Chapter Four Collection

Definition Collection means the handling by banks of documents in accordance with instructions received in order to (1)obtain payment and /or acceptance or (2)deliver documents against payment and /or against acceptance. ( 3)deliver documents on other terms and conditions.

Parties to collection operation Principal = exporter = seller = drawer =remitter Remitting bank = exporter’s bank in exporting country Collecting bank = importer’s bank in importing Importer = buyer = drawee Presenting bank = bank at importer’s place

How to release documents? Flow chart of Documentary Collection importer /drawee exporter/ principal 1Deliver goods 11Deliver goods Carrier 10Hand in B/L 2B/L 6Present 7Pay 8Release Documents D/A or D/P How to release documents? 4Rept. 3Documents and Instructions (Application) 5Collection Order or Instruction & docs. Collecting Bank Remitting Bank 9Credit Advice or Debit Authorization

Buyer must take delivery of goods with bill of Delivering documents = Delivering goods Buyer must take delivery of goods with bill of Lading(B/L), which is receipt issued by carrier when receiving goods delivered by seller for transportation. Importer must take delivery of goods against it. Without B/L, buyer could not get the goods at the carrier.

For sight payment, only when buyer pay the sight draft drawn by seller would collecting bank release documents(B/L) to buyer. For time bill, only when buyer accepts time draft drawn by seller would collecting bankrelease release documents to importer.

There are three kinds of collections,namely : (1)clean collection (2) documentary collection (3)direct collection

clean collection means collection of financial documents not accompanied by commercial documents. Financial documents mean bills of exchange ,promissory notes ,cheques. commercial documents mean invoice ,transport documents, documents of title or other similar documents.

documentary collection means collection of (1)  financial documents accompanied by commercial documents,or (2)  commercial documents not accompanied by financial documents.

direct collection: the documents under direct collection are remitted by the seller directly to the collecting bank

ICC Publication No.550 says that the collection from attaching with the documents under direct collection must indicate that: (1) the collection is subject to URC No.522.and (2) the collection is to be treated by the collecting bank as through it was received from the remitting bank.

Instructions for proceeds received in the collection instruction The remitting bank has maintained an account with the collecting bank , When collected ,please credit our account with you under your cable/airmail advice to us.

                                              Open an account When collected ,please credit our account with you under your cable/airmail advice to us. Remitting bank Collecting bank

The collecting bank has maintained an account with the remitting bank , please collect the proceeds and authorize us by cable/airmail to debit your account with us.

                                              Open an account please collect the proceeds and authorize us by cable/airmail to debit your account with us. collecting bank Remitting bank

The remitting bank has maintained an account with the X bank , please collect and remit the proceeds to X bank for credit of our account with them under their cable/airmail advice to us.

                                                             please collect and remit the proceeds to X bank for credit of our account with with them under their cable/airmail advice to us. Collecting bank Remitting bank Open an account Open an account X bank

Collection bill Drawer:exporter Payer: importer Payee: exporter/remitting bank/collecting bank Indorsement: 1. 受益人---背书给托收行，托收行再背书给代收行； 2. 托收行----背书给代收行 3 .代收行-----不须背书。 没有代收行的同意是不能作成代收行为付款人的托收汇票

The payee of the clean bill must make a blank endorsement and the remitting bank must make a special endorsement to the collecting bank before sending it to the latter.

The responsibility of the principal(consignor drawer) is that the party must prepare the collection instruction in his application to ensure the terms for the delivery of documents are clearly and unambiguously stated.

The responsibility of the banks are that banks are only permitted to act upon the instruction given by the principal in the collection instruction and in accordance with URC522.

Documents against documents D/A Importer Exporter 6Collecting bank keeps accepted draft for exporter and at maturity , presents it for payment. 6Present accepted draft for payment 3Present time draft for acceptance 7pay 4Accepted draft 5docs 1Time draft & other docs+ application = goods The risk is that buyer would not pay after taking the goods，though goods have been taken away. Remitting bank Collecting bank 2Collection order & time draft & docs

Document against payment D/P at sight Exporter Importer Only one presentment for payment 3Presents for payment 1Sight draft & other docs，etc. 4Pay after checking 5docs So, it is demanded that payment must be made on first presentation. Importer would try to delay payment to wait the arrival of goods 2Collection Order & sight Draft and docs Remitting bank Collecting bank

buyer gets documents. Why doing so ? Documents against payment at tenor D/P at tenor Importer Exporter 5After payment at maturity, buyer gets documents. 3Present time draft for acceptance 4No docs after acceptance 1Time draft & other docs， application 5pay 6docs Why doing so ? Remitting bank Collecting bank 2Collection order & time draft and other docs

advice of delivery from harbor authority and not Example of D/P at tenor China exporter Italy importer 5About 40 days for sailing 1Time draft & other docs & application 3Present time draft for acceptance 5Buyer would not pay until goods have arrived at Italy. 6pay 4No docs after acceptance 7docs 5So buyer would wait for advice of delivery from harbor authority and not pay until receiving it Remitting bank Collecting bank 2Collection order & time draft and other docs 2About 1 week for mailing

Documents against time promissory note made by buyer Importer Exporter 6Collecting bank keeps promissory note for seller and at maturity, presents it for payment. 3Advise and demanding documents against time promissory note made by importer. 1Apply Docs. 6Present time Promissory Note for payment 7pay 4Time promissory note 5docs The risk is that buyer would not pay after taking the goods. Remitting bank Collecting bank 2Collection order & docs demanding time promissory note made by buyer

Presenting bank Tianjin importer USA exporter No correspondent relationship Correspondent relationship 3Forward documents 1Application & documents Correspondent relationship Hong Kong Collecting bank USA Remitting bank 2Collection order & documents

In case of need Case of need Importer Exporter Case of need might XXX Importer Exporter Case of need might be seller’s close friend or agency in importing country, who would arrange shipping back the goods or selling the goods to other buyer in importing country. 4refuse 3present 5present 6Pay & take over docs. 1Documents (Application) Collecting Bank Remitting Bank 2Collection Order and documents 2In case of need, look for XXX

Exporter might have mentioned “case of need” on the draft when issuing it if exporter expects the possibility of importer’s dishonor. Exchange for USD4000 New York, 24 Feb,2000 At sight pay this first Bill of Exchange (Second of same tenor and date unpaid) to the order of ourselves the sum of US dollars Four Thousand only To The Chase Bank NA, For Sherman Motor Inc. New York New York Linsen Zhang In case of need refer to DEF Co., 139 St.LM, New YORK

Carrier Types of collection(1): Documentary Collection Buyer/ Seller/ drawee Seller/ principal 1Deliver goods Carrier 8Deliver goods 7Hand in B/L 2B/L 5present 6Pay 5D/A or D/P 3Commercial docs + financial Instrument OR not + Application Sometimes,importer pays against commercial documents, e.g. commercial invoice without financial draft to avoid stamp duty. Documents are released to importer against his payment or acceptance/ Collecting Bank Remitting Bank 4Collection Order & docs,esp. transporting documents + bill of exchange or not

Type of collection(2): Clean Collection Importer Exporter Post office 1Send sample 3Delivery advice 5sample 2Rept. 4Hand in Delivery adv. 6Only draft +Application 9Pay 8Present draft 1,2,3,Post receipt is sent to buyer’s country together with sample by post office. 4,5,Importer takes the advice to post office and get sample against it. Dividend warrant and time promissory note can also be used in clean collection Collecting Bank Remitting Bank Payment must be made through bank 7Collection Order & draft

Carrier Types of collection(3): Direct Collection Buyer/ Seller/ drawee Seller/ principal 3Deliver goods 9Deliver goods Carrier 4B/L 8Hand in B/L 5Fill in collection order and forward documents and collection order directly to 1Sign long terms contract with bank 6present 2Prenumbered presigned collection order 6D/A or D/P 7Pay As if it is sent by remitting bank whose responsibility is the same as under documentary collection. Collecting Bank Remitting Bank save much time

in by exporter filled in by remitting bank Collection order = Collection Instruction Exporter/ principal 1,2 They are the same in contents, for remitting bank carry out order given by exporter (principal). Banks are not responsible for whether payments can be collected or not so long as they carry out the order of the principals. 1Application filled in by exporter Collecting Bank Remitting Bank principal 2Collection Order filled in by remitting bank

Sight bill: presentation for payment Bank’s responsibility Banks must act upon the instructions given by principals 2. Banks check the documents received against order to see if there is any missing The principal must be informed of any documents missing. 3. Banks are not responsible for examining the contents of documents, e.g. any discrepancies between docs. Sight bill: presentation for payment Time bill: presentation for acceptance, then, presentation for payment

Risks for exporter under documentary collection importer 2Additional costs if shipping back the returned goods Apply & docs . 1. Refuse to pay or accept time draft on some small inadvertent infraction(疏忽的小错） of the sales contract. 1Refuse or demand Price cut down present 2. Demand deep cut down of price, or refuse to accept the goods. 3. A heavy storage charge, fire insurance, demurrage （滞期费） and great expenses and time delay if court action is taken. Collecting bank Remitting bank Collection order & documents

Carrier Exporter Importer 3,4 The excuse might be defective Risks for exporter under time payment Exporter 3Take delivery of goods with the documents Importer Carrier 4Deliver goods Apply & docs . 3,4 The excuse might be defective quality and ask for cut down of price or not having foreign exchange approved by authority. 2Refuse to pay 1Accepted bill Present for acceptance Docs Accept time bill 1,2 At the maturity of draft, importer refuses to pay Collecting bank Remitting bank Collection order & documents

Economic reasons：e.g. defective quality of Summary of possible reasons for dishonor Economic reasons：e.g. defective quality of goods, short of flowing capital, downturn of market, bankruptcy of importer,etc. 2. Political reasons: war, turbulence, foreign exchange control, having not got import license, etc. 3. The credit risk of importer (fraud)

Protection for exporter Exporting country Importer Importing Credit investigation Financial credit and operational style of importer Market trend of importing country Whether import license or foreign exchange has been approved by relative authority. Whether political situation in importing country is steady Whether a case of need could be found once dishonor happens, who could help handle returned goods, e.g warehousing and insuring the goods, arranging shipment of returned goods, finding another buyer for exporter, etc.

Exporter could find an agency (usu.banks) to aid the investigation. To buy export credit insurance at government agency(e.g. import/export bank). Have direct control over documents, esp. the transporting documents,e.g. the consignee should be “to the order of shipper, or collecting bank (with consent of collecting bank) ”, which could be endorsed to importer only when payment is made. If it is non-negotiable transport document (e.g. airway bill), collecting bank should be the consignee who could issue delivery order to importer after the payment.

Carrier B/L B/L Risks for importer under collection Exporter Importer 2,3 Deliver goods 2,3 Deliver goods B/L B/L Rept. Apply & 1Docs. 1. Might be fraudulent documents. 1docs 4pay present 2. Might be defective or dummy假货 or not the model ordered by importer 3. Late shipment,and miss the optimal selling seasons. In advance payment , can not inspect goods beforehand. 5. Dishonor would ruin importer’s reputation. Remitting bank Collecting bank Collection order 1documents

Protection for importer Investigate exporter’s reputation and deal only with creditworthy exporters. If it is time payment, payment time can be XX days/months after Bill of Lading date, which means that earlier delivery ,earlier payment. Choose the most favorable procedure of documents delivery basing on the credit standing, financial capability , market trend. Use D/P at tenor as possible as you can to confirm if goods arrive at the harbor of your country. e.g. if price is going high, use D/P. If price is going down ,use D/A.

Bill purchased under Documentary Collection Importer Exporter There is no payment guarantee from collecting bank. So, remitting bank provide the service only for creditworthy clients. Docs Pay Present 2Discounted amount 1Sight or time bill & full set of original Bill of Lading and apply for discounting the bill. Holder in due course, facing the risk of dishonor from importer’s trade credit. Remitting Bank Discounting bank Collection Order & docs Collecting Bank Credit Advice or Debit Authorization 1,2 Bank’s financing to exporter

Discounting bill under documentary collection The payee on the draft is normally the discounting bank, e.g. No.BP203123350 Exchange for USD36551.54 Tianjin,24 Nov. 199- At…………………….. sight of this First of Exchange (Second of the same tenor and dtate unpaid) pay to the order of BANK OF CHINA, Tianjin Branch the sum of U.S.dollars Thirty Six Thousand Five Hundred and Fifty One and 54/100 only To Bank of New York, For Tianjin Carpets I/E Corp. 45 New York ST. Baoding, Tianjin,China Linsen, Zhang 托收行

Trust Receipt under D/P at tenor Trustee Importer Exporter 4,5 Importer borrows B/L and other documents by writing a Trust Receipt (T/R),usu. with permission of exporter. 6Accepted Bill & T/R 7pay 3Present time draft for acceptance 6,7 After selling the goods importer retires the bill with the money. 4Acceptance & IOU=T/R 5docs 1Time draft & other docs This is Bank’s financing to importer Trustee must store, keep books and sell the entrusted goods for the truster who is entitled to inspect goods, accounting books, money from selling the enstrusted goods. Collecting bank Remitting bank 2Collection order & time draft and other docs truster

that is; The obligation of trustee, explanation of some points Not to put the goods in pledge抵押 to other persons that is; trustee cannot pledge the goods to other banks for credit. To settle claims of the collecting bank before liquidation清理 资产in case of the trustee’s bankruptcy. If trustee goes bankrupt, the entrusted goods would not joint the liquidation or entruster has first lien over the entrusted goods. Entrusted goods should be stored and booked separately from other goods and can be examined by entruster any time. Money from sale of entrusted goods should go directly to entruster’s account.

Trust Receipt does not prevent trustee from Risks for collecting bank in T/R financing Trust Receipt does not prevent trustee from selling goods to （a third party) someone who buys the goods for value and without notice of trust (the goods does not belong to trustee). If trustee runs away with the money, the entruster could not sue the third party. Laws protects the purchaser in good faith. So, entruster usu. demands that a guarantor (usu. a bank) should sign the T/R in addition to trustee’s signature.

+ Documents against Trust Receipt payment at tenor = capital-free business to buyer Accommodation Bill+ sight payment Can you explain why ?