Guide to Trade Finance Documentary Services Ulster Bank Trade Finance Basic Definitions The collection service provided by a bank is a means whereby a creditor (usually an exporter) in one country obtains payment from a debtor (generally an importer) in another country. Standard international rules governing the role and responsibilities of banks in collections have been established by the International Chamber of Commerce. These are known as the Uniform Rules for Collection (ICC publication URC 522). The URC are internationally recognised and have been adopted by most banks world-wide. Two types of documentation may be handled by the bank when it arranges a collection on behalf of a customer: Financial documents A Bill of Exchange. Commercial documents A document of title such as a Bill of Lading; invoices, insurance policy and possibly other documents such as certificate of origin. When commercial and financial documents are present, the collection is known as a Documentary Collection. Whereas, a Clean Collection consists only of financial documents. Ulster Bank’s Collection Service can be divided into two types: Outward Collections The bank undertakes to obtain payment of financial and/or commercial documentation from an overseas party on behalf of an exporter. The exporter may or may not be a customer of Ulster Bank. Inward Collections The bank assists a correspondent bank abroad to obtain payment of a Bill of Exchange or cheque from an Irish importer on behalf of a foreign supplier. It is noteworthy that the debtor may or may not be a customer of Ulster Bank. The parties to a collection are as follows: The principal Either our customer, the exporter who entrusts an Outward Collection to Ulster Bank, or a foreign supplier who entrusts the collection to a bank in his country for obtaining payment from a debtor in Ireland. The Remitting Bank Where documents are sent from a bank. The Collecting Bank Usually a correspondent bank of the remitting bank or the bank specified by the principal in his instructions to the remitting bank. The Presenting Bank The bank which presents the documents to the debtor for acceptance/ payment. Often the collecting bank and the presenting bank are the same bank. The Debtor The importer. The two main sources from which Ulster Bank typically receives instructions to handle Collections are: A bank customer who is an exporter (an Outward Collection). A foreign correspondent bank acting on behalf of an exporter in its own country (an Inward Collection). Target Customer Profile Collections are suitable for any customer receiving payment from overseas in the form of Bills of Exchange and documentation. The bank’s collection service is likely to be of interest to importers and exporters of goods and services. These could be small, medium or large corporates. Ulster Bank’s collection service is available to customers and non-customers alike. For customers with a knowledge of international trade documentation an Expedited Bill Collection Service is available. This service is a speedier method of remitting documents to the importer’s bank overseas and is described in more detail later. The Collection Cycle (Outward Collections) Refer to Diagram (A) Our customer (the exporter) negotiates a commercial contract with a foreign buyer (the importer) and ships his goods. The exporter submits his collection together with financial documents and commercial documents to Ulster Bank Although there is no legal obligation to scrutinise any documents, the bank undertakes a prima facie check of documents to ensure that everything appears to be in order. The Remitting Bank (i.e. Ulster Bank) forwards documents to the Collecting Bank. The Remitting Bank should utilise the Collecting Bank specified by the Principal (i.e. the exporter). Only if no Collecting Bank is nominated should the Remitting Bank select a correspondent bank of its choice. Upon receipt, the Collecting Bank acts in accordance with the instructions of the Remitting Bank as set out in the Collection. When handling a Documentary Collection, the Collecting Bank arranges for the importer to inspect the documents. Under no circumstances should documents be released without payment or an agreed acceptance. If the importer considers the documents are in order, the Collecting Bank releases them against payment or acceptance of the Bill. When the Bill is paid the Collecting Bank should without delay, send the proceeds to the Remitting Bank (less charges if appropriate). The Remitting Bank then credits proceeds to the account of the exporter (again less charges if applicable). The Collection Order Ulster Bank customers should use the Bank’s standard Collection Order BA 405 Instructions for Collection of Bills and/or Documents (see Form I). By signing the form our customer agrees not only to accept our terms but also: - To be bound by the Uniform Rules for Collection - That Ulster Bank is not liable for any errors made by the Collecting Bank. The Collection Order should contain the following information: The name of the nominated bank to whom the collection is being sent. The name of the drawer. The name and address of the drawee. Details of the documents accompanying the collection. In the case of a Documentary Collection containing a Bill of Exchange, whether the documents should be released against payment (D/P) or against acceptance (D/A). In the absence of any such instruction, the Collecting Bank should assume that documents should be released against payment (D/P). The date, tenor and value of the collection. How the charges should be borne, by the principal, the drawee or both. Whether a Bill should be protested in the event of a non-acceptance or non-payment. Special instructions, e.g. how the goods should be protected (warehousing and insurance). In cases where the documents are not delivered to the buyer immediately on the goods arriving at their destination - provided that prior approval from the Collecting Bank has agreed to help in this respect. Advantages of a D/P Collection versus a D/A Collection An exporter should always specify in his instructions how the importer should settle a Bill of Exchange. This should be in one of two ways: 1. Documents against payment (D/P): This means that the Bill is payable at sight by the importer. The Collecting Bank hands over the shipping documents only when the importer has paid the Bill. 2. Documents against acceptance (D/A): This means that the exporter is allowing credit terms to the importer. The period of credit is the “term” of the Bill. The importer/drawee is required to accept the Bill, i.e. to sign the Bill as a promise to pay the Bill at a set date in the future. When he has signed the Bill by way of acceptance, the importer can take the documents and clear his goods. The Bill of Exchange is then held by the Collecting Bank until its maturity and will be presented again at that time for payment by the drawee. D/A terms are considerably more risky for the exporter than D/P terms: Under the D/P terms the exporter keeps control of the goods (through the Presenting Bank) until the importer pays. If the importer cannot pay or refuses to pay, the exporter can: Protest the Bill and take him to court (may be expensive and difficult to control from another country). Find another buyer. Arrange for sale of the goods at an auction. In these last two instances the price may be lower but probably still better than shipping the goods back. Sometimes the exporter will have a contact or agent in the importer’s country who can help with any arrangements. Such an agent is often referred to as a “case of needs”, i.e. someone who can be contacted in case of need by the Collecting Bank. Under D/A terms the importer can inspect the documents and if he is satisfied, accept the Bill for payment, take the documents and clear the goods. The exporter therefore loses control of the goods. Under D/A Collection the exporter runs various risks: The Importer might refuse to pay on the due date because; - he finds that the goods are not what he ordered; - he has not been able to sell the goods; or - he is prepared to try to cheat the exporter. In these circumstances the exporter can protest the Bill and take the importer to court, but this can be expensive. The importer might have gone bankrupt, in which case the exporter will probably never obtain his money. If the importer refuses to pay, the Collecting Bank acts on the exporter’s instructions in the Collection Order. These instructions could include: - Removing the goods from the port to a warehouse and insuring them. - Protesting the Bill through the bank’s lawyer (or notary public). Advantages of Collections Documentary Collections provide a method of settlement in international trade which (like Documentary Credits) offers a compromise between: Payment in advance which favours the exporter who receives payment before he ships the goods. Under this arrangement the buyer must therefore trust the exporter to send the goods which have already been paid for. Trading on open account which favours the importer who usually pays after he receives the goods. Here the exporter must trust the buyer to pay for the goods that have been sent to him. The Uniform Rules for Collection (URC) are an internationally recognised set of rules (see the ICC publications No 522) which are binding on all parties (Principal, Drawee, Remitting Bank and Presenting/Collection Bank) unless otherwise expressly agreed, or unless contrary to local laws. The URC define internationally accepted procedures, responsibilities and liabilities and technical terms for Collections.