International Trade Finance

Presented by:

Jim Chester
Chester/Associates, PLLC
Dallas, Texas JD, LL.M, CHB, CCS

Chester/Associates, PLLC
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International Business Transactions Key principal in all business transactions: - maximize sales & prots while simultaneously managing risk & reducing exposure Risks in international transactions include: - legal risk - political risk - marketing risk - nancial risk

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March 28, 2008

International Trade Finance

Risk in international trade nance: - non-payment - inadequate or incorrect goods received - currency issues Most nancial risk can be minimized/or eliminated with good contracts and planning

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March 28, 2008

International Trade Finance

Methods of Payment A. Advance/Post Payment

1. 2. 3. Cash Check Wire

B.

Letters of Credit (LC)

1. 2. 3. Documentary LC Stand-by LC Back-to-back LC

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March 28, 2008

Wire
Wire Transfers Trivia
-- Every day in the USA, roughly 2 trillion dollars are transferred via Fedwire and the Clearing House Interbank Payment System (CHIPS); -- Every 2 -4 days, the total gross national product of G-10 countries turns over on the wires.

Initiated by Buyer pursuant to the underlying contract

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March 28, 2008

Letter of Credit
Reasons for Using LC

A. Parties do not know each other. B. A means to avoid risk of default by the other party. C. Shift risks to other parties.

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March 28, 2008

Letter of Credit
What is a LC?

A promise issued by a bank to another party which states the bank will pay the seller a specified amount when certain conditions are met. Can be continuous/revolving or for a single transaction

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Letter of Credit
Parties Involved in a LC Transaction:

A. B. C. D. E. F. G.

Buyer Issuing Bank Seller Receiving Bank (sellers Bank)

A. Can be Confirming Bank

Freight Forwarder Carrier Insurance Company

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March 28, 2008

Letter of Credit
Governing Law of LC: A. LC is by nature a matter of contract; the rules of letters of credit are embodied in the terms of the contracts themselves. B. Parties may choose the governing law in the LC document/contract.

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March 28, 2008

Letter of Credit
Governing Law of LC: C. UCP 600: Standards developed by the ICC; if incorporated into the LC, it is binding in case of dispute. D. UCC Article 5: If the UCP 600 is not incorporated into the LC, and there is not other choice of law provision, the UCC might be a gap-filler.

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Documentary Letter of Credit

Documentary LC Step 1: Forming the Sales Contract
The basis of all transactions - Provisions for the LC
-- Step -

2: Arranging Financing

Buyer & its bank signs an independent loan agreement - Issuing bank is not privy to the Sales Contract - LC & credit worthiness of Buyer - Sellers Bank either conrm or deny LC - If conrmed, Seller ships goods.

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March 28, 2008

Documentary Letter of Credit

Step -

3: Shipping of the Goods

The Seller engages a Freight Forwarder (FF) - Seller gives instructions and documents to FF - Common Shipping Documents include: - Packing List - Commercial Invoice - Certicate of Origin - Certicate of Inspection - Seller transports goods to Carriers pier for Dock Receipt. - When goods loaded to the vessel, Carrier issues a negotiable bill of lading. - Seller arranges for insurance for the goods during transport.
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Documentary Letter of Credit

Step -

4: Payments for the Goods

The Seller draws a draft on the Issuing Bank - The Seller presents draft and required documents to conrming bank for payment. - Common Documents include: - Negotiable bill of lading - Insurance Certicate - Packing List - Certicate of Inspection - Commercial Invoice - Certicate of Origin

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March 28, 2008

Documentary Letter of Credit

Step -

4: Payments for the Goods

The Conrming Bank honors the draft and pay Seller in return for the documents tendered. - The Conrming Bank forwards the documents to Issuing Bank for payment. - Issuing Bank presents the Documents to Buyer on Credit or upon payment. - Buyer presents the bill of lading to Carrier for the release of goods.

Chester/Associates, PLLC
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March 28, 2008

Documentary Letter of Credit

Fundamental Principles of LC
- The responsibility of banks to deal with documents only.
- The

rule of independence: LC is considered independent from the sales contract between the parties. - The rule of strict construction: terms and conditions of the LC are strictly adhered to.

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March 28, 2008

Standby Letter of Credit

What is it? --US equivalent of a performance bond issued by US banks. --A guarantee and not a way to make payment. --It allows buyers to collect payment if the buyer shows the seller has not met certain promises dictated in the contract. --The party putting up the standby letter of credit does not have to deposit any money or release any money unless the other party demands payment on the standby letter of credit.

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Back - to - Back Letter of Credit

When/How to Use? -- Often used if Seller needs capital to obtain resources form a Supplier to fill Buyers order -- Seller executes LC with a bank FBO the Supplier, using the primary LC (i.e., the Buyers LC) as collateral

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March 28, 2008

Regulatory Considerations
Anti-Boycott Laws -- Do not allow impermissible terms to appear in LCs Foreign Corrupt Practices Act (FCPA) -- Beware of improper commissions or other payments

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March 28, 2008

Questions?
Email JFChester@tradelawfirm.com Direct 214.800.2845

Toll Free 1.877.34.World

Chester/Associates, PLLC 6060 NCX, Suite 560 Dallas, Texas 75206 www.tradelawfirm.com

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March 28, 2008