International Trade Finance: A Pragmatic Approach
By Tarsem Bhogal and Arun Trivedi
()
About this ebook
The 21st century has witnessed swift change in every sphere of the human endeavour. Regulatory re-alignment, digitalisation and economic and political developments have contributed to paradigm shift in banking, trade, finance and the shipping industry virtually transforming the landscape. International Trade Finance is an essential tool for bankers, exporters/importers, shippers, consultants, teachers and students navigating the procedures of international trade finance. The book addresses basic topics relating to international trade including letters of credit mechanism, collections of bills, trade customs and practice. New to this revised edition, it covers SWIFT updates, supply chain system, UKEF, Blockchain technologies, the implications of BREXIT, NAFTA, Mexico, Canada and other bilateral agreements and their implications, the US sanctions, terrorist financing and anti-money laundering provisions, and a check list to control financial crime risks in tradefinance. The extended metaphor of the book is that of an arm chair tour covering fundamentals to the nuances of the hard core of the subject matter and enabling the readers to deal with complicated implementation issues in a forthright and comprehensive fashion.
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International Trade Finance - Tarsem Bhogal
Finance and Capital Markets Series
The Finance and Capital Markets series is designed to bring you high-quality, cutting-edge information on the latest issues and developments in the financial world. These authoritative yet accessible books, written by experts in their field, provide clear, practical guidance not only for industry professionals, but also serve as a framework of current analysis for scholars and form a comprehensive reference resource for libraries.
More information about this series at http://www.palgrave.com/gp/series/13977
Tarsem Bhogal and Arun Trivedi
International Trade Finance
A Pragmatic Approach
2nd ed. 2019
../images/361668_2_En_BookFrontmatter_Figa_HTML.pngTarsem Bhogal
London, UK
Arun Trivedi
London, UK
Finance and Capital Markets Series
ISBN 978-3-030-24539-9e-ISBN 978-3-030-24540-5
https://doi.org/10.1007/978-3-030-24540-5
© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2019
This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use.
The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Cover illustration: Thatree Thitivongvaroon / GettyImages
Cover design by eStudio Calamar
This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG.
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
Preface
The global trading system is undergoing a period of transition. Shifting economic circumstances, major advances in technology and the emergence of new players on the global scene all underscore that we are on the cusp of big changes. Persistent imbalances, driven largely by macro-economic factors, continue to be a cause of concern in some major economies. Even in such a climate of uncertainty, one thing is certain: that there is a great need to strengthen the global trading system by making it more equitable and relevant for those who trade in the twenty-first century with Uniform Customs and Practice.
In retrospect we find that in 2005, the value of world merchandise exports rose by 13% to $10.1 trillion and the value of world commercial services export by 11% to $2.4 trillion. The volume and value of international trade is a testimony to make us believe that the world order has changed quite swiftly over the past ten years at a much faster pace than that of the previous 20 years. It is difficult to contemplate what the world trade/economies will look like in 2010. One thing is certain, however: Change is inevitable. Bankers and trading communities operating in such a climate will have to face challenges that are immense.
Technology has indeed opened up new markets, with geographic boundaries becoming non-existent to the web-enabled community. What we see today is the beginning of the reaction to this expansion as an outcome of globalisation and internationalisation, adding multi-complexities to the players in the international trade.
In this spectrum, industry practitioners will solicit solace by resorting to basics and learning the lesson of the laser. How to understand rather than find a solution from the ponderance? So we did, encouraged by these international interactive developments.
Based on our learning experience and working as practitioners facilitating international trade, in our capacity as bankers, we have worked on the treatise in your hands: International Trade Finance: A Pragmatic Approach (2007). In fact, we have been motivated to write this book in view of the urge from the beginners as well as industry practitioners to understand and grasp the type and nature of various documents in use in international trade and mechanisms of settlement of payments thereof.
The book is organised into 25 chapters endeavouring to address key topics relating to the gamut of international trade, letter of credit mechanism, collections , trade customs and practice, and so on. We do not pretend that all technical concerns are answered but we are confident that we have gone much further than any other published material on the subject. Dealing with complicated implementation issues in a forthright and comprehensive fashion and design, we have given a lucid account of provisions vis-à-vis trade customs and practice while protecting the interests of the parties involved in international trade. We have striven to present and explain transaction flow through diagrams, easing the job of a learner enabling to understand and grasp the hardcore subject matter.
We sincerely believe that this book will be regarded as an essential tool for both beginners and practitioners in international trade. We are hopeful that the readers will position this book within easy reach for navigating solutions to assorted trade-related issues and/or as a constant travel companion when in business across the world.
Tarsem Bhogal
Arun Trivedi
London, UKLondon, UK
Acknowledgements
We are grateful to the following authorities for their permission to publish information in this book relating to their products and services. As the systems and procedures of international trade change with improvements of information technology and other developments, we request the readers to visit their websites to obtain the latest information:
1.
Export Credit Guarantee Department— www.ecgd.gov.uk .
2.
UK Export Finance— www.ukexportfinance.gov.uk
3.
International Chamber of Commerce (ICC) Paris—www.iccwbo.org
4.
Society for Worldwide International Financial Telecommunication—www.swift.com
Disclaimer: The authors have made reasonable efforts to ensure the accuracy of the information given in this book at the time but assume no liability for any inadvertent error or omission that may appear. The information may change from time to time and practical procedures may also differ from one bank to another; the authors do not accept any liability for the consequences of error or omission.
Tarsem Bhogal
Arun Trivedi
Praise for International Trade Finance
This book is a welcome addition to the literature with details of both innovative concepts and professional practice. This book will be highly useful to academics, practitioners and banking officials all over the world.
—Professor Thomas Muthucattu Paul, Professor of Economics and Finance, PNG University of Technology, Papua New Guinea
This topical book is essential reading suited to a wide range of readers interested in International Trade Finance. An armchair read for consultants and practitioners, it features useful background material for short duration or capsule programmes run by trainers. The extensive content qualifies this is as a good desk reference book for both bankers and shippers.
—Somya Mishra, Assistant Vice-President, Risk COO, Deutsche Bank London, UK
This handy tool provides a comprehensive foundation for understanding all aspects of International Trade Finance in a global context, covering the key principles, concepts, infrastructures, practices, issues, and current developments. Definitely a must read for professionals in banking, commerce, trade and transport industry who want to gain a closer understanding of International Trade Finance pragmatically.
—Ankita Sethi, freelance Socially Responsible Investment Consultant, analyst and writer
I appreciate the endeavours of the authors in bringing this informative, educational and self-training literature on this subject. The topics covered in the second edition will be appreciated by beginners and practitioners undertaking the demanding and complex international trade business.
—B.C. Bassi, Former Non-workmen Director on the Board of State Bank of India (formerly known as State Bank of Patiala)
Contents
1 International Trade and Inherent Risks 1
Background of International Trade 1
Exporters’ Risks 2
Importers’ Risks 2
2 Services Offered by Commercial Banks 5
Finance for Exports 7
3 Methods of Trade 9
Cash on Delivery 9
Advance Payment 10
Open Account 10
Collections 10
Letters of Credit 11
Methods of Payment/Settlement of Account 11
Cheque 11
Bank Draft 11
Mail Transfer (MT) 12
SWIFT 12
CHAPS 12
CHIPS 12
Direct Debit 12
EFT 13
Fedwire 13
4 Foreign Exchange Rates 15
Introduction 15
Foreign Currency Transactions 15
Bank’s Accounting System 15
Foreign Exchange Market 16
Exchange Rates Quotation 16
GB Pound Spot and Forward Rates 16
Sterling Spot and Forward Rates 17
Spot Exchange Rates 17
Forward Exchange Rates 17
Fixed Forward Exchange Rates 18
Option Forward Exchange Rates 18
How Exchange Rates Are Determined 18
Factors Influencing Exchange Rate 19
Forward Exchange Rates 19
Foreign Exchange Spot Transaction: Mechanism 20
Forward Exchange Contract 21
How the Forward Exchange Rate Is Calculated 22
5 Bills of Exchange, Collections, Purchasing and Discounting 25
Definition of a Bill of Exchange 25
Parties to a Bill of Exchange 27
Other Parties to a Bill of Exchange 27
Types of Bills of Exchange 28
Sight Bill of Exchange 28
Usance Bill of Exchange 28
Clean Bills of Exchange 28
Documentary Bill of Exchange 29
Accommodation Bill of Exchange 29
Clauses on Bills of Exchange 29
Acceptance of a Bill of Exchange 30
Importance and Requisites of Acceptance 30
Liability of Acceptor 31
Presentation for Acceptance 31
Types of Acceptances 31
Endorsement of Bills of Exchange 32
Types of Endorsements 32
Negotiability of Bills of Exchange 36
Discharge of Bills of Exchange 37
Collection of Bills 38
Mechanism: Sight Bill for Collection 41
Mechanism: Documentary Usance Bills for Collection 42
Bills Purchased 44
Bills Discontinued 45
Precautions to Be Taken 45
Bills Processing Cost (Indicatives) 46
6 Documentary Letters of Credit 47
Parties to a Letter of Credit and Their Responsibilities 48
Who Does What? 51
Advantages and Disadvantages of Letters of Credit 52
Advantages to Exporter 52
Advantages to Importer 52
Disadvantages to Applicant/Importer 53
Disadvantages to the Beneficiary 53
Letter of Credit Mechanism 54
Letter of Credit Contracts and Regulations 55
Contracts and Regulations 55
Sale Contract 56
What Is a Sale Contract? 56
Contents of a Sale Contract 57
7 Letters of Credit: Types 59
Types of Letters of Credit 59
Clean Letter of Credit 59
Documentary Letter of Credit 59
Circular or Traveller Letter of Credit 60
Revocable Letter of Credit 61
Irrevocable Letter of Credit 62
Irrevocable Confirmed Letter of Credit 63
Silent Confirmation 64
Revolving Letter of Credit 65
Revolving Letter of Credit: Mechanism 65
Red Clause Letter of Credit 66
Red Clause Letter of Credit: Mechanism 67
Transferable Letter of Credit 69
Transferable Letter of Credit: Mechanism 70
Transferable Credit: Limitations 71
Limitations 71
Procedure for Effecting Transfer of a Letter of Credit 73
Back-to-Back Letter of Credit 73
Back-to-Back L/C: Salient Features 75
Back-to-Back Transactions Risks 75
Risk Factors 76
Back-to-Back Letter of Credit: Mechanism 76
Important Points to Consider 76
Status of Issuing Bank of the Prime Letter of Credit 78
Credit Check on Letter of Credit Applicant 79
Assignment of Prime Letter of Credit 79
Safeguards 83
Third Country or Transit Letter of Credit 85
Mechanics of Third Country or Transit Letter of Credit 85
Deferred Payment Letter of Credit: Mechanics 87
Standby Letter of Credit 88
Standby Letter of Credit: Mechanism 89
A Specimen of Standby Letters of Credit 91
Skeleton Letter of Credit 94
Omnibus Letter of Credit 94
Straight Letter of Credit 94
8 Methods of Payment Settlement 95
Payment L/C 95
Channels of Payment Settlement 95
Payment 95
Payment L/C: Bill on Issuing Bank 96
Payment Settlement: Method/Acceptance Letter of Credit 96
Mechanism of Settlement: Acceptance L/C 97
Acceptance 97
Method of Settlement: Usance Bill on Issuing Bank 98
Bankers’ Acceptances 98
Advantages of Discounting Bankers’ Acceptances 100
Method of Settlement: Negotiation 100
Negotiation: Sight Bill of Exchange Drawn on Issuing Bank 101
Negotiation 102
Usance Negotiation 102
Procedure for Advising/Confirming Bank 102
Negotiation of Documents under Reserve 104
Advising/Confirming Bank: Procedural Aspect 105
9 Financial Load Variations: Eight Types of Letters of Credit 107
Payment Letter of Credit: Bill Drawn on Issuing Bank 108
Payment Letter of Credit: Bill Drawn on Confirming Bank 109
Deferred Payment Letter of Credit 110
Acceptance Letter of Credit: Bill Drawn on Issuing Bank 111
Acceptance Letter of Credit: Bill Drawn on Confirming Bank 112
Sight Negotiation Letter of Credit: Bill Drawn on Issuing Bank 113
Usance Negotiation Letter of Credit: Bill Drawn on Issuing Bank Paid at Maturity 114
10 INCOTERMS 2010 117
Background 117
Purpose 118
Structure of INCOTERMS 119
INCOTERMS for Any Mode or Modes of Transport 119
INCOTERMS for Sea and Inland Waterway Transport Only 127
11 Documents in Foreign Trade 131
Genesis and their Significance 131
Bill of Exchange 132
Invoice 133
Pro-Forma Invoice 134
Bill of Lading 134
Types of Bills of Lading 135
Air Waybill 137
Certificate of Origin 138
Certificate of Inspection 138
Packing List 138
Post Parcel/Courier Receipt 139
Forwarding Agent’s Receipt 139
Rail, Road Consignment Notes/Truck and Carrier Receipt 139
Consular Invoice 139
Veterinary Certificate/Health Certificate 140
Non-Negotiable Sea Waybill (UCP Article 21) 140
Multimodal Transport Document (UCP Article 19) 140
Combined Transport Document 140
FIATA Bill of Lading 141
Other Documents 141
Note 141
12 Negotiation of Documents 143
Meanings of Negotiation 143
Role of Advising and Confirming Banks 144
Role of Issuing Bank 144
Negotiation of Documents Under Reserve 145
Letter of Credit: Processing Cost (Indicatives) 146
13 Factoring and Forfaiting 147
Factoring: Genesis 147
Factoring and Cash Flow 147
Factoring and Legal Implications 148
Factoring Mechanism 148
Advantages of Factoring 149
Disadvantages of Factoring 150
Invoice Discounting 150
Advantages to Exporter 151
Export Factoring 151
Export Factoring: Sales Criteria 151
Forfaiting: Genesis 152
Fixed Rate Export Finance 152
Forfaiting: Capital Goods Sale 153
Forfaiting: Secondary Markets 153
Risks in Export Finance 154
Advantages to the Exporter 154
Disadvantages to the Exporter 155
Requirements of a Forfaiter 155
Documents Required by the Forfaiter 155
Forfaiting Procedures in Practice 156
Mechanism of a Forfaiting Transaction 157
14 Electronic Documents (eUCP) 159
15 Scrutiny of Documents: Procedures 165
Buyer’s Responsibilities 166
Seller’s Responsibilities 166
Responsibilities of Other Parties (Banks) 166
The Issuing Bank 167
Letter of Credit 167
Bill of Exchange 167
Commercial Invoice 168
Insurance Document 169
Bill of Lading 170
Air Waybill and Air Consignment Note 171
Parcel Post/Courier Receipts 171
Other Transport Documents 171
Certificate of Origin 172
Packing List 172
Weight List/Note 173
Other Documents 173
16 Common Irregularities in Documents 175
Compliance of Terms 175
Documentary Credit 175
Bill of Exchange 175
Invoice 176
Bill of Lading 176
Marine Insurance 177
Note 177
Remember 177
17 Bank Guarantees and International Bonds 179
Guarantees as Security 179
Distinction Between Guarantees and Indemnities 181
Advantages of Guarantees as Security 182
Disadvantages of a Guarantee as Security for a Credit Facility 183
Procedures for Taking as Security 183
Precautions 185
International Bonds/Bank Guarantees 186
Introduction 186
Parties 186
Bank’s Role 187
Format of Bank Guarantees/Bonds 187
Advantages 187
Categories of Bank Guarantees/Bonds 188
Types of Bank Guarantees/International Bonds 189
Bid Bonds or Tender Bonds 189
Mechanics of Bid Bond 190
Performance Bond 192
Retention or Maintenance Bonds 194
Banking Facility 194
Other Types of Bonds 194
Precautions 194
International Bonds/Guarantees: Precautions 195
Time for Payment 195
Arbitration Clause 196
Documentation 196
Expiry Date 196
Return of Guarantee Document 196
Issuing Bank Guarantees: Action Steps 196
International Bonds and Bank Guarantees: Specimens 198
18 SWIFT and Letters of Credit 203
Introduction 203
Definitions 204
License 204
Limitations 204
Sub-licensing 204
Ownership of SWIFTStandards 204
Termination 205
Disclosure of IP Rights 205
Non-enforcement of IP Rights 205
Disclaimer 205
Limitation of Liability 205
Choice of Law: Arbitration 206
SWIFT UCP 600 Usage Guidelines 206
Exceptional Update to Achieve Alignment 206
Changes That Financial Institutions Could Use from 1 July 2007 207
Date and Place for Presentation of Documents Under a Credit 207
Expiry Dates in Reimbursement Authorizations (or Amendments Thereof) 207
Details About the Disposal of Documents in a Notice of Refusal 208
Messages Types (MT) 210
Issuing Documentary Letter of Credit Using SWIFT MT (Page 701) 213
Pre-advice of a Documentary Letter of Credit MT 705 214
Advice of a Third Bank’s Documentary Letter of Credit MT 711 216
Documentary Credit Amendment Page 1 (707A) 218
Documentary Credit Amendment Page 2 (707B) 220
Transfer of a Documentary Credit MT 720 221
SWIFT Format of a Letter of Credit 224
19 ICC DOCDEX Rules 227
Genesis 227
ICC DOCDEX 227
Background 228
Speed: A Hallmark 228
Scope 228
Administration 229
DOCDEX: Transparency and Independence 229
Speed Vs. Quality: Decision-Making 230
DOCDEX Rules: Benefits 230
DOCDEX and the Trade Finance Lawyers 231
DOCDEX: When Trade Finance (TF) Documents Are Subject to General ICC Rules 231
DOCDEX: Implications on Trade Finance Documentation 231
20 UK Export Finance 233
Background 233
Equivalent Organisations in the World 233
No Finance by the ECGD 234
Aim/Objective 234
Mission 235
How UKEF Operates 235
UKEF Products 236
Export Insurance Policy 236
Credit Insurance Services 236
Bond Support Scheme 236
Eligibility 237
How to Apply? 237
Bond Insurance Policy 237
Eligibility 238
How to Apply? 238
Eligibility 239
How to Apply 239
Access UKEF’s Bond Support Scheme Directly Through Their Bank Viz. 239
Export Working Capital Scheme 239
Eligibility 240
How to Apply? 240
Letter of Credit Guarantee Scheme 241
Eligibility Criteria 241
How the Scheme Works? 242
How to Apply? 242
Benefits of the Scheme 242
Risks Covered 243
Cost 243
Export Finance: Collections 243
Key Points 243
Characteristics of a Documentary Collection 244
When to Use Documentary Collections 244
Typical Simplified D/C Transaction Flow 244
Supplier Credit Financing Facility 245
Eligibility 245
How the Supplier Credit Loan Facility Works 246
How the Supplier Credit Bills and Notes Facility Works 246
How to Apply? 247
Buyer Credit Facility 247
Eligibility 248
How It Works? 248
How to Apply? 249
Local Currency Financing 249
Eligible Currencies 250
How It Works? 250
Benefits of Local Currency Financing 251
LIMIT 251
Cost 251
How to Apply? 251
Disclaimer by UKEF 252
How It Works? 252
Benefits of Local Currency Financing 253
Maximum Amount 253
Cost 253
How to Apply? 253
UKEF’s Disclaimer 254
Direct Lending Facility 254
Eligibility: The Following Criteria Must Be Met 254
Initial Enquiry Form 254
How It Work? 255
How to Apply? 255
Benefits of a Direct Loan 256
Maximum Amount 256
Cost 256
Interest Rate 257
Disclaimer by the UKEF 257
Export Refinancing Facility 258
Eligibility 259
How It Works? 259
How to Apply? 260
Lines of Credit 261
How to Apply? 261
Line of Credit 262
The Benefits of a Line of Credit 262
Risks Covered 263
Eligibility Criteria 263
LIMIT 263
Term 263
Cost 263
Disclaimer by the UKEF 264
Overseas Investment Insurance 264
Eligibility 264
How It Works? 264
How to Apply? 265
Debt Conversion Scheme 265
How to Apply? 265
How It Works? 266
The Benefits of the Debt Conversion Scheme 266
Eligible Countries 267
Eligibility 267
Cost 268
21 Marine Insurance 269
Introduction 269
Importance of Marine Insurance 269
Definition 270
Classification of Marine Insurance Cover 270
Marine Insurance Associations 271
Types of Insurance Instruments 271
Marine Insurance Policy 271
Institute Cargo Clauses (A) Risk Covered 272
Institute Cargo Clauses (B) Risks Covered 272
Institute Cargo Clauses (C) Risks Covered 273
Contents of a Marine Insurance Policy 273
Insurance Certificate 274
Insurance Documents Normally Show the Following Details 274
22 Innovative Non-traditional Finance 275
Supply Chain Finance 275
What Is a Supply Chain? 275
Mechanism 275
UK Government Support 276
Large Companies vs. SMEs 276
Supply Chain Finance: Benefits 277
Tim Breedon Taskforce on Non-Bank Lending 277
Pharmacist Scheme 277
NHSBSA 277
GSFC Role 278
Structures 280
Structured Finance 281
Structured Finance-Anatomy 281
Structured Finance-Products/Instruments 281
Benefits 281
Securitisation 282
Bridging Loan 282
High Street Banks 282
Bridging Loans Work Mechanism 282
Auction Purchase 283
Development and Refurbishment of Property 283
Cash Buy and Opportunity 283
Exit Strategy 283
Bridging Finance-Interest 284
Quantum of Finance 284
Bridging Finance Is Basically to 284
Bridging Finance Providers 284
Mezzanine Finance 285
Debt and Equity vs. Mezzanine Finance 285
Debt Finance 285
Mezzanine’s: Importance 286
Equity-Business Participation 286
Illustration 286
For 287
Against 287
Final Word 287
23 BREXIT 289
Theresa May 290
Divorce Issues 290
Key EU Summit 291
Brexit: The Britain’s Stand 291
The Labour Party and Brexit? 291
Soft
and Hard
BREXIT: Implications 292
Standards and Level Playing Field 292
Critics 292
Reality Check: The Government’s Customs Options 293
Health Care 294
BREXIT Deal: Parliament Vote 294
UK Residents: Visa to Travel to the EU 294
Work/Study: Issues 294
Pensions, Savings, Investments and Mortgages 294
UK to Leave: Reasons 295
Immigration 295
UK–EU: Remainers 295
UK to Remain in EU: Reasons 296
Businesses 296
UK: Political Influence 296
NAFTA (North American Free Trade Zone): Historical Perspective 297
Goal 297
Intellectual Property 297
Re-negotiation 299
Trade Policy 299
President Trump’s Approach 299
Threats/Retaliation 300
WTO Effectiveness 300
Manipulating Currency 300
WTO 300
24 Blockchain Technology and Trade Finance 303
Blockchain Technology 303
Cryptographic Keys 304
Relationship and Belief of Architects 304
Distributed Network 305
Blockchain: A System of Record 305
Protocol 305
Network Servicing Protocol 306
Verification vs. Blockchain 306
Blockchain and Trade Finance 307
Current Scenario and Perspective 307
Importers 307
Exporters 307
Timeline 307
Anti-money Laundering (AML) Checks 307
Multiple Platforms 307
Shipping Documents 308
Facts/Truth 308
Payment/Settlement 308
Trade Finance: Future State Version (Blockchain) 308
Blockchain: Advantages 309
Disadvantages 309
Blockchain: Issues and Limitations 310
Network Size 310
Costs and Speed 310
Human Error 311
Security Flaw 311
Regulatory Provisions 311
Bolero 312
Goal 312
25 Money Laundering and Sanctions 313
Money Laundering 313
Terrorist Financing 313
Contribution 314
Funding Sources 314
International Terrorist Groups 314
Money Movements 315
Intermediaries/Professionals 315
Money Changers/Couriers 315
Hawala or Hundi and Underground Banking 316
Trade-Based Activities 316
Investment Houses 316
Capacity Building 317
Cleaned to Give 317
UK Law 318
Tax Evasion 318
Single/Multiple Act 318
The Terrorism Act 2000 319
US Sanctions: Perspective and Implications 319
Perspective 319
Objective 319
Economic Power Strategy 319
Russia 320
Iran 320
North Korea 321
Venezuela 322
Global Magnitsky 322
Annexures 323
Glossary 333
Index 351
List of Figures
Fig. 4.1 Action flow diagram customer sells GBP against USD 21
Fig. 4.2 Action flow diagram customer sells USD against GBP 22
Fig. 4.3 Fixed forward contract 23
Fig. 4.4 Forward contract with option over third month 23
Fig. 4.5 Exchange margins: premium and discount in forward contract 23
Fig. 5.1 Bill of exchange: specimen 26
Fig. 5.2 Types of bills of exchange (Note: the term D/P is not permitted on Usance bill of exchange
under URC522) 28
Fig. 5.3 Example of a blank endorsement of a bill of exchange 33
Fig. 5.4 Example of a special endorsement of a bill of exchange 34
Fig. 5.5 Example of a restrictive endorsement of a bill of exchange 35
Fig. 5.6 Example of a conditional endorsement of a bill of exchange 36
Fig. 5.7 A specimen of customer’s instructions for collection of bills of exchange 40
Fig. 5.8 Mechanics of a sight bill for collection 42
Fig. 5.9 Mechanics of a documentary usance bill for collection 43
Fig. 5.10 Mechanics of a bill discounting 46
Fig. 6.1 Letter of credit: mechanism 54
Fig. 6.2 Letter of credit: contracts and regulations 56
Fig. 7.1 Types of letters of credit 60
Fig. 7.2 Revolving letter of credit: mechanism 66
Fig. 7.3 Red clause letter of credit: mechanism 68
Fig. 7.4 Transferable letter of credit: mechanism 70
Fig. 7.5 Suggested specimen of request to transfer transferable L/C (Note: Amend to suit the Bank’s … requirement) 72
Fig. 7.6 Back-to-back letter of credit: mechanism 77
Fig. 7.7 Third country/transit letter of credit: mechanism 86
Fig. 7.8 Deferred payment letter of credit: mechanism 87
Fig. 7.9 Standby letter of credit: mechanism 90
Fig. 7.10 Specimen of standby letters of credit (Specimen 1) 92
Fig. 7.11 Specimen of standby letters of credit (Specimen 2) 93
Fig. 8.1 Channels of payment settlement 96
Fig. 8.2 Payment letter of credit: bill on issuing bank 97
Fig. 8.3 Acceptance letter of credit: mechanism of settlement 98
Fig. 8.4 Usance bill on issuing bank: mechanism of settlement 99
Fig. 8.5 Negotiation sight letter of credit: bill drawn on issuing bank 101
Fig. 8.6 Negotiation: three-month usance L/C bill on issuing bank 103
Fig. 9.1 Eight types of letters of credit: financial load variations 107
Fig. 9.2 Payment L/C: bill of issuing bank 108
Fig. 9.3 Payment L/C: bill on confirming bank 109
Fig. 9.4 Deferred payment L/C 110
Fig. 9.5 Acceptance L/C: bill on issuing bank 111
Fig. 9.6 Acceptance L/C: bill on confirming bank 113
Fig. 9.7 Sight negotiation letter of credit: bill drawn on issuing bank 114
Fig. 9.8 Usance negotiation L/C: bill drawn on issuing bank paid at 115
Fig. 9.9 Usance negotiation L/C: bill on issuing bank reimbursement on sight basis 116
Fig. 11.1 Specimen of bill of exchange 132
Fig. 13.1 Factoring: mechanism 149
Fig. 13.2 Forfaiting transaction: mechanism 157
Fig. 17.1 Guarantee as security—mechanism 180
Fig. 17.2 Distinction between guarantee and indemnity 181
Fig. 17.3 Distinction between guarantee and indemnity 181
Fig. 17.4 Bid bond—mechanism 190
List of Tables
Table 4.1 Example of exchange rates spot/forward against GBP 17
Table 5.1 Bill of exchange indicative processing cost 44
Table 7.1 Transferable and back-to-back credits: comparison 78
Table 7.2 Comparison of commercial and standby letter of credit 91
Table 12.1 Letter of credit: inactive processing cost 146
Table 13.1 Difference between factoring and forfaiting 154
About the Authors
Tarsem Bhogal
../images/361668_2_En_BookFrontmatter_Figb_HTML.jpgwas the Principal of the Staff Training Centre, Association of Indian Banks in the UK from 1990 to August 2006. Earlier, he was a senior faculty of an International Bank’s Regional Staff Training and Development Centre in London. Bhogal set up a Regional Staff Training Centre of a public sector bank in northern India. Starting a banking career with The Standard Bank Limited, he has been a practical banker who has managed banking operations in Kenya, India and the UK. Bhogal is a fellow of The Institute of Financial Accountants, Fellow of the Institute of Public accountants, Member of Chartered Management Institute and ordinary member of the Chartered Institute of Bankers (now Institute of Banking and Finance), London, UK.
In his personal life, he is a poet, writer, thinker, General Secretary Panjabi Likhari Forum (UK), and formerly a governor of primary and secondary schools and six form colleges. Bhogal is a former elected Councillor in the London Borough of Waltham Forest and Mayor of the Borough, an important borough representing multi-cultural society with diverse faiths in his area of operation, and a philanthropist. He was a former Trustee of a Sikh Gurdwara (Temple), Chairman of Waltham Forest Citizen Advice Bureau and Vice Chairman of Waltham Forest Race Equality Council. He is a member of the Standing Advisory Council on Religious Education representing the Sikh faith. He lives in London, with his wife Amar Kaur.
Arun Trivedi
../images/361668_2_En_BookFrontmatter_Figc_HTML.jpgis a thorough banker, thinker, researcher, author and an academic par excellence. Presently he is engaged as a business design consultant and a corporate governance coach, based in London, UK. He has engagements in Africa, Asia, Canada, Europe and the Middle East for human capital development, capacity building through seminars, specialised modular courses, mock-drills in areas such as behavioural sciences and provides functional knowledge viz. foreign exchange, international banking, trade finance and risk management, corporate governance/ethics and value system through behavioural applications. His practice includes banking, structured finance, financial strategy, innovation and corporate governance.
Trivedi has authored books on various subjects viz. Forex and Risk Management
(2000), Credit Risk Management
(2003), International Trade Finance
(1996), Behavioural Science—Scope and Uses
(1992) including a fiction Dawn to Dusk (2010).
Trivedi achieved his professional qualifications and experience in his early career in India, with State Bank of India (SBI)-(eSBP), Kotak Mahindra Bank (earlier Vysya ING), National Institute of Bank Management (Faculty on Deputation)—a prominent body of bankers, IndusInd Bank & Doha Bank, undertaking a number of roles—Chief