PatriciaM.Hernandez

June5,2012

LegalRisksinInternationalTradeFinance

• Types of Transactions (Trade Services, including Letters ofCredit, Factoring, Forfaiting, Supply Chain Financing andother Cross‐Border Loans and Participations)

•Why is Counsel important?

•What type of Counsel?

• Documentation, Collateral and Default Situations

Introduction

• International trade presents a variety of risks, includingthe timing of payments between an importer and exporter.

• For each of importer and exporter there are a variety ofpayment options available each with its own risks andrewards.

TradeServicesandTradeFinance

TradeServicesandTradeFinance(con’t)

• VariousMethodsofPaymentforTradeTransactions:o Cash‐in‐Advanceo LettersofCredito DocumentaryCollectionso OpenAccount

• Banksinvolvedineachandeverytransaction

Cash‐in‐Advance:Buyerpre‐paysforthegoods

• Mostsecuretoseller• Riskiesttobuyer• Cantakemanyforms

oWiretransferoCreditCardoInternationalCheck

• PresentsvariousriskstoBanksinthechain

LettersofCredit

• Risk is even between buyer and seller• This is because a letter of credit is an independent obligationof a bank issued in favor of another party

• Can take various formsoRevocable or IrrevocableoConfirmed – A second bank is involved and becomesobligated

oSpecial – For example, assignable letters of credit• In event of bank failure – both sides lose

DocumentaryCollections:

•MoreRisktoSeller• Varioustypes

oDocumentsagainstPaymentoDocumentsagainstAcceptance

• Banks assume responsibility in these types of transactions

OpenAccount:Buyerpayslater

•Most risk to Seller• Various forms

oExport Working Capital FinancingoGovernment‐Guaranteed or private credit insuranceExport Working Capital (example, U.S. based Ex‐Imbank)

oExport Factoring• Banks involved as Lender, often with third party insurers orguarantors

• Foreign law almost always involved

TradeServices– LettersofCredit

• WhattypeofLetterofCredit?• Answergivesrisetoavarietyoflegalissues• KeyIssues

o COUNSEL• Coordination with counsel is key•Most letters of credit transactions are routine, butlegal considerations are always present

o DOCUMENTATION• Properly prepared letter of credit• Underlying obligation to pay• UCP600 vs. UCC• Domestic vs. foreign

TradeServices– LettersofCredit(con’t)

o BANK’SOBLIGATIONS• Ensurethatobligationsarelimited• Not determining validity or satisfaction of underlyingtransactions

• AMLconcerns

o TRANSFEROFINTERESTS• IsLetterofCredittransferable?

TradeServices– LettersofCredit(con’t)

o PRESENTATIONISSUES• Determiningwhetherpaymentconditionshavebeenmet

o OTHERISSUES• SwiftMessages

TradeServices– LettersofCredit(con’t)

• DefaultSituationso DOCUMENTATION

• Gather and analyze all of the documentation that youhave received with respect to the transaction.

o COORDINATION• Establish a line of communication with counselregarding strategy if issues arise.

o OTHERCONSIDERATIONS• FailureofBank?

TradeFinance‐ Factoring• DescriptionofProcessandPlayers

oPlayers• SellerofReceivables• BuyerofReceivables(i.e.,Bank,factoringcompany)• AccountDebtors

oProcess• InvolvesSaleofReceivables• Not loanwithReceivablesascollateral• Non‐recourse(Recoursecanaffectvalidityofsale)

oNoticetoAccountDebtoroFactoringvs.Forfaiting– SimilarLegalIssues

TradeFinance– Factoring(con’t)• Key Issues

o TRUE SALE• It is critical that the documentation provide that thefactoring is a “sale” of the receivables and not a loanfrom Bank to Seller.

• Notice to Account Debtor• Retains Service of Receivables

o REPURCHASE• Obligations• Collateral

TradeFinance– Factoring(con’t)o INFORMATION

• As a factor, you want to ensure that you are entitled to allinformation and documentation relating to receivablesand account debtors.

o DOCUMENTS• FactoringAgreement• Receivables• ForeignConsiderations?Restrictions?

TradeFinance– Factoring(con’t)

• DefaultSituationo DOCUMENTATION – Gather and analyze all of thedocumentation that you have received with respect tothe transaction.

o COORDINATION• Establish a line of communication with Sellerregarding strategy.

• Engageindependentoutsidecounsel.o RESOLUTION– AnalyzeSeller’sObligations;Repurchase?

SupplyChainFinancingandotherCross‐BorderLoans

• DescriptionofPlayers• Bank• Seller/Buyer(i.e.Borrower)• GovernmentGuarantee/PrivateInsurance

o Ex‐ImBanko PrivateCoverage

SupplyChainFinancingandotherCross‐BorderLoans(con’t)

• Key Issueso LOCAL COUNSEL; LOCAL LAW

• Engaging competent local counsel is critical to any cross‐border loan transaction.

• Some examples.o LOCATION OF BORROWER / GUARANTORSAND COLLATERAL• Determine the jurisdictions where the Borrower andGuarantors have operations and the location of collateral.

SupplyChainFinancingandotherCross‐BorderLoans(con’t)

• The locations of the Borrower and Guarantors isimportant because these are the jurisdictions which youwill eventually have to look to in order to satisfy anyjudgment against the Borrower or Guarantors.

• The location of the collateral will be critical indetermining how to legally perfect any lien or mortgagegranted to secure the loan.

o FORECLOSURE/JUDGMENT PROCESS• Determine the process for obtaining a judgment andforeclosing or executing against collateral in each of theapplicable jurisdictions

SupplyChainFinancingandotherCross‐BorderLoans(con’t)

o AUTHORITY OF BORROWER• Local law will determine whether the Borrower hasthe appropriate authority to execute the loandocumentation.

o COORDINATION OF CLOSING• It is important that closing logistics be coordinatedwell in advance to avoid any last‐minute delays.

• Notarization?

SupplyChainFinancingandotherCross‐BorderLoans(con’t)

• Default Situationo DOCUMENTATION

• Gather and analyze all of the documentation that youhave received with respect to the transaction.

o CONTACT COUNSEL• Establish a line of communication with your in‐house oroutside counsel and local counsel regarding strategy.

o RESOLUTION• Determine the best resolution based on the currentfacts.

Participations

• DescriptionofProcessandPlayerso LeadLendero Participanto Borrower

• KeyIssueso TRUE PARTICIPATION

• It is critical that the documentation provide that theparticipation is a “sale” of the participated interestand not a loan from Participant to Seller.

Participations

o REPAYMENT TO PARTICIPANT• The Participation Agreement should provide thatParticipant has a right to its pro‐rata portion of anypayments received by Seller (including fees andreimbursement of expenses).

o INFORMATION• As a participant, you want to ensure that you areentitled to all material information and documentationreceived by Seller with respect to the loan.

o ACTIONS• The Participation Agreement should clearly state whatactions cannot be taken by the Seller without theParticipant’s consent.

Participations(con’t)

o DEFAULT; ASSIGNMENT• In the event that there is a disagreement as to how todeal with a default by Borrower, the ParticipationAgreement should provide a mechanism by which theParticipant may request that the participation interestbe assigned to it by Seller.

o ADDITIONAL TRANSFERS• Participant should require that Seller maintain apercentage of the loan. Participant may want the abilityto sub‐participate the participation.

Participations(con’t)

• DefaultSituationo DOCUMENTATION

• Gather and analyze all of the documentation thatyou have received with respect to the transaction.

o COORDINATION• Establish a line of communication with Sellerregarding strategy. Engage independent outsidecounsel.

o RESOLUTION• Determine whether the Seller’s proposedresolution is acceptable to you. If not, and theParticipation Agreement provides for anassignment of the participation to you, request thatsuch assignment be effected.

TradeServicesandTradeFinance–OtherConsiderations

• In 2008, international trade transactions amounted to anestimated $15.7 trillion in global merchandise exports in2008.

• According to the 2009 International Narcotics ControlStrategy Report, it is estimated that the annual dollaramount laundered through trade ranges into the hundredsof billions.

TradeServicesandTradeFinance–OtherConsiderations(con’t)

• U.S. Immigration and Customs Enforcement (ICE) reports thattheir trade‐based money laundering case initiations haveincreased since 2004. The international inter‐governmentalFinancial Action Task Force (FATF) names trade‐based moneylaundering as an increasingly important money launderingand terrorist financing vulnerability. FATF lists the physicalmovement of goods through the trade system as one of threemethods criminal organizations and terrorist financiers use tomove money for the purpose of disguising its origins andintegrating it into the formal global economy.

TradeServicesandTradeFinance–OtherConsiderations(con’t)

• OFACo BlockingofTransactions

• Anti‐MoneyLaunderingo ResponsibilitiesofBanks

Red‐FlagsBanksareRequiredtoDetect

• Third party payments for goods or services made by anintermediary (either an individual or an entity) apparentlyunrelated to the seller or purchaser of goods. This may bedone to obscure the true origin of the funds.

• Amended letters of credit without reasonable justification.• A customer’s inability to produce appropriate documentation(i.e., invoices) to support a requested transaction.

• Significant discrepancies between the descriptions of thegoods on the transport document (i.e., bill of lading), theinvoice, or other documents (i.e., certificate of origin, packinglist, etc.).

Red‐FlagsBanksareRequiredtoDetect(con’t)

• Negotiable instruments (such as traveler’s checks, cashier’schecks and money orders) in round denominations under$3,000 used to fund domestic accounts or, alternatively,smuggled from the United States for placement into accountsat foreign financial institutions.

• International wire transfers received as payment for goodsinto U.S. bank accounts or processed through U.S.correspondent or intermediary accounts, especially where theordering party (importer of goods) of the wire does not live inthe country from which the wire originated. For example:

Red‐FlagsBanksareRequiredtoDetect(con’t)

o Funds transferred into U.S. domestic accounts that aresubsequently transferred out of the account in the same ornearly the same amounts. Origination and destinationlocations are frequently high risk jurisdictions.

o Sudden onset and equally sudden cessation of payments –typically wire transfers – within a short duration. Thiscould be an indication that the account is temporarilybeing used to launder illicit proceeds.

o A foreign import business with U.S. accounts receivingpayments from locations outside the areas of theircustomer base.

Red‐FlagsBanksareRequiredtoDetect(con’t)

• Beware of:o Back to back L/C’so Transferable L/C’s (because they are brokers)o L/C’s w/partial shipments and transshipmentso Frequent and repeated changes through

amendments, extending maturity, change of venue,change of payment source and change of beneficiary(all very dangerous and must be dealing withreputable person)

Conclusions

• Legal,Legal,Legal!

• Donotassumealldocumentationiscreatedequal

• Alltransactionsaredifferent

• Analyzelegalrisk– notonlycreditrisk

PATRICIAM.HERNANDEZAvilaRodriguezHernandezMena&FerriLLP

2525PoncedeLeonBlvd.,Suite1225CoralGables,FL33134tel 305.779.3566fax305.779.3561phernandezl@arhmf.com