Workshop On Trade Finance Infrastructure

1. Workshop On “Trade Finance Infrastructure” Risks and Fraud in International Trade

2. Outline Types Of Risks Faced By Traders Types Of Fraud Other Risk Associated With Trade Finance Measures To Mitigate Risk Protection Against Fraud

3. Types Of Risks Faced By Traders Commercial Risk Non-Acceptance Financial or Non-Payment Transport Risk Political and Sovereign Risk Transfer Risk Changes in Government Regulations and Documentation Requirements Interest Rate Risk Foreign Exchange Risk Transactional Risk Economic Risk

4. Commercial Risk Changes in the price of goods that a company intends to buy or sell. Go into futures market and commodity options market to minimize such risks.

5. Non-Acceptance Importer will not accept the shipment. The exporter is left with the goods in a foreign port, which may accumulate customs dues, warehouse and additional insurance charges. Settled either through direct negotiations or legal channels.

6. Financial or Non-Payment Slow payment, default or financial insolvency.

7. Transport Risk Loss of, or damage to, the goods while in transit between exporter and importer.

8. Political and Sovereign Risk The sovereign action of the importing country may cause the shipment to be delayed, refused or prevent payment from being transferred out of the country. Risks of war, embargoes, civil disturbances or revolution.

9. Transfer Risk Shortage of foreign currency in the importer's country or Exchange or trade controls in the importer's country.

10. Changes in Government Regulations and Documentation Requirements Changes in government regulations and documentation requirements may sometimes block payment or prevent the trade transaction from being completed. E.g. a previously approved import license may be revoked, causing the shipment to be refused. Documentary requirements may include shipping, packing and marking requirements, import licenses, and pre-import approval for foreign exchange.

11. Interest Rate Risk When interest rates are on the rise, those who have borrowed funds at a variable rate pay more interest than they expected and are in a weaker position than competitors with fixed-rate financing.

12. Foreign Exchange Risk Both exporter and importer are also subject to exchange risks from the date of the contract of sale until the date of settlement if they have agreed to settle the transaction in foreign currency. When the exporter is to receive payment in a currency other than that of his own country, there is the risk that if there is a decline in the exchange rate (devaluation during the time between the signing of the contract and the receipt of the foreign currency), the exporter will receive less and may incur a loss

13. Transactional Risk The exposure to lost or gained value between the time a transaction is "booked" as a receivable or payable and when it is settled or paid.

14. Economic Risk The longer-term exposure (one to three years) attributed to foreign-currency-denominated sales and earnings forecasts, unfulfilled contracts, foreign product sourcing and other factors that affect the firm's international "macro operating position."

15. Types Of Fraud Scuttling, Deviation and Cargo Theft Wilful casting away of a vessel for the purpose of claiming against insurance. When the vessel is lost with a high value cargo aboard, or deviation and sale of the cargo. Documentary Credit Fraud Documentary fraud may occur when the sale and purchase of goods are made on documentary credit terms

16. Other Risk Associated With Trade Finance Exporters and importers are also faced with ‘Incomplete International Data’ and financial information

17. Measures To Mitigate Risk Export Credit Insurance (ECI) Credit Checks Pre-Shipment Inspection by Independent Inspectors Confirmed Letters of Credit (L/C) Forward Exchange Contracts Foreign Currency Accounts Forfaiting Factoring

18. Protection Against Fraud Shipment of goods by well-established and reliable transport service companies Use irrevocable commercial letter of credit Independent inspectors Independent 3rd party document

19. In July 1999 in the Port of Durban, South Africa. The manifest for the container declared one cargo type: canvas school book bags with a scheduled duty of 5 percent. In fact, only the first five rows of cargo near the door were book bags. The balance of the container contained TDK magnetic cassette tapes with a proper duty of 20 percent. The difference in recovered duties was approximately USD15,000.