2020 marks the 21st anniversary of the Certificate for Documentary Credit Specialists (CDCS). LIBF’s experts in trade finance – Mike Backhouse, Alex Gray and David Morrish – explain why the qualification is so important.
No doubt all of us working in trade finance expect technology to radically alter the way the sector works. But we don’t believe that technology will mean the end of human expertise in letters of credit.
“AI can already do some document checking,” says Alex Gray our new Head of Trade and Transaction Banking who joined LIBF this month.
“And the physical checking of documents will disappear over time, but you still need a person to oversee the technology. You will have to have someone who understands the documentation. A computer does not.”
Mike Backhouse agrees. “The fact is in some countries original documents have to be supplied. For a purely technological solution to be feasible, governments and customs regulations all need to be aligned. It will take quite a long while,” he says.
“At the end of the day,” says Mike, “the use and operational management of documentary credits is standard transactional banking business for banks. However, its value in the development of international trade – and the benefits that brings to the globally economy – is often underestimated.”
As CDCS ‘comes of age’ what does it offer to people working in the sector?
Because of the high risk to a bank’s bottom line – and to its reputation if things go wrong in trade finance – issuing and paying letters of credit demands detailed technical understanding.
Both banks and their customers want to make sure the terms are correct and watertight.
“The Certificate for Documentary Credit Specialists (CDCS) is specifically designed to ensure the expertise of individuals doing the job – for people physically handling new applications and documents in their day-to-day work,” says David Morrish. “That makes it unique.”
Letters of credit do provide the security they promise. Default rates for import letters of credit from 2008 to 2018 averaged 0.37%, and 0.05% for export letters of credit, according to the International Chamber of Commerce (ICC).
Global trade in 2018 was valued at US$18.5tn and trade finance backed US$48bn. As those numbers suggest, trade documentation errors matter.
“At a minimum, if exporters don’t get the documents right there will be a downside in terms of delayed cash flow,” says Mike.
“Or the importer could use a mistake in the documents presented to ask for a discount. If things really go wrong, potential losses are very high as the value of many trade deals can run into millions of dollars.”
When a bank has CDCS trained staff, customers can turn to an expert to get the right answers. That provides a lot of comforts and assists the relationship dynamic between the bank and its customers.
Fully trained trade finance staff are vital for compliance. This goes far beyond making sure that the bank doesn’t lose money due to discrepant documentation.
“Checking letters of credit is the first line of defence in tackling problems like money laundering and the financing of terrorism,” says Mike. “The document checker will notice anomalies like under-invoicing or over-invoicing that could indicate money laundering. They have a lot of responsibility.”
Mike argues that the importance of the work done by holders of the CDCS cannot be overstated. “Thousands of people hold the CDCS and they help maintain the trade flows that we all rely on,” he says.
CDCS and the world of trade finance
Checking letters of credit does require an eye for detail and it can sound like a mundane job. But don’t judge this book by its cover. “When I worked in Hong Kong,” says Alex, “I could see letters of credit issued in March and April for the toys that would be hit at Christmas. You get to see the logistics of global trade.”
Because the CDCS is the accepted benchmark, holders of are employable around the world – at both banks and large corporates.
The CDCS is based on the Uniform Customs and Practice (UCP) 600 rules for Documentary Credits, issued by the ICC.
Including the UCP 600 in contracts is voluntary, but banks deviate from the standards at their peril. “In the Far East, the CDCS is effectively a de facto licence to practice,” says David.