Helping hands in international trade finance

Three international trade finance professionals--from Wachovia Bank, SunTrust Bank, and ABN AMRO-provide insights and cautions on getting involved in this increasingly complex area of financial services and on working with the Export-Import Bank of the U.S.

A few years back, a TV ad featured a 60-something Italian woman standing outside her rustic home in a little village. Her dress suggested she was a typical contadina (peasant). You soon learned that the woman had an international wine business conducted through the Internet.

Although much of the mystique surrounding international trade has gone out the window in recent years, the complexity of deal structures and regulatory requirements has streamed right back through the same window. As more and more businesses of all sizes count on their banks to grow with them as they move into exporting outside the U.S., these same banks are counting on larger banks or organizations like Ex-Im Bank to navigate the waters and mitigate the risks of trade finance while allowing them to retain important customer relationships.

Wachovia Bank and its predecessors have been active in international trade for more than 200 years, reckons John Sapoch, director and manager of Wachovia's Structured Trade Finance team of a dozen professionals located throughout the Eastern U.S. The bank has maintained a specialized unit for more than 25 years to work on trade finance deals that are larger in dollar size, longer in tenor, or involve some of the more challenging emerging markets where the bank extends credit. The group also is responsible for managing Wachovia's use of risk mitigation programs whose acronyms alone can be intimidating. There are U.S. government programs, such as Ex-Im Bank (Export-Import Bank of the U.S.), OPIC (Overseas Private Investment Corporation), and CCC (Commodity Credit Corporation, an agency of the USDA); multi-lateral agencies, such as EBRD (European Bank for Reconstruction and Development), ADB (Asian Development Bank), and IDB (Inter-American Development Bank): and private credit insurance providers.

Buddy Baker is director of Technical Advisory/Compliance for the Global Trade Advisory unit of ABN AMRO Bank, which has been financing international trade since before ABN AMRO was chartered as a bank.

Originally chartered as a trading company by Willem I, King of the Netherlands, to succeed the Dutch East India Trading Company, ABN AMRO has been in the business for more than 180 years and in the U.S. has six professionals on its Structured Trade Finance staff. Relative newcomer SunTrust Bank still can boast 30 years of involvement in international trade finance and, like Wachovia and ABN AMRO, has its own "shop." Susanne Keough is vice president and manager of SunTrust's Trade Finance unit.

What justifies having your own shop? "It is relatively simple for a smaller bank to engage in trade finance if it partners with an 'upstream' bank that offers the appropriate services," says Baker. "The more difficult decision is whether to develop in-house capabilities. International trade finance is becoming more and more automated, and the ante to offer competitive services is now millions of dollars just for hardware and software. Of course, you must then add the expenses of recruiting and retaining employees with sufficient experience and expertise to offer clients satisfactory service and to keep the bank out of trouble. Many banks that have been in this line of business for years--some with hundreds of customers--are finding they cannot justify the overhead anymore. They simply don't have the scale to be able to recover their investment."

Wachovia and SunTrust work with clients of all sizes and in a variety of industries. Wachovia clients range from small commercial concerns to middle-market and large corporate clients. "Our export clients have differing levels of sophistication when it comes to such financing programs, and some may need more or less handholding than others," says Sapoch.

Keough says that some industries are more conducive to structured finance programs than others, noting that SunTrust works mostly with clients that export construction equipment, industrial equipment, aircraft, agricultural equipment, and similar products.

ABN AMRO targets multinational corporations and mid- and upper-tier correspondent banks. "Our reach into the middle market is through partner banks and our subsidiary banks--LaSalle, Standard Federal, and, in South America, Banco Real," says Baker. A competitive factor for ABN AMRO in serving both multinational corporations and other banks is having branches in all 60 countries to which they or their customers export. "This allows one-stop shopping, avoiding the need for a bank to establish a complex set of correspondent relationships with individual banks [and performing the appropriate due diligence] in each country."

Working with Ex-Im Bank. All three institutions work with Ex-Im Bank, as do dozens of other financial institutions. "Establishing a relationship with Ex-Im is not difficult," says Sapoch, referring to Ex-Im's eight regional offices and business development officers who are eager to help. "The more challenging task is developing a thorough understanding of the specific terms and requirements of these programs and how they are best applied to meet the needs of your export customers. Most active users of Ex-Im have established specialized units staffed with experienced professionals who market Ex-Im products. These individuals also are responsible for providing ongoing loan servicing/monitoring to ensure compliance with the various program requirements. If using Ex-Im's credit insurance products, it's important to establish a relationship with an experienced credit insurance broker who can serve as a liaison with Ex-Im staff, assist with Ex-Im's application process, explain the various documentary requirements of the policy, and assist in claims as necessary."

"All trade finance staff sales and support--must be trained in how to work with Ex-Im Bank," agrees Keough. "This includes participating in Ex-Im's Lenders Training Seminar and the Ex-Im annual conference, and frequent contact with Ex-Im and the brokerage community on program updates."

The key to winning the Ex-Im guarantee and direct loan deals is working with the importer rather than the exporter, advises Baker. "The importer is actually the borrower and chooses how to finance his or her purchases. Going with a bank that puts together a program covering all of the importer's purchases from the U.S. will almost always be more attractive to the importer than working with numerous banks representing all of the exporters."

Acknowledging that Ex-Im Bank offers unique and much-needed support for financing exports, especially medium- and long-term transactions, Sapoch says the lender must bear in mind that Ex-Im Bank is a government agency. "They do not have the same commercial motivations as private financial institutions," he says. "Broader economic impact issues, environmental concerns, 'additionality' tests, and OECD (Organization for Economic Cooperation and Development) guidelines all affect deal terms and application approvals. Turnaround times on applications and decision making can be frustrating if an applicant doesn't have realistic expectations."

Sapoch lists four important rules when working with Ex-Im:

1. Once it is booked, continue to service the loan with the same diligence as for any commercial loan not guaranteed/insured by Ex-Im.

2. Be aware of all reporting deadlines.

3. Pay insurance premiums and/or guarantee tees as they are due.

4. Don't agree to any requests from the borrower to amend loan terms without first getting Ex-Im Bank approval in writing.

Additional hurdles in international trade finance. "Know Your Customer is never more important than when working in international trade finance," says Keough. "In addition, it may be prudent to engage third-party service providers--such as attorneys and notaries--in the borrower's country to assist with due diligence and loan closing."

Sapoch concurs, saying that best practices would include the development and implementation (with documentation) of very strung internal controls and BSA/AML (Bank Secrecy Act, anti-money-laundering) procedures and staff training.

Baker adds that conducting a due diligence review on a foreign bank, especially one in an emerging market, must include a review of that bank's anti-money-laundering policies and procedures and the regulatory environment in which it operates.

"As far as USA PATRIOT Act and BSA compliance go, the issue with trade transactions is that they, by nature, involve at least two parties," Baker says. "The question is, who, in a trade transaction, is the customer requiring identification? We recommend, as a best practice, that an institution adopt the model practice published by the International Financial Services Association [IFSA]. This document was developed by representatives from many of the largest trade finance banks in the U.S., with review and comment from much of the IFSA membership, whose institutions provide the vast majority of trade finance services for the U.S. So what we are recommending is consistency with this group of banks.

"Our biggest challenge in financing international trade is developing products that meet our customers' needs for supply-chain management," Baker continues. "Customers are gradually migrating toward conducting business electronically and using open account terms. It is incumbent on us to support our customers with new products for facilitating and financing their trade business as their practices change. Banks that confine their services to 'traditional' products, like letters of credit, will find they are no longer providing sufficient value to keep their relationships. Although financing domestic receivables and inventory has been commonplace for some time, financing cross-border open-account receivables and inventory that is in another country or in transit between countries must take into account the laws, regulations, and practices of multiple countries.

"Furthermore, our customers need to make their processes more efficient by automating as many procedures as possible and by improving their ability to track goods in transit. Our systems must be able to interface with theirs and also with those of their suppliers, customers, freight forwarders and transportation providers, inspection agencies, insurance providers, and so forth. We then must add value by offering additional services, such as matching purchase order data with the invoice, packing list, and waybill data. When it comes to such automation, product development can be quite expensive. The challenge is to understand where the market is going so that we develop innovative, useful products that deliver neither 'too little, too late' nor 'too much, too soon.'"

Contact Foster by e-mail at [email protected].

COPYRIGHT 2005 The Risk Management Association
COPYRIGHT 2005 Gale Group