Paper documentation has been the mainstay in the trade space for a very long time. But in recent years the conversion to a digital format of some elements has taken place. Is paper really on its way out?
Overseas trade has for many hundreds of years relied upon a full set of documentation to ensure the dispatch, shipping, offloading and receipt of goods by the paying customer. Such a requirement is unlikely to change dramatically, however, the form of that documentation certainly will. Currently the trade world is shifting from paper to electronic and in doing so is ushering in an era of vastly improved administrative efficiency, security and accessibility. The problem is that it is taking the industry a long time to let go of paper.
Why not drop the paper?
In theory, the preparation, dispatch and receipt of electronic documents facilitates cost savings and process efficiencies whilst reducing the potential for fraud. Back in 1997, Professor Paul Todd from the Law School at Southampton University wrote a paper in which he asserted that “it is much easier to dematerialise non-negotiable shipping documents, such as waybills, than it is to dematerialise the negotiable bill of lading, since it is necessary to send only information by a computerised system, rather than proof of title.” Professor Todd concluded in his paper that “it is possible, on the basis of existing technology and under the existing legal framework, to replace bills of lading by electronic documents, which can in principle afford to the parties security at least as great as existing paper documents.” He did however accept that changes may be required in some states to the rules on personal data protection, admissibility of computer-generated documents in court, and the transmission of encrypted data across national boundaries.
That was almost two decades ago. Today, the issues with digitisation of trade documentation are not just legal. There is also a persistent perception that electronic documents are somehow less secure than paper and that they are open to abuse by hackers and other cyber-criminals. Of course, there is an element of vulnerability with all electronic systems but those who hang onto this argument might like to consider the following. In 2014, an investigation was launched at Qingdao port in China around a private metals trading firm suspected of duplicating paper warehouse certificates in order to use a metal cargo multiple times to fraudulently raise financing. And a statement issued in December 2014 by the International Federation of Freight Forwarders Associations (FIATA) warned its members to be on the lookout for forged ‘master bills of lading’. A number of these paper documents had recently been presented to a consignee’s bank for payment, the documents “indistinguishable from the paper originals.” Paper has very little in the way of security.
Where are we now?
With this in mind, it is worth looking at the general state of play in the world of trade documentation. A trade conference in Singapore in August last year saw representatives of US food processing company, Cargill, and Australian mining company, BHP Billiton, take to the stage to discuss the use of electronic presentation (ePresentation) and electronic bills of lading in the export space. Back in December 2012, BHP Billiton was part of the first-ever fully electronic presentation of LC documents in mainland China, with partner the Sichuan Emei Ferroalloy steel mill and its receiving bank, China CITIC Bank (ANZ was BHP’s advising bank). Today, both BHP and Cargill are fully committed to ePresentation and Singapore session moderator, Ian Kerr, CEO of multi-bank trade solutions platform, Bolero, says the joint presentation “was really a call to action of the industry for the adoption of new technologies.” The general agreement on stage was “it is time the industry moved to electronic systems.” A few weeks later, at a trade conference in Beijing, speakers from China Minmetals, the Agricultural Bank of China, National Australia Bank and Bank of America Merrill Lynch’s global trade office for Asia Pacific gave a similarly enthusiastic pitch for the adoption of ePresentation by importers and banks. If major industrial players want it and banks want it, what is the hold up?
Kerr admits that it will require “alignment of all involved parties” before real growth is seen, not just in Asia but right across the globe. Until then, he says, the whole suite of ePresentation in trade can only be as fast as its slowest constituent. Unfortunately, it is often the demand by local customs and excise officials to see a paper document that prevents progress. Notwithstanding certain entrenched local practices, inroads into digitisation have been made in some countries, for example, there has been progress with certificates of origin used in agri-business, veterinary or export health certificates used when shipping livestock, and the Shipper’s Export Declaration for export control of items over a certain value (the latter is now known as an Electronic Export Information Filing). “It’s about gaining momentum,” he states.
As progress is made there has been more activity in terms of thoughtful solutions offered by the key players, particularly infrastructure providers such as SWIFT, Bolero and Essdocs.
Essdocs dates back to 1986 in its first incarnation as the Seadocs (Seaborne Trade Documentation System) project and was the first significant attempt to use electronic documentation for goods carried by sea. It never got beyond the trial stage and in any case, according to legal expert, Professor Todd, no provision was made for the transfer of contractual rights and liabilities to holders of the bill, apart from the original shipper. This made it “fatally flawed” contractually. Fast forward several years and with the problems ironed out, Essdocs claims to be the largest electronic bill of lading network globally (it says it is being used by more than 2,100 companies across 65 countries: the latest Asian banking signatory announced late last year was Agricultural Bank of China).
Rapidly gaining credence is the relatively new MT798, SWIFT’s trade envelope aimed at de-risking open account trading. It is basically a means of carrying the range of MT7xx trade messages used to initiate import letters of credit (LCs), standby LCs and guarantees, or to receive export LCs. The MT798 transfers large documents from corporates to banks via FileAct, with FIN messages allowing corporates to communicate with the banks on both sides of a trade. SWIFT reported in June last year that 11 corporates and 27 banks had adopted MT798 messaging.
As a key infrastructure provider, SWIFT is in a natural position to engage with the trade sector and also offers the Bank Payment Obligation (BPO). This “irrevocable payment undertaking” delivered by banks was first used back in 2012 by BP Chemicals’ Global Credit Manager, David Vermylen and his trade partners at Oman-based PET manufacturer, Octal, and Standard Chartered. It has since gained a degree of traction in the Asian commodities trade sector. In October 2014, UniCredit Bank and its correspondent bank, Bank of Tokyo-Mitsubishi, processed the first BPO deal ever between Germany and Japan, taking the total number of banks processing BPOs to 14. The UniCredit deal covered a transaction between German industrial mixer firm, RVT, and Mitsui Plant Systems (MPS) in Japan.
It is worth noting that the BPO struggled to get any traction until its rules of engagement, held in the SWIFT domain, gained unanimous approval in April 2013 from the International Chamber of Commerce (ICC) Banking Commission. André Casterman, Head of Corporate and Supply Chain Markets at SWIFT told Treasury Today at the time that the rules underpinning BPO “should be independent from our technology and legally binding so that counterparties can resolve potential disputes, should those arise.”
Another interesting provider of e-commerce solutions for the international trade finance community is eLCY. This is an independent vendor offering an auction site for the confirmation of LCs and direct corporate risk, and a multi-bank portal that enables the secure transmission of approved trade-related instructions and messages. Similarly, Global Trade Corporation (GTC) is a software firm providing multi-bank trade finance solutions for core elements such as LCs, guarantees and documentary credits and collections.
The possibility of full STP
“In a perfect ePresentation scenario, the exporter would ship the goods and apply for an electronic bill of lading to be issued by the carrier, with which the exporter would transmit the necessary documents electronically to the presenting bank,” suggests Gabriel Sham, Director GTS Product Head Trade Services Asia at RBS. “The presenting bank would check the documents against the relevant LC and forward the documents electronically to the issuing bank, which would in turn check the documents to ensure compliance with the terms and conditions of the LC before making the payment. The issuing bank would then forward the documents electronically to the importer, who would use the documents for obtaining clearance of the goods.” Throughout the transaction, he adds, the various parties would log into the same platform for access to the documents and for forwarding the documents to the next party.
For the buyer or importer, digitisation offers the opportunity to negotiate extended payment terms using dynamic discounting, says Sham. “This is because the buyers, usually multinational companies with better credit ratings than their suppliers, can use ePresentation or BPOs to leverage their lower cost of capital and provide financing to the suppliers.” In return, they may ask for better payment terms or a reduction in the cost of goods.
For the seller or exporter, a BPO lessens the non-payment risk “because the seller or exporter takes on the risk of a bank instead of the buyer.” With the BPO, the risk of discrepancy dispute and the costs associated with it are removed as data is matched automatically without manual checking of documents.
“Whether ePresentation or BPO, the immediate benefit is a reduction in turnaround time, which, depending on the payment terms, might mean that the buyer or importer is required to pay sooner,” notes Sham. “However, the buyer or importer can also benefit by the timely clearance of cargo without the need for an LOI (Letter of Indemnity).” LOIs are intended to allow delivery without a bill of lading. They tend to be seen as problematic by trade insurance bodies such as the International Group of P&I Clubs, largely because there have been a number of fraudulent uses of these paper documents over the years.
Despite the obvious advantages, the reality of today’s trade documentation is that paperless solutions are not deployed everywhere. Dermot Canavan, Head of EMEA Trade Products for RBS, feels that treasurers have many things to juggle right now and that the relatively low level of uptake of these solutions is more a matter of focus than a reflection of the products’ fitness for purpose. “There are only so many hours in a day, and they have to look at where they are going to get the biggest bang for their buck,” he suggests. But he adds that there is also “a degree of inertia” to contend with and a reluctance to invest in new systems. “Banks are looking to make ePresentation or the BPO more accessible at a low cost of investment,” says Sham. “However, while we can educate customers on the benefits and when to use them, the onus remains with corporates to decide when to adopt.”
With credit risk being now of paramount importance to just about every party, improving trade confidence is a persuasive argument for treasury action, especially where using the BPO, for example, can increase end-to-end security and potentially open new markets, notes Canavan.
If the law cannot always be relied upon to secure the transfer of goods when using a digital replacement for a bill of lading, it seems provident that the document itself should offer its own means for the transfer of contractual rights and liabilities. Sham notes that the providers of the Bolero and Essdocs platforms have set up internationally recognised legal frameworks based on a common user agreement to enable such a transfer. SWIFT messages issued in line with the appropriate central bank guidance also have a legally binding effect on the sender.
“Every party on Bolero signs up to our framework but there is no point in having a trade mechanism unless there is a legal framework to support it,” says Kerr. Back in 1996, when Bolero was a fledgling company, it commissioned a “significant number of leading law firms” to carry out what it says was “one of the most comprehensive studies into the use of electronic documents in global trade across multiple jurisdictions”. The study covered the major legal systems in common use. This included English Common Law, US Common Law, German/Dutch Law and Napoleonic Law as well as Mixed Jurisprudence systems (as found in Japan, for example), and also those of Emerging Jurisdictions such as in China.
It used the results of its tests of legal feasibility to form the basis for the Bolero Rulebook and governance of the title registry. This legally underpins its entire technical operation and is binding on those parties who have agreed to be bound to it. The rulebook is administered by Bolero members but crucially is fully compliant with ICC’s eUCP (Uniform Customs and Practice for Documentary Credits).
The level of appetite among Asian corporates to adopt full ePresentation generally depends on whether the corporate is an exporter or an importer, and on the volume of transactions, notes Sham. There is a cost involved in terms of supporting software and architecture and the cost/benefit decision lies in the hands of the individual company. However, he adds, digitisation is gaining momentum in the region. “We are seeing the concept of digitisation gaining traction with large companies in the mining and commodities sectors,” says Sham. “With more focus on operational and working capital efficiency, the interest in electronic trade documentation is gaining momentum and we could soon see more documentary flow of this kind between Western and Asian businesses.”
Spurred on by the success of China CITIC Bank and BHP Billiton (as mentioned above), in June 2013, Bank of China (BoC) and Agricultural Bank of China (ABC) executed their first fully electronic, end-to-end LC transactions, followed soon after by Industrial and Commercial Bank of China (ICBC). Since June 2013, the Bolero platform has been used in China for a number of commodity transactions, including a major iron ore deal for the Shagang Group and a $21m deal for Yanggu Xiangguang Copper Co. Ltd, the largest ePresentation deal to date by one of China’s Big Four. In January 2015, Switzerland-based ferroalloy distributor, RFA International, announced that it was moving from paper documents to ePresentation, via Bolero, to serve deals between its production units and clients at steel mills and larger foundries in 60 countries across Asia, Europe, the Americas and Africa.
ePresentation is the foundation that allows these deals to take place. As such deals increase in number, Bolero’s CEO, Kerr, whilst not predicting a paperless world anytime soon, does envisage a “tipping point” which will be driven by the corporates and banks “buying into the benefits.”
With some documentary forms clearly in advanced stages of digitisation and others needing to catch up, full STP in the trade space is not yet a reality. As Professor Todd stated in his work almost 20 years ago, it has been possible to partially dematerialise and to keep paper documentation for some purposes for some time. But, he added, doing half the job seems pointless once the reality is grasped that there is nothing that paper can do that computerised documentation cannot. “If you are going to dematerialise, dematerialise totally.” That argument, it seems, has still not gone away.