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Deutsche Bank Trade Finance - Market Trends & US Regulatory Compliance prepared for: December 10, 2013 John Baranello Director Head of Americas Trade Finance Product Management Deutsche Bank AG, New York (212) 250-9604 [email protected] 0 Strengths of Deutsche Bank’s Trade Finance Business Europe / MEA Long-standing Expertise: — Deutsche Bank was founded in Berlin in 1870 to support the internationalization of business and to promote and facilitate trade relations between Germany, other European countries, and overseas markets — A leader in Germany and Europe, the bank is powerful and growing in North America, Asia and key emerging markets — Deep-rooted client relationship with major players in global trade business Global Coverage: — Trade Finance offices in 39 countries and 74 locations — Main hubs in Frankfurt, London, New York, Singapore Americas Extensive Integration: — Solutions for commercial trade, capital market and structured trade, commodity and export finance to cover client’s entire sales cycle in crossborder trade Asia-Pacific Austria Belgium Czech Republic Egypt Finland France Germany Hungary Italy Kazakhstan Netherlands Nigeria Norway Poland Portugal Russia SaudiArabia Spain Sweden Switzerland Turkey UAE UK Argentina Brazil Mexico US China India Indonesia Japan Korea Malaysia Pakistan Philippines Singapore Sri Lanka Taiwan Thailand Vietnam Enhanced Technology: — Comprehensive online tools to enable performance tracking, reporting and optimization of trading and risk management DB Trade Finance Global Presence Countries Recognized Leaders in the Trade Industry: — Leadership and membership roles in all important Trade and Regulatory Associations globally, e.g. members of BAFT - IFSA (Bankers’ Association for Finance & Trade - International Financial Services Association), ICC (International Chamber of Commerce) Deutsche Bank John Baranello Locations Americas Europe/MEA Asia 4 22 13 Americas Europe/MEA Asia 4 46 24 Total 39 Total 74 1 Share of Mind We are recognized leaders in the trade industry as we maintain leadership and membership roles in all the important Trade and Regulatory Associations throughout the world. -Chairman of the BAFT - IFSA (Bankers Association for Foreign Trade -International Financial Services Association) NY / Metro Documentary Letter of Credit Committee -Chairman of the BAFT - IFSA Payments and Compensation Committee - Board of Director BAFT- IFSA - Member of the BAFT- IFSA National Documentary Letter of Credit Committee - Member of the BAFT- IFSA National US Regulatory Committee - Member of the US Regulatory, Trade Committees for BAFT- IFSA - Member of the SWIFT Cash and Treasury Committee - Rapertoire and member of the ICC (International Chamber of Commerce) -Trade and Regulatory resource for FIBA (Florida International Bankers Association) -Trade Resource for the International Cotton Institute of the American Cotton Shippers Association -Trade Resource for the FFEIC (Federal Financial Institutions Examination Council) and the Asociación Bancaria de Panamá -Recognized by the FBI as a Trade Finance Expert Witness -Our Trade Services team recognized as the Benchmark operation for all Trade Operations by the Federal Reserve for having exemplary US Regulatory Policies and Procedures. 2 Trade Finance Practitioner Concerns: •The UCP 600, •The UCP 500, (….and 400 & 290) •URDG 758, •ISP 98, •ISBPED, Now: •Incoterms 2010, •“Open Account” Then: •URC 522, UCP 290 •URR 525, •SWIFT – BPO - 798 •The Back, Front, & Sides of Documents, •Atlas’s, Maps, •Internet… •Differing Local Commercial Law.. — Example: UCC Article V differs from State to State Regulatory Compliance in the United States: — US Department of the Treasury (“OFAC”) — US Department of Commerce (“BIS”) — Financial Crimes Enforcement Network (“FINCEN”) — Patriot Act — Bank Secrecy Act (“BSA”) — Indicators of Suspicious Activity — Politically Exposed Persons (“PEPS”) — Suspicious Activity Reports (“SARS”) — Fraud — KYC Deutsche Bank John Baranello 3 Global Risks ‒ Trade Finance An initiative of the ICC Banking Commission (cont’d) Trade Finance, which supports USD14-16 trillion in annual global commerce, is crucial for international trade. It facilitates and enables the management of cross-border trade for bank and corporate clients. These transactions are underpinned by the movement of goods and services and evidenced by commercial contracts that document the relationship between buyer and seller. Data pooled within the Register supports the view that trade finance is a low-risk asset class. Notable features of the dataset are: o Short tenor of trade transactions. The average tenor of all products in the dataset is 147 days; the off-balance-sheet products covered by the Register (import L/Cs, export confirmed LCs, and standby L/Cs and guarantees) have average tenors of less than 80 days. o Low default and loss across all product types. Fewer than 3,000 defaults were observed in the full dataset comprising 11.4 million transactions. For the three focus years of this report, default rates for off-balance sheet trade products were especially low, with only 947 defaults in a sample of 5.2 million transactions. Using a standard calculation, ICC calculated the following average default and loss rates within each product type over the three focus years of this report (2008-2010): Import L/Cs: default 0.077 percent, loss 0.007 percent Export confirmed LCs: default 0.09 percent, loss 0.03 percent Standbys and guarantees: default 0.013 percent, loss 0.0007percent Import loans – corporate risk, default 0.06 percent, loss 0.07 percent Import loans – bank risk, default 0.09 percent, loss 0.05 percent Export loans – corporate risk, default 0.29 percent, loss 0.017 percent Export loans – bank risk, default 0.17 percent, loss 0.01 percent Deutsche Bank John Baranello 4 Global Risks ‒ Trade Finance An initiative of the ICC Banking Commission (cont’d) • Trade Finance has historically been an engine of growth in world commerce, a critical source of economic growth and a provider of hard currency to developing countries. •Traditionally, trade finance has been considered one of the safest, most collateralized, and most self-liquidating forms of finance. This report provides the empirical evidence that this is clearly the case. • As demonstrated in this report, traditional trade finance has a very low loss experience. Contingent liabilities such as letters of credit do not convert to ―on-balance sheet‖ liabilities when paid because the issuing/confirming bank reimburses itself immediately from its client and is typically heavily collateralized. Such off-balance sheet contingencies would support significantly lower capital allocations. • Likewise, traditional trade loans to corporate entities and banks carry a very low loss history and should carry lower capital allocations. In both categories, defaults do not necessarily result in write-offs since transactions are liquidated by the sale of the underlying merchandise, and the bank is reimbursed for the amount of the transaction. • The data in this report supports the short-term nature of trade transactions and supports using the actual maturity of trade transactions as opposed to a one-year minimum. The data collected for this report would support lower risk-based capital weightings; the Basel II risk-based capital Credit Conversion Factors are more than sufficient and, at a maximum, and should be retained Deutsche Bank John Baranello . 5 Global Risks ‒ Trade Finance An initiative of the ICC Banking Commission — ICC concluded that trade finance was not the main driver behind the 2008 trade collapse. First, the shortfall in trade finance could not be considered as a factor in the sharp 2008-2009 drop in trade flows. Trade finance and trade volumes dropped primarily as a result of the spillover of the financial crisis to the real economy, resulting in lower activity and destocking. Moreover, the crisis was caused by factors exterior to the trade finance industry. — Based on the key findings of Global Risks – Trade Finance 2011, ICC maintains that new Basel regulations should not constrain trade finance supply, especially for banks based in low-income countries (as well as second- and third-tier banks in middle-income countries). ICC has called on standards setters and policy makers to carefully study the potential unforeseen impact of Basel III changes on trade finance. — In particular, the report’s 2011 data supports the view that the increase in the leverage ratio under the new regime would not reflect market realities and may significantly curtail banks’ ability to provide affordable financing to businesses in developing countries and to SMEs in developed countries. In addition, the dataset confirmed that the one-year maturity floor applied to trade assets under the advanced model should be reconsidered, and that the actual maturity of trade transactions should be the most logical standard to be applied. Deutsche Bank John Baranello 6 Letter of Credit A Letter of credit (documentary or standby) is a written undertaking given by a bank (issuing bank) to the beneficiary - on the instruction of the applicant (issuing banks client) to pay the Beneficiary at sight or at a determinable future date - up to a stated amount of money – within a defined period of time. This irrevocable undertaking is contingent upon the Beneficiary’s documentary compliance of the terms and conditions stated in the Letter of Credit. A Letter of Credit by its nature is a separate transaction from the sale or other contract on which it may be based Beneficiary looks to a bank to receive payment for their goods, services or performance – not their client. Reasons a Bank needs to substitute its own credit for the credit of its Client… — New economic relationship — The credit of the buyer/applicant is weak or unknown — Economic and political conditions are uncertain — Security — Convince beneficiary capital has been allocated in their favor, and provide for a, — Clear, defined, rules based path to payment — Local law demands: — Recognition - Control - Tariffs Documentary (Commercial) Letter of Credit Used as the primary means to finance the buying and selling of goods, services or performance Deutsche Bank John Baranello 7 Documentary Letter of Credit Advised - Unconfirmed Applicant (Buyer) Beneficiary (Seller) Issuing Bank Irrevocably bound to honor beneficiaries complying documents. Article 2 & 7 Issuing Bank Deutsche Bank $ Letter of Credit Advised Article 9 Advising Bank 8 Documentary Letter of Credit - Confirmed Applicant Beneficiary (Seller) (Buyer) 1 2 Issuing Bank Deutsche Bank Letter of Credit Application 3 Contract Letter of Credit Advised 4 & Confirmed Letter of Credit Issued via SWIFT Confirming Bank Irrevocably bound to honour beneficiaries complying documents. Assumes Issuing Bank risk Confirming Bank 9 Documentary Letter of Credit – “Silent” Confirmation Purchasing the Beneficiaries Documents “Silent” Confirming Bank: Commits to honor beneficiaries complying documents by direct arrangement detailing assumed risks. Beneficiary (Seller) Not requested by Issuing Bank to add confirmation. Issuing Bank is not made aware of this arrangement. $ Advising Bank Issuing Bank Deutsche Bank “Silent Confirmer” 10 Private Label Letter of Credit - Issuance Issuer (buyer) Beneficiary (seller) 1 2 Letter of credit advised Letter of Credit 3 Pass-thru bank New York Deutsche Bank Contract John Baranello Letter of credit passed thru via SWIFT MT 710 4 Advising Bank Asia 11 Financial Supply Chain Solution – Supplier Advanced Funds 1 Purchase Order 2 Goods Delivered 3 Buyer Approved Payables File 4 Invoice Notification of Maturity date 5 FSC 7 6 Day 60 9 Debit Settlement Payment Principal Discount Request Day 30 Process Request Day 2 Day 1 Supplier 8 Discounted Payment Day 30 Day 60 Trade Value Chain Produce & Ship Goods Deutsche Bank John Baranello Payment Terms 12 “Traditional” Methods of Settling Trade Finance Transactions LC Advising Bank Bank services based on paper document processing ICC Rules Based Bank Payment Obligation Documents Advice LC Advising Bank LC Advising Bank Goods Electronic Letter of Credit Seller Documents Application Advice Buyer Documents Advice of LC Issuance Payment Deutsche Bank “Private Label” Letter of Credit Seller Documents Documents LC Issuing Bank Goods Documents Letter of Credit Letter of Credit Documents Application Documents Seller Buyer Documents Goods Buyer Contract Advice Contract Contract Payment Bank services based on paper document processing ICC Rules Based Buyer Payment Obligation LC Issuing Bank Issuance LC Advising Bank Payment Bank services based on electronic document processing ICC Rules Based Bank Payment Obligation 13 Methods of Settling Trade Finance Transactions Contract Contract Goods Seller Buyer Data Open Account With Documents Documents Documents Buyer Docs / Goods Seller Open Account No Documents Documents LC Issuing Bank LC Advising Bank Payment Bank payment services based on limited paper document processing. No ICC Rules Subject to Arrangement Buyer Payment Obligation Deutsche Bank Buyer’s Bank Seller’s Bank Payment Bank payment processing services . No ICC Rules Subject to arrangement Buyer Payment Obligation 14 Bank Payment Obligation “BPO” – Combining the best of all worlds (?) Contract Bank Payment Obligation Seller Buyer Data Docs / Goods Buyer Data Letter of Credit Advice Seller Documents Application Documents Buyer Contract Data Contract Docs / Goods Seller Open Account Documents LC Issuing Bank Issuance LC Advising Bank Payment Bank services based on paper document processing Bank Payment Obligation Deutsche Bank BPO Obligor Bank Data BPO Recipient Bank Payment Bank services based on electronic trade data exchange Bank Payment Obligation Buyer’s Bank Seller’s Bank Payment Bank services limited to payment processing Buyer Payment Obligation 15 Bank Payment Obligation (BPO) • What is it? • A BPO is an irrevocable undertaking given by an Obligor bank (typically the buyer’s bank) to a Recipient bank (the seller’s bank) to pay a specified amount on an agreed date under the condition of a successful electronic matching of data according to an industry-wide set of rules adopted by the ICC. • BPO constitutes a legally binding, valid and enforceable payment obligation of the Obligor Bank to the Recipient Bank under the appropriate standard of law, enforceable in accordance with its terms. • BPO is a technology independent instrument based on ISO 20022 XML that can be used on any open Trade Matching Application (TMA) such as the SWIFT Trade Service Utility platform (TSU). Deutsche Bank 1616 Bank Payment Obligation (BPO) • How does it work? • Only the data required to assess the financing risk is extracted from existing documentation – Purchase order, Commercial invoice, Transport, Insurance Certificate • Importer and Exporter need to agree on the use of a BPO in their commercial agreement. Both will establish the BPO terms and conditions in the bilateral agreement with their own bank. • Obligor and Recipient banks rely on the ICC URBPO and the contractual agreement of the Transaction Matching platform, such as TSU Service Description. Deutsche Bank 1717 BPO flows for data, documents and goods Carriers Delivery of goods 4 Shipment Documents sent directly to the client 1 Purchase order 8 Invoice and shipping documents Seller Buyer 2 Request BPO based on PO Transport and invoice data (match report) 6 BPO Obligor Bank 3 ‘Confirm’ BPO Transaction BPO is Establishe Transaction Matching d baseline due Matching Application Application 9 Transfer funds at maturity Deutsche Bank BPO Recipient Bank 5 Transport and invoice data Confirm payment is 7 due on agreed date 18 Standby Letter of Credit / Guarantee…. …….is a written undertaking given by a Bank or Guarantor to the Beneficiary - on the instruction of its Applicant or on its own behalf - to pay the Beneficiary a stated amount of money – within a defined period of time – against certain rules and articles….. — This irrevocable undertaking is contingent upon the Beneficiary’s documentary compliance of the terms and conditions stated in the Letter of Credit or Guarantee — The instrument is separate from and independent of the underlying contract. — The Bank or Guarantor will not investigate the underlying facts of the transaction – e.g. whether or not there was a default or contract breach. — References to underlying purpose and references to related agreements and contracts are “for information only”. — Assures the beneficiary of the performance of their customer's obligation — Bank / Guarantor stands behind monetary obligations of its client or commits itself to make payment — Bank / Guarantor strengthens the credit worthiness of its client or commits itself to make payment — Documents presented under a Standby/Guarantee lack any intrinsic value because they are usually a simple certification to satisfy payment — Capital adequacy reserves — Thus more expensive to issue and maintain than a documentary (commercial) letter of credit Choice of governing rules: — UCP 500 – UCP 600 – ISP 98 – URDG 758 — UCC Article 5 (US regional law) Deutsche Bank John Baranello 19 Standby Letter of Credit / Guarantee Issuing Procedure – Motivating College Student (Performance) Paying Dad Lucky Student 1 2 3 Standby Letter of Credit Requested Motivate Student Son …Standby Issued in Son’s favor payable against copy of Son’s Report Card Issuing Bank Deutsche Bank 20 Standby Letter of Credit / Guarantee Payment Processing Paying Dad Lucky Student Report Card 1 2a 2 Presents copy of Report Card $ 3 $ - Payment to son value predicated on his scholastic Performance (GPA) Issuing Bank Deutsche Bank 21 Forms of Guarantees & Standby’s Counter Guarantee / Standby Issued to support issuance of a separate Standby or Guarantee or other such undertaking by the beneficiary of the Counter Standby. Mainly issued by a Bank in one Country to request a Bank in another country to issue their local undertaking. Lease / Rental Security for landlord / leaser in the event lessee or renter unable to make payment Direct Pay Support payment when due of an underlying payment obligation typically in connection with a financial standby without regard to default. This standby is also used to directly pay an obligation where the only conditions of payment are the passage of the term and presentment of payment. 100% of the value of the transaction 30 days after the expiation of the instrument it is supporting 100% of contract / lease value Until expiry of lease. Can revolve on a monthly basis. 100% of the value of the transaction Economic lifetime depends on nature of underlying transaction Insurance This instrument is an insurance or reinsurance obligation of the applicant. 25% - 75% of risk quotient Until expiry of contract or end of contractually obligations + further claim period Reclamation Covering the cost of repairing environmental damages caused by worked conducted by the applicant 50% - 100% of estimated damages Until end of warranty period Cover brokerage firm’s margin requirements 50% - 100% of trading limits Until end of trading activity Margin Deutsche Bank John Baranello 22 Forms of Guarantees & Standby’s Function Typical Amounts Validity Bid / Tender Bond Security for beneficiary that terms of tender will be fulfilled by the applicant if their bid has been accepted 20 - 30% of contract value Until the end of tendering or contracting Advance Payment Guarantee Security for beneficiary that the down payment will be paid back if terms of contract are not fulfilled by the applicant Amount of down payment (sometimes incl. interest) Date of expected delivery/ performance + further claim period Delivery Guarantee Security for beneficiary that delivery as per contract will be or has been effected 20% - 30% of contract value Until delivery/ performance + further claim period Commercial Supports the obligations of an applicant to pay for goods or services in the event of nonpayment by a business debtor 100% of the value of the transaction Economic lifetime depends on nature of goods and services provided Performance Bond Secures payment of the guaranteed sum when the party whose performance is guaranteed by the guarantee fails to perform or discharge in full his contractual obligations 10% - 15% of contract value Until expiry of contract or end of contractually obligations + further claim period Guarantee for Warranty Obligations Covers risk of buyer that goods are of bad quality or breach of warranty 25% - 50% of contract value Until end of warranty period Payment Guarantee Security for the beneficiary in case that the debtor (applicant) fails to pay Contract value Due date of payment + further claim period Deutsche Bank John Baranello 23 URDG 758 – Uniform Rules for Demand Guarantees •Issued by the ICC •Effective July 2010 •Replaces the URDG 458 •Internationally acclaimed •Consists of 35 articles •Reflects International practice in the use of demand guarantees •Sets out the liabilities and responsibilities of the parties to a demand guarantee •Shares Independence and Documentary nature with the UCP 600 and ISP 98 •Details vital phases in the lifecycle of a demand guarantee •Offers model guarantee and counter-guarantee forms 24 Side – by – Side…….. Demand Guarantee Standby Letter of Credit •Irrevocable Undertaking •Irrevocable Undertaking •ICC issued Rules Based •ICC issued Rules / Articles Based •Recognized Internationally including the US •Recognized Internationally including the US •Independent of the underlying Relationship •Separate from sale / contract •Issued by Guarantor •Issued by Issuing Bank •At request of Instructing Party •At request of Applicant •In favor of Beneficiary •In favor of Beneficiary •Guarantor deal with documents and not with goods, services or performances to which the documents may relate •Banks deal with documents and not with goods, services or performances to which the documents may relate •Provide for payment against complying documentary demand •Honor complying documentary presentation •Finite Expiration •Finite Expiration •Finite Amount •Finite Amount •Defined Payment / Documentary Rejection Process •Defined Payment / Documentary Rejection Process •Transferrable / Assignable •Transferrable / Assignable 25 Foreign Guarantee Issued Supported by Our Guarantee Cross border business arrangement Business can be conducted Guarantee Issued Trading Partner Our Client 2 1 Guarantee on both sides Guarantee Requested To Support (Foreign) Financial Arrangement Counter Guarantee Issued in Favor of Our Foreign Correspondent / Branch Issuing Bank Deutsche Bank 26 Basel Accords Requirement Basel I Common Equity Basel II 2013 Basel III 2015 2019 2.0% of RWA 3.5% of RWA 4.5% of RWA 4.5% of RWA Tier 1 Capital 4.0% of RWA 4.0% of RWA 4.5% of RWA 6.0% of RWA 6.0% of RWA Total Capital 8.0% of RWA 8.0% of RWA 8.0% of RWA 8.0% of RWA 8.0% of RWA -0- -0- +2.5% of RWA Capital Conversion Buffer Counter Cyclical Buffer Leverage Ratio (based on Tier 1 Capital) Observation Observation 3% of direct and contingent assets Liquidity Coverage Observation 30 days 30 days Net Stable Funding Observation Observation 1 year Additional Loss Absorbency +Up to 2.5% of RWA +1% to 2.5% of RWA The amount of Risk-Weighted Assets (“RWA”) is computed by multiplying the amount of each asset and contingent asset by a risk weighting and a Credit Conversion Factor (“CCF”) Under Basel I, risk weightings are set: 0% for sovereigns, 20% for banks where tenors ≤ one year, 50% for municipalities and residential mortgages, 100% for all corporate obligors Under Basel II, risk weightings are based on internal or external (rating agency) risk ratings with no special distinction for banks; capital requirements for exposures to banks are increased by as much as 650% (from 20% to as much as 150%) The Credit Conversion Factor for Letters of Credit varies under Basel I vs. Basel II and Basel III Under Basel I, this is 20% for commercial L/Cs, 50% for performance standbys and 100% for financial standbys; confirmation of a commercial letter of credit has a capital requirement of 0.32% (8% x 20% x 20%) Under Basel II and III, “Sophisticated Banks” are required to do a statistical analysis of losses based on structure (and, due to limited losses, there are insufficient loss data for any bank in the world to do this for letters of credit, resulting in using the default CCF of 100%; under Basel II, the capital requirement to confirm a letter of credit can jump from 0.32% to 12%, viz., 8% x 150% x 100%; under Basel III, it can be as high as 23.25%, viz., 15.5% x 150% x 100%) In the US, Basel II only applies to “Large, Internationally-Active Banks”—the 9 largest commercial banks fit the definition—and has never been fully implemented. Basel III-Advanced is expected to be applicable to the same banks while Basel III-Standardized will apply to all US banks. The Leverage ratio does NOT apply risk weightings or credit conversion factors; the ratio is 100% for all direct and contingent assets. (The ECB has modified this for Europe.) The Additional Loss Absorbency requirement applies only to “Globally Systemically Important Banks” Depending on the bank and the point in the economic cycle, under Basel III, the total capital requirement for a bank in 2019 may be as much as 15.5% of Risk-Weighted Assets (“RWA”), compared with 8% under Basel I and Basel II The Laws and Regulations of the United States apply to all United States Persons…. And you are "a U.S. Person" if… — You are a(n): — Individual, Corporation, United States Government, Bank located in the United States or, — Located outside the United States if Controlled-in-Fact by a United States concern — You are a company liable to U.S. law — A U.S. citizens in or outside the USA as well as non U.S. citizens staying in the USA — You are an individual or economic entity, located in the USA, especially financial institutions, their subsidiaries, branches, agencies, representatives and all their directors, staff etc. — Note: This definition includes both the singular and plural, You are Controlled-in-Fact by a United States concern: — Owns substantial stock, appoints officers and / or — Controls: — general policies, or, — the day-to-day operations of foreign concern, You are a Foreign Division or entity of a U.S. Concern. Not the Head Office or any Foreign Branch of a Branch of a Foreign Bank in the United States. — US Laws apply only to DBNY Article 37d of the UCP 600 – Article 18d of the UCP 500: — The Applicant shall be bound by and liable to indemnify a bank against all obligations and responsibilities imposed by foreign laws and usages. 29 Trade Transactions are Reviewed for Compliance with: Department of the Treasury: Office of Foreign Assets Control (OFAC): OFAC Country Sanction Programs OFAC List-Based Sanctions Programs SDN List Bureau of Industry and Security US Department of Commerce: Denied Person Unverified List Entity List Debarred List Anti-boycott Compliance Others: KYC Politically Exposed Persons FFIEC - Bank Secrecy Act Anti-Money Laundering Examination Manual, 2010 30 European Union List OFAC – Office of Foreign Assets Control OFAC, is a Division of the US Department of the Treasury, administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction…. As part of its enforcement efforts, OFAC publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific. Collectively, such individuals and companies are called "Specially Designated Nationals" or "SDNs." Their assets are blocked and U.S. persons are generally prohibited from dealing with them. Many of the sanctions are based on United Nations or other international mandates, are multilateral in scope, and involve close cooperation with allied governments. OFAC acts under Presidential wartime and national emergency powers as well as under the authority granted by specific legislation to impose controls on transactions and to "freeze” or “block" assets under U.S. jurisdiction 31 OFAC Sanctioned Entities…... Vessels… Anti Terrorism Sanctions Counter Narcotics Trafficking Sanctions Diamond Trading Nonproliferation Blocked Persons Certain Countries Certain Named Ocean Vessels…. The Casablanca, Celtic, Cotty, Huntsland, Violet or West or Rose Islands, Sand Swan, and the Ravens… All fly the flag of…Cuba The Pilot, Police 1, 2, or 3, Sky Sea, and the Antara… All fly the flag of…..Iran 32 The United States Department of Commerce... The Bureau of Industry and Security (“BIS”) The mission of the (BIS) is to: — Advance U.S. national security, foreign policy, and economic interests BIS’s activities include: — Regulating the export of sensitive goods and technologies in an effective and efficient manner — Enforcing export control — Public safety laws — Cooperating with and assisting other countries on export control and strategic trade issues — Assisting U.S. industry to comply with international arms control agreements — Monitoring the viability of the U.S. defense industrial base and seeking to ensure that it is capable of satisfying U.S. national and homeland security needs — Requires us to enforce export controls on dual use goods and technology (primarily commercial goods which have potential military applications) not only to fight proliferation, but also to pursue other national security, short supply, and foreign policy goals (such as combating terrorism) — Requires us to enforce sanctions against imports and exports of goods and services to certain Denied / Embargoed Persons During the mid-1970's the United States adopted two laws that seek to counteract the participation of U.S. citizens in other nation's economic boycotts or embargoes. These "antiboycott" laws are the 1977 amendments to the Export Administration Act (EAA) and the Ribicoff Amendment to the 1976 Tax Reform Act (TRA). — The antiboycott laws were adopted to encourage, and in specified cases, require U.S. firms to refuse to participate in foreign boycotts that the United States does not sanction. — They have the effect of preventing U.S. firms from being used to implement foreign policies of other nations which run counter to U.S. policy. 33 Requirements….. Concerned with United States Commerce The export of goods or services from the United States and the import of goods or services into the United States are activities in United States commerce In addition, the action of a domestic concern in specifically directing the activities of its controlled in fact foreign subsidiary, affiliate, or other permanent foreign establishment is an activity in United States commerce Primary Impact The Arab League boycott of Israel is the principal foreign economic boycott which impacts U.S. persons Each of the following is currently a member of the Arab League: Algeria, Bahrain, Iraq, Jordan, Lebanon, Libya, Mauritania, Morocco, Oman, Qatar, Saudi Arabia, Somalia, Sudan, Tunisia, United Arab Emirates, Yemen, Egypt, Palestine, Comoros, Syria, Djibouti, Kuwait There are actually three levels of boycott: Primary boycott: — Examples: — Syria refuses to trade with Israel — Kuwait asks a U.S. Company not to ship Israeli goods to Kuwait — …In these examples, U.S. persons may comply, but must report their receipt. Secondary boycott: — Example: Syria refuses to trade with anyone who does business with Israel and develops a "blacklist" of those trading with Israel Tertiary boycott: — Example: Syria refuses to trade with anyone who does business with names on Syria’s "blacklist" For the Secondary and Tertiary boycotts, U.S. persons may not comply and must report receipt of requests to comply to the United States Department of Commerce 34 Recent Examples of Boycott Requests Permissible Reportable Shipment of goods of Israeli Origin prohibited, or, shipment contains no Israeli Material N Y Certificates of origin acceptable from any country other than Iraq and Syria Y Y Furnish a certificate that neither the manufacturer nor supplier are blacklisted N Y Manufacturer is a 100% U.S. factory and has no foreign partnerships Y N A certificate of origin stating that the goods are wholly of U.S. origin Y N A certificate of origin stating that the goods are wholly of U.S. origin and contain no foreign parts Y N We certify that no raw materials of Israeli origin have been used for the production or preparation of the goods mentioned in this invoice N Y Certificate from the owners or masters or agents of the ship stating that the carrying vessel is allowed to enter Kuwaiti Ports according to it Maritime Laws and Port Regulations Y N In case of shipment by steamer, bill of lading should evidence that carrying vessel is allowed to enter UAE ports N Y Shipment on Israeli flag vessel is strictly prohibited Y N (war risk 7.60.3) Provide a certificate from the owner, captain or agent of the vessel carrying the goods that is not Israeli owned, will not call at Israel on the way to Oman or other boycotting country and that it is allowed by Arab authorities to enter Arab waters N Y John Baranello 35 Indicators of Suspicious Letter of Credit Activity Suspicious activities or transactions may present themselves in many different forms. The scenarios listed below are considered to be "Red Flags" that you should be aware of and alert to for possible money laundering activities in Trade Finance: — Letter of Credit does not provide for a description of the goods, services or technology being furnished, — Transactions that have no apparent business or lawful purpose, are not expected of a particular customer, and the Bank knows no reasonable explanation for the transaction after examining the available facts, — Changing the Letter of Credit beneficiary name and address just before payment is to be made, including requests for assignment of proceeds or transfer at the time documents are presented, — Changing the Letter of Credit place of payment, — Standby Letter of Credit fails to reference underlying project or contract, or designates an unusual beneficiary, — A freight-forwarding firm is listed as the products final destination, — The shipping route and destination appears to be abnormal for the product… — Transactions which appear to lack reasonable economic substance or intent, — Inadequate or unreliable information / documentation provided by the client to support a transaction, — Transactions for which the source of funds is not readily apparent and / or is otherwise suspicious, — Unusual transactions involving inherently risky industries or geographical areas where the client typically does not do business, — Transactions or business opportunities that seem "too good to be true“ or that can not pass the "Smell test“ — Transactions which appear to be inconsistent with the clients financial status, — Transactions which appear unnecessarily or unusually easy to complete, — Pricing inconsistent with previous transactions, — Identify trends and patterns, — "…Know, suspect or have reason to suspect unlawful activity…“ 36 Bank Secrecy Act / Anti-Money Laundering Examination Manual………..updated 2010 Trade Finance practitioners must review all documentation to detect: Items shipped that are inconsistent with the nature of the customer’s business (e.g., a steel company that starts dealing in paper products, or an information technology company that starts dealing in bulk pharmaceuticals). Customers conducting business in higher-risk jurisdictions. Customers shipping items through higher-risk jurisdictions, including transit through noncooperative countries. Customers involved in potentially higher-risk activities, including activities that may be subject to export/import restrictions (e.g., equipment for military or police organizations of foreign governments, weapons, ammunition, chemical mixtures, classified defense articles, sensitive technical data, nuclear materials, precious gems, or certain natural resources such as metals, ore, and crude oil). Obvious over- or under-pricing of goods and services. Obvious misrepresentation of quantity or type of goods imported or exported. Transaction structure appears unnecessarily complex and designed to obscure the true nature of the transaction. Customer directs payment of proceeds to an unrelated third party. Shipment locations or description of goods not consistent with letter of credit. Significantly amended letters of credit without reasonable justification or changes to the beneficiary or location of payment. Any changes in the names of parties also should prompt additional OFAC review. 37 Fraud / Scam Key Phrases / Buzz Words Banking Coordinates Buy-Sell "Cash" Wire Transfer C&F ASWP Comfort Letter "Conditional" Swift Payment CUSIP Number Cutting House X % Performance Bond Validation of the MCC (Master Collateral Commitment) Verbiage With Full Bank Responsibility Zero-Coupon Letter of Credit Discounting L/C’s Due 1, 5, or 10 years and 1 day First-cut Paper Fresh-cut paper Foreign Bank Advice Good, clean, cleared funds Good, clean, cleared funds of non-criminal origin ICC Investment Program ICC Promissory Notes ICC 322 Program ICC 3039/3034 International Certificate of Deposit (ICD) Irrevocable Bank Purchase Order (IBPO) Deutsche Bank John Baranello 38 More Key Phrases / Buzz Words… Middleman Non-circumvention — or, Non-disclosure Agreement Prime Bank Financial Instrument Prime Bank Guarantees Prime Bank Notes Prime World Bank Proof of Funds Proof of Product Irrevocable and confirmed Divisible, Assignable, Fractionable Revolving, Credit Payable 100% at Sight, Key Tested Telex (KTT) Mandate Market to Buy or Sell Credits Deutsche Bank John Baranello Ready, Willing and Able (R,W, & A) Roll Program Secondary Market — (in letters of credit, prime bank notes, guarantees) Soft Probe Pay Order Top 50 – 100 — or any number — World Bank Transaction Tranche Third Party Documents Acceptable Name dropping : — within their organization, — within your organization, — regarding their “connections” — regarding their referrals Seeking Banks Letterhead Seeking Bank Correspondence Seeking “road-map” Letters of Credits signed by John Baranello 39 Documentary Trade Contact…. John Baranello Director Documentary Trade Product Management Deutsche Bank AG Global Transaction Banking 60 Wall Street New York, NY 10005 Telephone +1 (212) 250-9604, Fax +1 (212) 797-0780 E-Mail: [email protected] The information contained herein is strictly for informational purposes only and does not constitute and shall not be construed to constitute any contractual or non-contractual obligation or liability of Deutsche Bank AG or any of its affiliates, including Deutsche Bank Trust Company Americas (collectively "Deutsche Bank"), nor shall this [brochure/presentation]or the content herein be construed as advice, an offer or a solicitation of any nature whatsoever nor is this brochure or its contents intended to be relied upon by any person. Deutsche Bank makes no representation as to the accuracy, completeness, or timeliness of such information. Deutsche Bank shall not be held liable for the authentication of or compliance with the information contained herein nor does Deutsche Bank assume any obligation to update any such information. No part of this brochure may be copied or reproduced in any way without the prior written consent of Deutsche Bank. Copyright © 2013 Deutsche Bank AG. All Rights Reserved. 40
