Safeguarding Trade and Trade Finance Operations in the Covid-19 Regime
(Published in the Financial Express in April 2020)
Professor Shah Ahsan Habib
Estimations, identifications, forecasting, propositions and policy interventions are consistently going on by the international and national entities, bodies, organizations and governments with the common goals of safeguarding trade and trade-financing related challenges that arises with the invent of Covid-19 in China. Trade implication has drawn immediate attention throughout the globe because of the fact that China is a massive trading partner in the global economy as a manufacturer and exporter of consumer products, and has become the main suppliers of intermediate inputs for manufacturing companies throughout the globe. Today, all the major trading partners are in the firm grip of Covid-19, and as the trade-financing providers, banks have come across major challenges.
Banks facilitate payment and financing services-called as trade services, and undertake related risks through their trade financing products. Disruptions of trade transactions brought in problems with timely shipment; delay in transportation and releasing goods; troubles in sending, receiving and delivery of documents; failures in the commitment of payments; defaulting loan repayments etc., and resulted in operational challenges in international trade services offered by banks and financial institutions. Certain operational challenges and issues of trade financing need immediate attention of the policy makers and other key stakeholders to minimize potential loss in trade and trade financing activities.
Trade financing activities offered by banks to the traders take place within very formal setup and regulatory arrangements. These transactions rely almost exclusively on hard-copy paper documentation to process payments and then ultimately used to clear the release of goods by the buyers. In most global jurisdictions, electronic trade documents are not allowed and practiced or their legal status is unclear. It is obvious that social isolation and other health related necessary interventions have significant negative implications for the processing of existing trade financing transactions with the typical requirements of hard-copy submission and examination of documents, and face to face interactions with the clients. Severely disrupted or suspended courier or postal services are adding to the concerns. All these have significant implications for global trade flows and thus disrupting supply chains.
In this evolving and increasingly uncertain environment, banks, traders and policy makers became ambiguous and skeptical on the interpretations of ‘certain situations of commitment failures’ within the regulatory frameworks and guidelines that are commonly published by the International Chamber of Commerce (ICC). On the way to address these challenges, ICC issues a guidance note that basically are the views of the experts in the management of trade finance transactions. However, it has clearly been noted, ‘all decisions taken with regard to a trade finance transaction that follows this guideline will be understood to be taken under the full responsibility and agreement of the parties involved’. Regarding the query, whether Covid-19 may be considered to be an interruption of the business or an event that is beyond the control of banks, as is referenced in the force majeure provisions of ICC rules (UCP, eUCP, URDG, URC, eURC, URR and URBPO), the stance of ICC remained in line with the opinion provided back in 2010 following the volcanic eruption in Iceland that caused severe delays in the presentation of documents under numerous trade finance transactions: ‘It must be noted that this is not an event that is covered by the force majeure rules of UCP 600 (article 36), URDG 458 (article 13) and URC 522 (article 15). The concerned banks, guarantors and instructing parties are still open for business; it is the documents that are being delayed in transit to them.” It is however, recognized by the ICC that banks are already operating with reduced working hour and staffs, and as the situation continues to evolve, some banks may even be closed for certain period; and notes, it is not for the global body to pronounce whether this situation is a force majeure event rather it will require a court or tribunal with jurisdiction, or a government or regulatory authority to make a decision to declare an event as force majeure. ICC suggests for resolving most issues through dialogue between the commercial parties. Regarding other associated issues like delivery and examination of documents, liaison with applicants and beneficiaries, different places for presentation, document examination period, definition of a banking or business day etc., ICC stands for facilitating and enabling good-faith trade, under which all parties are encouraged to continue to interact on this basis and to leverage rules as well as sound commercial practice to find solutions. The global trade body however emphasized that any alternate solutions for the handling of a trade finance transaction subject to ICC rules require the express agreement of the parties under LC, guarantees or documentary collection, and terms of all agreed alternative solutions should be clearly documented to avoid any potential disputes.
Ultimately, roles of the national regulatory authority is the key. To take that forward, ICC issued an urgent memo as steps to the governments and central banks of the global economies on April 06, 2020 that raised due concerns about the impact of COVID-19 pandemic on the functioning of the global trade financing activities. ICC calls on all governments to take emergency measures to immediately void all existing legal prohibitions on the use of electronic trade documentation; and as a temporary measure, void any legal requirements for trade documentation to be in hard copy. It is to be noted that some governments have already taken steps of this nature in response to the Covid-19 pandemic. Subsequently, ICC urged policy makers to go for constitutional arrangements and necessary legislative or executive actions to adopt legal frameworks to clarify the functional and legal equivalence of electronic and paper-based documents; and to consider implementing the 2017 United Nations Commission on International Trade Law on Electronic Transferable.
Undertaking customized temporary policy initiatives and long-term steps regarding presentation of electronic documents in the country might help repairing the ongoing damage in trade financing activities and bringing notable positive changes in the trade finance processing by banks. Operational bankers need to go through the documents circulated by the ICC. It is however, obvious that the real solutions of the challenges will have to be found through interactions and communications amongst the traders and banks under the guidance and support of the central bank and the government. Legal enforceability of the purchase/sale contract, that are not common in the country, would have assigned greater bargaining power and responsible behavior on the part of traders in this scenario of uncertainty. For handling fraudulent activities in LC, need for an applicable supportive local laws/set of rules alongside universally accepted guiding rules might be strongly felt in the near future. Subsequently, for ensuring safe and sound legal environment on trade financing, the policy makers needs to ratify the UN Vienna Convention on Contract of Sale, and enactment of a separate law/sets of rules on LC to complement ICC publications.