Is an MT999 Acceptance Message Available for Forfaiting?

The financing bank should abandon the old-style judgement for the MT999 message, and provide low-cost forfaiting for enterprises, so as to achieve a win-win situation between banks and enterprises.

When it comes to banking matters, for an exporter with different types of international settlements, forfaiting can be used mainly in two ways in transaction: one is under documentary credits and the other is under documents against acceptance with Aval. According to UCP600 article 2, both the "irrevocable" and the "independent" characteristics of a documentary credit stated in UCP600, make forfaiting under documentary credits favored by the exporter.

In the case of an exporter's complying presentation and receipt of an acceptance message, the issuing bank has an irrevocable liability to the beneficiary. Therefore, the beneficiary can still get the issuing bank’s reimbursement even if the applicant is in a bankruptcy or default situation. Consequently, regardless of 100% pledge or credit for the importer's application of issuing a documentary credit, forfaiting under documentary credits in many banks is considered as a low-risk trade finance product. Benefiting from convenience and low cost, forfaiting has been applied widely in recent years.

As a low-risk trade finance product, forfaiting under a documentary credit takes the following as a premise. First is the beneficiary’s complying presentation and second is the acceptance message sent by the issuing bank. When sending the acceptance message through the SWIFT system, the message between two institutions with an authorized relationship normally starts with a 7. It might look like MT799, MT756, MT752, or MT754, for example. Because some issuing banks may not have established an authorized relationship with the advising bank in another country, the acceptance message sent by the issuing bank is consequently uses the MT999 format. In this case, is it possible to do forfaiting on behalf of the exporter and if so, how to do it? What kinds of risk would the forfaiter be confronted with?

Case Study

A company we will call "Company S" is an export-oriented enterprise, exporting denim fabrics to Southeast Asia, South America and other regions. Its international settlements are mainly based on TT, but partly by documentary credits. On May 5, the advising bank known as "Bank C" informed Company S that it had received a letter of credit from the issuing bank, "Bank U" in another foreign country. The main elements on the document were as follows (number indicates the field in the document):

41D: AVAILABLE WITH ANY BANK IN CHINA BY NEGOTIATION

42C: 120 DAYS AFTER SIGHT

Upon completion of the shipment, Company S made a presentation to Bank C on July 7th, and received a MT999 acceptance message on July 22th. The main elements were as follows:

79: YOUR BILL FOR USD1,000,000.00 UNDER A/M REFERENCE HAS BEEN ACCEPTED BY THE APPLICANT AND WILL BE MATURED ON XX.11.201X FOR PAYMENT.

YOUR PAYMENT WILL BE MADE ON OR BEFORE DUE DATE AS PER L/C TERMS AND CONDITIONS.

AT MATURITY WE SHALL EFFECT PAYMENT IN ACCORDANCE WITH YOUR INSTRUCTIONS LESS ALL OUR CHARGES. IF MATURITY DATE FALLS ON A BANKING HOLIDAY WE SHALL REMIT FUNDS VALUE THE NEXT BANKING DAY.

Upon receipt of the MT999 acceptance message, the Company S applied to Bank C for forfaiting. Although Bank U's interbank facility has been available, Bank C declined to offer forfaiting for Company S because the MT999 was considered as free format message without any authorization.

Analysis

The "low risk" characteristic of forfaiting under documentary credits is mainly based on the outstanding credit rating of the issuing bank, the acceptance of the drawee, and the real transfer of property in the basic transaction. Most banks in the issuing bank’s country do not establish an authorized relationship with Bank C. As the settlement bank, Bank C has a comprehensive understanding of the normal accounts receivables and trade partners of Company S.

It is unreasonable not to accept the application of forfaiting only owing to the acceptance message in the format of MT999. In this regard, the analysis is as follows.

Firstly, an MT999 acceptance message cannot be the reason for application refusal. There are ten categories of SWIFT messages. The 7th category applies to documentary credit and guarantee, such as the credit issuing in the form of MT700. The 9th category applies to cash management and accounting. Compared with the 7th category, which is only suitable for credit and guarantee, the 9th category applies to various types of messages, including the SWIFT messages between two institutions without authorized relationship. However, forfaiting under letters of credit is one kind of trade finance products, which should base on the authenticity of the basic transaction and should not be limited to the message format only.

In this case, the transaction reference number in field 20 and the related reference number in field 21 are in line with the letter of credit and related documents. Although belonging to a nonauthorized message, the bank sending the acceptance message does share the same SWIFT Code with the issuing bank. The contents of field 79 also indicate that the bills of exchange under this documentary credit have been accepted by the issuing bank.

Secondly, the bank should bear the liability for payment at maturity after accepting the drafts. The drafts are not required under a deferred payment LC, and the drafts must be presented under an acceptance LC. The credit in this case is a negotiation credit, and the beneficiary is required to present the drafts.

The acceptance under a credit contains two concepts: invisible acceptance and visible acceptance. The invisible acceptance is the issuing bank's promise to pay at maturity on the basis of a complying presentation. The other is the visible acceptance. The drafts are included in the presentation under a credit, subject to the protection of the law of the country.

The financial documents mainly include checks, bills of exchange and promissory notes, and the acceptance is a special and unconditional draft. It served as a condition for determining whether the legal act is effective in some uncertain circumstances in the future.

In this case, the acceptance message sent by the issuing bank is in the MT999 format. There are drafts under this negotiation credit, and the issuing bank has made an acceptance for the drafts in Field 79 of this acceptance message, and has promised to pay at maturity. Therefore, this case is with visible acceptance. The drafts in this case are protected by the Negotiable Instruments Law. Even if the acceptance message has not been authorized, the drawee’s (issuing bank’s) acceptance for the drafts is effective.

Thirdly, URF800 does not specify the format of the acceptance message. The first point of the forfaiter to examine is the completeness of documents, which means to judge whether

the initial seller delivers the full set of documents to the forfaiter in the secondary market.

URF800 article 10(c)(i) states, "the buyer must examine the required document in accordance with market practice". In addition to the integrity of the documents, it is also necessary to confirm whether the documents are in line with international practice and market condition. According to UCP600 article2, it is not difficult to find that the definition of "complying presentation" is different in UCP600 and URF800. As a uniform rule for trade finance, the standard for "complying presentation" in URF800 refers to the business transactions and customer requirement. Therefore, the MT999 message is not one kind of unacceptable documents.

To sum up, from the perspective of the sustainable cooperation between the bank and the enterprise, it is unreasonable to refuse to offer forfaiting to Company S only because of the MT999 acceptance message. The most reasonable arrangement is that Bank C accepts the application of forfaiting, and its role changes from that of the settlement bank to the financing bank for Company S. Meanwhile, Bank C can corporate with Bank H in Hong Kong, which has the authorized relationship with the issuing bank, Bank U. It is imperative for Bank U to send an MT799 acceptance message to Bank H, and then make a transfer to Bank C via Bank H.

Risk Control Measures

Firstly, the bank should adhere to the principle of "substance is more important than form". The first repayment source for forfaiting is the applicant's due payment under the credit. If the applicant defaulted, the issuing bank must bear the priority payment liability. Although is without an authorized relationship, the MT999 message in this case has clearly stated and committed to pay on the due date. The rejection-payment of the credit is on the basis of non-complying presentation, and the injunction is on the basis of a trade fraud or a document fraud. If the bills of exchange are accepted in the MT999 message, no discrepancy is mentioned and the MT734 message of rejection advisement or the MT750 message of discrepancy advisement is not received in the following period, the issuing bank has accepted formally in silence.

Secondly, confirming the authenticity of the trade is the bank's top priority. Forfaiting is a form of Receivables Purchase. Even if the acceptance message is in MT799 format, the forfaiter should effectively implement three principles: know your customer, know your business and perform customer due diligence. Related departments in the bank shall cooperate together to conduct pre-loan investigation, with the concise judgement by the facility department and regular examination by risk managers. Meantime, although the issuing bank has made the acceptance, the financing bank should pay attention to whether the property title has been transferred in the underlying transaction and whether the third party documents as the supporting paper can prove the logistics path, to prevent the applicant's application of Injunction on the due date, owing to any fictitious trade between exporters and importers.

Thirdly, the bank should make specific analysis of specific cases. Some banks in foreign countries do not establish authorized SWIFT relationships with Chinese financial institutions, and the acceptance message is mainly in MT999 format. The trade finance is related with the transfer of titles in the basic transaction, the method of settlement and the credit rating of exporters and importers. The financing bank should avoid a "broad brush" phenomenon, and change the traditional views to make the financing scheme tailored for the enterprise, so as to scientifically manage the business risk.

To sum up, the financing bank should abandon the old-style judgment for the MT999 message, and adopt the strategy of "adjusting measures to local conditions". Through the cooperation with third-party institutions, this would provide low-cost forfaiting for enterprises, and achieve a winwin situation between banks and enterprises.