Chapter no: 1

Introduction to Foreign payment

1.1 Introduction

The importance of international trade in the economy of a country is too well

known to require emphasis. A number of advantages flow from international

trade. Many developed nations of the world owe their present status to

international trade; many developing countries place their hopes of development

on it. A common man, who is not keenly interested in these use a large number

of these items are either imported or some components of them are imported.

Even if an item is indigenously produced, it may be found that it is made on an

imported machine.

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1.2 Foreign Trade and Foreign Exchange

International trade refers to trade between the residents of two different

countries. Each country functions as a sovereign state with its own set of

regulations and currency. The difference in the nationality of the exporter and

the importer presents certain peculiar problems in the conduct of international

trade and settlement of the transactions arising there from. Important among

such problems are:

Different countries have different monetary units;

. Restrictions imposed by countries on import and export of goods;

Restrictions imposed by nations on payments from and into their

countries;

Differences in legal practices in different countries.

The existence of national monetary units poses a problem in the settlement of

international transactions. The exporter would like to get the payment in the

currency of his own country.

For instance, if amerexport of New York export machinery to in imports,

Mumbai, the former would like to get the payment in US dollars. Payment in

Indian rupees will not serve their purpose because Indian rupee cannot be used

as currency in the USA. On the other hand, the importers in India have their

savings and borrowings in Indian in rupees. Thus the exporter requires payment

in the currency of the exporter’s country whereas the importer can pay only in

the currency of the importer’s country. A need, therefore, arises for conversion

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of the currency of the importer’s country into that of the exporter’s country.

Foreign exchange is the mechanism by which the currency of one country gets

converted into the currency of another country.

The conversion of currencies is done by banks who deal in foreign exchange.

These banks maintain stocks of foreign currencies in the form of balance with

banks abroad.

For instance, Indian bank may maintain an account with bank of America. New

York, in which dollar balances are held,. In the earlier example, if in imports

pay the equivalent rupees to Indian bank, it would arrange to pay amerexport at

New York in dollars from the dollar balances held by it with bank of America.

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1.3 Foreign Exchange Regulation Act

The Foreign Exchange Regulation Act (FERA) was legislation

passed by the Indian Parliament in 1973 by the government of Indira

Gandhi and came into force with effect from January 1, 1974. FERA

imposed stringent regulations on certain kinds of payments, the dealings in

foreign exchange and securities and the transactions which had an indirect

impact on the foreign exchange and the import and export of currency. The

bill was formulated with the aim of regulating payments and foreign

exchange.

Coca-Cola was India's leading soft drink until 1977 when it left

India after a new government ordered the company to turn over its secret

formula for Coca-Cola and dilute its stake in its Indian unit as required by

the Foreign Exchange Regulation Act (FERA). In 1993, the company (along

with PepsiCo) returned after the introduction of India's Liberalization

policy.

FERA was repealed in 1998 by the government of Atal Bihari

Vajpayee and replaced by the Foreign Exchange Management Act, which

liberalized foreign exchange controls and restrictions on foreign investment.

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1.4 FERA :

Regulated in India by the Foreign Exchange Regulation Act (FERA),

1973. Consisted of 81 sections. FERA Emphasized strict exchange control.

Control everything that was specified, relating to foreign exchange. Law

violators were treated as criminal offenders. Aimed at minimizing dealings

in foreign exchange and foreign securities.

FERA was introduced at a time when foreign exchange (Forex)

reserves of the country were low, Forex being a scarce commodity. FERA

therefore proceeded on the presumption that all foreign exchange earned by

Indian residents rightfully belonged to the Government of India and had to

be collected and surrendered to the Reserve bank of India (RBI). FERA

primarily prohibited all transactions, except one’s permitted by RBI.

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OBJECTIVES :

To regulate certain payments.

To regulate dealings in foreign exchange and securities.

To regulate transactions, indirectly affecting foreign exchange.

To regulate the import and export of currency.

To conserve precious foreign exchange.

The proper utilization of foreign exchange so as to promote the

economic development of the country.

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Chapter No: 2

INTERNATIONAL PAYMENT

2.1 Introduction:

Payment made between countries, whether in settlement of a trade debt, as a

unilateral transfer of funds, for capital investment, or for some other

purpose. The reasons for such payments and the methods of making them

and accounting for them are matters of concern to economists and national

governments. International debts are settled either from accumulated

balances of foreign currency or claims on foreign currency, or by loans from

creditor to debtor, or by drawing on the International Monetary Fund, or by

movements of gold. How a country balances its international accounts is

one of the most important decisions for its balance of payments.

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2.2 Methods of Payment in International Trade

This guide explains the different methods of getting paid and the different levels

of risks involved. You should note that none of the methods outlined below will

completely eliminate the payment risks associated with international trade, so

you should consider your preferred payment option with care and hedge the

risks along with appropriate credit insurance and credit checks on your

customers. You should read it if you trade internationally and want to know

what your options are in making and receiving international payments. You may

wish to pass on the information in this Briefing to your colleagues in the Sales

& Marketing team and your Finance Director so that they are aware of these

issues.

Introduction

Getting paid for providing goods or services is critical for any business.

However, getting paid for an international transaction (also commonly known

as "export receivables") can be a very different experience from securing

payment on business with other UK entities, due to the number of extra factors

that can influence the process. The main factor in considering how an exporter

expects to be paid for a transaction is the potential risk that they and their

customer are willing to face between them - don't forget, there are always two

sides to any situation. There are different types of risk that you will face as an

exporter, this briefing will consider the payment risk.

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Payment Risk Ladder

It is often a good idea, during, or even before contract negotiations, to consider

where, on the diagram below, you and your customer will be comfortable in

placing yourselves.

Exporter Impoter

Least Secure Most Secure

Open Account

Bills Of Collection

Letter Of Credit

Advance Payment

Most Secure Least Secured

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Common Payment Methods

Once acceptable risks have been determined then the most appropriate

payment method can be selected. While this document is a useful starting

point, the advice of a qualified financier or banker should be sought at least

for the first transactions.

Cash in advance

Letter of credit

Documentary collection

Open account or credit

Countertrade or Barter

Bills for Collection

Here is a list, beginning with those that present the least risk for the seller,

of the most common payment methods. They are further described below

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Cash in Advance

Cash in advance clearly is risk-free except for consequences

associated with the potential nondelivery of the goods by the seller. Cash

in advance is usually a wire transfer or a check. Although an international

wire transfer is more costly (from U.S. $15 to more than U.S. $100), it is

often preferred because it is speedy and does not bear the danger of the

check not being honored. The check can be at a disadvantage if the

exchange rate has changed significantly by the time it arrives, clears and

is credited. On the other hand, the check can make it easier to shop for a

better exchange rate between different financial institutions.

For wire transfers the seller must provide clear routing instructions in

writing to the buyer or the buyer's agent. These include:

The full name, address, telephone, and telex of the seller's bank

The bank's SWIFT and/or ABA numbers2

The seller's full name, address, telephone, type of bank account , and

account number.

No further information or security codes should be offered.

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Letter of Credit

Basic Understanding

The letter of credit (LC) allows the buyer and Seller to contract a

trusted intermediary (a bank) that will guarantee full payment to the seller

provided that he has shipped the goods and complied with the terms of the

agreed-upon Letter. This instrument, although inherently simple, can have

many variations. The LC serves to evenly distribute risk between buyer and

seller since the seller is assured of payment when the conditions of the LC

are met and the buyer is reasonably assured of receiving the goods ordered3.

This is a common form of payment, especially when the contracting parties

or unfamiliar with each other. Although this instrument provides excellent

assurances to both parties, it can be confusing and restrictive. It can also be

somewhat expensive, ranging from several hundred U.S. dollars up to 5

percent of the total value.

LCs are typically irrevocable, which means that once the LC is

established it cannot be changed without the consent of both parties.

Therefore the seller, especially when inexperienced, ought to present the

agreement for an LC to an experienced bank, a trusted broker, and its freight

forwarder so that they can help to determine if the LC is legitimate and if all

the terms can be reasonably met. A trusted bank, other than the issuing or

buyer’s bank can guarantee the authenticity of the document for a fee.

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Disadvantages

The LC has certain disadvantages.

If even the smallest discrepancies exist in the timing, documents or

other requirements of the LC the buyer can reject the shipment.

A rejected shipment means that the seller must quickly find a new

buyer, usually at a lower price, or pay for the shipment to be

returned or disposed.

Besides being one of the most costly forms of payment guarantee

LCs also take time to draw up and usually tie up the buyer's

working capital or credit line from the date it is accepted until final

payment, rejection for noncompliance, expiration or cancellation

(requiring the approval of both parties).

The terms of an LC are very specific and binding. Many traders,

even experienced ones, encounter significant difficulties because of

their failure to understand or comply with the terms.

Some statistics show that approximately 50 percent of submissions

for LC payment are rejected for failure to comply with terms!

For example : if the terms require the delivery of four specific

documents and one of them is incomplete or merely delivered late

then payment will be withheld regardless of whether every other

condition was fulfilled and the shipment received in perfect order.

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The banks whose job it is to ensure a safe payment transaction will

insist that the terms be a fulfilled exactly as written. The buyer can

sometimes approve the release of payment if a condition is not

fulfilled but changing terms after the fact is costly, time consuming

and sometimes impossible.

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Four Parties Are Involved In Any Transaction Using An LC:

Buyer or Applicant: The buyer applies to his bank for the

issuance of an LC. If the applicant does not have a credit

arrangement with this issuing bank then he must pay in cash or

other negotiable security.

Issuing bank: The issuing or applicant's bank, issues the LC in

favor of the beneficiary and routes the document to the

beneficiary's bank. The applicant's bank later also verifies that all

of the terms, conditions, and documents comply with the LC, and

pays the seller through his bank.

Beneficiary's bank: The seller’s or beneficiary's bank verifies that

the LC is authentic and notifies the beneficiary. It, or another

trusted bank, can act as an advising bank. The advising bank is

used as a trusted bridge between the applicant's bank and the

beneficiary’s bank when these do not have an active relationship

and to verify the authenticity of a document. It also forwards the

beneficiary's proof of performance and documentation back to the

issuing bank. However, the advising bank has no liability for

payment of the LC. The beneficiary, or his bank, can ask an

advising bank to confirm the LC. This means that the confirming

bank also promises to ensure that the beneficiary is paid when he is

in compliance with the terms and conditions of the LC. The

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confirming bank charges a fee for this service. This is most useful

when the issuing bank and its credibility is not familiar to either the

beneficiary or his bank, or if the issuing bank (even a well-

established one) is in a high-risk country.

Beneficiary or Seller: The beneficiary must ensure that the order

is prepared according to specifications and shipped on time. He

must also gather and present the full set of accurate documents, as

required by the LC, to the bank.

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Drafts

A draft (sometimes called a bill of exchange) is a written order by one

party directing a second party to pay a third party. Drafts are negotiable

instruments that facilitate international payments through respected

intermediaries such as banks but do not involve the intermediaries in

guaranteeing performance. Such drafts offer more flexibility than LCs

and are transferable from one party to another.

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There are two basic types of drafts: sight drafts and time drafts.

Sight Drafts: Sight drafts are the most familiar kind of draft, as a sight

draft would be a check. The characteristics of a sight draft include those

of all drafts, with the distinguishing trait that sight drafts are always

payable when presented, in a manner somewhat akin to bearer

instruments. This means that upon the presentation of such sight draft, the

drawee would be required to immediately pay the presenter without any

substantial delay. Sight drafts are most often used for those interpersonal

payments or in shipping transactions, for example, when the seller does

not want the buyer to gain control of the shipment until payment has been

made. In such an instance, a sight draft would ensure that the seller would

have an immediately payable draft before transferring title of the goods to

the buyer.

Time Draft: A time draft is differentiated from a sight draft by the fact

that it has a set payment date some time in the future, as opposed to

immediately upon presentation of the draft. A time draft does not have to

be set for a specific date. It can instead be set so that it is only payable

upon the fulfillment of certain conditions. The point of a time draft is to

delay any form of payment until certain actions will likely have occurred.

Time drafts are the only type of draft used with acceptances. Acceptances

are used, as in the above example, when the drawee of a draft negotiable

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instrument "accepts" the draft, essentially promising the payee that it will

provide payment to the payee upon satisfaction of the terms in the draft.

A sight draft would never require such an acceptance, however, as a sight

draft would always require the drawee to pay the payee presenting the

sight draft.

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Hybrid Methods

In practice, international payment methods tend to be quite flexible and

varied. Frequently, trading partners will use a combination of payment

methods. For example: the seller may require that 50% payment be made

in advance using a wire transfer and that the remaining 50% be made by

documentary collection and a sight draft.

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Open Account

Open account means that payment is left open to an agreed-upon future

date. It is one of the most common methods of payment in international

trade and many large companies will only buy on open account. Payment

is usually made by wire transfer or check. This can be a very risky

method for the seller unless he has a long and favorable relationship with

the buyer or the buyer has excellent credit. Still, there are no guarantees

and collecting delinquent payments is difficult and costly in foreign

countries especially considering that this method utilizes few official and

legally binding documents. Contracts, invoices, and shipping documents

will only be useful in securing payment from a recalcitrant buyer when

his country’s legal system recognizes them and allows for reasonable (in

terms of time and expense) settlement of such disputes.

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Bills for Collection

More secure for an exporter than Open Account trading, as the exporter's

documentation is sent from a UK bank to the buyer's bank. This

invariably occurs after shipment and contains specific instructions that

must be obeyed. Should the buyer fail to comply, the exporter does, in

certain circumstances, retain title to the goods, which may be recoverable.

The buyer's bank will act on instructions provided by the exporter, via

their own bank, and often provides a useful communication route through

which disputes are resolved. The Bills for Collection process is governed

by a set of rules, published by the International Chamber of Commerce

(ICC) called "Uniform Rules for Collections" document number 522

(URC522). Over 90% of the world's banks adhere to this document - pick

up a copy from the ICC (See contact details below) or your bank and

familiarise yourself with the contents.

There are two types of Bill for Collection, which are usually determined

by the payment terms agreed within a commercial contract. Different

benefits are afforded to exporters by each and they are covered separately

below.

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International Payment Instruments Comparison Chart

Payment

Method

Features Advantages Disadvantages

Wire

Transfer

Fully electronic means

of payment Uses

correspondent bank

accounts and Fed Wire

U.S. Dollars and

foreign currencies

Same convenience and

security as domestic

wires Pin numbers for

each authorized

individual Repetitive

codes for frequent

transfers to same

Beneficiaries

Fastest way for

Beneficiary to

receive good

funds

Easy to trace

movement of

funds from bank

to bank

Cost is usually more

than other means of

payment Funds can be

hard to recover if

payment goes astray

Intermediary banks

deduct charges from the

proceeds Details needed

to apply funds

received for credit

management

purposes are often

lacking/insufficient

Impossible to stop

payment

after execution

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Foreign

Checks

Paper instrument that

must be sent to

Beneficiary and is

payable in

Beneficiary's

country

Uses account

relationships with

foreign

correspondent banks

Available in U.S.

Dollars and all major

foreign currencies

Convenient when

Beneficiary's

bank details are

not known

Useful when

information/

documentation

must

accompany

payment

(subscriptions,

registrations,

reservations, etc.)

Relatively easy to

stop payment

if necessary

Mail or courier delivery

can be

slow

Good funds must still

be

collected from the

drawee bank

If payable in foreign

currency,

value may change

during the

collection period

Stale dating rules differ

in

various countries

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Commercial

Letters of

Credit

Bank's credit replaces

Buyer's credit

Payment made against

compliant

documents

Foreign bank risk can

be eliminated via

confirmation of a bank

in Beneficiary's

country

Acceptance credits

offer built-in financing

opportunity

Rights and risks

of Buyer and

Seller are

balanced

Seller is assured

of payment

when conditions

are met

Buyer is

reasonably

assured of

receiving the

goods ordered

Confirmation

eliminates

country risk and

commercial

risk

More costly than other

payment

alternatives

Issuance and

amendments

can take time

Strict documentary

compliance

by Seller is required

Reduces applicant's

credit

facilities

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Standby

Letters of

Credit

Powerful instrument

with simple language

Increasingly popular in

U.S. and abroad

Foreign bank risk can

be eliminated via

confirmation of a bank

in Beneficiary's

country

"Evergreen" clauses

shift expiry risk from

Beneficiary to issuer

May be cheaper

than

Commercial

Letter of Credit

More secure than

open account

or Documentary

Collection

Discrepancies less

likely than

under Commercial

L/C

Confirmation

eliminates

country risk and

commercial

risk

Weak language can give

Beneficiary unintended

advantages

More costly than

Documentary

Collections

Reduces Buyer's credit

facilities

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Documentary

Collections

Seller uses banks as

agents to present

shipping documents to

Buyer against

Buyer's payment or

promise to pay

With Direct Collection

Letter (DCL), Seller

ships and sends

shipping documents

directly to Buyer's

bank, which collects

and

remits funds to Seller's

bank

Somewhat more

secure than

open account

Cheaper and less

rigid than

Commercial L/C

No strict

compliance rules

apply

No credit facilities

required

Country risk and

commercial

risk exist

No guaranty of payment

by any

bank

No protection against

order

cancellation

No built-in financing

opportunity as with

Commercial L/C

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Conclusion

The purpose of this study is to analyze the development of anti-money

laundering regime in responding to the progress of money laundering

practices. It examines the internationalization and criminalization of

money laundering through the creation of international standards.

Furthermore, it examines the legal effects of the international standards

on the basic principles of sovereignty, jurisdiction, and law enforcement,

and the negative implications that exacerbate the effectiveness in

implementing and enforcing money laundering laws and regulations. A

wide array of theories, state practices, and opinions of jurists are used to

uncover the conceptual as well as practical challenges in countering

money laundering practices. This chapter provides conclusions to the

study for policymakers and possible future research.

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