparencia/Normas-
Legales/Circulares/2024/circular-0017-2024-bcrp.pdf 40
Trends that will be shaping the World
The future of trade will be shaped by five trends
Fair and sustainable trade Risk diversification
Companies are increasingly focused on implementing fair and Companies will accelerate diversification of their supply
sustainable trade practices chain locations and partners to protect against future
Commitments to combat climate change, a rising wave of disruptions
conscious consumerism and the development of global Global supply chains will shift away from the fast and
governance standards for sustainability, will drive efficient but vulnerable ‘just-in-time’ model to a more
ESG-compliant global supply chains. capital-intensive ‘just-in-case’ model, where supply chains
Inclusive participation are diversified to protect against future disruptions, such as
Globalisation needs to become more equitable to provide trade wars, climate change, technology risks, or even
smaller businesses the chance to participate in global supply another pandemic. This may result in a broader range of
chains emerging manufacturing hubs within Asia, such as Vietnam,
The growing reach of technology and e-commerce will Indonesia and Malaysia.
continue to unlock new opportunities and make global trade Rebalancing
more accessible - more SMEs are likely to participate than ever Global trade will continue to shift to Asia, Africa and the
before. Middle East
Digitalisation The move towards higher growth markets in Asia-Pacific,
The increased adoption of digital trade platforms will make Africa and the Middle East will be driven by rising consumer
trade faster, more transparent and secure demand. Supply chain dynamics are also changing -
Blockchain, AI and the IoT will be game changers in the future. emerging markets (e.g. the ASEAN region) stand to benefit
Technologies that reduce costs and enhance transparency, as companies shift to low-cost markets to diversify
trust and efficiency across supply chains will continue to gain production, and local suppliers enhance their capabilities to
traction and help grow global trade. move up the value chain. 41
Global Banking Challenges in 2024
• Heightened Regulatory Oversight
• Increased scrutiny & compliance requirements

• Cybersecurity Threats
• Sophisticated Fraud Schemes Enabled by AI
• Evolving Cyber Threats
Cyber
• Shifting Customer Expectations
• Rapidly evolving digital technologies and
changing consumer preferences demand
banks to innovate their products.

• Economic Volatility
• Macroeconomic uncertainties and potential
economic downturns, challenge Banks to
maintain profitability & Manage risk.

• Disruptive Competition
• Rise of Fintech startups and BigTech
companies are disrupting traditional banking
models 42
Pathways towards digitalisation

• 6 document have multiple standards

36 documents analysed, of electronic representation. the real need is
for standards development to drive
interoperability.

• 9 documents are in early stages of

• 21 already have standardised standards development, meaning the bulk
of the work on standardisation must still be
electronic versions.
done.

Factors needed to drive digitalisation and interoperability:

1. Standardisation of electronic 3. Industry convergence and
documentation. engagement:
Widespread recognition of the need Engagement of key users is essential to
for digitalisation and collaboration educate and drive adoption of needed
between stakeholders to ensure standards. standards.

2. Legislative and regulatory support: 4. Adoption at scale where digitalization

Several trade documents have a takes place across national borders.
regulatory or compliance function
and/or must “pass” regulatory tests,
whether at a border or elsewhere.
43
 ICC Genesis

• ICC has launched a new digital trade tool, ICC

Genesis, offering a new way to trade within the
framework of Free Trade Agreements (FTAs) by
streamlining the invoice self-declaration
process.
• The innovative tool has been developed by the
World Chambers Federation (WCF) at ICC and
eight member chambers of commerce, to
simplify exporting under FTAs.
• With ICC Genesis, exporters have clear guidance
to complete the procedure to digitally certify
declarations via chambers who act as a trusted
third party between governments and
businesses.

44
 ICC Project for
Paperless Trade

• Trade documentation is a paper-intensive and resource-consuming process.

• An electronic bill of lading could save $6.5 billion in direct costs and enable $40 billion in global trade.

• Imagine you’re a cargo owner in the year 1450:

• You hand over your goods to the ship that will carry them across the world and are presented with a bill of lading—
a piece of paper stating what you’re shipping, where it comes from, and where it’s heading.
• Fast forward to the year 2024:
• The world has changed dramatically, but the BL remains relatively unchanged. Today, the BL process is still reliant
on the physical transfer of paper records and applies to roughly 40 percent of all containerized trade transactions.

• Current trade documentation spans many documents and processes, and is a manual, time-consuming, and resource-
intensive process for all stakeholders. Documentation for a single shipment can require up to 50 sheets of paper that are
exchanged with up to 30 different stakeholders.

• The bill of lading is one of the most important trade documents required for shipping.
• McKinsey analysis indicates that the BL accounts for between 10 and 30 percent of total trade documentation costs.
• Regrettably, shipping has not matured far beyond where it was in the 1400s. 45
 Rules

INTERNATIONAL TRADE FINANCE I

Lecture 9. Main Letter of Credit Rules
2024-2
Oscar Melo Vega Ángeles
Antonio Esquivel Delfín
UCP 600

2019 Revision. Some rules.

2
 UCP 600 Rules - Introduction
• The UCP rules (Uniform Customs & Practices) were originated
by the ICC (International Chamber of Commerce) and are
prepared by experts from the private sector.
• 6th revision since 1933 – Became effective 01/Jul/2007.
• For this revision were considered:
– Opinions from ICC’s Banking Commission,
– Decisions made by the ICC, Cases from DOCDEX,
– Legal Decisions,
– URR525, ISP98 & eUCP from the ICC.
• To count with harmonized rules means:
– To have a common way to understand commercial terms.
– To avoid commercial disputes.
– To count with a standardized guide.

To date, they are still the most successful set of private

commercial rules that have been developed.

3
 Principles that rule the L/Cs

Principle of Irrevocability: LCs can not be cancelled without the

express consent of the beneficiary. It is guaranteed their
operability and validity from issuance to expiration.

Principle of Independence from contracts: LCs are defined as

operations independent from the Purchase and Sale Agreement.
They are based on the agreement but are not regulated / ruled
by it.

Extrict Compliance: Banks accomplish their chores based on the

Documents that support a commercial transaction and can not be
held responsible for the state of the merchandise. It is for that
reason that the banks do a thorough revision of the documents to
verify that the terms and conditions have been fulfilled.

4
 Article 2 - Definitions

Advising bank The bank that advises the credit at the request of the
issuing bank.

Applicant The party on whose request the credit is issued.

Banking day A day on which a bank is regularly open at the place at

which an act subject to these rules is to be performed.

Saturday Half day?

Beneficiary The party in whose favor a credit is issued.

Compliant Presentation A presentation that is in accordance with the

terms and conditions of the credit, the applicable provisions of these
rules and international standard banking practice. ISBP 745E
5
 Article 2 - Definitions

Issuing bank The bank that issues a credit at the request of an applicant
or on its own behalf.

Negotiation The purchase by the nominated bank of drafts (drawn on

bank other than the nominated bank) and/or documents under a
complying presentation, by advancing or agreeing to advance funds to
the beneficiary on or before the banking day on which reimbursement is
due to the nominated bank.

Nominated bank The bank with which the credit is available or any bank
in the case of a credit available with any bank.

Presentation Either the delivery of documents under a credit to the

issuing bank or nominated bank or the documents so delivered.

Presenter A beneficiary, bank or other party that makes a presentation.

6
 Article 2 - Definitions

Confirmation A definite undertaking of the confirming bank, in addition to

that of the issuing bank, to honour or negotiate a complying presentation.

Confirming Bank The bank that adds its confirmation to a credit upon the
issuing bank’s authorization or request.

Credit Any arrangement, however named or described, that is irrevocable

and thereby constitutes a definite undertaking of the issuing bank to honour
a complying presentation.

Honour
• to pay at sight if the credit is available by sight payment.
• to incur a deferred payment undertaking and pay at maturity if the credit
is available by deferred payment.
• to accept a bill of exchange (“draft”) drawn by the beneficiary and pay at
maturity if the credit is available by acceptance.

7
Article 2 - Definitions

• Banking Day ▪ Compliant Presentation

Commercial Offices
SATURDAY = LC Terms
+ UCP 600
Bank Main Hall + ISBP 745E

▪ Presentation / Presenter

Nominated Issuing
Beneficiary
Bank Bank
Presentation Presentation

Presenter Presenter
8
Article 2 - Definitions
• Honour • Negotiate
 Payment at sight Pay at sight
Buy, discount, or
Commits to pay at term
 Deferred Payment Payment at maturity Advance funds of
Compliant documents
Accept a bill of exchange
presented
 Acceptance Payment at maturity

• Nominated Bank
Issuance Advise
Issuing Advising
Beneficiary
Bank Bank

Nominated Nominated NEW

Nominated
Bank Bank Bank

L/C available with L/C

9
any bank restricted
 Article 3 - Interpretations
No more “(s)”, “Document” instead of “Document (s)”

A Credit is irrevocable even if there is no indication of the irrevocability.

To determine the expiry date:

30 days from the shipping 30 days after the Shipping
“From” & “After” date = Date
exclude the date
mentioned Shipping Date: Expiry Date:

1st OF AUGUST 2020 31st OF AUGUST 2020
To determine the shipping period:
The shipment has to be
“From” includes the effected from the 10th of The earliest Shipping Date is
= the 10th of august
date mentioned august
“After” excludes the The shipment has to be = The earliest Shipping Date is
date mentioned effected after the 10th of the 11th of august
august

10
 Principle of independence: Article 4 – Credits versus contracts
A credit by its nature is a ¿discourage? Letter of
separate transaction from Contract Nº 123
Credit
the sale or other contract
The details according to
the Contract Nº123, which
An issuing bank should discourage any attempt by we attach and it is an
the applicant to include, as an integral part of the integral part of the credit.
credit, copies of the underlying contract, proforma
invoice and the like

Article 5 – Documents versus goods,

services or performance
Banks deal with documents and not with goods,
services or performance to which the documents
may relate.
11
Article 6 – Availability, Expiry Date
and Place for Presentation
• Availability

LC available with any LC available with the

Bank Bank XYZ
Note: A credit must not be issued
available by a draft drawn on the
applicant
• Place for presentation

1. Any Bank 1.Bank XYZ

2. Issuing Bank 2.Issuing Bank

• Expiry Date
 Last day for the presentation of Documents

12
 Article 7 – Issuing Bank Undertaking

• Honour at sight or at term the required Documents presented to the

Nominated Bank or to the Issuing Bank that constitute a complaint
presentation.
• It is irrevocably obliged to honour since they issue the Credit.
• Reimburse the Nominated Bank that honoured / negotiated and sent the
compliant Documents to the Issuing Bank.
• For a usance Letter of Credit, the reimbursement is payable at the expiration of the deferred
or acceptance undertaking whether the Designated Bank has advanced payments /discounted
or not before the maturity

• The Issuing Bank commitment to reimburse the Nominated Bank is

independent from the commitment with the beneficiary

Issuing Docs. Docs. Expiry

Date Presented Accepted Date

Irrevocable Reimbursement
Undertaking Payable
starts 13
Article 8 – Confirming Bank Undertaking

• Honour a complaint presentation or negotiate without recourse

• Irrevocable undertaking since the moment the confirmation is added.
• Reimburse the Nominated Bank that honoured / negotiated and sent the
compliant Documents to the Confirming Bank.
• For a usance Letter of Credit, the reimbursement is payable at the expiration of the deferred
or acceptance undertaking whether the Designated Bank has advanced payments /discounted
or not before the maturity

• The Confirming Bank commitment to reimburse the Nominated Bank is

independent from the commitment with the beneficiary

Issuing Docs. Docs. Expiry

Date Presented Accepted Date

Irrevocable Reimbursement
Undertaking Payable
starts 14
 Article 9 – Advising of Credits and Amendments

• When advising a Letter of Credit, the Advising Bank expresses that:

• They hold no commitment to honour or negotiate
• Their satisfaction in respect to the apparent authenticity of the Letter of Credit or
amendment
• Their advise reflects exactly the terms & conditions of the Letter of Credit

Letter of Credit
Available with: Any bank
Notification
Available with: Advising Bank

For: Negotiation For: Negotiation
Reimbursement: Request payment from Reimbursement: Advising Bank holds
Bank XYZ, New York special instructions for
Branch reimbursement

An Advising Bank can use the services of another bank to

advise the Credit: second Advising Bank

15
 Article 10 – Amendments
• The Issuing Bank, Confirming Bank (if it is the case), and the
beneficiary must agree with the amendments
• Partial acceptance = Notice of Refusal
• Silence ≠ Consent
• A compliant presentation with the Credit terms and an amendment that has not
been accepted yet, is considered as the beneficiary’s no acceptance of the
amendment
Has it
Original LC Amendment been
Date: July 1st 202x Date: July 4th 202x accepted?
US$150,000 Amount reduced to
US$100,000 Document
Ship before:
Aug 20th, 202x Ship before:
July 20th, 202x US$100,000
Partial Shipments
allowed Shipped:
Agreed? July 20th, 202x
Agreed?
16
 Article 12 – Nomination

• A Nomination doesn’t compel a Nominated Bank to honour

• When nominating a Bank to accept a Bill of Exchange or to commit for a
Deferred Payment, an Issuing Bank authorizes that Nominated Bank to
effect an advance payment or to buy an accepted Bill of Exchange or a
Deferred Payment

XYZ BANK is authorized to:

Letter of Credit
Available with 1. Assume a Deferred Payment
commitment and
XYZ BANK
For Deferred Payment 1. “To effect payments in advance”
at 90 days after the against their Deferred Payment
Commitment (payments before due
Shipping Date
date)
17
Article 14 – Standard for Examination of Documents
• The issuing bank must examine a presentation to determine, on the basis of the
documents alone, whether or not constitute a complying presentation.
• In documents, other than the commercial invoice, the description of the goods,
services or performance, may be in general terms.
• A document presented but not required by the credit will be disregarded and may
be returned to the presenter.
• If a credit contains a condition without stipulating the document to indicate
compliance, banks will disregard such condition (non documentary conditions)
• A document may be dated prior to the issuance date of the credit, but must not
be dated later than its date of presentation
• A nominated bank, a confirming bank, & the issuing bank shall each have a
maximum of 5 banking days following the day of presentation to determine if a
presentation is complying.

18
Article 14 – Standard for Examination of
Documents

Presentation Date
• A presentation including one or more original transport
documents must be made by the beneficiary not later
than 21 calendar days after the date of shipment, but in
any event not later than the expiry date of the credit.

Consistent Data 14(d)

• Data in a document, when read in context with the credit,
the document itself and international standard banking
practice, need not be identical to, but must not conflict
with, data in that document, any other stipulated
document or the credit.

19
 Article 14 – Standard for Examination of Documents

Letter of Credit Invoice 

Addresses for the Beneficiary and applicant Applicant: ABC Inc. Invoice: ABC Inc.

3 Temasek Avenue 10 Coleman Street

16-00 Centennial Tower Singapore 179809
It is not obligatory to have the same in all the Singapore 039190
documents as well as in the credit, however: Fax Nr. 6328 5201 Fax Nr. 6328 5464
Bill of Lading, notify applicant
• They must be within the same country as it
mentioned in the credit.
• Do not consider for the comparison details for
contact with the beneficiary or the applicant
Bill of Lading  Bill of Lading 
• If they are part of the details of the Notify: ABC Inc.
Notify: ABC Inc.
“consignee” box & the “notify” box in the 10 Coleman Street
Transport Document, the details for contact Temasek Avenue
Singapore 179809
must be shown as it has been noted in the 16-00 Centennial Tower
Singapore 039190
credit. Fax Nr. 6328 5464
Fax Nr. 6328 5201

20
Article 14 – Standard for Examination of Documents

Issuer or Unspecified Content

• Besides the Commercial Invoice, Transport Document or Insurance Certificate
(policy), Banks will accept a Document if:
1. The content apparently fulfills the requirement &
2. It is compliant with article 14(d)

• Example: The Letter of Credit requires an Inspection Certificate


Certificate of Inspection Certificate of  
Inspection
Goods have been Goods have been
inspected and we certify We certify that the origin
that everything seems to of the goods is Singapore inspected and we certify
be in order that everything seems to
be in order

Signature: _______ Signature: _______ Signature: _______

Date: 1 Aug 202x Date: 1 Aug 202x Date: 1 Aug 202x
21
Article 15 – Compliant Presentation
Without
delay

The Issuing Bank determines that a They must honour and deliver
presentation is compliant documents to the applicant

They must honour or negotiate and

The Confirming Bank determines
send the Documents to the Issuing
that a presentation is compliant
Bank

They must honour or negotiate and

The Nominated Bank determines
send the Documents to the Confirming
that a presentation is compliant
Bank or to the Issuing Bank

22
Article 16 – Discrepant Documents, Waiver and Notice

• The Nominated /confirming/Issuing Bank can refuse to honour or negotiate

discrepant documents
• Refusal Notification must happen before the closing of the 5th Banking Day after
the presentation day.
• Not fulfilling this Article cancels the possibility to a bank to claim a non compliant
presentation

Ma Mi Ju Vi Sa Do Lu Ma
Maximun time allowed for documents revision

0 1 2 3 x x 4 5

Honour, if terms & Term to notify

conditions the refusal
have been fulfilled

23
Article 16 – Discrepant Documents, Waiver and Notice
• The refusal notification must indicate:
• The bank refuses to honour or negotiate;
• Each discrepancy that justify the refusal, and
• One of the following:

The Bank retains documents expecting further instructions from

the presenter

The Issuing Bank retains Documents awaiting acceptance from

the applicant or receive further instructions from the presenter
before receiving acceptance from the applicant

The Bank returns Documents

The Bank acts according to the instructions previously delivered

by the presenter
24
 Article 18 – Commercial Invoice
• Issued by the beneficiary, made to the name of the applicant. It is not
mandatory to be signed (except as expressed in Article 38, Transferable
Letter of Credit)
• Description of Goods, services or performance must agree to that in the
Letter of Credit
Letter of Credit
• If the amount in the invoice is greater than that in the Credit: the
Currency & Amount: Nominated Bank can accept it but must not honour it or negotiate for a
USD 1’000,000 greater amount than that in the Credit
• It has to be in the same currency that in the Credit

Invoice Nº 123  Invoice Nº123 

Invoice Amount:
Invoice Amount:
USD 1’000,000
SGD 1’560,000
(equivalent to
(equivalent to
SGD 1’560,000)
USD 1’000,000)

25
 Article 19 - Transport Document Covering at Least
Two Different Modes of Transport
Transshipment means unloading from one means of conveyance and reloading to
another means of conveyance (whether or not in different modes of transport) during
the carriage from the place of dispatch, taking in charge or shipment to the place of final
destination stated in the credit.

Article 20 - Bill of Lading

Article 21- Non-Negotiable Sea Waybill
▪ No changes

Article 22 - Charter Party Bill of Lading

• The port of discharge may also be shown as a range of ports or a geographical

area, as stated in the credit. (also in ISBP 106)
• i.e., the LC stipulates that the merchandise will be send to Asian Ports
26
 Article 27 – Clean Transport Document

• A bank will only accept a clean transport document.

• A clean transport document is one bearing no clause or

notation expressly declaring a defective condition of the
goods or their packaging.

• The word “clean” need not appear on a transport document,

even if a credit has a requirement for that transport
document to be “clean on board”.

27
 Article 28 - Insurance Document and Coverage
• Date of the insurance document must be no later than date of shipment, unless it appears
on it that the cover is effective from a date not later than date of shipment.

Insurance policy Board knowledge

Coverage start date Shipped on board
Aug 1st 202x Aug 1st 202x
Issuance Issuance
Aug 8th 202x Aug 2st 202x
• Insurance Document: Insurance Policy, certificate or declaration sponsored by an
open / global policy.
• Insurance Coverage = a % of the merchandise value / invoice (i.e., 110% of the CIF
value). This is the minimum coverage required (ISBP 191)
Invoice: CIF total value USD
Letter of credit 100,000.00
Insurance requested for 110%
of the value of the invoice Insurance: Insurance coverage 120%
amount USD 120,000.00

minimum coverage required Its accepted

28
 Article 31 - Partial Drawings or Shipments
• A presentation consisting of more than one set of transport docs. evidencing shipment
commencing on the same means of conveyance and for the same journey (if it
indicates same destination) will not be regarded as covering a partial shipment, even if
they indicate different dates of shipment or ports of loading, places of taking in charge
or dispatch.
• If the presentation consists of more than one set of transport documents, the latest
date of shipment as evidenced on any of the sets of transport docs. Will be regarded
as the date of shipment. (ISBP 89) (i.e. Aug. 9th)

Port A B/L “A” 1 Aug

Same Ship & Trip

Same Destination

Port B B/L “B” 7 Aug Port D

B/L “C” 9 Aug

Port C
A B C = Quantity of the LC

29
Article 31 - Partial Drawings or Shipments

• If the presentation of several sets of Transport Documents that show shipment in

more than one transport but the same type of transport (i.e. by truck) will be
regarded as a partial shipment, even if the shipment takes place the same day to
the same destination (ISBP 89)
Partial Shipment

Truck A 1st Aug

Truck B 1st Aug Destination D

Truck C 1st Aug C

A B = Quantity of the LC

• Several Courier Receipts will not be considered as partial shipments if they are
stamped/signed by the same courier in the same place and date and with the
same destination

30
 Most common
discrepancies

1. Letter of credit has expired

2. Late presentation of documents
3. Late shipment of goods
4. Inconsistent spelling of parties’ names in documents
5. Terms of sale not complied with
6. Merchandise description not strictly as per L/C term
7. Partial shipment or transshipment effected despite L/C terms
8. Foreign language documents must be exactly as per L/C
9. Documents are not consistent with one another
10. Ocean Bill of Lading issued by forwarding agent unacceptable
11. Bills of Lading not clean
12. Insurance does not cover risks stipulated in
13. Insurance issued after shipment date
14. Bills of Lading and Drafts not properly endorsed
15. Drafts not completed properly

31
Correctable discrepancies Major discrepancies

1. Draft not in accordance with L/C terms 1. Late shipment

2. Amount of draft does not agree with invoice 2. Late presentation
total 3. L/C expired
3. Invoice incorrectly addressed to the account 4. Draft in excess of amount permitted in L/C
party 5. Bills of Lading incorrectly issued
4. Description of goods in invoice does not 6. Insurance policy bears a date later than the
correspond with description in L/C date of shipment shown on Bill of Lading
5. Invoice omits shipping terms
6. Commercial invoice not signed
7. Bill of Lading not endorsed
8. Inconsistencies found in documents presented

32
 NOMBRE DE LA DEPENDENCIA O CARRERA
HASTA DOS LÍNEAS

INTERNATIONAL TRADE FINANCE I

Lecture 9. Letters of Credit
2024-2
Oscar Melo Vega Ángeles
Antonio Esquivel Delfín
Letters of Credit

An LC is an instrument which, based on the

Goods, Purchase/Sale Agreement between
Purchase /Sale Agreement,
an Importer and an Exporter, when issued by
a bank (issuing
issuing bank)
bank it commits
commits for payment
payment
(at sight or term) for the documents
documents that are
presented as evidence shipping the
evidence of shipping
goods.

Risk for the bank: Importer vs Exporter?

2
Letters of Credit

3
 Letters of Credit

Basic Characteristics:
• Means of payment:
• Domestic (within same country)
• International (different country)
• Commitment
• Terms & Conditions

4
Letters of Credit
Requirements:
⚫ For the Importer:
1. If it is the first time, it always requires a credit assessment. If you already have a
Line of Credit approved, you must fill out an application for documentary
credit, a bank contract and take a transport insurance (depending on the
incoterms)
2. It is recommended for operations that have high value, for first purchase or
complex products.
3. It can be an operation with minimum costs above average. However, it will
depend on how much the buyer wants to mitigate risk.

⚫ For the Exporter:

1.There are no minimum requirements, however, banks today require exporters
to be customers and to have a checking account.
2.It is advisable to ensure payment conditions in a first sale and when the buyer
does not accept advance payments or request credit from you.
3.It is advisable to request specialized advice (banks, counsellors, etc.) as it may
include technical and documentary terms that may make it difficult to manage.

5
 Letters of Credit
Parties Involved
⚫ Importer: Buyer, Applicant
⚫ Issuing Bank: Issues, opens an LC (Documentary Credit)
⚫ Exporter: Beneficiary, Seller
⚫ Correspondent Bank: Advising or Confirming
⚫ Other: Negotiating, Reimbursing, etc.

Usual Documents
⚫ Commercial Invoice
⚫ Transport Document
⚫ Insurance Policy
⚫ Origin Certificate
⚫ Weight Certificate
⚫ Packing List
⚫ Sanitary Certificates

¿Discrepancies? 6
Letters of Credit

Advantages to Buyer Advantages to Seller

• Payment to the Seller is made only after supplier’s • Elimination of Applicant credit risk (issuing Bank
full compliance with terms of the L/C assumes it)
• Risk of non receipt of goods ordered can be • Elimination of country risk if L/C is confirmed
reduced through conditions & Terms within the • Can assist in obtaining pre & post shipment
L/C financing
• Extended credit may be available through L/C
financing mechanisms

Risks to Buyer Risks to Seller

• Goods may not be as represented in documentation • Inability to comply with terms of L/C may result in
non-payment, delay or payment of a discounted
amount
• Issuing bank risk assumed if unconfirmed may
also result in slower payment

7
 Letters of Credit
Discrepancies:
❖ Differences in documents after comparing them with LC.
Consequences:
❖ Delays to pay the L/C + operating costs
❖ Additional expenses as a result of amendments
❖ Penalties and discounts
❖ Sometimes even no payment of the LC
Recommendations to avoid discrepancies:
Subscribe a full Purchase/Sale Agreement (avoid only quotations).
If you are importing:
❖ look for help when filling out the LC Application (according to the contract);
❖ request the issuing bank a copy of the swift message and verify the information consigned (make sure it’s OK).
❖ Do not request excessive details or unnecessary documents
If you are exporting:
❖ review carefully the swift message as soon as you receive it from the advising bank (do not ignore typing errors)
and make sure you will be able to provide the requested documents.
❖ Compare with the Purchase/Sale Agreement .
❖ Prepare export documents exactly as on the LC & present them as early as possible to have sufficient time to
make corrections where necessary.
❖ Avoid any unnecessary detail or unsolicited information.
❖ Pay attention to the solution of any discrepancy (even minor).

8
 Most common
discrepancies
1. Letter of credit has expired
2. Late presentation of documents
3. Late shipment of goods
4. Inconsistent spelling of parties’ names in documents
5. Terms of sale not complied with
6. Merchandise description not strictly as per L/C term
Correctable discrepancies
7. Partial shipment or transshipment effected despite L/C 1. Draft not in accordance with L/C terms
terms 2. Amount of draft does not agree with invoice
8. Foreign language documents must be exactly as per total
L/C 3. Invoice incorrectly addressed to the account
9. Documents are not consistent with one another party
10. Ocean Bill of Lading issued by forwarding agent 4. Description of goods in invoice does not
unacceptable correspond with description in L/C
11. Bills of Lading not clean 5. Invoice omits shipping terms
12. Insurance does not cover risks stipulated in the LC 6. Commercial invoice not signed
13. Insurance issued after shipment date 7. Bill of Lading not endorsed
14. Bills of Lading and Drafts not properly endorsed 8. Inconsistencies found in documents
15. Drafts not completed properly presented 9
Letters of Credit
The MT700 Swift Message
Status Tag Field Name
M 27 Sequence of Total O 43T Transshipment
O 44A Place of Taking in Charge/Dispatch from .../ Place of Receipt
M 40A Form of Documentary Credit
M 20 Documentary Credit Number O 44E Port of Loading/Airport of Departure

O 23 Reference to Pre-Advice O 44F Port of Discharge/Airport of Destination

O 31C Date of Issue
O 44B Place of Final Destination/For Transportation to.../ Place of Delivery
M 40E Applicable Rules
M 31D Date and Place of Expiry O 44C Latest Date of Shipment
O 51a Applicant Bank O 44D Shipment Period
M 50 Applicant O 45A Description of Goods and/or Services
M 59 Beneficiary
O 46A Documents Required
M 32B Currency Code, Amount
O 47A Additional Conditions
O 39A Percentage Credit Amount Tolerance O 71B Charges
O 39B Maximum Credit Amount O 48 Period for Presentation
M 49 Confirmation Instructions
O 39C Additional Amounts Covered
O 53a Reimbursing Bank
M 41a Available With ... By ...
O 78 Instructions to the Paying/Accepting/Negotiating Bank
O 42C Drafts at ...
O 42a Drawee O 57a 'Advise Through' Bank
O 42M Mixed Payment Details O 72 Sender to Receiver Information
O 42P Deferred Payment Details
O 43P Partial Shipments

10
 Letters of Credit

• Means that it can not be modified or canceled

without the approval of the Issuing Bank and
IRREVOCABLE? therefore security and confidence of the parties
involved in the negotiation.

According to the correspondent bank commitment

NOTIFIED CONFIRMED
• Advise to Beneficiary certifying • A Confirming Bank is bound to honor, as
authenticity of the credit. is the Issuing Bank, whenever the
• Advising Bank has no obligation documents are compliant with the
to pay. terms and conditions specified in the
credit.

11
 Letters of Credit
Meaning for the Exporter

If the L/C is:

NOTIFIED CONFIRMED

• Decision to Pay Issuing Bank Confirming Bank

• Time to Pay (Worst Scenario) 20 to 25 days Up to 5 days

• Time to Pay (Best Scenario) 10 to 12 days Up to 3 days

• Issuing Bank Risk Yes No

• Country Risk Yes No

• Extra cost No Yes (aprox 0.25% p.q.)

12
Letters of Credit
(1) CONTRACT
BENEFICIARY APPLICANT
(Seller) (Buyer)
(5) MERCHANDISE

(6) DOCUMENTS

(8) DOCUMENTS
(11)PAYMENT

(4) ADVISE

(3) L/C ISSUANCE

(7) DOCUMENTS
ADVISING ISSUING
BANK (*) BANK
(10) REIMBURSEMENT

(*) Confirmation 13
 Terms within the LC

Validity:
• Length of time for the issuing bank undertaking to honor a compliant presentation.
Includes the time for shipping and the term for documents presentation and the
Letters of Credit

necessary amendments to the documents.

• If due date falls on a nonbanking day, it will be prorogued to the following Banking day.

Term to Present documents:

• If not specified, banks will consider 21 days from B/L (but within the validity of the LC).

• If due date falls on a nonbanking day, it will be prorogued to the following Banking day.
falls on a nonbanking day, it will NOT be prorogued to the following Banking day.
Shipping Date:
• Last date to effect shipment of goods.
• If due date falls on a nonbanking day, it will NOT be prorogued to the following Banking
day.

14
 Terms within the LC
Example: Graphing the Terms in an LC
Issuing Date: 13.03.2x Last day for Docs Presentation: 15 ds B/L Deferred Payment or
Acceptance: 90 ds B/L
Shipping Date: 20.04.2x Validity: 90 days

Supplier
Issuing Last date for docs. LC Expira
Shipping Date: credit Due
date: Presentation: tion:
20.04.2x date
13.03.2x 05.05.2x(*) 11.06.2x 19.07.2x
15 days

Docs Presentation

LC Validity (90 days) Finance

* 05.05.2x was a Sunday (day considered 06.05.2x)

NOTE: * When it is not mentioned banks will consider 21 days from B/L.
15
 Availability within the LC

AT SIGHT
By Payment:
• Beneficiary receives payment as a consequence of a compliant presentation (in
accordance with the terms and conditions of the credit, the provisions of the UCP
Letters of Credit

600 and ISBP) of the export documents.

By Negotiation:
• Through advance or commitment to advance proceeds

AT TERM
By acceptance:
• Sale at term or credit granted by the exporter to the importer (usually for tenors of
not less than 30 days and not greater than 180 days).
• It means accepting a “Bill of Exchange” as a way to recognition of the debt to the
issuer of the B/E
By Deferred Payment:
• Similar to Acceptances (payment at term) but there is no Draft but a
“Commitment Letter”.
• Also known as “Supplier Credit”.
16
 Letters of Credit
Clasification by:

L/C

DOMESTIC INTERNATIONAL LOCATION

DEFERRED PYMT PAYMENT

SIGHT ACCEPTANCE TERM

NEGOTIATION AVAILABILITY

NOTIFIED TYPE OF
CONFIRMED
INSTRUMENT

TRANSFERIBLE REVOLVING

BACK TO BACK CLAUSE STAND BY MODALITIES

To be
covered
RED GREEN in ITF II

17
 Transferable Letters of Credit

article 38 UCP 600

USE:
• Broker doesn’t produce the goods
• Collects goods in the case of Export Consortiums.
1st beneficiary instructs transfer of the LC:
• To a 2nd Beneficiary (or several 2nd beneficiaries)
• Partial or total – just 1 time
• Substitution of 1st beneficiary as applicant
L/C opened as “Transferable” (field 40A from the SWIFT message)
Invoice substitution (Art 38 j.) in cases of Brokerage / Trading
Art 38 g.:
• Transfer must keep original terms & conditions
• Changes that can take place (reductions - not increments):
• Unit prices and amount
• Expiry date, Presentation date and shipping date.

18
 Transferable Letters of Credit

BUYER Beneficiary(ies) of the

(Applicant) Transferred LC (2nd
Beneficiary(ies) - Supplier)

Application for
Transferable L/C
ADVISING BANK
ISSUING BANK
of the Transferred LC Or more

FIN 700
FIN720
Field 40ª Transferable
Transfer of the LC
Opened w/instructions to
Notify Beneficiary
Bank that advises /Transfers
the Documentary Credit

Notification Instructions to transfer part or the

total of the LC

Beneficiary
(Intermediary)

19
 Back to Back Letters of Credit
(Support LCs): Each one of the 2 LCs is
ruled by UCP 600
USE:
• When there is an intermediary (who doesn’t manufacture the goods)
• When the exporter is unable to supply the whole purchase order.
Allows beneficiary to request a similar LC backed up by the original credit:
• In f/o another beneficiary (who manufactures the goods)
• Original L/C is used as support for the auxiliary credit (Back to Back)
• Importer might ignore existence of 2nd LC (difference with transferable).
Replacement of Invoice & Bill of exchange (if there is one).
Types:
• Export backing an Import (Exporter receives an LC but needs to import
goods)
• Export backing a Domestic purchase (Exporter receives an LC but needs
to buy domestic goods)
• Domestic Sale backing up a Import operation (Broker receives a domestic
LC but needs to import goods for the sale)
• Domestic Sale backing up a Domestic purchase (Broker receives a
domestic LC but needs to buy locally goods for the sale)
20
 Back-to-Back Letters of Credit

Beneficiary for the

BUYER
(Applicant)
subsidiary LC
(Supplier)

L/C N°1 Application Notification of L/C N°2

ADVISING BANK
ISSUING BANK
for the subsidiary LC

1st 2nd
FIN 700 FIN 700
LC L/C N°1 Original L/C N°2 Subsidiary
LC
ISSUING BANK for
ADVISING BANK the subsidiary LC

Notification of L/C N°2 Application

L/C N°1 Based on L/C N°1
Beneficiary of the
Original LC
(intermediary)
21
 Clauses Letters of Credit
Based in Banking Practice.
UCP doesn’t cover advances
RED CLAUSE
o Allows beneficiary to obtain advance payment (partial or total), against simple receipt.
o Pre shipment
o Use: Working Capital: Intended to cover manufacturing, packaging & packing, shipment, etc.
o Risk for Buyer – no shipment
o History (2 color Ribbon)

GREEN CLAUSE
o Similar to Red Clause, Advance payment (partial or total), against documents that allow the
importer to take control over the goods, at origin, that are waiting to be shipped.
o Exporter will deliver a Warrant or Certificate of Deposit or Warehouse Receipt:
o Issued by an authorized Warehouse, to the order of the Importer
o Kept in custody by the negotiating or confirming bank

22
 Clauses Letters of Credit
Based in Banking Practice.
UCP doesn’t cover advances

RED CLAUSE: Example of the text to be included on the LC:

ON FIELD 47A:
THIS IS A RED CLAUSE L/C. BENEFICIARY IS AUTHORIZED TO CLAIM ADVANCE PAYMENT FOR XX PCT
OF FACE VALUE OF THIS CREDIT //OR UP TO USD.XXXXXX AGAINST THEIR SIGNED STATEMENT
CERTIFYING THAT:

A) THE AMOUNT DRAWN IS TO BE USED FOR THE SHIPMENT OF THE MERCHANDISE FOR WHICH THIS
CREDIT IS OPENED.
B) BENEFICIARY UNDERTAKES TO DELIVER DOCUMENTS IN CONFORMITY WITH THE CREDIT TERMS
FOR NEGOTIATION ON OR BEFORE EXPIRY OF THIS CREDIT AND AGREES TO REPAY THE ADVANCE
PAYMENT AGAINST THE PRESENTATION OF DOCUMENTS.
C) BENEFICIARY GUARANTEE THAT THEY WILL REFUND THE AMOUNT DRAWN IN THE CASE THEY FAIL
TO PRESENT DOCUMENTS IN CONFORMITY WITH L/C TERMS BEFORE EXPIRY DATE OF THIS CREDIT.

ALL INTEREST AND CHARGES DURING THE PERIOD OF ADVANCES ARE FOR THE ACCOUNT OF THE
APPLICANT.

23
 Clauses Letters of Credit
GREEN CLAUSE: Based on Banking Practices.
No UCP article covering it.
Sample of text to be included:

46A: Documents required

DEPOSIT CERTIFICATE / WARRANT, ISSUED BY ALMACENERA AUTORIZADA SAC IN THE NAME OF BENEFICIARY AND
ENDORSED TO THE ORDER OF THE APPLICANT, INDICATING QUANTITY OF THE ABOVE-MENTIONED GOODS
ACCOMPANIED BY A QUALITY CERTIFICATE ISSUED BY CERTIFICADORA AUTORIZADA MADE FROM A SAMPLE OF EACH
WARRANT.
SIMPLE DULY SIGNED RECEIPT OF THE DRAWN AMOUNT UNDER THIS LETTER OF CREDIT ISSUED BY BENEFICIARY IN
DUPLICATE STATING: QUANTITY, AMOUNT, NUMBER OF THIS LETTER OF CREDIT, NUMBER OF THE CERTIFICATE /
WARRANT, ISSUER OF THE CERTIFICATE / WARRANT, NUMBER OF THE WEIGHT AND QUALITY CERTIFICATES ISSUED BY
CERTIFICADORA AUTORIZADA .
THIS LETTER OF CREDIT WILL ONLY BECOME OPERATIVE, FOR THE COUNTER VALUE OF EACH WARRANT AND / OR
CERTIFICATE OF DEPOSIT, AFTER CONFIRMATION FROM ADVISING / CONFIRMING BANK CERTIFYING:
HOLDING RELATIVE ORIGINAL WARRANTS / CERTIFICATES OF DEPOSIT IN THEIR PORTFOLIO ISSUED BY ALMACENERA
AUTORIZADA IN THE NAME OF BENEFICIARY AND ENDORSED TO THE ORDER OF APPLICANT.
TO HOLD THESE ORIGINAL WARRANTS AND CERTIFICATES OF DEPOSIT UNDER THEIR CUSTODY AT THE DISPOSAL OF
APPLICANT UNTIL LATTER AUTHORISES CERTIFICADORA AUTORIZADA TO COLLECT THE ORIGINAL WARRANTS AND
THE ORIGINAL CERTIFICATES OF DEPOSIT FROM ADVISING / CONFIRMING BANK, AGAINST PRESENTATION OF THE
FOLLOWING DOCUMENTS:
XXXXXXXXXXX
47A: Additional conditions
IN CASE SEPARATE WARRANTS ARE NEGOTIATED UNDER THIS LETTER OF CREDIT, FOR EACH CERTIFICATE / WARRANT
QUANTITY, A COMPLETE SET OF DOCUMENTS MUST BE PRESENTED FOR THE SAME QUANTITY AS SPECIFIED IN
XXXXXXXX.
24
 Revolving Letters of Credit

(art. 32 UCP 600)

USE: when there is a contract to supply goods periodically
• An LC is issued for the total amount, but LC commissions are charged per
period = Shipment.
• Means saving time doing administrative work & requesting credit.
• Issuer requires to have confidence & credit worthiness in the customer.
• Several regular & constant shipments

Comparative advantages of a revolving L/C vs. several L/C’s:

• Partial use more convenient
• Principal charged per period.
• Only one application for several shipments (cheaper)
• To the exporter means securing a larger sale for a longer period
• To the importer means negotiating a better price due to larger volumes
• To participating banks, mean to secure a long-lasting operation

COMMERCIAL USES:
• Commodities Export/Import: Sugar, Rice, Copper, Silver, Gold, wheat, etc.

25
 Non covered risks on LCs
• No way to know that purchased goods are those that have been invoiced
(Unless there is an Inspection)
• It doesn’t secure quality or quantity of goods same as in documents
(unless there is a certification)
• Banks negotiate with documents and not with goods.
• Banks are not responsible for the authenticity of the documents
• Due to a drop in goods price, applicant might feel compelled to press
Issuing bank to find whatever discrepancies there might be in order to
refuse documents.
• Technical Risks:
For the Issuing Bank: Interpretation & transmission of correct applicant
instructions.
For the Designated Bank: To make sure that documents are reviewed
thoroughly and according to issuing bank instructions

26
 Commissions on Letters of Credit

Events in LCs

IMPORTER EXPORTER Issuing Date Due Date

Ship Date Pres. Docs

Accept Due Date

VALIDITY

EVENTUAL USUAL EVENTUAL USUAL EVENTUAL

USUAL
/EVENTUAL
UTILIZATION /
PRE ADVISE OPENING AMENDMENT AMENDMENT SIGHT (Usual)
NEGOTIATION
UTILIZATION /
PRE ADVISE ADVISE AMENDMENT AMENDMENT ACCEPTANCE (Eventual)
NEGOTIATION
CONFIRMATION DEFERRED PAYMENT
(Eventual) (Eventual)

MODIFICACION AMENDMENT MODIFICACION AMENDMENT

SWIFT SWIFT SWIFT SWIFT
POSTAGES POSTAGES POSTAGES POSTAGES

Increment Term of pymt? Discrepancies

Extension Endorsements
Amendments Amendments

VALIDITY
LIFE CYCLE OF AN L/C - COSTS TO THE IMPORTER/EXPORTER 27
Letters of Credit

Cases…….

28
 CASE: Solution Bk of China

Graphing the Terms of the LC Tolerance Terms in the LC

Issuing Date: 24.06.22 Last day for Docs Pres.10 ds B/L 1) Amount Tolerance (Field 32B & 39A)
Shipping Date: 20.04.2x Validity: 90 days
+ 5% = USD 14,490
Last date for USD 13,800
Issuing Shipping LC Expira - 5% = USD 13,110
docs.
date: Date: tion:
Presentation:
24.06.22 15.08.22 24.08.22
25.08.22????
2) Quantity Tolerance (Field 45A & 47A)
10 days
+ 5% = 2,100 x ($310 – 1% = 306.90) = $ 644,490
2,000 MT
Docs Presentation - 5% = 1,900 x ($310 – 1% = 306.90) = $ 583,110

LC Validity (61 days)

Validity should be 62 or more days, Do you agree? How do you fit quantity tolerance within the amount tolerance?
CASE: Solution FANDANGO

Tolerance Terms in the LC

1) Amount Tolerance (Field 32B & 39A)
+10% = USD 17,512
USD 15,920
-10% = USD 14,328

2) Quantity Tolerance (Field 45A & 47A): 1 product separated in 2 orders:

+10% = 13.2 x $995 = $ 13,134 Maximum

12 M3
- 10% = 10.8 x $995 = $ 10,746 Minimum

+10% = 7.7 x $995 = $ 7,661.50 Maximum

7 M3
- 10% = 6.3 x $995 = $ 6,268.50 Minimum

• Addition of Maximums = 13,134 + 7,661.50 = $20,795.50

• Addition of Minimums = 10,746 + 6,268.50 = $17,014.50

NOTE: Amount Tolerance and Quantity Tolerance are discrepant

 INTERNATIONAL TRADE FINANCE I
Lecture 8. Discrepancies on LCs
2024-2
Oscar Melo Vega Ángeles
Antonio Esquivel Delfín
UCP 600

Documents Discrepancies

2
Let’s Review….

How to avoid future

Discrepancies on LC’s……..

3
¿Are the documents “compliant”?

• The discrepancies are

defined as the lack of
conformity between the
conditions specified in
the Letter of Credit and
the content of the
documents presented to
the bank to effect the
payment.

4
Discrepancies: ¿What are the consequences?

The existence of discrepancies

generate:

• Delay in the payment of the

Letter of Credit.

• Deductions from the payment

• No payment and refusal of

the goods

• Bigger operating costs

• Possible penalties

5
Frequent Discrepancies

INVOICE DOESN'T SHOW THE NAME OF THE

EXPIRED LC APPLICANT
LC SHOWS A DISCOUNT NOT CONSIDERED ON THE
INVOICE INVOICE NOT SIGNED
GOODS DESCRIPTION ON B/L DIFFER FROM THOSE LANGUAGE USED TO ISSUE THE INVOICE DIFFERS
ON THE LC FROM THE REQUIRED LANGUAGE
B/L SHOWS EXPENSES NOT CONSIDERED AS HEALTH CERTIFICATE IS DATED LATER THAN THE
FREIGHT SHIPMENT DATE
NAME OF A DOCUMENT DIFFERS FROM THE INSURANCE CERTIFICATE IS DATED LATER THAN
REQUIRED DOCUMENT ON THE LC THE SHIPMENT DATE
AMOUNT ON THE INVOICE DIFFERS FROM THE LC
MISSING INSURANCE DOCUMENT AMOUNT
UNSIGNED INSURANCE DOCUMENT CREDIT AMOUNT EXCEEDED
LACK OF REQUIRED DOCUMENTATION INCOTERM DIFFERS FROM THE ONE ON THE LC
PARTIAL SHIPMENT NOT ALLOWED (SHORT SHORT DRAWING (VOLUME SHIPPED BELOW THE
DRAWING) ONE REQUIRED ON THE LC)
AMENDMENTS IN DOCUMENTS LATE PRESENTATION
THIRD PARTY INVOICE SUBMITTED

6
Most Common Discrepancies and how they are named:

❑ Expired LC – Documents are presented in a date passed the LC

expiration date.
❑ Late Presentation (Stall Documents) – Exporter presents the
documents after the time for presentation or after the 21 days from
the B/L but within the LC Validity allowed by UCP 600.
❑ Late Shipment – Exporter shipped goods out of the permitted “Latest
Date for Shipment”
❑ Credit overdrawn – Invoice amount exceeds the LC amount.
❑ Short Drawing – either the invoiced amount or the quantity shipped
are smaller than those in the LC
❑ Value of the goods inconsistent among the different documents
presented.
❑ Shipment doesn’t include the quantity requested and partial
shipments are not allowed.
❑ “Health Certificate” has been requested but a “Sanitary Certificate”
has been presented. Wrong Document presented

7
¿What to do?

• The way to avoid the

existence of discrepancies
implies:
• a diligent acting not only from
the party that present the
documents for negotiation but
from the moment the exporter
receives the LC , verifying if he
will be able to fulfill the terms
and conditions required and
whether or not he will be able
to comply.

8
A few tips….

The Data must be consigned correctly in the documents to be presented to the

bank:
• Commercial Invoice:
• Names and addresses must be according to the LC as well as the
goods description which has to match that in the LC.
• Transport Documents (Bill of Lading, Airway Bill, Truck Transport receipt,
Railroad Transport Receipt:
• The Consignee and the name in the field "Notify to" must be as
requested. This document has to be signed and dated, CLEAN (without
unauthenticated or validated amendments but also without negative
observations to the merchandise). When signed by an agent, it must
indicate who is that the agent represents (the name of the captain of the
transport agent or the captain of the vessel has to appear).
• Other documents:
• Such as packing list, Origin Certificate, Health Certificate, Inspection
Certificate, Quality Certificate, Insurance certificate. The weight of the
merchandise has to match in the different documents presented
(Commercial Invoice, B/L, AWB).

9
Presenting the documents and then what?
❑The exporter makes the delivery of the documents
that are specified in the Letter of Credit to the
designated local bank (Advising Bank and/or
Confirming Bank (as it is the case).

❑The bank will review the documents, revision that

will be carried out in diligent form, in order to
determine if said documents agree fully with the
terms of the credit.

❑If they are compliant, the bank will proceed to

make the corresponding payment; however, if
they are not compliant, the bank will point out the
existence of discrepancies, which will be
communicated to the exporter; taking place the
suspension of the payment until the discrepancies
are lifted or of being the case, the payment won't
take place.

10
Criteria Banks use for the examination of Dox

EXPORTER BANK
DOCUMENTS
$ Payment against Compliant
/ Conforming Documents

Banks deal with documents & documents alone and use the following criteria to
examine documents:
• Terms and conditions of the L/C
• Uniform Customs & Practice (UCP 600)
• International Standard Banking Practice for examination of Documents (ISBP – Pub745E)
• Against each other
• Reasonable care / Common sense

11
Structure of the Application – Avoiding inconsistence
Letter of Credit Application

Content

• Structure
- Type of Documentary Credit & Parties
- Amount, Tolerance and Payment Terms
- Date & Place for expiration, last date for shipment and period for presentation
- Goods Description and shipment term (Incoterm)
- Required Documents
- Additional Conditions

• Analysis of the information within the application and possible inconsistencies

- Logistics Inconsistency
- Payment Terms impossible to determine
- Inconsistencies among dates vs. period for presentation
- Shipment Terms vs. required documentation

• The MT700 SWIFT message

1

12
Structure of the Application

13
Structure of the Application

Type of Credit and Parties in the credit

14
Structure of the Application

Amount and Payment Terms

15
Structure of the Application

Date & Place for expiration, last date for shipment and period for presentation

16
 Structure of the Application

Goods Description and Shipping Terms (Incoterms)

17
 Structure of the Application

Required Documentation:

18
 Structure of the Application

Additional Conditions

19
Analysis of the information within the application and
possible inconsistencies
Logistics Inconsistencies

20
Analysis of the information within the application and
possible inconsistencies

Payment Terms impossible to determine

21
Analysis of the information within the application and
possible inconsistencies
Inconsistencies among dates vs. Presentation Period

22
Analysis of the information within the application and
possible inconsistencies

Shipment Terms vs. required documentation

23
Analysis of the information within the application and
possible inconsistencies
Shipment Terms vs. required documentation

24
How to avoid Discrepancies and delays

Field Detail Recommendation

Beneficiary’s Indicate full address (Name, street, state, country, Number,

Not included or incomplete
address etc.). Avoid using P.0. Box
Place for expiration should be the country of the Negotiating
Expiration date Not mentioned
Bank
Basic principles are:
•If Drafts at sight (vista)—LC available 'By payment’
Inconsistency between •If Term drafts on Advising/Confirming/Negotiating bank
Availability of the availability of the credit and (usance)—LC available 'By Acceptance’
L/C details for drawings under the •If Term drafts on any other bank—LC available 'By
L/C negotiation’
•If Term Credit but no drafts—LC available 'By Deferred
Payment'
LC doesn’t specify details for
Available With...By,
availability, drawings, drawee, Whenever applicable, any LC must contain clearly indicated:
Drafts At..., drawee
(Available with...By, Drafts At.., Availability, Negotiating Bank, Term for payment; drawee
and place for
Drawee) nor place for and expiration place
expiration
expiration
Sometimes it is used the
previous year, the supposed
Make sure when indicating the expiry date that it is todays
Expiration Date date of advise, inconsistent
year but it has to be past the shipment date.
with the last date for
shipment
25
How to avoid Discrepancies and delays
Field Details Recommendation
When there are terms such as: As
The LC should always include a brief description of
per Purchase Order No.
the goods and/or service. In the case of electronics
Spare Parts, Commodity:B-18-S, As
Goods Description equipment or chemical products, it is advisable to
per Contract No.XXX, As per
indicate the purpose of their final use. Avoid the use
Performa Invoice, Machine Parts,
of technical acronyms.
RI-H7802-8-I, Details as per ATT
Ports in general are not mentioned
Ports / airports
or it is inconsistent with the mean Mention the ports or airports depending of the type
For loading and
of transportation (i.e. maritime but of transport used
unloading
they mention an airport)
In order for a bank to be able to confirm an LC it is
required:
Do not authorize a debit to an a) Authorization from Issuing Bank to debit their
Confirmation account or they nominate a account or
reimbursing bank b) Authorization to claim reimbursement from a
bank in the country where the payment will be
effected (GBP,JPY)
Facilitate complete address and SWIFT of the 2nd
advising bank if within the same country as the 1st
No indication of the swift address advising bank (street address, city, state and Zip
Advise Through
nor physical address of the Advise Code) along with the Swift/GCN address.
Bank
Through Bank If LC to be advised via electronic means (in a different
country), swift address is a must (also mention if a
specific branch is required)
Retransmission of Issuing Bank requests the
Usually in the format of a FIN 710. 26
Messages and LCs retransmission of a message or LC
How to avoid Discrepancies and delays
Field Details Recommendation

All LCs must require Commercial Invoice as well as a

Shipping Document (depending on the transaction).
Required
Transport Document not required by This is, regardless of the transaction, a must because
Documents
the LC of the Anti Money Laundering Laws.
(Transport)
Additionally it should be enforced to require the
originals and their quantity.

Required The LC should always mention the terms of sale –

Inconsistency among INCOTERMS
Documents INCOTERMS, under which the goods will be
and other references to freight or
(not consistent dispatched with a clear consistency with the way the
insurance within the LC
with Sale Terms) freight will be paid.

LC requires as special condition that Banks, as per Trade Finance banking practice, abide
Additional Citi verifies that the signatures of by the rules, do not assume responsibility to verify
Conditions the documents presented for signatures (UCP600 Article15). As per policy, the
(signatures negotiation match against a majority of banks do not verify signatures on
verification) specimen of signatures sent to them documents presented for negotiation against any
as part of the LC specimen provided by the Issuing bank

LC or amendment mentions Eliminate this type of conditions as it is not a good

Charges & conditions such as: it will become banking practice. Expenses should be charged at
Expenses operative or advised once charges every event or agreed with the parties to be charged
are paid at negotiation.
27
Case revision

• Case: LC text revision

• Case: Comparing documents against an LC

• Case: Discrepancies detection

28