PROOF OF FUNDS
There is a great deal of misinformation circulating regarding various elements of the trading business. Some of these false facts have resulted from simple misunderstandings which have then been widely propagated, and other untruths have been deliberately engineered by unscrupulous types who seek to scam honest traders.
The following seeks to clarify some of the more common procedures which are likely to be encountered in the course of commodities trading.
Agreements or contracts can only be regulated by the laws of one jurisdiction. This is because international contract law states that a contract cannot be regulated in multiple jurisdictions due to potential legal conflicts in various jurisdictions making the contract unenforceable.
It is not necessary, nor is it advisable for buyers to send personally identifying information, or sensitive information via a broker. This includes things such as bank account details, passports, and so on. It is advised that this type of information is only sent directly between the seller and the buyer.
The seller should be open and forthright regarding providing proof of product and other relevant information to the buyer. There is no need for secrecy, and indeed, an unwillingness to divulge necessary or pertinent information should be considered a red flag for a potential buyer.
Fee protection agreements should always have named pay masters. Fee protection agreements which do not name pay masters are essentially useless.
The maximum amount of any international trade is $500 million. Amounts exceeding this limit will be frozen and investigated, due to the growth of terrorist activities in the past decade. It is not wise to enter into transactions which require more than $500 million to be moved at any one time.
LOI (Letter of Intent)
A LOI (Letter of Intent) is not a contract. Letters of intent serve to notify the seller that the buyer wishes to enter into negotiations to purchase. They do not contractually oblige either the buyer or the seller to go through with the trade.
Letters of intent should be regarded only as an opening point. Issuing an LOI does not make the buyer culpable for anything written in it. Until a contract is agreed upon and signed, both parties are free to back out of negotiations at any time, and buyers cannot be held liable for statements made in the LOI.
Banking information is not sent with a LOI. Banking information needs to be provided so that the seller can conduct a soft probe on the buyer’s accounts, but this is not necessary at the LOI stage.
Speaking of proof of funds, it is not a legal requirement that a buyer provide proof of funds before entering into a contractual agreement with a seller. Most sellers will prefer this, and many will insist upon it, but it is not an absolute legal requirement.
L/C (Letter of Credit)
You cannot buy a letter of credit. These are financial instruments which should be obtained from your bank, never from a third party. Financial instruments offered by third parties are almost always a scam.
There is no such thing as a discounted letter of credit. If you follow the previous rule, this is obvious, but many buyers are tempted into purchasing so called ‘discounted’ letters of credit in order to save money. Remember that a letter of credit is a financial instrument prepared by your bank that will be drawn on your accounts when the seller fulfills their contracted obligations. There is no way to save money on a letter of credit, other than negotiating for a lower price with the seller.
Banks do not sell or buy financial instruments.
SWIFT is the Society for Worldwide Interbank Financial Telecommunications. This organization operates a closed network which operates between banks and financial institutions for the purposes of exchanging messages relating to financial information. SWIFT was founded in Brussels, Belgium, in 1973 at a time when it was fast becoming apparent that globalization was a major market force, but banks in various countries were having trouble keeping up with the emerging demand for quickly and efficiently sending money and communicating financial information across borders.
When it was first founded, the SWIFT network operated in just fifteen countries and had less than 300 banks and financial institutions associated with its network. Nowadays SWIFT operates in 208 countries and there are well over 8,000 banking institutions who make use of the SWIFT messaging network.
SWIFT codes are simply a means of differentiating between different kinds of SWIFT messages. The SWIFT messaging network operates using a series of standardized message types. In order to send a SWIFT message, the banking officer simply fills in the appropriate information in the appropriate fields, and sends the message. In order to identify the different types of SWIFT message, there are numbers assigned to each of them. The ‘MT’ prefix stands for ‘Message Type’, and the three digit number that follows it represents a specific message type.
There is no such thing as an MT543. At one time there was a SWIFT message with the code MT543, however this was withdrawn from the SWIFT messaging system in 2003. When the MT543 was in existence, it was a bank commitment, however it was almost never used as banks are not in the business of taking on liability on behalf of their customers.
There is also no such thing as an MT100. The MT100 has been replaced by the MT103.
SWIFT MT-103′s are the most commonly used form of SWIFT communication, and one which many people will have utilized without even knowing it. For most bank customers, they are known not as MT-103′s at all, but rather as wire transfers, telegraphic transfers, or SWIFT transfers. A SWIFT MT-103 is used by the bank when its customers wish to make payment to customers of another bank in another country.
If the buyer and seller have a good relationship, then they may use a MT-103 to make payments, however standard practices dictate that payment for shipments is made via a letter of credit. Letters of credit are documents which guarantee that the seller will be paid once the product has been shipped, and documentary evidence of this has been provided. Paying by MT-103 in advance can leave a buyer open to fraud, and few, if any sellers, will send product before they receive payment or a guarantee backed by a major world bank that payment will be made upon shipping.
The MT-760 is a type of SWIFT message that is sometimes requested in trading because it functions much like a Bank Guarantee, although it carries with it a much higher level of risk for the issuer (usually the buyer), and a reduced level of risk for the recipient (the seller). Essentially, a MT-760 is a SWIFT message which guarantees that a bank will make payment in favor of a client of another bank. When a MT-760 is issued, the issuing bank puts a hold on its client’s funds, thereby ensuring that the funds are in place to make payment to the recipient of the MT-760.
One of the more commonly requested, but lesser understood documents is the MT-799.
Many sellers will request that the buyer issue an MT-799 before they provide proof of product, or proceed beyond the initial stages of the sale.
The MT-799 is a free format SWIFT message type in which a banking institution confirms that funds are in place to cover a potential trade. This can, on occasion, be used as an irrevocable undertaking, depending on the language used in the MT-799, but is not a promise to pay or any form of bank guarantee in its standard format. The function of the MT-799 is simply to assure the seller that the buyer does have the necessary funds to complete the trade.
The MT-799 is usually issued before a contract is signed and before a letter of credit or bank guarantee is issued. After the MT-799 has been received by the seller’s bank, it is then normally the responsibility of the seller’s bank to send a POP (proof of product) to the buyer’s bank, at which point the trade continues towards commencement.
The actual payment method commonly used is a documentary letter of credit, which the seller presents to the issuing or confirming bank along with shipping documents. Once the bank confirms the documents, the seller is then paid. An alternative method is to use a bank guarantee in place of a letter of credit. It is normally at the seller’s discretion which method of payment is used.
Information required to issue MT-799
You will need the following information to send an MT-799.
• Name of the advising bank.
The Intercoms rules or International Commercial terms are a series of per-defined commercial terms published by the International Chamber of Commerce (ICC) that are widely used in International commercial transactions or Procurement processes. A series of three-letter trade terms related to common contractual sales practices, the Intercoms rules are intended primarily to clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods.
The Intercoms rules are accepted by governments, legal authorities, and practitioners worldwide for the interpretation of most commonly used terms in international trade. They are intended to reduce or remove altogether uncertainties arising from different interpretation of the rules in different countries. As such they are regularly incorporated into sales contracts worldwide.
First published in 1936, the Intercoms rules have been periodically updated, with the eighth version—Intercoms 2010—having been published on January 1, 2011. "Intercoms" is a registered trademark of the ICC.
When commodities are shipped, there are many documents which accompany it. Some of these documents are required in order for the seller to be paid, others are required in order that the shipment can be imported into a foreign country, others provide assurances that the products meets the requirements set out in the contract and that has being properly handled and is being shipped aboard a seaworthy vessel. This is a list of the most commonly provided types of shipping documentation, along with explanations of their function.
A commercial invoice is made out from the seller to the buyer. It details the specifications of the product being shipped and the total cost of the shipment. This invoice is normally required in order for the seller to receive payment under the terms of a letter of credit, and functions as a tax invoice for the buyer.
Clean on Board Bill of Lading
A bill of lading is a document which is issued by a carrier or transporter. The document confirms the specifications of the shipment received, the port where it was loaded, and the destination port. It also outlines the terms of carriage. Bills of lading can be negotiable or non-negotiable. A negotiable bill of lading enables the holder of the bill of lading to change the destination port of the shipment. A non-negotiable bill of lading means that the shipment will be delivered to a specified port, and this port cannot be changed.
A packing list is simply a document which outlines the quantity and type of product shipped. This document is normally very detailed. In order for the seller to obtain payment it is important that the packing list is identical to the terms of the contract and those set out in the letter of credit.
SGS Certificate of Weight Grade, Quality, and Condition
SGS is an international independent inspection company which will inspect the sugar shipment before it leaves the port and verify that the sugar is of the correct weight, grade, quality, and condition as stated in the bill of lading, packing list, and contract. If all is in order, they will issue an SGS certificate which states that the product met certain standards when it was shipped.
Certificate of Origin
Phytosanitary certificate states that the shipment meets the Phytosanitary requirements which are in place in the country it is being exported to. Phytosanitary certificates are always required for plants and plant products, as these can represent a potential hazard to the ecosystem of the country to which they are being exported.
Loading / Stowage Supervision Certificate
A loading /stowage supervision certificate is offered by SGS, and covers the following elements of loading:
• A thorough check of the overall appearance of the cargo and any packaging.
• Verification that all product is being loaded against the contract details..
• Ensuring that proper handling procedures are followed during loading.
• Ensuring that the transport medium is clean and sanitary.
• Ensuring that the shipment is adequately stowed and secured, and that it is protected from the elements.
The loading/stowage certificate provides the buyer with peace of mind that not only was the product good condition when it left the mill or warehouse, but that it was handled properly prior to shipping. It is also important from the seller’s perspective that a loading/stowage certificate be obtained as it is additional proof in case of mishap in transit that all due care was taken to ensure successful delivery to the buyer.
Certificate of Radiation
A certificate of radiation states that the shipment is within internationally acceptable radiation levels.
A crop certificate states the crop from which the product was produced. This allows the product to be traced right back to the exact point of its origin where it was grown.
Shipping Company Statement
A shipping company statement relates to the ship aboard which the product will travel. It normally states that the ship is of a certain age, and that it is well maintained. This document is designed to provide assurance that the vessel is sea worthy.