International Payments and Settlements Currency Transactions - Essay Example

INTERNATIONAL PAYMENTS AND SETTLEMENTS CURRENCY TRANSACTIONS insert Affiliation (Please insert) INTRODUCTION Business activities, across the boundaries of nations, involve movement of goods and services (goods) and a reciprocal movement of payments. There are several ways of handling overt payments, representing the true value of the goods received, and these are discussed in some detail in 'Section-1' of this paper. Detailed description and evaluation of the alternatives give a good overview of their operations, differences and relative merits and demerits. Increasingly, governments are concerned about covert payment in the form of bribes and favours to gain or continue business, or to influence decisions in favour of the paying company. Prestigious companies of the stature of Halliburton, Lucent Technologies and Monsanto face allegations of bribery to gain unnatural advantage in business and billions of dollars involved. A discussion on this issue including an assessment of the impact of the Foreign Corrupt Practices Act and the Organisation of Economic Cooperation and Development Convention forms 'Section-2' of this paper. The objective of this section is to understand the law and to suggest a way forward for businesses and governments to control this menace. Utilitarian analysis of bribery serves no purpose at all since there is no ground for choosing an option that allows for bribery. Section -1: Modes of International Payments International trade involves the exchange of goods and services ('goods') and international payments. There are several ways to make payment for goods received, each involving certain methods and procedures and the inherent advantages and disadvantages. The choice of mode of payment depends upon the contract negotiated between the exporter and the importer. Within this parameter, each partner to the agreement will tend to look for the most cost-effective and secure way of making the transaction. The usual methods of payment are through: a) Open Account Trading, b) Documentary Collection, and c) Documentary Credits Open account trading is the simplest where the supplier makes an invoice and the buyer pays. Rarely followed in trade, only between the US, UK, and some European countries, and there is no further reference to this mode in this paper. Documentary Collection Exporters, to obtain payment from customers in another country, use the collection services provided by banks. The International Chamber of Commerce has established a set of, standard and internationally accepted, rules known as the 'Uniform Rules for Collection', (1995 Revision, ICC publication No. 522). The bank may be required to handle financial documents such as the bill of exchange or promissory note and other secondary documents like the Bill of Lading, Invoice, Certificates of Inspection and so on. When both types of documents are to be collected, it is called documentary collection. Clean collection is of only financial documents. The crucial financial document is the 'Bill of Exchange'. It is an agreement to pay a fixed sum by the buyer to the seller on a fixed date. It is an instrument made out in writing and signed by the maker (drawer, the importer) directing another person (drawee, usually a bank) to make payment to a third party (payee, the exporter). Called 'Bill of Exchange' in International law, it is called a 'Draft' in the Uniform Commercial Code. A bill of exchange differs from a promissory note, in that, it is a firm commitment to pay rather than a promise to pay and a third party - the drawee is involved. A bill of exchange may also be subject to meeting certain conditions by the payee. A draft has no value unless the Importer accepts it. However, the payment made immediately (Sight Draft, or Documents against Payment D/P) or at a mutually agreed future date, endorsed on the draft (Time Draft, or Documents against Acceptance D/A, or Usance). The advantages of this mode of payment are: It is relatively safe for exporter offering a measure of protection. The exporter retains control over the goods until the importer accepts the bill or pays for it. The Bill of Lading is a title to the goods, and handed over only on acceptance of the bill of exchange, or payment or the issue of a promissory note. Exporter can raise finance against the draft until it becomes due for payment by offering the instrument as security to a lending agency. With this facility, he is able to offer better terms to the Importer and to manage his own cash flow. Collections are cheaper than documentary credits since no commissions or margins are paid to the intermediary banker. This mode is quick because the collection bank is obliged to present documents immediately and present the accepted drafts for payment on the date of maturity. This method also has some disadvantages, and these are: The importer may refuse to accept the bill of exchange on presentation. In this situation the has no recourse but to either abandon the goods or to arrange for their warehousing and reshipment. Remittance of documents and collection times can be slow due the drawer bank being in a different country. To add to the normal delay some countries have a tradition of not accepting bills of exchange until the goods have arrived. An exporter can raise finance and offer better terms to the importer to sweeten a deal. This is a costly affair - and will ultimately reflect in either the cost of the goods or their quality. Any expense involved in protesting a bill is to the account of the exporter. He can only protest if the benefits from the protest justify the cost of making such a protest. Documentary Credit Better known as a Letter of Credit (LC), it is a written undertaking by a bank on behalf of an importer to pay the exporter an amount of money within a specified time, provided the exporter presents documents in strict accordance with the terms laid down in the LC. A LC may be revocable, in that the importer can amend or even cancel it without notice to the exporter and therefore do not offer any safety to the exporter. Such LC's are extremely rare. The normal LC is irrevocable, which, once issued cannot be amended or cancelled, unless it is agreed by both parties in writing. For example in case there is a delay in delivery due to some reason and this delay is acceptable to the importer then the delivery date condition of the LC may be amended. This offers the maximum safety to the exporter provided he does not default on the delivery schedule, Quality inspection requirements, and any other terms that the LC specifies as also the preparation and presentation of the required documents in perfect order. In the case of an LC, four parties are involved, the drawer (Importer), the drawers bank, the Exporter (payee) and the exporters bank. The two banks may be different or branches of the same bank in the two countries. In some cases, the bank receiving the LC may not recognise the issuing bank and require the confirmation of yet another bank to act as a second guarantor to the payment. An LC may also be paid immediately (Sight) or on a later date (Usance). The importer, however, loses all say in the release of payment to the importer once the latter has presented the documents. It is easy to see that the LC is an instrument more tuned to save the interest of the exporter. The major advantages of an LC are: It instils a great degree of confidence and credibility since there is international understanding and acceptance of the 'Uniform Rules of Collection' in both the exporter and importer. It provides a much stronger degree of safety, especially for the exporter as compared to the bill of exchange. The LC is like a bank guarantee. It is also possible to use an LC used to raise pre-shipment credit, to help fund the manufacture and despatch of goods. Detailed instructions to the bank, as to the documents required, eliminate the buyer's risk. These can and usually do include detailed inspection of the quality and quantity through a third party, Insurance of the shipment and so on. By fixing a last date of shipment in the LC conditions, the importer can insist and get timely delivery. Since the exporter can get pre-shipment credit, the importer can negotiate better credit terms. Even LCs have a few disadvantages, these are: The goods might be defective, with the defect not noticed at the time of third party inspection. The importer has a fixed credit limit with his bank. With the opening of an LC, his credit limits get curtailed affecting domestic operations. The cost of effecting payments through LCs is much higher as compared to any other method of payment. With the detailed description of the two main methods of payment provided above it is easy to comprehend the differences between the two. Section -2: Significance of Utilitarian Analysis of Bribery "From early 1994 through early 2001, the United States Government learned of significant allegations of bribery by foreign firms in over 400 competitions for international contracts valued at $200 billion. The practice is global in scope, with firms from over 50 countries implicated in offering bribes for contracts in over 100 buyer countries during the seven-year period" (Fighting Global Corruption, 2001). The issue is of moral and ethically correct behaviour and does not lend itself to Utilitarian Analysis. Giving of bribes is not an option at all. Therefore, there is no purpose in evaluation of consequences, estimation of probability and estimation of utility of such an option at all. Corruption in any form is bad but international corruption has the following deleterious effects on the business environment: New investments stop and economic development slows down since the productivity of money falls off. Cost of running a business increases and reduces the competitiveness of the organisation. In order to lower cost compromises are made in the quality of products and services and in the long run the business suffers shrinking markets and customer base The Foreign Corrupt Practices Act ("FCPA", or the "Act") enacted in 1977 was substantially amended in 1988 and 1998. After enactment of the FPCA, the US congress was concerned about US companies abroad. In 1988, congress directed the executive branch to commence negotiations in the Organisation of Economic Cooperation and Development (OECD) to make laws similar to the FCPA. In 1997, the US and 28 other countries signed the Convention on combating bribery of foreign public officials in international business transactions (Global Trade Law,2004). Before the FCPA there were other laws dealing with fraud and bribery, namely The Securities Act of 1934, Mail Fraud and Wire Fraud Act, Internal Revenue Code, False Statements Acts and so on. In 1998, the US ratified the OECD convention on combating bribery of foreign public officials in international business transactions by enacting the international Anti-Bribery and Fair Competition Act of 1998. FCPA places special constraints on US companies represented by their Officers, Directors, employees and agents whether employed by the home office or their branches and subsidiaries in foreign countries. It requires ethical behaviour, disclosure of any practice that may attract the provisions of the Act. Payment to third parties attracts the special provisions of the FCPA that prohibit any payment to a third party or intermediary, 'even if the payer is not certain that the payment will be shared with a foreign official'. The Act also prohibits actions, usually described as "conscious disregard", "wilful blindness" or "deliberate ignorance". Some types of payments, made to facilitate governmental action routinely performed, for example expediting issue of permits and licenses are allowed. The payment has to be of some reasonable and logical amount compared with the action performed. Routine governmental action does not include any decision of a foreign official to award new or continuing business, but does include activities that are legal under the foreign countries written laws. Reasonable and bona fide expenditures directly related to The promotion, demonstration, or explanation of products or services, or The execution or performance of a contract with a foreign government or agency The following actions or lack of them will trigger a reaction from the FCPA authority and are termed as 'Red Flags' Refusal to agree, in writing, with the FCPA compliance Unusual payment patterns or financial arrangements Foreign country or foreign official with a reputation of corruption Foreign official or agent with poor or no books/records Sharing profits with or making payments to undisclosed or unnecessary third parties A foreign agent who is a government official or closely related to one or involved with the politics of the foreign country Lack of qualifications on the part of the Joint venture partner or representative (Global Trade Law, 2004). In United States v. Kay, (359 F.3d 738, 5th Cir. 2004), the US Courts of Appeals for the fifth circuit clarified the scope of the FCPA anti-bribery provisions, holding payments made to foreign officials for the purpose reducing a US company's liability for taxes and duties could violate the FCPA, so long as the bribe had a "Business nexus". The court found that payments intended induce foreign officials to reduce taxes or custom duties could also assist a company to obtain or retain business. In 2002, the US congress passed the Sarbanes-Oxely Act that made sweeping reforms in corporate governance and accountability. Section 302 of this enactment requires CEOs and CFOs to certify the accuracy of their companies' financial statements. The certification requirements include disclosure of any fraud involving persons with significant role in corporate internal controls. FCPA violations, a type of fraud, trigger this requirement. Sarbanes-Oxley requires companies to develop and oversee internal controls and compliance programs, including the FCPA. In December 2003, the terms of the UN 'Convention against Corruption' (the "Convention"), the first global treaty to address corruption, were finalised. The convention signed by 111 countries has received ratification by only eight countries (as of October 2004). The Convention will come into force ninety days after it is ratified by 30 countries. The US has not considered ratification so far. Since US laws already incorporate all of the convention's mandatory provisions no amendment of the FCPA would be required. (Wiley, Rein & Fielding, 2004). The enforcement history, under the FCPA, demonstrates a willingness to prosecute large and medium-sized companies, and high-level officers of those companies, alleged to have been involved in violations of the FCPA throughout the world. The illegal payments alleged have ranged from US$ 22,000 to US$ 10 million. These illegal payments represent varying percentages of up to 40 per cent of the business obtained. In most if not all prosecuted cases, the payments have taken the form of money, most often paid into third-country bank accounts (Corruption - Why it Matters, 2001). Most of the prosecutions so far have involved direct and overtly corrupt payments to foreign government officials. Major companies across a variety of industry have been the subject of criminal FCPA prosecution. However, there also has been an advance in the sophistication of the mechanisms used in bribery itself. Detection and enforcement have also evolved with time. It is very difficult to determine as to what extent bribery of foreign governments and nationals has come to the surface so far. Generally, the pattern has changed to more subtle means of bribery involving intermediaries, complex transactions and misstatement of business and promotional expenses. This has led to increasing number of suspicion indicators - the so-called 'Red Flags' that companies need to look for and a wider array of safeguards to be employed. The FCPA also imposes liabilities for bribery committed by third parties acting as agents. This has prompted the introduction of 'due diligence' by companies while employing agents, representatives and business partners who may expose them to the risk of prosecution. In this scenario, it is necessary to evolve a set of guidelines that may serve as 'Best Practice' guidelines for companies involved in trade in foreign countries. A suggested best practice list is: Train personnel to understand the FCPA and compliance with the different provisions of the Act Have an agreement, in writing, with all agents, representatives and business partners that they have understood and will ensure compliance with Act. Avoid all cash transactions and keep detailed and accurate books of accounts Have thorough audits from time to time Due diligence in hiring or appointing personnel in foreign offices or those involved in dealing with foreign governments, companies, and personnel. Check the antecedents of all foreign nationals employed in its businesses and offices abroad Watch out for competitors and whistleblowers In an era of increasing global trade, the SEC and DOJ investigations, prosecutions and civil enforcement actions under the FCPA are bound to increase. At the same time, work needs to be done on making the FCPA a sharper and a more focused instrument. The accounting and auditing professions must have a sharper focus towards the FCPA and the fines and penalties must be raised to higher levels. All countries need to be pressurised to ratify and follow the 2003 UN Convention against bribery. A few more high profile prosecutions of high-ranking officials and politicians followed by exemplary punishment will also help. It is only awareness, education and training that will help in the long run for the cost effectiveness of the enforcement machinery is already under debate. DEADLINE: FRIDAY 12 MAY 2006 References Fighting Global Corruption: Business and Risk Management, Released by the Bureau of International Narcotics and Law Enforcement Affairs, May 2001. Report Home Page (accessed on May 10,2006) Corruption: Why It Matters, US Department of Commerce website. http://www.state.gov/p/inl/rls/rpt/fgcrpt/2001/3144.htm. (Accessed on May 11,2006) (Wiley Rein & Fielding, Foreign Corrupt Practices Act, Handbook, 2004, excerpts on http://www.ffrsj.com/cmemos/216659.htm ) (Accessed on May 10, 2006) http://www.reingex.com/en67.asp (Accessed on May 10,2006) Global Trade Law, Website http://www.global-trade-law.com/ITRN%20711(Fall%202004).Project%202.FCPA%20(Bribery).ppt (Accessed on May 10, 2006) Biblography Mullineux,A.W.; Murinde, V (2003) Hand Book of International Banking, Northampton, MA Edwards Publishing Inc. Global Trade Law, Website http://www.global-trade-law.com/ITRN%20711(Fall%202004).Project%202.FCPA%20(Bribery).ppt (Accessed on May 10, 2006) Read More