INTERNATIONAL BANK REMITTANCE CHAPTER Four INTERNATIONAL BANK REMITTANCE

General Description －In international trade, the settlement of claims and debts and the transfer of money are carried out by several methods of transmission. －International remittance happens when a client (payer) asks his bank to send a sum of money to a beneficiary abroad by one of the transfer methods at his option. The beneficiary can be paid at the designated bank, which is either the remitting bank’s overseas branch or its correspondent with a nostro account.

General Description －That is to say, when remittance is adopted in international trade, the buyer on his own initiative remits money to the seller through a bank in accordance with the terms and time stipulated in the contract.

Parties involved and methods Parties involved in international bank remittance include the following four parties: The remitter The remitter is the person who requests his bank to remit funds to a beneficiary in a foreign country. The remitter is also the payer.

Parties involved and methods Remitting bank Remitting bank is the bank transferring funds at the request of a remitter to its correspondent or its branch in another country and instructing the latter to pay a certain amount of money to a beneficiary.

Parties involved and methods The payee The payee (beneficiary) is a person who is addressed to receive the remittance. Paying bank Paying bank is the bank entrusted by the remitting bank to pay a certain amount of money to a beneficiary named in the remittance advice.

Methods of remittance There are three basic ways for a bank to transfer funds for its client from the home country to abroad. They are mail remittance, telegraphic remittance and transfer by demand draft.

Remittance by airmail Definition Remittance by airmail transfers funds by means of a payment order, a mail advice, or sometimes a debit advice issued by a remitting bank, at the request of the remitter. It is more generally known as mail transfer i.e. M/T.

Remittance by airmail Payment order A payment order, mail advice or debit advice is an authenticated order in writing addressed by one bank to another instructing the latter to pay a sum certain in money to a specified person or a beneficiary named thereon.

Remittance by cable / telex / SWIFT Definition Remittance by cable / telex / SWIFT is often referred to as cable transfer or telegraphic transfer, namely T/T. Difference from mail transfer It is exactly the same as a mail transfer, except that instructions from the remitting bank to the paying bank are transmitted by cable instead of by airmail.

 信汇(Mail Transfer，M／T)。信汇是汇出行应汇款人的申请，将信汇委托书寄给汇入行，授权解付一定金额给收款人的一种汇款方式。信汇的做法与电汇大致相同，所不同的是，汇出行应汇款人申请，不用电报，而以信汇委托书(M／T Advice)或支付委托书(Payment Order)作为结算工具，邮寄给汇入行，委托后者解付汇款给收款人。

Remittance by cable / telex / SWIFT Features It is therefore quicker, but more expensive than mail transfer is. It is often used when the remittance amount is large and the transfer of funds is subject to a time limit. Means of authentication The only means of authenticating a cable transfer is the test key. However, remittance by SWIFT should be authenticated by SWIFT authentic key.

Remittance by banker’s demand draft Definition Remittance by banker’s demand draft is often referred to as demand draft (D/D,票汇). Banker’s draft A banker’s draft is a negotiable instrument drawn by a bank on its overseas branch or its correspondent abroad ordering the latter to pay on demand the stated amount to the holder of the draft.

票汇(Remittance by Banker's Demand Draft, D/D)。票汇是汇出行应汇款人的申请，汇款人向汇出行交款并支付一定费用的条件下，代替汇款人开立的以其分行或代理行为解付行支付一定金额给收款的银行即期汇票(Banker's Demand Draft)，寄交收款人，由收款人凭以向汇入行取款。其具体做法是：汇出行开立银行即期汇票的同时将汇票通知寄给汇入行，收款人在凭汇票向汇入行取款时，汇入行应在汇票与票根核对无误后，方才解付票款给收款人，并将付讫事实通知汇出行。

D/D transfer is a remittance method in which upon the application of remitter, the remitting bank issues the demand draft taking its overseas branch or correspondent as the paying bank, and gives it to the remitter for sending it to the beneficiary. Very flexible and simple but there are risks of losses or damages of the draft, applicable for mail order or payment for all kinds of expenses.

Remittance by banker’s demand draft When to use It is often used when the client wants to transfer the funds to his beneficiary himself.

Process －The draft is drawn. －After the draft is drawn, it is handed to the remitter, who may send or carry it abroad to the person in whose favor it is drawn. －Upon receipt of the draft, the payee namely the beneficiary can either present it for payment at the counter of the drawee bank or sell it to his own bank crediting his account.

Procedures for M/T and T/T The operations conducted by the remitting bank are called the outward remittance and those carried out by the paying bank are called the inward remittance. The procedures for bank remittance by mail or by cable usually comprise the following steps:

Procedures for M/T and T/T (1) The remitter makes the application. This actually means that the remitter sends a written order to the remitting bank to pay to the debit of the remitter’s account or against cash deposit

Procedures for M/T and T/T (2) The remitting bank debits his customer’s account with the amount to be remitted together with its commission and expense (if any)

Procedures for M/T and T/T (3) The remitting bank issues a payment order to its branch or correspondent in the place where the beneficiary is domiciled. The payment order specifies the details of the payment: amount, name and address of the beneficiary, and name of the remitter. The payment order must be authenticated with the authorized signatures of the remitting bank.

Procedures for M/T and T/T (4) Upon receipt of the payment order, the paying bank verifies the authorized signatures, notifies the beneficiary, and pays to him the stated amount minus expenses charged by itself. (5) The paying bank claims reimbursement from the remitting bank in accordance with the latter’s instructions.

Procedures for M/T and T/T Summary The whole procedure virtually is done by entries over banking accounts, where the buyer’s bank (remitting bank) debits his account and credits the account of the correspondent bank. On receipt of the payment instructions, the latter (the paying bank) passes a reciprocal entry over its account with the remitting bank and pays the money over to the exporter.

A Simplified Remittance Diagram Remitter Payee Remitting bank Paying bank funds

Procedures for D/D (1) A written request to issue a draft is made by the remitter (a bank’ s customer). (2) The remitting bank (the draft-issuing bank) debits the customer’s account with the amount of the draft plus bank commission (if any), issues a bank draft and hands it to the remitter.

Procedures for D/D (3) The issuing bank sends an advice (a special letter of advice or a non-negotiable copy of the draft) by airmail to the drawee bank, namely its overseas branch or its correspondent abroad, instructing the latter to pay it on presentation as well as how to reimburse it. Nowadays most banks usually omit airmailing the advice to the drawee bank.

Procedures for D/D (4) The remitter forwards the draft to the payee. (5) The payee presents the draft to the drawee bank for payment.

Procedures for D/D (6) The drawee bank verifies the signatures, pays the draft, and claims back the amount that is paid according to its agency arrangement with the remitting bank. If the signatures can not be identified, the paying bank will only pay the draft on collection basis

A Demand Draft Diagram Paying bank Payee Remitter Remitting bank 2. Bank sight draft 1.D/D application 4. Bank sight draft 6. payment 3. D/D advice 7. debit advice 5. Bank sight draft

Advantages and disadvantages Advantages of D/D (1) Demand draft can be attached to the invoice for ease in paying small amounts.

Advantages and disadvantages (2)  Demand draft is a negotiable instrument, which can be transferred from one person to another by endorsement, so that it is more convenient in use for payment. (3)    In time of war, one can transfer funds out of the enemy country by means of the demand draft in virtue of its negotiability.

Advantages of remittance by airmail It involves bank-to-bank instructions with banks responsible for making payments, so it is rather reliable.

Advantages of Remittance by cable (1) It is the fastest way to transfer funds. (2) It involves bank to bank instructions with banks responsible for making payments, so it is quite safe, especially when large amount is transferred.

Disadvantages of Remittance by demand draft (1) As a remitter himself is responsible for mailing the demand draft, its transmission is slower than that of T/T and cannot serve the purpose of quick payment.

Disadvantages of remittance by demand draft (2) It is possible for a demand draft to be lost, stolen or destroyed. The remitting bank is generally reluctant to stop payment on a draft issued by itself for this would mean an act of dishonor on its part which will have an unfavorable effect on its credit-worthiness. To stop payment on lost draft is time consuming.

Disadvantages of Remittance by airmail (1) It is possible for the mail transfer order to be delayed or lost in the post, thus causing difficulty for its payment. (2) As the mail transfer exclusively depends on international airmail service, its transmission is slower than that of T/T and cannot serve the purpose of quick payment.

Disadvantages of Remittance by airmail (3) Unlike the remittance by demand draft, the beneficiary must await notification from the bank concerned.

Disadvantages of Remittance by cable (1) It is more expensive as compared with M/T or D/D, but if the amount transferred is large, the interest cost which should be otherwise incurred due to time delay can be saved. (2) Beneficiary must await notification from the bank concerned

Summary The advantages and disadvantages of the three methods of fund transfer have to be balanced when transferring funds. Generally speaking, airmail remittance is less used than T/T or D/D nowadays, except for small amount remittances made by individuals for family maintenance, cash gift, etc.

Summary T/T is favorable to the seller. He can get money at an early date, speed up the turnover of funds, increase the income of interests and avoid the risk of fluctuation in the exchange rate. However, the buyer has to pay more cable expenses and bank charges. Therefore, if T/T is not definitely stipulated in the transaction, the buyer makes payment only by M/T.

Summary Sometimes the amount of payment is comparatively large, the money market fluctuates greatly and the currency of settlement being used is likely to devaluate. In these cases, T/T is preferable, and T/T should be definitely stipulated in the contract. However, the seller should prevent the buyer from forcing the contractual price down under the pretext of bearing more expenses.

Summary A large number of international remittances are carried out by telecommunications. SWIFT, an automated payment system, is commonly used among member banks, which provides the member banks with faster, safer, and more reliable handling of their customer’s transactions. Swiftness, reliability, safety, and inexpensiveness are major advantages of transactions by means of SWIFT messages.

Practice of Remittance Remitting bank’s procedure The remitting bank, at the remitter’s request, sends M/T advice or payment order (in M/T), or a telegram or a telex with test key enclosed (in T/T) to the paying bank as a payment authorization, directing it to offer the fund to the payee on behalf of the remitter.

Paying bank’s procedure Under telegraphic transfer, the paying bank, having received the cable and verified the test key, will make payment to the payee in accordance with the instruction, and will give a reply of debit advice to the remitting bank in line with the nostro account procedure between the two correspondents.

Reimbursement Methods There are varieties of reimbursement methods: (1)Crediting vostro account of the paying bank If the paying bank opens a current account with the remitting bank, the reimbursement instructions should be written as: “In cover, we have credited the sum to your account with us.”

Reimbursement Methods (2)Debiting remitting bank’s nostro account If the paying bank maintains the remitting bank’s account, the reimbursement may be instructed as: “Please debit the sum to our account with you.” “You are authorized to debit the sum to our account with you.” After effecting payment, the paying bank debits the sum to the account of the remitting bank with them.

Reimbursement Methods (3) Instructing a reimbursing bank to pay the paying bank by debiting the remitting bank’s nostro account If the remitting bank does not open an account with the paying bank, the former may instruct its correspondent with which it maintains an account, to debit this account and credit the paying bank’s account if the paying bank has an account with that correspondent, too, or to pay the amount to another bank with which the paying bank maintains an account. The reimbursement clause is thus written:

Reimbursement Methods “In cover, we have authorized The Bank of Tokyo, New York to debit our account and credit your account with the above sum.” or “In cover, we have instructed The Bank of Tokyo, New York to pay the proceeds to your account with The Standard Chartered Bank, New York.”

Reimbursement Methods (4)Instructing the paying bank to claim reimbursement from another branch of the same bank or another bank with which the remitting bank opens an account: “In cover, please reimburse yourselves to the debiting of our account with The Bank of Tokyo, New York.” “In cover, please claim on The Bank of Tokyo, New York.”

Reimbursement Methods (5)According to the payments agreement between two countries In case there is a payment agreement signed by two countries concerned, the reimbursement instructions must abide by the terms in that agreement.

Reimbursement Methods “In cover, you are authorized to debit our Central Bank’s clearing account with your Central Bank.” or “In cover, we have requested our Central Bank to credit the sum to the clearing account of your Central Bank with them.”

Cancellation of remittance Cancellation of T/T or M/T Mail transfer or telegraphic transfer can be cancelled before its payment is made. It is usually done at the request of the remitter or the payee who refuses to receive the payment.

Cancellation of the remittance Whenever the paying bank receives an advice from the remitting bank to cancel the latter’s payment order, it will do so accordingly. Once the payment has been made, the remittance can not be cancelled. The remitter himself may contact the payee to claim back the remittance payment.

Cancellation of remittance Cancellation of a bank draft already issued If the remitter requests the remitting bank to cancel a bank draft already issued by reason of its being lost or stolen, the latter is generally reluctant to do so because the remitting bank assumes the responsibility of guaranteeing the draft’s payment once it is issued.

Cancellation of remittance However, the remitting bank may issue a duplicate of draft against a letter of indemnity from the remitter, if the paying bank confirms that the original one has not yet been paid.

The Function of Remittance in the International Trade In international trade, remittance as a settlement of claims and debts, according to the time of shipment and of payment, falls into two categories: the so called payment in advance, and open account.

The Function of Remittance in the International Trade Whichever of these two methods of settlement is decided upon, the same methods of payment are available to the importer: SWIFT or telegraphic transfer, mail transfer or demand draft. However, these two methods of settlement are seldom used in international trade, because of the risk involved for the importers or exporters.

Payment in advance is made by remittance Definition Payment in advance signifies that the importer pays the exporter before delivery of the goods. Essence In fact, importers are seldom prepared to make full payment in advance of the shipment of goods. It is more common to find that they are prepared to pay in advance only a certain percentage of the value of the goods, that is, the so called down payment.

Payment in advance is made by remittance When to use Payment in advance usually appears in transactions in small amount or in particular business lines. Written guarantee The buyer has to advance the capital too early and undertake the risk of late delivery or non-delivery, so sometimes the buyer asks the payee to offer a written guarantee promising to surrender the shipping documents to the paying bank within a certain period.

Payment in advance is made by remittance Methods of transfer Any of the following methods of transfer may be used to transfer the payment before delivery of the goods from the importer to the exporter through banks: remitting the payment by a banker’s draft, by mail transfer, by telegraphic transfer, by SWIFT message, by an international money order.

Open account business Open account business is also called payment after arrival of goods. The seller may be prepared to ship his goods on open account when the exporter is well acquainted with the financial status of the buyer and entertains no doubt about his solvency, or when the exporter sells goods to his an overseas branch or subsidiary.

Open account business Under open account business, the exporter sends his shipping documents to the buyer who remits in due course or at agreed intervals the agreed price either by T/T, M/T, or D/D through a bank. The exporter makes no precise date for payment of the goods shipped. Instead, he is prepared to rely on his past experience of the buyer’s integrity to effect settlement at the proper time.