Paper Is Not the Problem

Trade finance banks are out of sync with the needs of trade importers and exporters

Trade finance is as important to supporting trade as the left foot is to the right for running a race. There is no trade transaction without the goods and services being paid for at shipment (a credit), after shipment (a collection), or after delivery to the buyer (open account). However, unlike our metaphorical sneakers, we have tied our laces together. We have tied trade finance payment methods, documentary letters of credit and collections, to the paper documents needed for transporting, transferring title, and clearing cargo. The presentation of transport documents for payment should be done under UCP 600 Supplement 2.0 (eUCP) and URC 522 Supplement 1.0 (eURC) allowing for electronic record presentation and settlement while the hard copy paper is sent directly to the buyer for clearing cargo after payment or acceptance. 

The 2020 ICC Global Survey on Trade Finance surveyed which documents are required to be paper in 35 countries. The documents surveyed included the letter of credit, bill of exchange, commercial invoice, order form, insurance policy, promissory note, bill of lading, certificate of origin, payment confirmation, and import/export declaration. Only three countries surveyed allowed for all of these documents to be digital; Vietnam, Panama and Egypt. The other 32 countries required at least one or more of the subject documents to be a paper original.

The documents that need to be produced for shipping combine the requirements of the exporting country with the requirements of the importing country. Collectively, we refer to them as the transport documents. These documents include; the bill of lading, invoice, packing list, certificate of origin, inspection certificate, beneficiary certificate, fumigation certificate, phytosanitary certificate, weight certificate, export license, bill of exchange, and ship registration certificate to name a few of the most common. The freight forwarder is the expert as to the requirements of both countries, and responsible for advising and or complying these documents for the shipper.

The specific documents required to be presented for a letter of credit negotiation are listed in SWIFT paragraph 46A of a MT 700 message for a credit, and the collection instructions for a collection. There is no set rule as to which documents should be included for negotiation or collection; but traditionally, evidence of movement (bill of lading), value (invoice), content (packing list), and quality (inspection certificate) are considered to be the minimum.

ICC’s initiatives in response to Covid-19

The time has come to untie the laces. Separate apples from oranges. Chew gum and walk at the same time (except in Singapore; no gum). All of the documents required for negotiation in a documentary letter of credit can be presented to the bank as electronic records if the credit has been issued under UCP 600 Supplement 2.0 for Electronic Presentation. Documents for collection can be presented to the buyer as electronic records under URC 522 Supplement 1.0. In both cases, the original hard copy bills of lading, invoices, certificates of origin, and health-related certificates can be forwarded to the consignee after payment or acceptance. 

ICC eRules guidelines for electronic record presentation include:

• 1 July 2019 – Uniform Customs and Practice for Documentary Credits (UCP 600) for Electronic Presentation (eUCP) Version 2.0.
• 1 July 2019 – ICC Uniform Rules for Collections (URC 522) Supplement for Electronic Presentation (eURC) Version 1.0.
• 6 April 2020 – ICC Memo to Governments and Central Banks on Essential Steps to Safeguard Trade Finance Operations.
• 6 April 2020 – ICC Guidance paper on the impact of COVID-19 on trade finance transactions issued subject to ICC rules.

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eRules Implementation for trade banks, importers, exporters, freight forwarder, carriers and service providers:

• IMPORTERs must apply for documentary letters of credit under UCP 600 Supplement 2.0.  The ICC has requested all banks accept this request as part of the war on Covid-19.

• BANKs must then issue their eUCP letters of credit with the following stipulations:
  • The eUCP shall apply where the credit indicates that it is subject to the eUCP, and becomes an “eUCP” credit.
  • An eUCP credit must indicate the applicable version of the eUCP, or latest version.
  • An eUCP shall include an electronic address for presentation; either an email or URL address.
  • An eUCP credit must indicate the physical location of the issuing bank. In addition, it must also indicate the physical location of any nominated bank and, if different to the nominated bank, the physical location of the confirming bank, if any.
  • The terms and conditions of the letter of credit must reflect the eRules guidelines, to include: the electronic record serves as an original and copy(s); sign shall include an electronic signature; and must include a “notice of completeness” for presentation.

• EXPORTERs must present their negotiable documents sets as electronic records in accordance with the ICC eRules guidelines, to include:
  • Electronic Records. Create or convert their transport documents to electronic records for presentation. The most common format is PDF. 
  • Notice of Completeness. This is a new document required under eRules as the cover letter for electronic record presentations.  A template can be found HERE.
  • Negotiable Documents Set. The negotiable documents set can be sent directly to the issuing bank and eliminate the courier and negotiating bank fees; unless it is an additional condition in the letter of credit.

• FREIGHT FORWARDER and DOCUMENT PREPARATION services must compile and convert their customers transportation documents to electronic records for presentation to their customer’s bank via electronic address.
  • New procedures need to be in place as to when and where to send the original paper documents if the shipper wants payment before releasing them.
  • The new “notice of completeness” must be included in the negotiable documents set.
  • No longer can the forwarder send the documents via courier and get a courier receipt as evidence of time and date of submittal. Now, he must keep on record the date and time stamp of the email to the bank. 
  • Ocean Bills of lading will normally not be “negotiable”. It is becoming common practice with electronic record ocean bills of lading to be consigned to the buyer or his agent and thus are no longer freely negotiable (like air waybills).   

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ICC takes the lead

The International Chamber of Commerce has taken the lead to keep trade moving during the Covid-19 pandemic by publishing the eUCP and eURC eRules guidelines for trade transaction presentations as electronic records instead of paper. The benefits of faster payment to the exporter, less cost to the importer, and transaction simplification will be ahead of us long after the pandemic is behind us.  

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This article was written by a member of TFG’s 2020 International Trade Professionals Programme. Find out more here.