Chapter 5 methods of international settlement Chapter 5

Chapter 5 methods of international settlement

Chapter 5 methods of international settlement remittance – definition Remittance refers to a bank (the remitting bank), the request of its customer (the remitter), transfers a certain sum of money to its overseas branch or correspondent bank (the paying bank) instructing it to pay a named person domiciled in that country. – Parties The remitter: the person who requests his bank to remit funds to a beneficiary in a foreign country. n

Chapter 5 methods of international settlement Remitting bank: the bank transferring funds at the request of a remitter to its correspondent or its branch in another country and instructing the latter to pay a certain amount of money to a beneficiary. paying bank: the bank entrusted by the remitting bank to pay a certain amount of money to a beneficiary named in the remittance advice. The payee: a person who is addressed to receive the remittance.

Chapter 5 methods of international settlement types u T/T (telegraphic transfer) : remittance by cable/telex/SWIFT u M/T (mail transfer): remittance by airmail (see P 71) u D/D (demand draft ): remittance by banker’s demand draft. (see P 71) A banker’s draft is a negotiable instrument drawn by a bank on its overseas branch or its correspondent bank abroad ordering the latter to pay on demand the stated amount to the holder of the draft. –

Chapter 5 methods of international settlement

Chapter 5 methods of international settlement – Reimbursement methods crediting vostro account of the paying bank: when paying bank opens a current account with the remitting bank, such as In cover, we have credited the sum to your account with us. Debiting remitting bank’s nostro account: when the paying bank maintains the remitting bank’s account, such as: Please debit the sum to our account with you, or You are authorized to debit the sum to our account with you.

Chapter 5 methods of international settlement Instructing a reimbursing bank to effect payment by debiting the remitting bank’s nostro account: when the remitting bank doesn’t open an account with the paying bank, the former may instruct its correspondent with which it maintains an account, to debit the account and credit the paying bank’s account if the paying bank also has an account with that correspondent, such as: In cover, we have authorized The Bank of Tokyo, New York to debit our account and credit your account with the above sum.

Chapter 5 methods of international settlement Instructing the paying bank to claim reimbursement from another branch of the same bank or another bank with which the remitting bank opens an account: In cover, please reimburse yourselves to the debiting of our account with The Bank of Tokyo, New York. According to the payments agreement between two countries: In cover, you are authorized to debit our Central Bank’s clearing account with your Central Bank.

Chapter 5 means of international settlement Collection – definition “Collection” means the handling by banks of documents, in accordance with instructions received, in order to: i. Obtain payment and/or acceptance; or ii. Deliver documents against payment and/or against acceptance; or iii. Deliver documents on other terms and conditions. n

Chapter 5 means of international settlement – l l i. ii. classifications clean collection: means collection of financial documents not accompanied by commercial documents. documentary collection: means collection of: Financial documents accompanied by commercial documents; Commercial documents not accompanied by financial documents.

Chapter 5 means of international settlement Parties The principal (seller/drawer): the person who prepares documents and submits them to his bank (remitting bank) with a collection order for payment from the buyer (drawee); The remitting bank: the bank receiving documents from the seller forwarding to the buyer’s bank along with instructions for payment; The collecting or presenting bank: the bank that presents the documents to the buyer and collects cash payment or a promise to pay in the future from the buyer in exchange for the documents. The drawee (buyer): the party that makes cash payment or accepts a draft in exchange for the documents from the collecting bank. –

D/A

Chapter 5 means of international settlement Collection order The collection order is a standard form of authority that enables the exporter to include specific instructions to his bank regarding the documentary collection. If the collecting bank can’t comply with the instructions given in the collection order, it must immediately advise the remitting bank. See exhibit 5 -2. –

Chapter 5 means of international settlement Risks involved in Collection For exporter, Non-acceptance of merchandise; Non-payment of trade acceptance: the exporter takes not only the risk that the time draft will not be accepted, but also the risk that the acceptance will not be paid at maturity; possession of goods; Exchange restrictions. –

Chapter 5 means of international settlement For importer, Payment may have to be made prior to the arrival of the goods; By accepting a bill of exchange under the documents against acceptance collection, the importer incurs a separate legal liability on the bill of exchange besides his liability on the sales contract; In some countries, if a bill of exchange is protested, this can ruin the reputation of the importer.

Chapter 5 means of international settlement letter of credit (L/C) – definition and characteristics l Definition: A documentary credit is any arrangement, however named or described, whereby a bank (the issuing bank) acting at the request and on the instructions of a customer (the applicant) or on its own behalf: n

Chapter 5 means of international settlement Ⅰis to make a payment to or to the order of a third party (the beneficiary), or is to accept and pay bills of exchange drawn by the beneficiary; Ⅱauthorizes another bank to effect such payment or to accept and pay such bills of exchange; Ⅲauthorizes another bank to negotiate, against stipulated documents, provided that the terms and conditions of the credit are complied with.

Chapter 5 means of international settlement u Characteristics: The issuing bank takes the first responsibility to pay, independent of whether the applicant is bankrupt or is in default or not, provided the documents presented are in compliance with the terms and conditions of the credit; L/C is a transaction of documents (article 4); L/C is independent on trade contract (article 3).

Chapter 5 means of international settlement – – l l l Advantages The seller is assured that payment will be made by a party independent of the buyer so long as the terms and conditions of the credit are complied with; The buyer is assured that payment will be made to the seller only after the bank has received the title documents called for in the credit. parties and their relationship applicant: an importer who requests his bank to issue a credit in favor of the exporter; issuing bank or opening bank: the bank which issues a letter of credit at the request of an applicant; (article 9 a ) beneficiary of L/C: the exporter in whose favor the credit is issued;

Chapter 5 means of international settlement l l advising bank or notifying bank( transmitting bank): correspondent bank or branch of the issuing bank to whom the letter of credit is routed for transmission to the beneficiary; (article 7) paying bank or drawee bank, paying bank agent: a bank who is authorized by the issuing bank to pay the beneficiary; accepting bank: a bank accepting the draft under the credit; negotiating bank: a bank that purchases the documents under the credit; (article 10 and 14)

Chapter 5 means of international settlement l l l confirming bank: a bank, usually the advising bank, which adds its undertaking to those of the issuing bank and assumes liability under the credit; (article 9 b, c, d) reimbursing bank: the bank from which the nominated paying bank, accepting bank or any negotiating bank that has made a payment, may obtain reimbursement; (article 19) transferring bank; transferor of L/C; transferee of L/C. Liabilities and responsibilities of banks under L/C (article 13, 15, 16, 17, 18)

Part 1：国际结算方式概览 u u See an example of SWIFT L/C。 流程图：

Chapter 5 means of international settlement Classifications l revocable credit & irrevocable credit (article 6 and 8) Revocable credit: a credit that may be amended or cancelled by the issuing bank without the beneficiary’s consent and even without prior notice to the beneficiary up to the moment of payment by the bank at which the issuing bank has made the documentary credit available. The revocable credit doesn’t constitute an undertaking by the issuing bank to make payment, so it is generally used between affiliated parties or subsidiary companies. –

Chapter 5 means of international settlement Irrevocable credit: a credit that can’t be cancelled or modified without the express consent of the issuing bank, the confirming bank (if any) and the beneficiary. It constitutes an undertaking by the issuing bank to make payment. l confirmed credit & unconfirmed credit Confirmed credit: a credit that carries the commitment to pay by both the issuing bank and the confirming bank. Advantage: a double assurance of payment.

Chapter 5 means of international settlement l transferable credit and non-transferable credit– Under this agreement, the beneficiary (first beneficiary) may request the authorized bank to pay, incur a deferred payment undertaking, accept or negotiate (the “transferring bank”), or in the event of a freely negotiable credit, the bank specifically authorized in the credit as a transferring bank to make the documentary credit available in whole, or in part, to one or more other beneficiaries.

Chapter 5 means of international settlement characteristics of transferable credit: The transferable L/C is suitable where a middleman operates between the buyer and seller, his profit being the difference in price. It enables the middleman who is receiving payment from a buyer to transfer his claim under the credit to his own supplier. article 48.

Chapter 5 means of international settlement back-to-back credit involves two separate documentary credits, one opened in favor of the first beneficiary, the other opened in favor of the second beneficiary for the account of the first/primary beneficiary who becomes the applicant for the second documentary credit. The first L/C is used as security for the second L/C. A back-to-back credit may be used when the credit issued in favor of the middleman is not transferable or though transferable it does not meet his requirements.

Chapter 5 means of international settlement l payment L/C, negotiation L/C, acceptance L/C, deferred payment L/C Payment L/C: a credit available by payment , under which the nominated bank is authorized to pay against the shipping documents with or without a draft; Acceptance L/C: a credit available by acceptance, under which the nominated bank is authorized to accept the draft; Deferred payment credit: a credit under which the beneficiary doesn’t receive payment when he presents the documents, but at a later date specified in the credit. No draft is required.

Chapter 5 means of international settlement Negotiation L/C: a credit under which a specifically nominated bank or any bank is authorized to negotiate the documents and /or drafts. Negotiation of drafts and/or documents is with recourse to the beneficiary unless the credit has been confirmed by the negotiating bank. The differences among the above L/Cs see appendix. l stand-by L/C & commercial L/C;

Chapter 5 means of international settlement l special types of L/C revolving L/C– Under the terms of this L/C, the amount is renewed or re-instated without specific amendments to the documentary credit. This type of L/C may be revocable or irrevocable and will revolve in relation to time and value. The revolving clause can be formulated in different ways with different words stipulated in the credit: automatic; semi-automatic; nonautomatic.

Chapter 5 means of international settlement reciprocal L/C, the beneficiary and the applicant in the first L/C are the applicant and the beneficiary in the second L/C. This credit is generally used in a barter transaction. anticipatory L/C or red clause L/C- a credit with a special clause that authorizes the confirming bank, or any other nominated bank, to make advances to the beneficiary before presentation of documents. It is a kind of pre-shipment financing intended to assist the exporter in the production or procurement of the goods sold.

Chapter 5 means of international settlement A Usance Letter of Credit Payable at Sight is a usance L/C issued by the issuing bank, which undertakes to pay the beneficiary at sight, provided the required documents are submitted and the terms of the credit are complied with, while the applicant makes reimbursement to the issuing bank when the tenor is due. It is a kind of finance offered to the applicant and the interest thereof is normally borne by the applicant.

Letters concerning Letters of Credit Discrepancies in Documents under Our Letter of Credit No. 4081419 l l l We are in receipt of your captioned payment advice together with the relative documents. We regret to advise you that we are unable to make payment for the reason of the following discrepancies in the documents: 1. Net weight is not indicated on the invoice, packing list and inspection certificate; 2. The number of cases shown on the invoice and the bill of lading is not consistent. We have referred the matter to our clients, who state that the above discrepancies are unacceptable to them. They, however, express the idea that the payment will be effected upon receipt of relative revised documents and deducting the delay penalty from the invoice value. Please take note of the above and convey the same to the beneficiaries. We are now holding the documents at your disposal pending your instructions.

Chapter 5 means of international settlement A B/L shows only the gross weight (205. 85 MT) whereas the other documents show only the net weight (200 MT). Is this acceptable? 2. A credit does not allow partial shipments, the beneficiary presents 3 sets of B/L, each with a different date of loading on board but indicating the same vessel and the same journey. Should this be considered a partial shipment? 1.

Chapter 5 means of international settlement 3. A credit concerns a shipment of "Fish/average weight 400/450 grams per piece". The documents presented show some pieces that are above or below the weight range established but the difference does not exceed 10% (i. e. they all weigh between 360 and 495 grams). Is this acceptable?

Chapter 5 means of international settlement 4. A beneficiary presents documents prior to the credit's expiry date but with discrepancies. The beneficiary takes back the discrepant documents to correct them and leaves the others with the bank. He subsequently presents the corrected documents, but in the meantime the credit has expired. Should the bank refuse the documents due to "credit expired"?

Chapter 5 means of international settlement 5. In a transferable credit, the first beneficiary may subsititute: a any documents b only drafts and invoices c drafts, invoices and insurance document d any document except for the transport document

Chapter 5 means of international settlement 6. A credit calls for a packing list and a list of weights: the beneficiary presents a combined document called: " list of packages and weights". Is this acceptable? 7. In a transferable credit, is it possible that the second beneficiary may ask to retransfer the credit to the first beneficiary? 8. The credit doesn't call for presentation of a transport documents but requires a "warehouse receipt". Does the rule concerning presentation within 21 days apply?