More Banker’s Insights on International Trade
Exporters' Edition
Selections Taken from 101 Lessons Based on Practical Experience
Published by Roy Becker Seminars, www.roybeckerseminars.com
17505 E. Prentice Circle, Centennial, CO 80015
Copyright 2010 by Roy Becker, revised 2011
All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the author, except for the inclusion of brief quotations in a review.
Unattributed quotations are by Roy Becker.
International Standard Book Numbers
eBook: "More Banker's Insights on International Trade: 101 Lessons Based on Practical Experience": ISBN 0-9679927-2-9
eBook: "More Banker's Insights on International Trade: Students' Edition":
ISBN 0-9679927-3-7
eBook: "More Banker's Insights on International Trade: Importers' Edition":
ISBN 0-9679927-4-5
eBook: "More Banker's Insights on International Trade: Exporters' Edition":
ISBN 0-9679927-5-3
Printed in the United States of America
About the Author
Roy Becker is considered one of the leading experts in International Trade and Banking. He has spent the majority of his corporate career working in international departments of several major banks. During that time he worked directly with importers and exporters consulting on intricate banking needs associated with international trade. After 34 years in the corporate world, Roy made the decision to give up the safety net to become a corporate trainer, consultant, speaker and publisher. Companies both large and small hire Roy to help them reduce risk and improve cash flow for their international transactions.
Roy serves as adjunct faculty in the International MBA programs at the University of Denver and the University of Colorado Denver. He is a frequent speaker and facilitator at workshops and seminars at the World Trade Center Denver. He has earned the Advanced Toastmaster Gold Award.
Foreword
Roy Becker was my professor for International Trade, Finance, and Management at the University of Colorado at Denver. The concepts taught in his class were often complex, yet I was able to retain the information because Roy used stories to illustrate his lessons, stories like the ones found in this book.
Now as a professor of Export Procedures and Practices at Johnson & Wales University, I use Roy’s book to teach my own students. The feedback that I have received demonstrates that my students also learn difficult exporting concepts, such as Incoterms® and Letters of Credit, by recalling the stories they read in Roy’s book. Additionally, Mr. Becker is often a guest speaker in my classes and is consistently regarded as the best guest presenter of the term…because he has the best stories to share.
Roy Becker’s stories are interesting and illustrate their point very quickly. I’ve had the benefit of hearing Roy deliver stories in person during his lectures in the classroom as well as in his classes at the Rocky Mountain World Trade Center. No matter who Roy is teaching, everyone leaves his lessons not only entertained, but also with additional knowledge in international trade.
If you have ever been confused by the difference in shipping goods “FOB” domestically versus internationally, this book is for you. If you have ever thought that Nigeria was a good place to invest in, you may want to read “The Nigerian Cement Story.” And if you are positive that your selected Incoterm® correctly matches your Method of Payment, you may want to compare your situation to the stories found in this book.
I highly recommend this book to be read for personal enjoyment and to increase your understanding of international trade. Whether a student or a global professional, Roy’s stories will enhance your knowledge and seriously entertain you!
Kelly Kasic, MSIB
President of GLOBAL ID LLC
Instructor of International Business at Johnson & Wales University
Testimonials
"The only thing better than a collection of Roy Becker stories is a newer, larger one. Don't let his folksy style fool you. Roy delivers extremely useful and sometimes complex international trade information in an easy to follow entertaining manner. Serious stuff that's fun to read."
Frank Reynolds, author, "Incoterms® for Americans"
***
"Simple international business experiences comprise Roy’s must-read manual for those who want to pursue international business. I learned basic business concepts including how to present myself and my company in a dynamic and diverse international business world."
Mohammad Holil
University of Colorado – Denver
MA in Global Finance, Trade, and Economic Integration (GFTEI) 2008)
Position: International Production Planner, Strategic Partner, Inc., Los Angeles, CA
***
"On the first day of class, Roy said it was his goal for us (the students) to wake up on Thursday morning with the first thought, 'Oh good, I get to go to Becker's class tonight.' I believe we achieved that every Thursday. I am from Saudi Arabia and my father has sent me to many countries to learn about international business. Roy has a wealth of experience in this field and his book has helped me learn in a way that has been practical yet easy."
Ghassan Alhaidari
University of Colorado – Denver
MBA student
Riyadh, Saudi Arabia
***
"Roy Becker’s book, 'A Banker’s Insight on International Trade: Tips, Techniques and Tales from Practical Experience,' illustrates that truth is often stranger than fiction in the world of international trade. The price of ignorance when it comes to compliance and political risk can be very expensive for corporations. Roy does a fantastic job of presenting real life examples of what can and will go wrong in the world of trade. The cases are presented in a manner that is tangible, not to mention amusing, for both the trade novice and expert alike. I’m very lucky to have been Roy's student during my tenure as an MBA student, as he helped open my eyes to opportunities in international trade."
Tom Valand
University of Denver - Daniels College of Business
MBA 2009
***
"Roy Becker's 'blue' book illustrates the most prescient and relevant topics in export logistics with a personal and anecdotal style. The cases greatly supplemented my MBA education and were axiomatic to my understanding the fundamentals of the global flow of goods."
C. William Carspecken
University of Denver
MBA 2008
MD Candidate, Harvard Medical School 2012
***
"Roy's 'blue' book is the most practical and useful textbook I have had in my MBA program."
Cindy Mayer
University of Colorado – Denver
MBA 2009
***
"Can INCOTERMS®, methods of payment, and international trade regulations be fun and interesting? Absolutely! Roy Becker has put together a collection of witty and entertaining stories that illuminate the potential missteps companies may take when engaging in international trade. I've had the pleasure of being in one of Roy's classes in my MBA program. It's evident his unique teaching style and passion for this topic shine as brightly in this book as they did when he was in front of our class."
Gary Hummel
University of Denver
MBA Supply Chain 2009
Director of OZEM Sales and Services, TEAM A T E
***
"Developing solar projects for BP often involves managing international supply agreements. Roy's lessons have proved very helpful in successfully negotiating deals that protect and deliver value to both my company and my customer."
Noah Eckert
University of Denver
IMBA/MSF 2007
Project Developer, BP Solar
***
"Roy Becker's 'blue' book is very useful and contains real world experience that I can't find in other textbooks. My family's business is importing raw material from China which is used as fuel for the steel industry. We have been doing business with Chinese agents for more than 20 years. Normally, we use letters of credit as a standard term for our transactions.
This semester, Spring 09, many of my friends are taking his class. I hope they will enjoy it and gain as much knowledge about international trade from him, his book, and his guest speakers as I have."
Anuson Kissanawonghong
University of Colorado – Denver
MBA candidate
***
"Roy’s book offers more than basic facts. The lessons provide examples of actual experiences that can easily and practically be applied to international business dealings. Roy encourages networking and practices what he preaches. I have developed multiple business and personal relationships as a direct result of Roy’s example and his class."
William "Lucas" Quintana
University of Denver - Daniels College of Business
BSBA 2003
IMBA 2010
***
"If you want to increase your understanding and boost your success in international trade, this book is for you. Through humorous real-world anecdotes and highly memorable stories, Roy Becker has crafted a valuable gem for all international trade professionals."
Jessica Abegg
University of Colorado Denver
MBA 2008, MS International Business
Author, Business Consultant
***
"Roy Becker’s ability to match international trade instruction with real life examples is an incredible strength that is missing in most other international business resources. He uses real products, companies, and countries to put names and faces to the issues that arise from international transactions, making them much less daunting and the goal of operating in an international environment much more attainable."
Lacey Barron
University of Denver
M.A. Global Finance, Trade, and Economic Integration 2008
Manager of Aviation Research & Statistics, Public Relations & Marketing
Denver International Airport (DEN)
***
"MGMT 4141 was by far one of the best courses I have taken at Daniel’s. The knowledge and experience that I gained from the class and Roy's 'blue' book have given me a competitive edge in the job market, and the export strategy plan that my team designed for a local company has always been the highlight of every job interview. I was surprised by the number of companies in Colorado that have worked with Roy Becker’s students and been impressed with the confidence they have developed in Daniel’s degree holders because of it. I am convinced the job offer that I received shortly before graduation had much to do with the real-life business experience I gained from this class."
Kate Hayes
University of Denver
MBA 2008
***
"The real-life anecdotes provided in this book give great insight into the unique nature of international business – demonstrating both the importance of doing your homework and communicating effectively across borders!"
Tracy Nicholas
University of Colorado – Denver
MBA 2008
MS International Business 2009
***
"Roy Becker's knowledge and expertise in international trade is unsurpassed. His book offers wits of wisdom and lessons learned for any aspiring or experienced importer and exporter. Roy's language is clear, concise, relevant, and infused with splashes of humor and playfulness. A great read and a great resource for all things 'international trade'."
Erika V. Lapsys
University of Denver - Daniels College of Business
IMBA candidate
***
"Real life examples of real life problems in the global business environment!"
Jenna Overgaard
University of Colorado - Denver
INTB 2010
Global Project Manager
***
"International business is one of the most confusing topics in business since it encompasses regulations from many countries that a businessperson may need when deciding to go global. Moreover, I am thankful that Mr. Becker has shared his wealth of experience through personal stories that illustrate situations businesses should avoid in international trade.
Simply, Mr. Becker presents these stories in very simple formula everyone can read, enjoy, and benefit from even people who have no business experience or who have just started their own business and are considering global trade."
Ahmed Aljughaiman
University of Colorado - Denver
MBA MS 2010
***
Order information
To order copies of this book, or the companion books, "More Banker's Insights on International Trade: Students' Edition," (includes discussion questions) "More Banker's Insights on International Trade: Importers' Edition," and "More Banker's Insights on International Trade: 101 Lessons Based on Practical Experience," go to www.RoyBeckerSeminars.com.
***
Acknowledgements
I have always enjoyed training one-on-one or groups. I became aware of the importance of story-telling as a teaching tool when participants would call me many months after a seminar. They would say, “You don’t remember me, but I was in one of your seminars. Our company needs your help with a particular situation. Can you help?”
When I asked, “Why did you think to call me?” the answer frequently was, “Because our situation reminds us of one of the stories you told in class.” They never said, “It reminds us of point three on your outline.”
I appreciate the years I had in Toastmasters where I learned the art of story-telling and recognized that telling stories is an effective teaching tool.
I am grateful for years of experience working for several banks, most of which no longer exist due to the merger frenzy in the banking industry. I was fortunate to work with many professionals who taught me how to take my job seriously without taking myself seriously. More recently I have been training and consulting companies whose stories provided me with learning experiences and lessons for this book.
The individuals who need particular recognition are many, and I’ll likely miss a few. Frank Reynolds, author of “Incoterms® for Americans,” provided the encouragement I needed to publish my first book. Dr. Dave Hopkins, University of Denver, read my first manuscript and provided valuable advice.
Thanks to Janet Randall, of J. Randall Ventures, who edited the material and provided hundreds of valuable suggestions for correct wording and ease of reading.
Patrick Gallagher, of Gallagher Transport Int'l, Inc. has graciously contributed several insightful, entertaining and educational stories based on his years of experience working as a U.S. Customs Broker.
Special recognition is due to two international banking gurus of years gone by. First is Jim Harrington who was a V.P. with Bankers Trust Company. He wrote several instructional books that helped me learn and understand letters of credit. I also had the privilege to attend a workshop where he told numerous stories, and I have used some of them in this book and have given him credit.
The other is Frank Sauter who was a V.P with First National City Bank. He wrote three companion booklets, "Random Notes on Letters of Credit," for in-house use at the bank, which I was fortunate to have obtained. I have attributed some stories to Mr. Sauter as well.
The stories told by Mr. Harrington and Mr. Sauter prove the timelessness of the principles of letters of credit.
Thanks to the many students who have told me that these stories provide them with real-world illustrations.
Finally, quotations from "Uniform Customs and Practice for Documentary Credits, (UCP 600) 2007 Revision" are used with permission from the International Chamber of Commerce.
***
Dedication
To my wife, Jean, for her unwavering love and support.
***
Table of Contents
International Payment Terms 101
The Nigerian Cement Story
Which Is Better, #2 Yellow Corn, or #3?
The Kind of Letter of Credit You Don’t Want
How a Sneeze Led to a Career in International Banking
Training during the West Coast Dock Strike
Who Writes the Letter of Credit Rules?
How to Avoid the Most Common Error of Letters of Credit
The Infamous Monday in Brazil
Two Tips to Avoid Getting Burned on a Canadian Check: When Cash in Advance Isn’t
Confirmed Letter of Credit from the Philippines
Unconfirmed Letter of Credit
How Do They Say “Hello” in France at 4 A.M.?
Where Does Risk Pass?
When a Mouse is an Elephant
Seven Factors for Determining the Right Method of Payment
You Can Export the Whole Pig - Except the Squeal!
The Legal Aspects of a Bill of Lading
What Do Chickens without Legs and Cows That Are 24 Months Pregnant?
Have in Common?
What Are the Two Most Important Articles of the UCP?
The Day Imports Equaled Exports
Investing at 50% in Mexico
How Swift Is SWIFT?
Former School Teacher Exports from Storage Shed
The Hidden Expiration Date on Every Letter of Credit
If You Must Use Letters of Credit - Get Them Right!
Back to Back Letters of Credit
Were the Whole Family Stowaways?
When a Confirmed Letter of Credit Isn’t
How I Lost a Sale because of Chinese Food on my Tie!
Khaki Pants That Will Keep You in Stitches
How I Won a Telemarketing Award
A Letter of Credit Used in an Organ Transplant
What is an Engineer’s Certificate?
The Only Thing Hotter Than a Hot Potato Is a . . .
How a Transposition Cost $300,000.00
The American Flag, Motherhood, Apple Pie, and . . . Ex Works?
How an Oil Company Recovered Their Losses
How Germinating Seeds Brought Ten Cents on the Dollar
Eight Tips on How to Get Paid with a Letter of Credit
Who Saw the Goods?
Who is at Fault?
DOD (Depths of Despair) Freight Forwarding Company
How to Create an Earthquake
Eighteen Neophyte Exporters
Swimming Across the Pacific
The Great Salad Oil Swindle
The Golden Rule
Why Doesn’t Everyone Use DDP?
The British Need Cement
Banks Create Drafty Situations
I Can Sell Anything, Anywhere
Playing Football Down Under
How Reliable are the Wall Street Journal Rate Quotes?
Can a Two by Four equal a 2 by 4?
Lessons from a Lap Counter
Filling a Full Set
Sale of a $400,000 Banker’s Acceptance
If We Sell to Mexico, How Will We Get Paid?
Wayne, the Weekend Wizard
Terms in a Flaky Transaction
How does a Bank Define “Official”?
Let’s Swap Lunches
Which Seems Better, New or Reconditioned?
What are Adzing Machines?
Comparing Apples with Oranges
History of Stale Documents
Shipment of One Cow (Partial Shipments Prohibited)
Requirements for a Standby Letter of Credit
Nigerian Scam Letters
What’s the Difference between One Inch and One Foot?
Diesel Engine under Water
New Incoterm®: FFU
Who is a Global Entrepreneur?
Is this a Back-to-Back Letter of Credit, or not?
Ten Questions to Ask when Receiving a Letter of Credit
The Big Rocks and the Little Rocks
Sky Ride
How Hector’s Blunder Led to a Standby Letter of Credit
Just When Ewe Thought Ewe Heard it All
DEQ or DOA?
Please Hold the Mayo
A Harmonized (Tariff) Christmas
Santa Will Not Be Coming This Year!
International Trade in the Bible
It Depends
***
Warning—Disclaimer
This book is designed to provide information on international trade, generally focusing on the financial aspects of trade transactions. It is sold with the understanding that the publisher and author are not engaged in rendering legal, accounting, or other professional services. If legal or other expert assistance is required, the services of a competent professional should be sought.
Every effort has been made to make this book as complete and as accurate as possible. However, there may be mistakes, both typographical and in content. The purpose of this book is to educate and entertain. The author and publisher shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to have been caused, directly or indirectly, by the information contained in this book.
If you do not wish to be bound by the above, you may return this book to the publisher for a full refund.
***
International Payment Terms 101
Learning objectives:
1. Understand the four payment terms used in international trade
2. Know the risk to the buyer and the risk to the seller
3. Search key words: cash in advance, open account, documentary collections, letters of credit
Since many of these lessons provide illustrations of the terms of payment used in international trade, a brief overview of these terms may assist readers in better understanding the lessons.
Four payment terms are commonly used for international trade: Cash in Advance, Letters of Credit, Documentary Collections, and Open Account.
Cash in advance is relatively easy to understand. The seller simply says, “Send me the money and I’ll ship the goods.” If the buyer agrees, he has to trust the seller to ship the goods which conform to the purchase order. The buyer takes all the risk and the seller takes none.
On the opposite end of the risk scale, open account terms allow the buyer to receive and inspect the goods before paying for them. The buyer can negotiate extended terms. He may even be able to sell the goods to another buyer(s) and collect payment before paying the supplier. The seller, on the other hand, trusts the buyer completely to pay as agreed. Here the seller takes all the risk and the buyer takes none.
In both methods of payment above, only one party takes risk. The buyer takes the risk with cash in advance and the seller takes the risk with open account. The money side of international trade is relatively easy to understand when only one party takes the risk. Sometimes, neither party is willing to bear all the risk, so these two methods of payment will not accommodate the transaction. The two parties must compromise and share the risk. The next two methods of payment are compromise payments because each party bears some risk.
A documentary collection method of payment provides a measure of protection for each party. The seller’s risk is partially protected because the buyer cannot get the goods until they pay for them. After shipment, the seller submits the shipping documents to their bank as a collection item. The seller’s bank sends the documents to the buyer’s bank with instructions that the documents are to be released to the buyer only after payment is collected. The buyer cannot receive the goods without the documents. If the buyer’s bank is unable to collect payment, the seller considers the best of four options: (a) return the goods, (b) find another buyer, (c) renegotiate the payment with the buyer, or (d) abandon the goods. The buyer, on the other hand, has proof of shipment, but has risk associated with paying on receipt of documents only. They hope the goods will conform to those described in the documents. If desired, the buyer may require the goods be inspected at the point of shipment to mitigate the risk of unacceptable goods. As demonstrated, each party must bear some risk, but each party also has means to mitigate it.
When the parties agree to a letter of credit, the seller informs the buyer that the shipment will be made upon receipt of an acceptable letter of credit. The buyer instructs their bank to issue the letter of credit in favor of the seller. In doing so, the bank makes a commitment to pay the exporter upon presentation of specified documents. Usually a transport document is required as proof that the seller has turned the goods over to a transportation company. Upon receipt of the letter of credit, the seller ships the goods, assembles the required documents, and presents them to the bank for payment. The bank determines that the documents conform to the terms of the letter of credit, remits payment to the exporter, and releases the documents to the importer. As mentioned, each party compromises in the sharing of risks. The exporter does not have to worry about the buyer’s ability to pay and is willing to believe that the issuing bank will honor their letter of credit. The importer is willing to believe that the goods will conform to the documents presented for payment against the letter of credit.
Uniform rules have been developed to provide worldwide standardization for many international transactions. Since no two transactions are alike, each one has its own unique story to tell. As in most human endeavors, communication is key for successful international sales transactions. Insufficient information, language barriers, and different expectations can cause misunderstanding. Everyone must be on their toes – including the banker.
The lessons in this book are actual situations in which importers, exporters, bankers, and transportation companies have found themselves. For the most part, the banker is the author. In some cases, the stories are from other sources and are easily indentified. It is my hope that the lessons will be educational, entertaining and inspiring.
***
The Nigerian Cement Story
Learning objectives:
1. Discover the subtleties of sovereign risk
2. Recognize the protection of a confirmed letter of credit
3. Search key words: letters of credit, risk, confirmed letter of credit, confirming bank, issuing bank, sovereign risk
When Nigeria struck oil in the mid 70’s, it became a cash-rich country. As a result, the Nigerians began to import large quantities of consumer goods. The goods arrived at a much faster pace than the out-of-date ports could handle. Ships sprouted up in the harbor like weeds in an untended garden. Because the ports had become so out-dated, they could bring only one ship in to dock at a time, unload it, send it back out, and bring in the next ship.
Crowded conditions slowed unloading by as much as six months. (Some stories claim that it took as long as 24 months, which I cannot verify.) In addition, Nigeria charged the ship owners up to $4,000 a day in demurrage charges (a charge for the detention of a ship beyond the time allowed for unloading).
The government conducted a survey of the situation and determined they would need five million metric tons of cement to upgrade the port facilities. The problem compounded when five ministers in the government thought they had responsibility to order the cement. Consequently, they placed orders for 22 million tons of cement.
When over 250 cement ships arrived, they only further added to the congestion and, of course, they could not unload. After about six months of waiting on the high seas, in the hot and humid weather, you can probably guess what happened to the cement! It took on moisture, hardened, and became useless while on board the ships.
The government immediately instructed the banks, “If you issued letters of credit for shipments of cement, don’t pay.” What did the banks do? They obeyed the law of the land and they didn’t pay. If a shipper of cement had an irrevocable letter of credit from a Nigerian bank, suddenly it became a useless piece of paper.
How does one foresee a risk such as this? The answer: You don’t. You could have the best international economist on staff, who monitors and plots every possible economic trend he can find, and still this risk could be unforeseen. What makes this story so bizarre is each of the five Nigerian ministers simultaneously making a stupid decision. Since economists don’t track stupid mistakes, they can’t possibly predict, “Well, I think the trend shows we are due for a stupid mistake!”
How can exporters protect themselves in a scenario such as this? By having the letter of credit “confirmed” by another bank in another country. When a bank confirms another bank’s letter of credit the confirming bank essentially guarantees payment. Effectively, the confirming bank has issued the letter of credit themselves thereby obligating themselves to pay, even if they cannot collect from the issuing bank. In this story, some confirming banks found themselves in the position of having to pay the exporters, even though they were unable to collect from the Nigerian banks. It’s the protection, or insurance, that an exporter wants, and the risk a bank willingly takes when it confirms another bank’s letter of credit.
This lesson provides an excellent example of sovereign risk. Let’s define sovereign risk with the question, “Can the government intervene in any way to prevent payment from being made?” Sovereign risk includes the stability of the government and the economy.
Now, the end of the lesson: What happened to the ships? Rumor has it that the cost of chipping the cement out of the holds exceeded the cost of the ships. So, the ships were intentionally sunk and remain on the bottom of the ocean off the coast of Nigeria.
Note: I first heard this story when I attended a seminar conducted by Jim Harrington, in the late 1970s. Since then I have verified what I could and have slightly revised and embellished the story based on others’ recollections of this incident.
***
Which Is Better, #2 Yellow Corn, or #3?
Learning objectives:
1. Understand one of the cornerstones of a letter of credit: “strict compliance”
2. Learn about the UCP
3. Search key words: Uniform Customs and Practice (UCP), commercial invoice, letter of credit, merchandise description, strict compliance, documents, sales contract, autonomy
The Uniform Customs and Practice for Documentary Credits (UCP) states: “The description of the goods, services or performances in a commercial invoice must correspond with that appearing in the credit” (Article 18 c). What does this mean to an exporter? What does it mean to a bank?
Every letter of credit will indicate a description of the merchandise covered by the letter of credit. Does the bank expect to see the merchandise description on the invoice exactly as shown on the letter of credit? What about punctuation, capital letters, and spaces?
In a workshop on letters of credit for a staff of commodity traders from a grain company, they said that they became frustrated by their bank’s interpretation of a letter of credit. The letter of credit described the merchandise as “#2 Yellow Corn or Better.” The company shipped #1 Yellow Corn and described it on the invoice as “#1 Yellow Corn.”
Astonished, they said, “The bank rejected the invoice! Why would they do that?”
Bankers cannot develop expertise in all kinds of merchandise they see in the documents which come across their desks. In the first 10 minutes on the job, a commodity trader likely learns the grading system for corn. However, bankers have no expertise as commodity traders. How does a banker know #1 is better than #2? Maybe #3 is better than #2.
Since bankers can’t possibly know everything about every type of merchandise, their limited role should include nothing more than precisely comparing the merchandise description on the invoice to that on the letter of credit. One insightful attorney advised me early in my career, “You are only required to compare, not interpret.” Good advice.
What possible alternatives do the traders have? Since the invoice must match the letter of credit, traders might prepare an invoice which describes the merchandise with a caption identical to the letter of credit, “#2 Yellow Corn or Better.” Then, below the caption the invoice might carry a notation, “merchandise actually shipped: #1 Yellow Corn.” Since this is not in conflict, a bank should find it acceptable.
Regardless of the actual goods shipped, the merchandise description shown on the invoice must precisely match the description stated in the letter of credit in order for the exporter to receive payment. This principle is the cornerstone of strict compliance.
The UCP goes on to state, “Banks deal with documents and not with goods, services or performance to which the documents may relate” (Article 5). In other words, a bank does not care what goods might have actually been shipped, or even if any goods have been shipped at all. An exporter must simply supply documents that strictly comply with the terms of the letter of credit to collect payment from it. The bank does not concern itself with the underlying sales contract and the shipment itself.
***
The Kind of Letter of Credit You Don’t Want
Learning objectives:
1. Learn the two major types of letters of credit
2. Become acquainted with the purpose of the UCP
3. Search key words: UCP, revocable, irrevocable, beneficiary
Prior to the July 1, 2007 revision, the Uniform Customs and Practice for Letters of Credit (UCP) stated, "A credit may be either revocable, or irrevocable. The Credit, therefore, should clearly indicate whether it is revocable or irrevocable. In the absence of such indication the Credit shall be deemed to be irrevocable" (UCP 500 1993 revision, Article 6).
It defined a revocable credit as, “A revocable credit may be amended or canceled by the Issuing Bank at any moment and without prior notice to the beneficiary" (UCP 500 Article 8 a). So a good question to ask is, “Who would accept one?” The obvious answer is, “No one.”
Since no one in their right mind would accept a revocable credit, the 2007 revision of the UCP no longer addresses or supports a revocable credit.
The 2007 revision states, “a credit can neither be amended nor canceled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary” (Article 10 a). Any wise beneficiary wants this protection in a letter of credit.
***
How a Sneeze Led to a Career in International Banking
Learning objectives:
1. Appreciate how careers happen
2. Search key word: letters of credit
University students who aspire to a career in international business often ask me, “How did you get into international banking?” My career path, I assume, took a route as different as anyone else’s. As I look back at important happenings in my life, often I can identify three turning points which influenced the final results. Those turning points resulted from circumstances, fate, or whatever you want to call it and were not of my own doing. I’d like to think of it as divine intervention. Who would have ever thought a shy, naive teenager, who grew up on a farm in the upper Midwest, would ever have had a career in international banking?
The first turning point remains very clear in my memory. As a teenager, I worked on the family farm as a duty. I neither received, nor expected, any pay for working on the farm. If I wanted some spending money, however, I would work for other farmers who needed help, usually during the harvest seasons. When harvesting a crop, a billowing cloud of crop dust would continually surround us. Unfortunately, I became allergic to the dust. I would sneeze, wheeze, and cough all day, then go home and try to sleep. Sleep didn’t come easily since I would continue the sneezing, wheezing, and coughing through the night. But if I wanted the spending money, I had to get up the next morning and do it all over again.
I remember one hot summer day when I helped a farmer put up his hay on a flatbed. The misery of the heat, the dust, and the humidity all got to me. I looked to the western horizon longing to see a single cloud which could eventually drift our way to provide some shade and relief from the sun and heat. I even dared to hope the cloud might have some rain which would cause us to quit work early that day. However, no cloud appeared. At that moment I determined to have a job some day in an air-conditioned office. It was a major turning point that remains firm and clear in my mind.
Turning point number two occurred in the big city of Minneapolis and eventually led me into a banking career. As a teen, I tinkered with radios and TVs trying to figure out why they worked and trying to fix them if they didn’t. I thought it would develop into an interesting career. I took my new bride to Minneapolis and enrolled in an electronics trade school. It didn’t work out for me. In an effort to find work, I approached an employment agency that sent me on several interviews, including one at a bank. I decided to accept the job as a teller in the cash vault, until something better came along. Nothing did and this first job started me on a 30-year career path in banking.
There was a position available in the international department. When I interviewed for that position my manager told me that after two years he and I would go to the Human Resources department to look for a job transfer. This seemed like a strange comment on the day I accepted the job, so I asked him to elaborate. He said this work would grow boring after about two years, and if it didn’t, I shouldn’t consider doing it in the first place. True to his word, after two years, we went to human resources to inquire about open positions in the bank and turning point number three surfaced.
One available position existed in the international department. The head of the international department told me the position involved working with letters of credit. I asked, “What is a letter of credit?”
He answered, “I’ll show you.” He took me to the eighth floor of the bank and we entered a room containing about 15 desks with no partitions. Phones were ringing constantly and people were yelling to each other across the room. He exclaimed, “This is it!”
I viewed the chaos and replied, “I still don’t know what a letter of credit is and I don’t think this looks like a very attractive place to work.”
We went back to Human Resources to look into the other openings. Three weeks later when no other jobs materialized, the international manager called me again and told me he would like me to reconsider. He told me all the positive reasons why the international department seemed like a good place to work and why he thought I was the right person for the job. After sufficient stroking of my ego, I accepted.
I questioned his sincerity three weeks later when he resigned and left banking altogether. However, turning point number three placed me into international banking and only after completing a frustrating training period (see next lesson) did I realize I wanted to continue my banking career in the international department.
Perhaps no typical pathway exists to any career, and certainly not in international business. I relate this lesson to show what can happen when you follow your nose, and take advantage of opportunities as they present themselves.
***
Training during The West Coast Dock Strike
Learning objectives:
1. Comprehend how a bank handles discrepant documents against letters of credit
2. Search key words: documents, letters of credit, discrepancies, customs, approval, UCP
In the previous lesson I related how my career led me to a bank’s international department. Now, you’ll learn the circumstances that surrounded my first few months on the job. The department had open positions due to an unmanageable workload as a result of the conclusion of a U.S. West Coast dock strike. The release of pent-up shipments resulted in daily deliveries of mail and couriered packages containing shipping documents for processing for payment against letters of credit.
Doug, the letter of credit supervisor, had hurriedly promoted secretaries to document examiners.
He hired me, and 12 days later hired another employee and asked me to train him. Doug’s availability to handle problems and answer questions was scarce because he was busily answering the telephone eight hours a day counseling customers whose lives were complicated by the dock strike. This was the environment for my entry into a long banking career.
On my first day Doug gave me a set of self-paced training manuals. After reading the books I felt I had a pretty good handle on the topic, from a textbook perspective, anyway. But I quickly learned how the textbook differs from the real world.
The first assignment I received from Doug was to examine a set of documents against a letter of credit which our bank had issued to pay for an importation of giftware from Japan. I checked the documents and found about eight discrepancies in them.
Since the textbooks hadn’t covered anything like this, I didn't know what to do next. I waited until Doug paused between phone calls and told him that I had encountered a rare occurrence – eight discrepancies!
Since the importer had a high volume of transactions, Doug knew them well. He simply instructed me to call the treasurer of the importer and tell him all the discrepancies I had found in the documents. “He’ll waive the discrepancies,” Doug said.
I called the treasurer and true to Doug’s prediction, the treasurer said, “I don’t care about the discrepancies, I just want the goods. Please make payment and send me the documents so I can clear the goods through customs.” This illustrates normal bank operating procedure – to obtain the importer’s approval prior to making payment when the documents contain discrepancies.
If the importer wants the goods, they’ll authorize the payment. While a bank does have the right to refuse payment without consulting the importer, they normally will call the importer first. A bank does not want to stand in the way of international trade. If the buyer wants the goods, the bank will proceed with the transaction. A bank will only refuse payment if so instructed by the buyer, or if the bank fears risk of the buyer becoming insolvent for some reason.
I went on to check my next set of documents and once again found a number of discrepancies which the importer also waived. I soon learned that I would probably find discrepancies in the majority of the documents I checked. If I didn’t find discrepancies, I would check them again because I figured I must have missed something.
This lesson illustrates how a bank handles discrepancies. It acts in accordance with the guidelines set forth in the UCP which says, “When an issuing bank determines that a presentation does not comply, it may in its sole judgement approach the applicant for a waiver of the discrepancies” (Article 16 b). A bank does not want to stand in the way of trade but it has an obligation to protect the buyer against risk. If the buyer approves, so will the bank, in most cases.
***
Who Writes the Letter of Credit Rules?
Learning objectives:
1. Discover the history and purpose of the UCP
2. Search key words: letters of credit, International Chamber of Commerce, UCP
In the early 1900s as large New York banks became more involved in financing international trade and issuing letters of credit, they discussed the need for a standardization of the way banks process and interpret letters of credit. A committee formed to develop common rules and the banks agreed to standardization around 1915. Soon thereafter, banks in Europe saw the need to do the same.
As time passed, it became apparent that banks all over the world should process and interpret letters of credit uniformly. Again a committee formed, with representation from many countries, under the auspices of the International Chamber of Commerce.
The first universally accepted rules developed in 1935, entitled, “Uniform Customs and Practice for Documentary Credits,” usually referred to simply as the “UCP.” Since 1935 it has gone through several revisions, usually about every 10 or 12 years. The 2007 revision, "International Chamber of Commerce Brochure No. 600", well written in plain English (no legalese), has become a guide for anyone who works with letters of credit.
Every letter of credit needs interpretation in light of the 39 articles of the UCP. Although one would not read the UCP for leisure, the document contains valuable information and anyone who works with letters of credit should have one close at hand. The ICC website, www.iccbooksusa.com, posts the publication or a local international bank may provide copies for its customers.
While banks typically spearhead the drive for each revision, they consult many different interest groups who may also have a hand in its writing. These include shipping companies, insurance companies, exporters, and importers.
***
How to Avoid the Most Common Error of Letters of Credit
Learning objective:
1. Realize an exporter can, and should, be proactive in setting letter of credit payment terms
2. Search key words: letters of credit, application for letter of credit, amendment, discrepancies
Many exporters become frustrated when they have shipped goods and then have to prepare documents to conform to the terms of the letter of credit. They suddenly realize they have to prepare or find certain documents which they did not anticipate, or cannot meet other surprise requirements. One frustrated exporter exclaimed, “Why would a foreign bank write a letter of credit with all these unacceptable terms and conditions?” What a great question to ask! Let’s discuss it and find the answer.
Does a bank arbitrarily draw up the terms of a letter of credit? No! Then who tells them what to write into the letter of credit? The bank asks the buyer to complete an application for the letter. Where does the buyer get the information?
Since the buyer is the exporter’s customer, can the exporter determine the terms in the letter of credit? The buyer will be very grateful to receive instructions from the seller about the preferred terms.
If the exporter develops a complete and detailed proforma invoice, it should have all the information needed by the buyer to complete the application for the letter of credit. Visit our website, www.roybeckerseminars.com, for a sample proforma invoice.
Some exporters prepare a template of instructions to the buyer for opening a letter of credit. Many banks have a model which an exporter can use as a guide. An exporter may prepare a customized template for each buyer. Visit our website, www.roybeckerseminars.com, to download “Instructions to the Buyer for Issuing a Letter of Credit.” At a minimum, create a list of bullet points, which includes important things such as the dollar amount, shipping and expiration dates, required documents, merchandise description, etc.
Some exporters have developed a pro-forma letter of credit. When they receive an order, they acknowledge the order and also send a copy of the proforma letter of credit.
Other exporters use a simple and effective technique. After receiving the instruction template mentioned above, sent by the exporter, the buyer will complete an application for a letter of credit. With the completed application form, the buyer dictates to the bank the terms of the letter of credit as discussed above. The exporter then requests each buyer to provide a copy of the completed application form to them before the buyer takes it to the bank. This allows the exporter to review the terms and provide feedback and suggestions, if necessary, to resolve differences at this stage in the process rather than waiting for the letter of credit to arrive and then go through a long and expensive amendment process.
The title of this lesson may have misled you, somewhat intentionally. Many people might think the most common error has to do with discrepancies in the documents. However, the most common error occurs when the seller fails to be proactive early in the process. Being proactive will reduce or eliminate the discrepancies which can crop up during payment time. Similar to the computer adage, GIGO (garbage-in-garbage-out), good instructions sent to the buyer will result in a well-written letter of credit, which will result in efficient collection of payment.
***
The Infamous Monday in Brazil
Learning objectives:
1. Understand sovereign risk
2. Search key words: accepted draft, sovereign risk, letter of credit, documents against acceptance, DAA, D/A, documentary collection
An exporter in Metro-Denver sold goods to a distributor in Brazil (and many other countries). After a long and satisfactory relationship with the Brazilian distributor, they agreed on payment terms of 180 days on an accepted draft basis. After shipment, the exporter’s bank sent the documents to a bank in Brazil with instructions to release the documents after the buyer accepted the 180 day draft thereby obligating themselves to pay it at maturity.
Some traders refer to this method of payment as a documentary collection with a time draft, or sometimes as “documents against acceptance,” abbreviated DAA or D/A. Visit our website, www.roybeckerseminars.com, for a flowchart of a documentary collection. For years this relationship worked well and the distributor always met their obligations.
In October of 1989, the exporter shipped goods valued at $76,000. The distributor in Brazil accepted the draft with the maturity date falling on a Monday in March of 1990. On the Friday preceding the maturity date the government of Brazil announced that at the end of business that day the old Cruzado would become invalid and a new currency, Cruzeiro, would be introduced on Monday.
On Monday, the due date, the distributor authorized their bank to pay $76,000. The bank informed them they could not transfer the funds until the central bank set a new rate of exchange for the new currency and implemented new regulations relative to wire transfers.
Days and weeks elapsed before they implemented the new regulations. The distributor then discovered that according to the new regulations, they could only wire $1,200 a year out of the country. It doesn’t take a calculator to figure out collection of the $76,000 would take some time!
This illustrates sovereign risk – the government intervened to prevent payment from being made. The distributor had the capacity and willingness to pay, but due to government controls, could not pay.
The exporter in Colorado informed the distributor that they would suspend future shipments until they received the $76,000. The distributor in Brazil, however, depended on receiving these goods for their livelihood. In order to keep their reputation clean, they arranged for payment from an account that they happened to have at a bank in Miami. Subsequently, payment terms for all future shipments were letter of credit only.
***
Two Tips to Avoid Getting Burned on a Canadian Check:
When Cash In Advance Isn’t
Learning objectives:
1. Comprehend the subtleties of sovereign risk
2. Recognize banking practices in Canada (and other countries) differ from those in the U.S.
3. Search key words: NSF, wire transfer, collections, final clearance, Federal Reserve System, sovereign risk
A distributor in the West Metro-Denver area received an order from a company in Canada for computer equipment. Taking proper precautions with a new customer, the distributor asked for payment before shipping the goods.
They received a check payable in U.S. dollars drawn on one of the major banks in Canada. They deposited the check in their bank which gave them immediate credit. (As with any check, the credit was subject to final clearance). For safety sake, the distributor waited a week to see if the Canadian bank returned the check unpaid. After a week with no returned check, they shipped the goods.
Three weeks later the check came back marked, “Non-Sufficient Funds.” They neither collected the money nor received the goods back.
Often U.S. companies assume that trade with Canada is “pretend exporting” because of the close proximity. However, Canada as a foreign country has a different currency, different laws, different customs and different banking practices.
United States banking practices require banks to pay or return checks within 24 hours. If a bank does not return a check within 24 hours banking rules consider it paid. Therefore, banks return “Non-Sufficient Funds” checks to the depositor within a few days from anywhere in the country.
Other countries, including Canada, may have different banking practices. The distance that the check must travel also affects the clearing time. The bank may return a check days, weeks, and even months after presentation, as illustrated in this lesson.
The title to this lesson indicates you will receive two tips. In fact, to get more than your money’s worth, we present three tips:
First, ask the buyer in a foreign country to send a wire transfer instead of a check. Wire transfers constitute good funds, immediately available.
Second, if you receive a check, especially for a large amount, drawn on a foreign bank, ask your bank to submit it on a collection basis rather than for immediate credit. When the foreign bank honors the check and your bank deposits the funds in your account, they are no longer subject to final clearance. You should hold shipment until you receive notice that the funds have been deposited into your account.
Third, instruct your buyer to send a check in U.S. dollars drawn on a U.S. bank. It’s easy for him to ask his bank to do this. You will receive an official bank check drawn on a U.S. bank which you can clear through the Federal Reserve System for immediate collection. Since it is a bank check (as opposed to a customer’s check) you can be confident that the bank will honor the check.
This lesson illustrates that although doing business in Canada appears relatively easy, one should bear in mind that differences exist between the Canadian and United States banking system.
***
Confirmed Letter of Credit from the Philippines
Learning objectives:
1. Appreciate the importance of being proactive
2. Discover a right way and a wrong way of asking for a confirmed letter of credit
3. Search key words: confirmed letter of credit, issuing bank, sovereign risk, sight, tenor, expiration date, advising bank
Exporters generally understand the protection they receive with a confirmed letter of credit. They know the confirming bank obligates itself to pay even if unable to collect from the issuing bank. However, some exporters do not fully understand how to effectively ask for a confirmed letter of credit. Let’s begin by emphasizing one very important principle and then provide a right way and a wrong way to ask for a confirmed letter of credit.
An astute exporter understands the need to be proactive when dealing with letters of credit of any kind. Stressed in a number of the lessons in this series, this strategy holds true for obtaining a confirmed letter of credit as well.
A second bank will consider confirmation of a foreign bank’s letter of credit only if asked by the foreign bank. A bank will not confirm a letter based only on the request of the exporter. In order for the confirming bank to have any recourse to the issuing bank, the issuing bank must request another bank to add its confirmation. It follows that a foreign bank will only request the confirmation if asked to do so by their customer, the buyer.
It further follows that the buyer has no motive to ask the issuing bank to request the confirmation unless the seller insists that the buyer do so: hence the need for the exporter to be proactive. Either party can offer to pay the fee for the confirmation.
Now, let’s consider the wrong and the right way to ask for a confirmation. The wrong way is to instruct the buyer to send a confirmed letter of credit. An exporter did just that recently. They received a hard copy of a letter of credit issued by a bank in the Philippines, very prominently entitled, “Confirmed Letter of Credit.” The advising bank gave no indication that they had confirmed the letter of credit because the issuing bank did not ask them to confirm it.
What did the exporter really have? Can a bank confirm their own letter of credit? No! It serves no purpose for a bank to confirm their own credit. It does not protect the exporter against the risk of default due to sovereign risk or the risk of the issuing bank not having the resources to pay. For an exporter to gain full benefit with a confirmed letter of credit it must carry the confirmation of a second bank in a second country.
Therefore, to ask for a confirmed letter of credit, use the following wording: “The letter of credit is to be confirmed by (name of your favorite bank),” and fill in the blank. You may indicate you want the letter of credit confirmed “by a bank acceptable to us,” or you may insert the name of a bank.
However, if you use a bank’s name, contact them first to verify they will confirm the credit. They will want to know five factors: (a) the country; (b) the name of the issuing bank; (c) the dollar amount; (d) the tenor, i.e., sight, 30 days sight, etc. and (e) the expiration date. At that time the bank can also give you a quote for the price of confirming the letter of credit so you can build it into the price of your product.
***
Unconfirmed Letter of Credit
Learning objectives:
1. Realize the importance of a confirmed letter of credit
2. Understand UCP article 10
3. Search key words: confirmed letter of credit, UCP, issuing bank, irrevocable letter of credit, amendment, beneficiary, advised letter of credit
A number of years ago I worked with someone who grew up in Cuba. Since she spoke English as a second language, interesting nuances became apparent when we discussed letters of credit. I remember on one occasion I referred to a letter of credit as “unconfirmed.” She gently corrected me, “If a letter of credit is unconfirmed, that means a bank first confirmed it and then removed the confirmation, making it unconfirmed. But,” she went on, “a bank cannot undo a confirmation once it has been made.”
Was she right? She spoke grammatically correct, of course, but it raises an interesting question. Can a bank add its confirmation to a letter of credit and then at a later date notify the beneficiary that they no longer wanted to have their name, reputation, and obligation attached to the letter of credit? Where can we turn to find an answer for a question such as this? The UCP, of course!
The removal of a confirmation requires an amendment. According to the UCP, “. . . a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary” (Article 10 a). In summary, a bank can rescind its confirmation but only if the beneficiary agrees. While possible, it is not probable.
After that conversation, my co-worker and I agreed to refer to letters of credit as “confirmed” or “advised.” An “advised” credit implies a bank has not added their confirmation.
***
How Do They Say “Hello” in France at 4 A.M.?
Learning objectives:
1. Appreciate the importance of humor in the workplace
2. Search key words: international wire transfer, beneficiary, intermediary bank
Many customers use international wire transfers when making payments overseas. This includes businesses paying invoices as well as individuals sending money to relatives.
Prior to the current state-of the-art ability to initiate such transactions on-line, a customer was required to call their bank with the pertinent information, such as: amount to be transferred, beneficiary’s name, address, bank, and bank account number.
The customer’s bank is the remitting bank. The remitting bank determines how to route the money to the beneficiary’s bank, and to notify the beneficiary’s bank that they sent the money.
On rare occasions, for a variety of reasons, the money doesn’t arrive promptly at the beneficiary’s bank. In such cases, the remitting bank traces the wire to determine where the money went, what went wrong, and how to correct the problem so the beneficiary receives the funds.
A bank I worked for had a customer who asked us to send a payment to a beneficiary in France. A young man in our department, Eric, took the call. He recorded the information, determined the routing and informed the customer that the beneficiary should have the money in two to three days.
A week later, the customer called Eric and informed him that the beneficiary in France claimed non-receipt. Eric offered to put a tracer on the wire and promised the customer he would resolve it quickly.