EXPORTS


REGULATIONS-EXPORTS                FAQs-EXPORTS

INTRODUCTION           WHAT IS EXPORT?        EXPORT PAYMENTS         INCOTERMS 

EXPORT FINANCE              ECGC              EXIM BANK               RISKS/FRAUDS 

1.INTRODUCTION:

                  India is very active in International Trade. Government of India has taken various steps for promoting exports to become competitive enough in today’s globalised world. Lots of issues and factors are required to be taken into account while exporting. The success of exports depend on the planning and adopting suitable strategy that could increases profit and economic growth of the country. Exporter needs to take in to account various factors before actual exports take place. Also, subsequent to effecting exports, there are various issues needs to be considered by the exporter. Here, we have, in brief, touched some of the important points, which an exporter needs to take into account for successfully and profitably completing an export transaction. Gist of RBI guidelines on Exports and FAQs are available in sub-section REGULATIONS of this page.

 

2.WHAT IS EXPORT?

Literal meaning is to ship goods and services out of the port of a country.

Seller – “exporter” – based in the country of export.

Buyer – “importer” – overseas buyer.

Why is it required?  – Characteristics of International trade

           Hardly any country produce what they need. Countries are dependent on one another for many products that they require. International trade has assumed greater importance in the globalised world. Goods move from one country to another and payment is required to be made for the same. Exchange of currencies are involved.

Steps involved in International trade

a) Physical movement of goods with the help of carrier from Producer country to the country where they are sold.

b) Contract of carriage – giving conditions of transportation of goods.

c) Procuring/preparing documents covering the goods such as Transport documents, Commercial Invoices, Cert. of origin etc.

d) Insurance of the goods and obtaining relative documents.

Stages of export process

1) Enquiry for export.  2) Performa Invoice.  3) Order Placement. 4) Order Acceptance.

5) Goods in readiness and Preparation of documents. 6) Goods removed from works.

7) Documents for C&F agent.  8) Customs clearance. 9) Document preparation for forwarding

10) Bank Negotiation  11) Documents forwarded from Bank to Bank

12) Receipt of the Export payment 13) Declaration of  Export receipt to DGFT.

Typical Export Documents

1) Commercial Invoices.  2) Bill of Lading.  3) Consular invoices. 4) Certificate of Origin.

5) Inspection Certificates.  6) Insurance Certificate.  7) Export Packing List. 8) SDF Form.

9) LC Copy – if export under LC

3.EXPORT PAYMENTS:

A) Domestic Trade vs. International Trade

Let us see what is happening in domestic trade and how it is different when it comes to Export.

Domestic Trade

  • Transactions are in same currency
  • Settlement can be through cash, cheque, credit cards, documentary collections, documentary credits.
  • Not complicated
  • Goods on display can be inspected
  • Little or no transportation risk.
  • Trading within the country smooth.

 International Trade

  • Various risks – Customer’s creditworthiness, country credit risk, political risk, other risks.
  • Based on the risks involved/ assumed, payment option is decided.

You will agree that when it comes to International Trade it becomes complected and require more attention.

 (B) Available options for payment

 a) Advance payment

  •  Payment before the goods are shipped.
  • Buyer runs risk in that the seller may default.
  • Buyer should make inquiries about local regulations, trustworthiness of the seller before actually remitting money.
  • Exporter made goods ready but his country’s regulations are changed.
  • Exporter ships goods but importer’s country does not allow goods in country.
  • Goods received by the buyer are not as ordered or are of inferior in quality.

b) Open account

  •  Both party agree that buyer will pay at the end of agreed period
  • Seller will ship goods directly to the buyer who will open account in name of the seller.
  • Relative documents are also sent directly to the buyer to enable him to take delivery of the goods.
  • Require high degree of trust and relationship between buyer and the seller.
  • Exposes great risk to the seller as he loses control over goods.
  • Payment may not be received.
  • No involvement of Banks for collection of documents hence cost is reduced.

c) Documentary credit

  •  In option a) and b) banks are involved only for remittance of money.
  • In collections, banks involve themselves in handling documents given to them by the seller and act as an agent for the seller.
  • In documentary credits banks do not have passive role; they undertake to make payment on their responsibility.
  • The Issuing bank undertakes to the beneficiary/ seller that it will pay, or arrange for payment to be made to seller, provided the beneficiary submits the stipulated documents.
  • Governed by UCP 600.

d) Documentary collections.

 Banks receive documents from its exporting client with the instructions to have it remitted to the foreign importer under agreed conditions.

i) Clean collections.

ii) Collections under documents against acceptance.

iii) Collections under documents against payments.

(C) Parties involved in collections:

1) The Principal –

  • The seller or exporter entrusting the operation to its bank.
  • Collection process originate from him – first in chain.
  • Principal is drawer of the bill of exchange.

2) The Remitting Bank –

  • Exporter’s bank receiving the documents with mandate to have them collected and forwarding them with necessary instructions to the collecting Bank.
  • Remitting Bank responsible to the principal in the collection process.

3) The Collecting Bank –

  • Correspondent Bank in the buyer’s country, usually chosen by the remitting Bank.
  • Receives collection from the Remitting bank and seeks payment from the buyer in terms of collection instructions received from remitting bank. After collecting money, remits to the Remitting Bank.
  • Is responsible to Remitting Bank from whom it receives instructions.

4) The Drawee  –

  • The buyer, importer to whom documents are finally presented.

4.INCOTERMS:

                Every Contract placed for export or import of Goods is covered by certain conditions mentioned in the contract. One of the conditions that govern the terms of supply is the delivery term. The mode of delivery, especially when goods are traded across the border are governed by certain internationally accepted terms such as FOB, FAS, CIF and so on. What are these terms and why are they important ? The details are available in INCOTERMS. INCOTERMS is an abbreviation of International Commercial terms. This term governs the Sales and Purchase practices, and form part of any standard Contract or Supply Orders. The INCOTERMS are revised periodically and published by the International Chamber of Commerce (ICC). The latest such revision was in the year 2010. The INCOTERMS are not law, but set of standard commercial practices adhered to around the world and when form part of the supply order or a contract it becomes a binding for both the parties and become basis for arbitration in cases of disputes.

Each term in INCOTERM specifies:

  • The obligations for services such as transport, import and export clearance, duty, documentation cost etc of the Supplier and the Buyer.
  • The point of transportation from where the risk and cost transfers from the Seller to the Buyer

By understanding the INCOTERMS and properly incorporating it into the Supply Orders or Contracts , both the Seller and the Buyer will be relieved of unnecessary disputes and litigation in the event of loss, damage or other mishap to the goods from the time of supply to the receipt of the goods.

INCOTERMS can be devided in to four main groups as under:

“E” – Departure

EXW – Ex Works – Named Place

 “F” – Main Carriage Unpaid

FCA – Free Carrier – Named Place

FAS – Free alongside Ship – Named Port of Shipment – OCEAN only

FOB – Free on Board – Named Port of Shipment – OCEAN only

“C” – Main Carriage Paid

CFR – Cost Freight – Named Port of destination – OCEAN only

CIF – Cost Insurance and Freight –Named Port of Destination – OCEAN only

CPT – Carriage Paid To – Named Place

CIP – Carriage Insurance Paid To – Named Place of destination

 “D” – Arrival

 DAT – Delivered at Terminal – Named Terminal at Port or Place of Destination

DAP – Delivered at Place – Named Place of destination

DDP – Delivered duty Paid – Named Place of destination

EXW – Ex Works (Named place of delivery)

The buyer bears all costs and risks involved in taking the goods from the seller’s premises to the desired destination. The seller’s obligation is to make the goods available at his premises (works, factory, warehouse). This term represents minimum obligation for the seller. This term can be used across all modes of transport.

FCA- Free Carrier (Named place of delivery)

The seller’s obligation is to hand over the goods, cleared for export, into the charge of the carrier named by the buyer at the named place or point. If no precise point is indicated by the buyer, the seller may choose within the place or range stipulated where the carrier shall take the goods into his charge. When the seller’s assistance is required in making the contract with the carrier the seller may act at the buyers risk and expense. This term can be used across all modes of transport

FAS – Free Alongside Ship (Named port of shipment)

The seller must place the goods alongside the ship at the named port. The seller must clear the goods for export. Suitable only for maritime transport but NOT for multimodal sea transport in containers. This term is typically used for heavy-lift or bulk cargo.

FOB – Free on Board (Named port of shipment)

The seller must load themselves the goods on board the vessel nominated by the buyer. Cost and risk are divided when the goods are actually on board of the vessel. The seller must clear the goods for export. The term is applicable for maritime and inland waterway transport only but NOT for multimodal sea transport in containers. The buyer must instruct the seller the details of the vessel and the port where the goods are to be loaded, and there is no reference to, or provision for, the use of a carrier or forwarder. FCA should be used for container shipments.

CFR – Cost and Freight (Named port of destination)

The seller must pay the costs and freight required in bringing the goods to the named port of destination. The risk of loss or damage is transferred from seller to buyer when the goods pass over the ship’s rail in the port of shipment. The seller is required to clear the goods for export. This term should only be used for sea or inland waterway transport.

CIF – Cost, Insurance and Freight (Named port of destination)

The seller has the same obligations as under CFR however he is also required to provide insurance against the buyer’s risk of loss or damage to the goods during transit. The seller is required to clear the goods for export. This term should only be used for sea or inland waterway transport.

CPT – Carriage Paid To (Named place of destination)

The seller pays the freight for the carriage of goods to the named destination. The risk of loss or damage to the goods occurring after the delivery has been made to the carrier is transferred from the seller to the buyer. This term requires the seller to clear the goods for export and can be used across all modes of transport.

CIP – Carriage and Insurance Paid to (Named place of destination)

The seller has the same obligations as under CPT but has the responsibility of obtaining insurance against the buyer’s risk of loss or damage of goods during the carriage. The seller is required to clear the goods for export however is only required to obtain insurance on minimum coverage. This term requires the seller to clear the goods for export and can be used across all modes of transport. The containerized transport/ multimodal equivalent of CIF.

DAT – Delivered at Terminal (Named terminal at port or place of destination)

Seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination. “Terminal” includes quay, warehouse, container yard or road, rail or air terminal. Both parties should agree the terminal and if possible a point within the terminal at which point the risks will transfer from the seller to the buyer of the goods. If it is intended that the seller is to bear all the costs and responsibilities from the terminal to another point, DAP or DDP may apply. Seller is responsible for the costs and risks to bring the goods to the point specified in the contract and for the export clearance procedures. Seller should ensure that their forwarding contract mirrors the contract of sale. Buyer is responsible to clear the goods for import, arrange import customs formalities, and pay import duty. If the parties intend the seller to bear the risks and costs of taking the goods from the terminal to another place then the DAP term may apply.

DAP – Delivered at Place (Named place of destination)

Seller delivers the goods when they are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. Parties are advised to specify as clearly as possible the point within the agreed place of destination, because risks transfer at this point from seller to buyer. If the seller is responsible for clearing the goods, paying duties etc., consideration should be given to using the DDP term. Seller bears the responsibility and risks to deliver the goods to the named place and is required to clear the goods for export. Seller is advised to obtain contracts of carriage that match the contract of sale. If the seller incurs unloading costs at place of destination, unless previously agreed they are not entitled to recover any such costs. Buyer is responsible for effecting customs clearance, and paying any customs duties.

DDP – Delivered Duty Paid (Named place of destination)

Seller is responsible for delivering the goods to the named place in the country of the buyer, and pays all costs in bringing the goods to the destination including import duties and taxes. The seller is not responsible for unloading. This term is often used in place of the non-Incoterm “Free In Store (FIS)”. This term places the maximum obligations on the seller and minimum obligations on the buyer.

The Terms HIGHLIGHTED IN GREEN are used for SEA and INLAND WATERWAY TRANSPORT.

Remaining Terms are used for Any mode or Modes of Transport.

What are the responsibilities of Buyer and Seller in respect of various services under INCOTERMS, can be explained in a Tabular form as under:

 EFCD
EXWFCAFASFOBCFRCIFCPTCIP DAT DAPDDP
Warehouse ServiceSSSSSSSSSSS
Export PackingSSSSSSSSSSS
Forwarder FeesBSSSSSSSSSS
Loading at port of originBSSSSSSSSSS
Inland FreightBBSSSSSSSSS
Port Receiving chargesBBSSSSSSSSS
Export ClearanceBSSSSSSSSSS
Ocean/ Air FreightBBBBSSSSSSS
Charges in Foreign PortBBBBBBBBSSS
Custom clearanceBBBBBBBBBBS
Customs DutiesBBBBBBBBBBS
Delivery Charges to DestinationBBBBBBBBBBS

5.EXPORT FINANCE:

An exporter may need financial assistance for execution of an export order from the date of receipt of an export order till the date of realisation of the export proceeds.  Export Finance is a short term, working capital finance allowed to an exporter and is broadly classified into two categories, depending upon the stage of export activity at which the finance is extended:

Types of Export Credit :

Pre- Shipment finance:

Pre-shipment OR Packing Credit finance means any finance granted by a Bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment, on the basis of LC opened in his favour or in favour of some other person by an overseas buyer, or a confirmed and irrevocable order for the export of goods from India or any other evidence of an order for export from India having been placed on the exporter or some other person.

This can be in form of :

 a) Packing Credit

b) Advance against receivables from Government e.g. duty draw back etc.

c) Advance against cheques/ drafts representing Advance payment.

Banks to decide the period for which a packing credit advance may be given, considering various factors so that the period is sufficient to enable the exporter to ship the goods / render the services, keeping in view prevalent RBI guidelines.

If pre-shipment advances are not adjusted by submission of export documents within 360 days from the date of advance, the advances will cease to qualify for prescribed rate of interest for export credit to the exporter ab initio. The finance can be liquidated out of export proceeds/ EEFC a/c / Rupee resources to the extent export took place.

(i)  The account should be maintained as separate account for the purpose of monitoring period of sanction and end-use of funds.

(ii) It may be disbursed in one lump sum or in stages as per the requirement for the orders / LC.

(iii) Banks to keep a close watch on the end-use of the funds and ensure that credit at lower rates of interest is used for genuine requirements of exports.

iv) ‘Running Account’ Facility :

Running Account facility is available only to exporters whose track record has been good/(EOUs)/ Units in Free Trade Zones / Export Processing Zones (EPZs) and Special Economic Zones (SEZs). Under the facility, exporter need not produce the evidence of export like export order or L/C at the time of disbuesement but based on a letter disbursement is made.Letters of credit / firm orders should be produced within a reasonable period of time to be decided by the banks. This finance is adjusted out of export proceeds against the earliest outstanding pre-shipment credit on ‘First In First Out’ (FIFO) basis.

Running account facility is not available to sub-suppliers.

Post- Shipment finance:

It includes any loan or advance granted or any other credit provided by a Bank to an exporter of goods from India from the date of shipment of goods to the date of realisation of export proceeds and includes any loan or advance granted to an exporter, in consideration of, or on the security of any duty drawback allowed by the Govt. from time to time.

This can be inform of:

a) Export Bills Purchased/ Negotiated / Discounted.

b) Advances against Bills sent on collection basis

c) Advances against duty drawback receivable from Government.

In this category of export, the Loan/advances/credit to exporter is granted after shipment of goods. The period of finance is up to NTP – 25 days in case of D/P bills. In case of D/A bills maximum period is up to 180 days (365 days under Gold card scheme)  from date of shipment including NTP. These finance can be liquidated out of  proceeds of export bills from abroad/ EEFC / proceeds of non-financed export bills.

Deemed Exports:

Category of export where goods do not move out of the country but still considered as Export is called ‘DEEMED EXPORT”. Finance is available to this category of export as well against orders for supplies in respect of projects aided/financed by bilateral or multilateral agencies/funds (including World Bank, IBRD, IDA), as notified from time to time by Department of Economic Affairs, Ministry of Finance under the Chapter “Deemed Exports” in Foreign Trade Policy, which are eligible for grant of normal export benefits by Government of India. Packing Credit provided should be adjusted from free foreign exchange representing payment for the suppliers of goods to these agencies. It can also be repaid/prepaid out of balances in Exchange Earners Foreign Currency account (EEFC A/c), as also from the rupee resources of the exporter to the extent supplies have actually been made.

Pre-shipment credit, and Post-supply credit (for a maximum period of 30 days or up to the actual date of payment by the receiver of goods, whichever is earlier) can be granted to this category of exports.

Export credit in foreign currency:

Both Pre-shipment as well as Post-shipment credit can be provided to the exporters in foreign currency also in designated currencies, USD, EUR, GBP and JPY. The finance is available with a spread related to the international reference rate such as LIBOR/EURO LIBOR/EURIBOR etc. Banks are free to determine the interest rates on export credit in foreign currency with effect from May 5, 2012.

INR Finance vs FC Finance:

The exporter may avail the finance in a) INR or b) Foreign Currency. Choice of currency depends on the factors as discussed in the following paragraph. How the exporter will decide on the currency of borrowing ?

The following example will give comparative position of cost in borrowal for different currencies.

CURRENCYINDIAN RUPEE %FOREIGN CURRENCY %
Effective Rate of Interest10.709.70
Rate of Interest10.703.70
(LIBOR +2.50)
Annualised Premium6.00
 We assume, the Bank is charging 10.70% on INR financing and LIBOR + 250 bp in FC financing. The annulised premium on the foreign currency is say 6.00%

In the example we observe that under the given scenario, an exporter should prefer FC finance as against availing finance in INR. The annualised premium and ROI chargeable on INR/FC finance change frequently. Hence, the above decision may be taken based on the prevailing situation.

Foreign Currency Accounts:

There are certain foreign currency accounts which exporter can maintain with Authorised Dealers e.g.

  1. Diamond Dollar Account (DDA)
  2. Exchange Earner’s Foreign Currency Account (EEFC)

Details about such accounts and Regulations are available in RBI Master Direction on Deposits and accounts available on RBI website at www.rbi.org.in -> Notifications ->  Master Directions.

6.EXPORT CREDIT GUARANTEE CORPORATION OF INDIA (ECGC):

Export Credit Guarantee Corporation of India Ltd. ( ECGC ) is a Government of India Enterprise which provides export credit insurance facilities to exporters and banks in India. It functions under the administrative control of Ministry of Commerce & Industry, and is managed by a Board of Directors comprising representatives of the Government, Reserve Bank of India, banking , insurance and exporting community. Over the years, it has evolved various export credit risk insurance products to suit the requirements of Indian exporters and commercial banks. ECGC is the seventh largest credit insurer of the world in terms of coverage of national exports. The present paid up capital of the Company is Rs. 1200 Crores and the authorized capital is Rs. 5000 Crores. ECGC is essentially an export promotion organization, seeking to improve the competitive capacity of Indian exporters by giving them credit insurance covers comparable to those available to their competitors from most other countries. It keeps it’s premium rates at the lowest level possible.

It helps exporters in the following areas:

  • Offers insurance protection to exporters against payment risks.
  • Provides guidance in export-related activities
  • Makes available information on different countries with its own credit ratings.
  • Makes it easy to obtain export finance from banks/financial institutions.
  • Assists exporters in recovering bad debts.
  • Provides information on credit-worthiness of overseas buyers.

Various Risks covered by ECGC are summarized as under:

 

EXIM

ECGC SCHEMES FOR EXPORTERS AND BANKS:

ECGC          

( For complete details of the schemes please visit ECGC website www.ecgcindia.in )

7.EXPORT-IMPORT BANK OF INDIA (EXIM BANK)

Export-Import Bank of India is the export finance institution, set up in 1982 under the Export-Import Bank of India Act 1981. Government of India launched the institution with a mandate to not just enhance exports from India, but also to integrate the country’s foreign trade and investment with the overall economic growth. Exim Bank of India has been both a catalyst and a key player in the promotion of cross border trade and investment.

The bank is working on the following programmes:

1. Overseas Investment Finance
2. Project Finance
3. Line of Credit
4. Corporate Banking
5. Buyer’s Credit Under NEIA

OVERSEAS INVESTMENT FINANCE PROGRAMME:

Exim Bank encourages Indian companies to invest abroad for setting up manufacturing units and for acquiring overseas companies to get access to the foreign market, technology, raw material, brand, IPR etc. For financing such overseas investments, Exim Bank provides:

  1. a) Term loans to Indian companies upto 80% of their equity investment in overseas JV/ WOS.
  2. b) Term loans to Indian companies towards upto 80% of loan extended by them to the overseas JV/ WOS.
  3. c) Term loans to overseas JV/ WOS towards part financing

(i) capital expenditure towards acquisition of assets,
(ii) working capital,
(iii) equity investment in another company,
(iv) acquisition of brands/ patents/ rights/ other IPR,
(v) acquisition of another company,
(vi) any other activity that would otherwise be eligible for finance from Exim Bank had it been an Indian entity.

  1. d) Guarantee facility to the overseas JV/ WOS for raising term loan/ working capital.

 

PROJECT EXPORT:

Exim Bank extends funded and non-funded facilities for overseas turnkey projects, civil construction contracts, technical and consultancy service contracts as well as supplies.

 

LINE OF CREDIT:

A Line of Credit (LOC) is a financing mechanism through which Exim Bank extends support for export of projects, equipment, goods and services from India. Exim Bank extends LOCs on its own and also at the behest and with the support of Government of India. Exim Bank extends Lines of Credit to:

  • a)  Foreign Governments or their nominated agencies such as central banks, state owned commercial banks and para-statal organizations;
  • b) National or regional development banks;
  • c) Overseas financial institutions;
  • d) Commercial banks abroad;
  • e) Other suitable overseas entities.

The above mentioned recipients of LOCs act as intermediaries and on lend to overseas buyers for import of Indian equipment, goods and services. LOC is a financing mechanism that provides a safe mode of non-recourse financing option to Indian exporters to enter new export markets or expand business in existing export markets without any payment risk from the overseas importers.

 

CORPORATE BANKING:

The Bank offers a number of financing programmes for Export Oriented Units (EOUs), importers and for companies making overseas investments. The financing programmes cater to the term loan requirements of Indian exporters for financing their new project, expansion, modernization, purchase of equipment, R&D, overseas investments and also the working capital requirements.

 

BUYER’S CREDIT:

Overseas buyers/importers can avail this facility for import of eligible goods and services from India on deferred payment terms. The facility enables exporters/contractors to expand abroad and into non-traditional markets. It also enables exporters/contractors to be competitive when bidding or negotiating for overseas jobs.

 

 

 

For complete details please visit EXIM Bank website www.eximbankindia.in .

 

8.RISKS /FRAUDS

Risks:

Risks while dealing in International Trade:

  • Foreign Exchange Risk:

Payments and receipts in foreign currency are an everyday occurrence in international trade and the trader is always at the mercy of exchange rate fluctuations due to various economic, political and even purely speculative reasons.

In India, simplest way of covering this risk is to take Forward Exchange Cover. Almost all banks provide facility to hedge the exchange risk by way of various derivative products including Forward Exchange Contracts.

  • Credit Risks in Opening LCs:

 Letters of credit are issued by banks to ensure payment for goods shipped in connection with international trade. Payment on a letter of credit generally requires that the paying bank receive documentation certifying that the goods ordered have been shipped and are en route to their intended destination. Letters of credit frauds are often attempted against banks by providing false documentation to show that goods were shipped when, in fact, no goods or inferior goods were shipped. Other letter of credit frauds occur when con artists offer a “letter of credit” or “bank guarantee” as an investment wherein the investor is promised huge interest rates on the order of 100 to 300 percent annually. Such investment “opportunities” simply do not exist.

  • Other Credit Risks:

Credit risk may be defined as the risk that a counter party to a transaction will fail to perform according to the terms and conditions of the contract, thus causing the holder of the claim to suffer a loss. Banks all over the world are very sensitive to credit risk in various financial sectors like loans, trade financing, foreign exchange, swaps, bonds, equities, and interbank transactions. Various Credit Insurance schemes are available which pays back a fraction or whole of the amount to the borrower in case of loss occurred on account of the underlying transactions. It protects open account sales against nonpayment resulting from a customer’s legal insolvency or default. In India ECGC is a major player covering risks in this area.

  •  Political Risk:

Political Risks are those risks which are affected by political decisions in a country. For example, political decisions by governmental leaders about taxes, currency valuation, trade tariffs or barriers, investment, wage levels, labor laws, environmental regulations  and development priorities, can affect the business conditions and profitability in the country.  Similarly, non-economic factors can also affect a business.  For example, political disruptions such as terrorism, riots, coups, civil wars, international wars, and even political elections that may change the ruling government, can dramatically affect businesses’ ability to operate. While dealing in international trade one has to keep close watch on the political scenario in the country where the trade transaction is to take place.

  • Transport Risk:

Transport risk is the risk of damage, loss, theft or pilferage of goods whilst in transit from seller to buyer. Whether the goods are being transported by Sea, Air or other means (road/rail), the risks can be covered by insurance.

  • OFAC – Office of Foreign Assets Control:

When transactions are taking place in USD and in some European currencies, you run a risk of blockage of transfer of such funds. Certain beneficiaries/entities and countries are black listed by OFAC and other agencies. Before remitting funds, the beneficiaries and beneficiary countries names should be checked to avoid such blocking of funds.

Frauds:

There are various types of fraud like documentary fraud, counterpart fraud, insurance scams, cargo theft, scuttling and piracy. Unfortunately, there are some countries which are renowned for harboring fraudsters. The golden rule is “if the deal looks too good to be true, it probably is” and one should be cautious when dealing with transactions which are much larger in value than the norm. Forged documentary credits are always in circulation and fortunately, an experienced trade services officer can detect a dud credit more often than not. If goods are released against an undertaking by the importer to pay in the future – usually by accepting a draft – then the exporter/financing bank loses control over the goods and this method of release termed D/A (documents against acceptance) is more risky than D/P. Same goes true for export when advance remittance is required to be sent.

Documentary Fraud

Documentary Fraud may occur when the sale and purchase of goods are made on documentary credit terms. Some or all of the documents specified by the buyer for presentation by the seller to the bank in order to receive payment are forged. The false documents are used to disguise the fact that goods either do not exist or that they are not of the quality or quantity ordered by the buyer.

Scuttling, Deviation and Cargo Theft

Scuttling is the willful casting away of a vessel with the connivance of her owners for the purpose of claiming against insurance. The highest incidences of scuttling occur during times of depressed freight markets when owners employ members of a ship’s crew to dispose of their vessel. This kind of fraud is known as hull fraud. The disposal of a vessel through scuttling may also be combined with either cargo fraud, when the vessel is lost with a high-value cargo aboard, or deviation and sale of the cargo.

Arson

The practice of arson is closely related to scuttling and offers the defrauding ship owner an alternative way of disposing of a vessel in order to claim against the insurer. Arson or the destruction or damaging of property through fire has become increasingly popular as a means to dispose of a vessel. This is because fire is an insured peril and any loss arising there from will generally give rise to a claim on underwriters. It is widely believed that “accidental” fires are easy to contrive and can be started with minimal risk and crew involvement. Fires started in certain parts of a vessel, notably the engine room and accommodation area, frequently result in a vessel becoming a total loss. It is generally very difficult to prove that a fire was started deliberately.

Charter Party Fraud

Vessels chartered through contracts of carriage are known as Charter-Parties. So long as each party performs under his contract, the voyage will be successful. Fraud occurs where one or two parties default, leaving the other(s) to unravel what is usually a contractual mess. The basic types of charter-party fraud occur as follows:

  1. i)Time Charter-parties

In this case vessels are hired on a per diem basis, and hire is usually paid in fortnightly installments in advance. The first hire is paid by the time chartered. The vessel proceeds to the loading port and the cargoes are loaded. The ship-owner authorises the release of freight pre-paid Bills of Lading to the charterers who passes them onto the cargo owner in exchange for the freight. The ship sails from the loading port to the destination. The charterers abscond after collecting the freight. The ship owner is now contractually bound to deliver the cargo to the destination under the Bills of Lading. However, as he is no longer being paid his hire, he may not have the financial resources to complete the voyage. Finally, if no agreement is reached between the cargo owners and the ship owner, an unscrupulous owner may attempt to sell the cargo illegally to cover his costs.

  1. ii)Voyage Charter-Parties

In this case, vessels are hired on a voyage basis and freight is paid to the owners, usually in advance. The ship owner collects the freight and authorises the release of Bills of Lading. However, after the vessel has sailed, the ship owner demands more monies under some pretext and threatens that if they are not paid the vessel will not proceed to destination.

Cargo Insurance Fraud

Cargo insurance fraud may be defined as the insurance of cargoes far in excess of their true value in order to profit from the insurance proceeds of a loss. Such fraud is generally limited to countries where there are foreign exchange restrictions and over-invoicing is used as a means to transfer local currencies into hard currencies.

Precautionary measures:

Maritime fraud is usually committed by persons outside or on the fringe of the maritime community. There are exceptions, but pitfalls are more likely to be avoided by dealing only with companies with an established reputation in their field.  Following agencies help in identifying reputed companies.

  1. Embassy commercial sections & Chambers of Commerce

Embassy commercial sections and Chambers of Commerce can do much on the educational side to make traders aware of the risks in trade and transport transactions and in making a minimum sense of checks before advancing the names of potential suppliers, buyers or transport companies. Similarly, Chambers of commerce should be capable of advising merchants on reputable organisations in their country or region capable of issuing the “independent loading certificate” and “report on vessel” type document.

  1. Buyers and Sellers

The best way for buyers and sellers to prevent their possible involvement in fraud is to make inquiries that satisfy them on the standing and integrity of the parties they deal with before entering into any binding commitment.

  1. Freight forwarders

Freight forwarders or similar intermediaries often know very well the conditions of local transport markets. On the one hand, they have a close relationship with the shipper of the cargo (seller or buyer) and the other hand; they have continuous contacts with the ship owner or charterers and their port agents.

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