More Banker’s Insights on International Trade
Importers' 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 Rev 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: 101 Lessons Based on Practical Experience," and "More Banker's Insights on International Trade: Exporters' Edition," 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
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 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
The Legal Aspects of a Bill of Lading
What Are the Two Most Important Articles of the UCP?
The Day Imports Equaled Exports
Investing at 50% in Mexico
How Swift Is SWIFT?
The Hidden Expiration Date on Every Letter of Credit
If You Must Use Letters of Credit - Get Them Right!
Were the Whole Family Stowaways?
Mismatched Gardening Gloves
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
They Thought They Imported Cue Sticks, What They Got . . .
How a Transposition Cost $300,000.00
The American Flag, Motherhood, Apple Pie, and . . . Ex Works?
Who Saw the Goods?
Who is at Fault?
The Great Salad Oil Swindle
The Golden Rule
Why Doesn’t Everyone Use DDP?
The British Need Cement
Door Delivery by the Steamship Line – A Good Idea?
Banks Create Drafty Situations
Why They Lost Their Shirts
The Value of a Penny: Why the Importer Volunteered to Pay More for His Bottles!
List of Entries from Customs
Playing Football Down Under
When is a Sweater not a Sweater?
How Reliable are the Wall Street Journal Rate Quotes?
The Danger of Dirt
The Problem of Power
Filling a Full Set
Sale of a $400,000 Banker’s Acceptance
Shipping by Rail from Korea to Vancouver
Terms in a Flaky Transaction
How does a Bank Define “Official”?
Let’s Swap Lunches
What are Adzing Machines?
How Paper Slippers Became a Tax Deduction
A New Market for Greek Candy
Comparing Apples with Oranges
History of Stale Documents
History of the Red Clause
Importing Veterinary Tools from Pakistan
Requirements for a Standby Letter of Credit
Ladies Italian Unfashionable Dresses
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?
The Big Rocks and the Little Rocks
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.
***
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 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.
Another week elapsed and again the customer called, somewhat less understanding this time, and informed Eric that the money still had not arrived in France. Eric came into my office and asked, “Roy, if I get up at 4 A.M. tomorrow and call the bank in France from my home, will the bank pay for my phone call?”
I smiled to myself as I replied, “Eric, if you want to get up at 4 A.M., yes, the bank will pay for your phone call!”
The next morning, at a staff meeting, he related what had happened. He had called the beneficiary’s bank in France. The bank’s operator answered, “Bon jour.” Eric, who knew no French, tried to explain that he needed to speak to someone in the international department who could speak English.
After several phone transfers, he reached someone who could help. They discussed the transaction and finally placed the problem with another bank in France, an intermediary bank, who apparently had failed to relay the money. Eric asked the employee at the French bank if she had the telephone number of the intermediary bank. She said she did and she gave it to him.
Eric then dialed the number of the intermediary bank. As it rang the first time or two he anticipated hearing, “Bon jour,” and expected he would again have to find an English speaking person. Instead, he heard a voice with a distinct American accent, say, “Hello?”
Of course, this caught Eric off guard. Since he knew he had carefully dialed the number, including country code and city code, he jumped right into his reason for calling. “Hello, my name is Eric. I’m calling from a bank in the United States and I’m trying to trace a wire transfer we sent to you two weeks ago,” he said and then went into a lengthy explanation of the problem.
When he paused, the voice on the other end said, “Excuse me, do you think you are speaking to a bank?”
“Why, yes,” Eric replied, “to whom am I speaking?”
“I’m an American student going to school here in Paris,” she explained, “I just walked down the street and heard this pay phone ringing!”
I have often reflected on this incident and continue to marvel at the remarkable sense of humor that Eric had. Most employees would have come in that morning, grumbling about how early they had to get up, and then, of all things, they ended up calling a pay phone! However, no one saw the humor in the situation better than Eric, and as he told us the story, the whole office laughed at his misfortune.
I believe humor in the workplace allows us to feel more relaxed and handle stress and frustration more effectively.
***
Where Does Risk Pass?
Learning objectives:
1. Obtain an introduction to "Incoterms® 2010"
2. Realize the misuse of the terms FOB and Ex Works
3. Search key words: International Chamber of Commerce, Incoterms® 1990, Incoterms® 2000, Incoterms® 2010, Ex Works (EXW), bill of lading, Free Carrier (FCA), Free On Board (FOB)
Early in my career, I heard debates on the topic: Where does risk pass? It seemed, among bankers anyway, this debate belonged to lawyers for argument in court. Now, thanks to the undertaking of the International Chamber of Commerce (ICC), we have the answer to the question.
A recent ICC publication, "Incoterms® 2010," includes definitions for each of the eleven trade terms. In a well thought out sequence, it lists each Incoterm® and then stipulates where the seller delivers. Delivery is defined as: “…where the risk of loss of or damage to the goods passes from the seller to the buyer.”
Once the delivery event is identified, Incoterms® 2010 lists ten responsibilities for the buyer and ten for the seller. It addresses who jumps through hoops and over hurdles. It explains who pays for loading the inland carrier, who pays the cost of shipping to the main carrier, who pays for loading the main carrier, who pays for the cost of shipping on the main carrier, who pays for the insurance, who pays for unloading the main carrier, the inland freight, import customs, etc. Each Incoterm® clearly states which responsibilities belong to the buyer and which ones belong to the seller.
A committee of 20 people (19 from Europe and one from Japan) wrote a predecessor publication, "Incoterms® 1990." Notice the absence of American representation. The ICC revised Incoterms® in 2000 and again in 2010. Both times they invited one American, Frank Reynolds, to the committee. Understanding Incoterms® is easier when read with a European mind-set. Many European countries can export products with the goods never leaving the surface of the earth: by truck, rail, barge, etc. As a result some Incoterms® may not apply for many U.S. imports and exports.
The Incoterm® used must correctly match the payment term used. The two most misused Incoterms® are EXW and FOB. For example, I have seen letters of credit issued to beneficiaries in Colorado stating, “Ex Works the seller’s warehouse.” That’s easy to understand and often exporters think it is the least hassle for them. It essentially means, “the goods are at my back door, come and get them.”
However, if the exporter has a letter of credit calling for an “on-board” ocean bill of lading issued from a west coast port, how will the exporter obtain the bill of lading? What if the merchandise is destroyed en-route to the port and they can’t get a bill of lading? They’ve fulfilled their obligation under the Ex Works agreement but they can’t get paid.
What about FOB? It’s a term as easy for an American to understand as the American flag. However, the term FOB, as Americans understand it, does not have the same meaning to the rest of the world. Our own Uniform Commercial Code defines FOB essentially as FOB here, there, or anywhere.
As defined in Incoterm® rules, FOB is reserved for ocean shipments only. Very precise in its definition, risk passes from seller to buyer when the goods are loaded on board. The 2010 revision no longer uses the phrase “pass over the rail of the ship,” as used in the 2000 rules. Notice the word “ship.” Terms such as “FOB our plant” or “FOB Airport” are used incorrectly for international shipments and no authoritative document exists in case of a dispute.
How can one solve the dilemma of Ex Works and FOB and letters of credit? The answer lies in asking for the correct transport document and either using an alternative Incoterm® or payment term.
In the case of Ex Works, since the seller has no shipping responsibility, there is no transport document. One might reason that the seller could obtain a receipt from the first carrier who picks up the goods, such as a freight forwarder or a trucker. However, this exceeds the responsibilities of the exporter. Worse, what if the buyer sends a truck to pick up the goods or the trucker refuses to provide a receipt? I am of the opinion that EXW and letters of credit do not work together.
The term FOB is restricted to ocean shipments. For all other modes, “FCA” or “Free Carrier,” is preferred. The exporter has responsibility to deliver the goods to the carrier nominated by the buyer at the named place. Americans can easily understand FCA because of its similarities to the beloved term “FOB Factory.”
An Incoterm® rule exists for almost any situation, and traders should choose the right one to prevent misunderstanding. Frank Reynolds’ book, “Incoterms® for Americans®,” provides valuable insight to enable American companies to avoid misunderstanding and problems. Information on ordering "Incoterms® 2010," and Mr. Reynolds' book is available on the reference page.
***
When a Mouse is an Elephant
Learning objectives:
1. Recognize strict compliance as a cornerstone of a letter of credit
2. Search key words: letter of credit, documents, UCP, commercial invoice, applicant, beneficiary, discrepancy, amendment, strict compliance
A company in the United States placed an order with a company from a country other than Scotland, and asked the buyer to open a letter of credit to pay for the purchase. The merchandise description in the letter of credit read simply, “Scotch Whiskey.”
When the documents arrived at the issuing bank, they discovered that the merchandise on the invoice read, “Scotch-type Whiskey,” not “Scotch Whiskey” as required by the letter of credit. The UCP requires, “The description of the goods, service or performance in a commercial invoice must correspond with that appearing in the credit” (Article 18 c).
Did it? Does “Scotch-type Whiskey” mean the same as “Scotch Whiskey”? A cautious banker would properly conclude, “Why should I make the decision? I’ll call the applicant and let him decide.”
The applicant, too, wondered, “What is Scotch-type Whiskey?” The bank and the applicant concluded the beneficiary should submit a correct invoice to read, “Scotch Whiskey.”
However, the beneficiary refused to substitute the invoice, which of course made everyone suspicious. If the beneficiary refused to replace the invoice, perhaps they shipped something other than “Scotch Whiskey.” They may have shipped a whiskey like Scotch, but not Scotch.
The applicant did not waive the discrepancy, instructed the bank to refuse payment and returned the shipment.
Many exporters become frustrated by a bank’s nit-picky examination of documents. The bank has an obligation to pay under the letter of credit only if the beneficiary presents documents which comply with the terms of the letter of credit. Without correct documents a bank can only pay if the applicant waives the discrepancies.
All legitimate discrepancies carry equal weight. A small discrepancy may seem like a mouse to the exporter but to the importer looking for a way to refuse the payment, it may look like an elephant.
Exporters must prepare documents which strictly meet the terms of the letter of credit in order to demand payment from the bank. If unable to meet the terms, they should request an amendment before shipping the goods.
Thanks to Frank Sauter for this illustration.
***
Seven Factors for Determining the Right Method of Payment
Learning objectives:
1. Comprehend payment risks
2. Search key words: letters of credit, risks, confirmed letter of credit
Importers and exporters often ask, “What is the best method of payment for international shipments?”
Many bankers answer, “Letters of credit.” This is a self-serving answer. Of all the methods, letters of credit generate the most fee income for a bank.
The correct answer is, “The one which allows the transaction to be completed to the satisfaction of both parties, the buyer and the seller.” If both parties can’t agree on a perfect method of payment, they must agree upon one with which they both can live.
What choices, then, does one have? The four basic payments are cash in advance, letters of credit, collections, and open account. The exporter’s risk it minimal with cash in advance while the risk to the importer is maximum. At the other end of the spectrum, the exporter’s risk is high with open account while the importer’s is low.
An exporter should ask seven questions before agreeing to a specific payment term. The seven questions are: (a) Is the relationship with the buyer new, or established? (b) Is the order custom-made or standard? (c) Is the political situation stable or unstable? (d) Is the economic situation stable or unstable? (e) Are competitors offering terms? (f) Is there a risk of price changes? (g) Is there a need to control cash flow?
By answering these questions, the exporter will be better qualified to select the right payment option for each transaction. However, not all seven questions carry equal weight. For example, extended payment terms ("e" above) may carry more weight.
One exporter stated that his sale terms remained confirmed letters of credit. Period. It didn’t matter if major British, German or Japanese banks issued the letters of credit, his needed confirmation. The company set a very restrictive policy for international payments. Proactive exporters will probably use all four methods of payment depending on the circumstances of their international business.
***
The Legal Aspects of a Bill of Lading
Learning objectives:
1. Know the importance of a bill of lading
2. Search key words: “on-board” date, bill of lading, title document, letter of credit, collection
The shipment date is an important point on the time line in an international transaction, as the payment date is often associated with it in some way. Financing too is associated with the shipment date, as banks often refer to “pre-shipment” financing or “post-shipment” financing.
How does one know the shipment date? The bill of lading determines it. For letter of credit purposes, the “on-board” notation is considered to be the ship date.
The bill of lading takes on an extremely important role in international trade because of its legal aspects. Legally, the bill of lading is three things:
1. A title document conveying ownership. Ocean bills of lading can be issued in negotiable form so that whoever holds the bill of lading has title to the goods. This is an important feature because control of the title cannot pass until the buyer pays for the goods.
2. A receipt from an independent carrier. Buyers find security in having an independent, third party hold the goods before they remit payment.
3. A contract for delivery. The carrier contracts to move the goods from point A to point B as agreed with by the exporter.
I’ve seen one legal definition as, “a document purporting to represent a shipment of goods. I’d say that’s very accurate.
When an ocean carrier issues a bill of lading in negotiable form, it can be bought and sold. This provides an advantage for the buyer who may have pre-sold the goods because he can simply endorse it to the next buyer in line. In fact, it can be bought and sold any number of times. Finally, the last endorser on the document must take possession of the goods when they arrive. While this discussion remains true in theoretical terms, recent concerns about security require documents to specify the ultimate buyer and destination and the feature of negotiability becomes less useful.
These features of a bill of lading are critical when control of the documents is at issue such as in a letter of credit or collection transaction.
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What Are the Two Most Important Articles of the UCP?
Learning objectives:
1. Gain an understanding of the Uniform Customs and Practice for Documentary Credits
2. Search key word: UCP
The current revision of the Uniform Customs and Practice for Documentary Credits (UCP) became effective on July 1, 2007. Leading up to that date, and after, the international business community had opportunity to attend many seminars to become acquainted with the impact the changes would have.
The UCP has 39 articles covering items such as liabilities and responsibilities, signature requirements for the bill of lading, frequently used word definitions (i.e. approximately), and other details needed to issue letters of credit and prepare conforming documents.
So which two articles seem the most important? I contend they are the silent articles, 40 and 41. Article 40 states, “The bank is always right.”
Article 41 states, “If the bank is ever wrong, refer to article 40!”
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The Day Imports Equaled Exports
Learning objectives:
1. Learn how to think big
2. Search key words: balance of payments
It happened on your birthday last year. Imports equaled exports. Exactly. However, it did not even make the Wall Street Journal, or the Financial Times. Why? Because it happens every day! Simply remember that an export to one country converts into an import for another country, therefore imports equal exports every day.
In theory, of course. When the transactions are actually recorded, is another matter.
Most people think of this topic in the context of one country’s balance of trade, defined as the record of transactions between one country and its trading partners in the rest of the world. In this context, imports would rarely if ever, equal exports. If viewed from a worldwide perspective, however, they are always equal.
***
Investing at 50% in Mexico
Learning objectives:
1. Understand sovereign risk
2. Search key words: sovereign risk
A bank customer called to withdraw money from his account and wire it to a bank in Mexico. This seemed a bit unusual so I asked, “Is this a gift to a relative, or have you purchased some goods?”
He replied, “No, I’m sending it to my own account at a Mexican bank.” Asked if he planned to live in Mexico, he said, “No.”
“Then why would you send money to Mexico?” I asked.
“I have a friend working and living in Mexico,” he said. “He told me that if I deposit money in a Mexican bank for one year, I will earn 50% interest.”
When asked if he considered the risks, he responded, “What risks?”
I asked, “First, is your deposit in pesos or dollars?”
“Pesos,” he replied.
“Then you bear the risk of currency exchange rate differences and you could lose considerable money,” I informed him. “Furthermore, the government of Mexico could freeze your deposit and you may never get it back. Any action on the part of the government can increase your risk.” Bankers commonly refer to this as sovereign risk.
Then he inquired if he could transact a forward contract with the bank to protect himself against adverse rate movement. I explained the simple and precise calculation using the interest rate differential between the two countries to determine the premium or discount on a forward rate. If he chose to leave the money in the U.S. and earn interest at prevailing rates, or chose to put pesos on deposit at a Mexican bank, earn interest, and lock in a forward rate, he would come out exactly the same at the end of the time period.
After considering the risks, and the possibility of no return at all, he decided to leave his money safely in the U.S. bank he trusted.
***
How Swift Is SWIFT?
Learning objectives:
1. Comprehend a basic international banking tool
2. Search key words: SWIFT
Technology continues to raise international banking to new heights. Prior to electronic communication, banks transmitted messages via mail or telex. While quite adequate, both remained slow, vulnerable to fraud, and lacked standardization.
In the mid 1970s, with the advent of computers, a new communication tool entered the international banking community. A cooperative formed and took the name, “The Society for Worldwide Interbank Financial Telecommunication,” or “SWIFT.” Similar to a private e-mail system for banks and other financial institutions which were members, SWIFT uses cutting edge technology. SWIFT now supports over 8,300 financial institutions in 208 countries.
In order to enjoy the benefits, a bank must join the cooperative and buy only approved hardware and software. Every message type has a standard format. For example, Message Type 100 (MT 100) exists only for wire transfers. The computer screen displays the format and a bank employee must enter the correct data in each required field. When transmitted, the message received at the receiving bank will appear in the required format. As employees become familiar with the message types, messages become easier to input and read, and errors are reduced.
With security a high priority, no fraudulent message has been transmitted since its inception in the mid 70s. The procedures that SWIFT has implemented include the exchange of authenticator keys among member banks which must change periodically, the upgrading of equipment and software, and the encryption of messages. In 2008, average daily messages reached 15.4 million, representing many trillions of dollars daily, up from 4.2 million only 10 years ago.
As the acronym implies, the system transmits messages instantaneously and they are received in a matter of seconds. The website, www.swift.com contains more interesting facts and figures.
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The Hidden Expiration Date on Every Letter of Credit
Learning objectives:
1. Become familiar with articles 6 and 14 of the UCP
2. Search key words: UCP, expiration date, letter of credit, presentation period, customs entry, consular invoice
The UCP states, “A credit must state an expiry date for presentation” (Article 6 d). It is relatively easy to find the expiry date in the letter of credit.
However, another date equal in importance, is referred to as the last date for presentation. The presentation period, the window of time in which the exporter must present documents, is tied to the ship date as indicated in the original transport document.
The letter of credit will contain terminology similar to “documents must be presented within 10 days after the bill of lading date but within the validity of the letter of credit.” For example, if the shipment took place on January 1st, documents must be presented no later than January 11th or the expiration date if earlier. If the expiration date is January 5th, documents must be presented by January 5th, not the 11th.
Some letters of credit require a presentation period of seven days, some 15, etc. If the letter of credit does not state a presentation date, the exporter has 21 days according to UCP Article 14 c. Exporters should be aware of this requirement and feel confident they can work within the stated time period. If not, they should request an amendment.
Why does a letter of credit include these time requirements? The importer stipulates them because a delay in presentation can create problems. When the goods arrive at the customs entry point, the importer needs the documents to clear the goods. If not cleared in a timely manner, the goods will go into storage and incur daily charges.
With a short presentation period, the importer can force the exporter to deliver the documents to the bank quickly. Once the documents enter banking channels, they will find their way to the importer in due time for customs clearance.
An alert exporter, however, must ask several key questions. How quickly after shipment can the documents be assembled and presented to the bank? Can unusual situations cause delays? Can the consular's signature be obtained (for a specific country) within the time limit?
Some consulates are located in distant cities and only sign documents once a week. If the appointed day for signing documents falls on a holiday, in either country involved in the transaction, then one more week must be added to the time frame. While 10, 15 or even 21 days may seem like adequate time, it can slip away quickly.
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If You Must Use Letters of Credit -- Get Them Right!
Learning objectives:
1. Learn how to be proactive
2. Search key words: letter of credit, application for letter of credit
Too often exporters receive a letter of credit and then become frustrated with the terms the issuing bank has provided. They ask, “Why would a bank issue a letter of credit with terms and conditions like this?” The issuing bank does not arbitrarily set the terms.
Many exporters have learned that they can set the terms of the letter of credit. Several proactive techniques can accomplish this. First, provide a detailed proforma invoice that gives sufficient information to the buyer for opening a letter of credit. Visit our website, www.roybeckerseminars.com, to download a sample proforma invoice. Second, provide detailed instructions to the buyer for opening the letter of credit. A copy in Word format is available on our website, www.roybeckerseminars.com. Third, ask buyers to fax a copy of the completed application for a letter of credit before they take it to their bank. This allows for feedback, revisions and agreement before the bank issues the letter of credit and will save time and money.