Facts: Discharge and release of cargo without OBLs 

Valency International Pte Ltd (“Valency”) provided letter of credit (LC) financing to K.I. (International) Limited (“Kamachi”) for Kamachi’s purchase of 55,000 metric tonnes (MTs) of steam coal from JSW International Tradecorp Pte Ltd (“JSW”). The cargo was shipped from South Africa to Krishnapatnam port in India on the MV Stella Cherise (the “Vessel”), and 22 BLs were issued in its respect. JSW had chartered the Vessel from Oldendorff Carriers GmbH & Co KG (“Owners”), and requested Oldendorff to nominate Unicorn Maritime (India) Pvt Ltd (“Unicorn”) as the discharge port agent. The cargo was discharged at Krishnapatnam port without the production of bills of lading by 31 August 2018 against a discharge letter of indemnity. The cargo was however not released to the receiver, Kamachi, because of its ongoing demurrage dispute with JSW. 

Shortly afterwards, on 10 September 2018, HSBC made payment under the LC, and Valency obtained an import trust receipt loan to repay HSBC. Valency also pledged to HSBC, by way of security, the 22 BLs for the cargo; and sent to HSBC a trust receipt for the release of the 22 BLs on the conditions (as are usual for trust receipts) that Valency would:

• receive the 22 BLs and take delivery of the cargo “exclusively for the purpose of selling [it] unless [HSBC] shall direct otherwise”; and
• hold the 22 BLs, the cargo and the proceeds of their sale on trust for HSBC and solely to HSBC’s order.

Valency collected the 22 BLs from HSBC under the trust receipt in two batches – on 13 September 2019 and 24 September 2019. Meanwhile, Kamachi was chasing Owners for the release of delivery orders for the cargo, which JSW was resisting on account of Kamachi’s failure to settle demurrage with JSW. Owners eventually took the position that demurrage was a matter for Valency to settle with Kamachi, and instructed Unicorn on 13 September 2018 to issue delivery orders for the Vessel. JSW also followed suit on 17 September 2018, and instructed Unicorn to release the delivery order for the cargo. Unicorn accordingly issued delivery orders and Kamachi obtained delivery between 17 September 2018 and 15 November 2018. 

Meanwhile, Valency’s import trust receipt loan with HSBC fell due on 24 September 2018. In order to settle this loan, Valency obtained two further loans from HSBC on 24 and 25 September 2018 by discounting (with recourse to itself) the 22 BLs with the bank. Kamachi however failed to pay for the cargo, making only one payment for 2,500 MT (of the 55,000 MT) of the cargo. 

Unicorn released all the cargo to Kamachi, but misrepresented to Valency that the balance of the unreleased cargo was 52,500 MT. It repeated this misrepresentation at least three times. Valency brought multiple claims against Owners, JSW, and Unicorn, including a claim for conversion of the cargo against the Owners and JSW on account of their release instructions for the cargo. 

Finding: A right to sue for conversion rests on possession or immediate right of possession

Valency’s claim in conversation against both the Owners and JSW failed. Central to the failure was the Court’s finding that Valency did not have actual possession, or the immediate right to possession, of the unpaid cargo at the time of the alleged conversion. 

On the facts, Valency argued that it had the immediate right to possession of the unpaid cargo on the basis that it had possession of the BLs. The Court, however, noted that the capacity in which Valency had possession of the BLs did not give it an immediate right to possession. At the time Owners and JSW issued release instructions, the 22 BLs were pledged to HSBC and released to Valency only under a trust receipt. The Court noted that where goods are pledged, the pledgee (in this case, HSBC) has the right to their possession. Until the underlying debt for the security is paid, the pledgee is the only person who may sue for conversion of the goods. The Court also noted the well-settled position that a trust receipt does not destroy a pledge, but maintains it despite the pledgee releasing BLs back to the pledgor. 

On the facts, Valency pledged the 22 BLs to HSBC as security for the import trust receipt loan on 10 September 2018, and obtained possession of the BLs on 11 September 2018 under a trust receipt which expressly preserved HSBC’s security interest. As noted, Valency repaid the import trust receipt loan on 24 and 25 September 2018. 

As such, from 11 September to at least 24 September, the BLs were pledged to HSBC, who was the party with the immediate right to possession to the cargo. 

For completeness, it is added that Owners and JSW also argued that since Valency was not named in the Import General Manifest (“IGM”), it could not have obtained delivery of the cargo from the Krishnapatnam Port authority. The IGM is a legal document containing information about the goods imported and the consignee or importer (if different), which the carrier or the discharge port agent was required to file. 

The expert witnesses for Valency and Owners agreed that under the IGM that was filed, only Kamachi was entitled to take delivery of the Cargo from the port and that certain steps had to be taken (including amending the IGM) or if necessary, a court order, before Valency could take delivery of the unpaid cargo from the port. The Court rejected this argument and clarified that the immediate right to possession, for the purposes of making a claim for conversion, refers to the right to legal possession. The fact that Valency had to take certain steps (including, if necessary, obtaining a court order) affected Valency’s ability to take actual possession of the Unpaid Cargo but did not affect Valency’s right to legal possession.

Comment: Pledged BLs under trust receipt  

It is often said that the BL holder has the right to sue for the goods in a claim for conversion: but this has to be qualified where the BLs have been pledged to a lender with the actual BLs released under a trust receipt mechanism. Applying trite principles, the Court clarified that the pledgor in such a case merely holds the BLs on trust for the bank. Since the trust receipt does not destroy the pledge, the right to possession of the goods remains with the pledgee bank, and a pledgor cannot therefore sue for conversion of the goods in its own right while the pledge remains on foot.  

The post BLs, pledges and the trust receipt: Possession as the touchstone for conversion claims appeared first on Trade Finance Global.

The collapse of traders like Hin Leong Trading Pte Ltd and Zenrock Commodities Trading Pte Ltd (“Zenrock”) left banks that made payments under letters of credit (LCs) out of pocket when their customers went under without reimbursing them. The banks in this predicament have, in a spate of recent cases, attempted to recoup payments under LCs made to beneficiaries whom they allege have received payments for fictitious trades. By and large, banks have had an uphill task when it comes to recovering or refusing LC payments. The law’s recognition of LCs as the “lifeblood of commerce” has permitted very limited instances of refusal to pay on LCs or recovery of sums paid under them. 

A significant clarification for banks resisting LC payments came from the Singapore Court of Appeal last year (in Winson Oil Trading Pte Ltd v Oversea-Chinese Banking Corp Ltd and another suit [2024] SGCA 31). The Court of Appeal clarified that a bank may refuse payment for a presentation that the beneficiary not only knew to be false but also in respect of which it was reckless as to whether the statements it made to the bank were true or false. This is particularly acute in the oil trade where payment letters of indemnity provide representations as to the shipment of the goods and the title relating to it, which may turn out to be untrue. 

Another significant decision on the subject of LC payments from the Singapore courts last year was Banque de Commerce et de Placements SA, DIFC Branch & Anor v China Aviation Oil (Singapore) Corporation Ltd [2024] SGHC 145 (“BCP v CAO”). This Singapore High Court decision makes a number of points of practical significance which we cover in this update. 

Facts: Two parallel sales chains or one circular chain? 

The Geneva branch of Banque de Commerce et de Placements (“BCP”) issued a letter of credit to finance Zenrock’s purchase of an oil cargo from China Aviation Oil (Singapore) Corporation Ltd (“CAO”). The LC was confirmed by UBS Switzerland AG (“UBS”). In line with the usual practice in oil trading, the LC permitted payment against a payment letter of indemnity (“LOI”) (instead of original bills of lading (“BLs”)) and invoice. UBS paid against CAO’s presentation of an LOI, and was reimbursed by BCP. 

BCP sought to recover the sums it paid under the LC on the basis primarily, that the contract between CAO and Zenrock was a sham and/or fraudulent transaction, and hence that CAO had made fraudulent and/or negligent misrepresentations to BCP in its LOI. The sales chains for the cargo, as found by the Court, can be summarised as follows: 

• A chain of sales involving Petco – Zenrock – Petrolimex (“Series A”). Title in this chain passed from Petco to Zenrock when the oil passed the flange connection between the delivery hose at the loading port and the vessel’s permanent hose connection. Title, however, passed from Zenrock to Petrolimex only upon receipt of the full contract price (which was due only 30 days after the bill of lading date).  

• Another circular chain of FOB sales, Zenrock – Intermediate Seller – SEIS – CAO – Zenrock (“Series B”). Title for each of the contracts in Series B passed simultaneously when the oil passed the flange connection between the delivery hose at the loading port and the vessel’s permanent hose connection.

The thrust of BCP’s case was that the CAO-Zenrock contract was a sham and/or fraudulent transaction. As such, BCP alleged that CAO did not sell any physical cargo to Zenrock. Among other things, BCP argued that physical cargo only moved in the Series A chain, not the Series B chain. It accordingly argued that the representations in the LOI were false. These included representations as to 

1. The existence, authenticity and validity of documents which included the “full set of signed [BLs] issued or endorsed to [BCP Dubai] (the “BCP OBLs”)”, 
2. Entitlement to possession of the documents which included the BCP OBLs; 
3. Entitlement to possession of the cargo immediately prior to the cargo coming into Zenrock’s possession; 
4. CAO having title to the cargo immediately before title passed to Zenrock. 

Zenrock was found to have acquired title from Petco before the Series B transactions commenced and was required to pass title to Petrolimex only after it was re-vested with title in Series B. 

As such, the Series A transactions were found to co-exist with the Series B, instead of being mutually exclusive. 

The evidence from the Court’s judgment supporting a co-existence of both trades appears to be grounded on the provision that title to Petrolimex passed on payment while the rest of the parties operated on title passing at the load port flange. It remains open for consideration if the same finding would have been found if all parties, including Petrolimex, operated on the basis of title passing at the load port flange – after all, only one party can have title at any time and the sequencing of the passing of title is critical. 

Finding: Was the Zenrock-CAO Contract a sham? 

One of the arguments asserted by BCP was that there was no physical shipment because the CAO-Zenrock contract was a sham. The Court disagreed with this assertion for a number of reasons, for example:

• CAO’s personnel gave evidence of having conducted due diligence and negotiations for both the purchase and sale leg of the transaction; exchanged deal recaps; and performed operational tasks concerning vessel nomination, the appointment of an independent surveyor to witness cargo loading and inspect its quantity and quality, and checking the documents presented under the purchase leg and documents to be presented to the LC bank under CAO’s sale leg to Zenrock.
• There was a legitimate commercial reason for Zenrock to conclude Series A and Series B transactions: to secure funds for an additional 35 days. 
• The mere fact that the transaction was concluded speedily, and did not envisage the exchange of original BLs, did not point to it being a sham since it is not unusual for oil cargoes to be sold promptly, and it is industry practice for LOIs to replace BLs for oil trades. 
• As a matter of industry practice, there was nothing unusual with a CAO not investigating the participants in the entire sales chain beyond its immediate buyers and sellers. 
• As title passed simultaneously in Series B, Zenrock was revested with title, and had good title before it passed title to Petrolimex. There was accordingly no reason why Zenrock would have orchestrated a sham circular trade in Series B when it could have performed both the Series A and Series B contracts legitimately. 

The Court found that on a proper interpretation, by way of the LOI, CAO represented that:

1.  The BLs had been issued (i.e., they existed, and were authentic and valid), but that 
2. They were unavailable in that they had yet to be issued or endorsed to BCP Dubai at the time of presentation, and 
3. The BCP OBLs would be endorsed to the order of BCP Dubai in due course (i.e., once CAO received them from its seller). 

None of these representations were found to be false since BLs for the cargo existed and CAO was entitled to them under its contract with SEIS. Further, since the CAO-Zenrock contract was not sham, and the full sales chain was known, the Court concluded that CAO was entitled to possession of the cargo immediately prior to it coming into Zenrock’s possession, and had good title immediately before passing title to Zenrock. 

The Court noted that BCP’s claim for misrepresentation failed for the additional reason that none of the representations in the LOI were made to BCP. The LOI was addressed to Zenrock, and in any event, presented to the confirming bank, UBS and not BCP. 

Comment: Arguments on sham and shipment

This case confirms the arduous task that a bank resisting an LC payment bears and the importance of industry practice of the particular commodity in question in deciding whether a sale contract is a sham contract. 

BCP’s argument that CAO did not ship any physical cargo to Zenrock was seemingly predicated on its position that the CAO-Zenrock contract was a sham and/or fraudulent transaction. This contrasts with how the banks argued the case in Winson. There, in alternative to arguing that the underlying sale contracts were sham, the banks also separately argued that the cargo was not shipped as described. The Court in Winson did not have to address the issue of sham as it was satisfied that the cargo was not shipped as described. 

Given sham entails an enquiry into parties’ subjective common intentions, it is preferable for a party resisting payment to plead it as an alternative argument to an objective challenge regarding the underlying shipment, which may be easier to establish. However, the outcome in BCP v CAO is unlikely to have been different even if the underlying shipment was challenged since the Court found that the sales chains in Series A and Series B were not mutually exclusive. 

It is further noted that BCP curiously failed to plead that CAO’s presentation under the LC was fraudulent, i.e., the fraud exception to payment under LCs. Rather, its pleadings focused on the fraudulent representations in the LOI, i.e., the tort of deceit. Whilst the Court noted that the elements of the fraud exception and the tort of deceit are similar, BCP was not allowed to rely on the fraud exception as the two causes of action have different juridical basis and CAO would be prejudiced if BCP is allowed to rely on the fraud exception. A payment LOI is often used as one of the documents needed for an LC payment. Careful consideration needs to be given to the interplay of these two documents when seeking to raise arguments based on fraud.

The post Clawing back LC payments: BCP v China Aviation Oil appeared first on Trade Finance Global.

As he prepares for a potential second term, the big question is: what’s next for Mexico? Could a new wave of tariffs or stricter rules under the USMCA push Mexico to the brink again, or has it learned enough from the past to weather whatever might come? Before diving into the future, let’s take a step back and explore how Mexican trade has evolved in the 21st century and what lessons it has learned from navigating its relationship with its powerful northern neighbour.

A brief look back at Mexican trade this century

When Trump entered the White House for the first time in 2017, the secure trading dependence Mexico had relied on for years felt fragile. Tariffs, trade wars, and a complete renegotiation of NAFTA threw Mexican industries into turmoil.

For decades, Mexico’s proximity to the United States shaped its trade policies, partnerships, and ambitions. Over 80% of its exports flowed north, creating a dependency that felt secure—until it wasn’t.

Mexico exports value by destination in 2000. Source: OEC 

Trump’s first term in office brought a storm of change for Mexico. Renegotiations of NAFTA and the subsequent implementation of the US-Mexico-Canada Agreement (USMCA) shook the bedrock of Mexico’s economic reliance on its neighbour. Tariffs on steel, aluminium, and other key sectors further disrupted the balance. The uncertainty surrounding trade agreements and protectionist policies forced Mexico to confront its vulnerabilities. 

In response, Mexico turned outward, exploring partnerships beyond its long-standing dependency on the US. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a trade agreement between 12 countries in the Indo-Pacific region, became a cornerstone of this strategy. Mexico’s inclusion in this multilateral pact opened doors to fast-growing markets across Asia-Pacific, including Japan, Vietnam, and Australia. These new opportunities allowed Mexico to expand its export portfolio, particularly in agriculture and manufacturing. 

The country’s evolving relationship with China presented a more complex challenge. China’s influence grew as Mexico imported intermediate goods for its manufacturing sector. Simultaneously, Mexican exports like mining and agricultural goods found new homes in Chinese markets. Yet this relationship was not without its tensions. Competition between Chinese and Mexican goods in North America created friction, particularly as Mexico sought to maintain its foothold in the US.

Infographic of current CPTPP membership. Source: WEF

As global supply chains shifted in the aftermath of Trump’s trade policies and, later, the COVID-19 pandemic, Mexico found itself uniquely positioned to benefit from nearshoring trends. American companies, wary of overreliance on distant suppliers, looked to relocate production closer to home. Mexico’s geographic proximity, skilled labour force, and trade agreements made it an attractive alternative. Industries like automotive and electronics surged, with factories and assembly lines humming with renewed activity. 

Mexico’s investment boom. Source: Apricitas Economics

The renewed activity, however, is once again being threatened, at least rhetorically, in the lead-up to Donald Trump’s second term as president of the United States.

A second Trump term

Trump’s protectionist rhetoric is not new. Before he took office in 2017, his threats to impose 35% tariffs on Mexico were routinely analysed. He has long advocated for an American-first approach to trade policy, regardless of what his many vocal critics say, and used this during the renegotiations of the North American Free Trade Agreement (NAFTA) – which he dubbed ‘the worst trade deal ever signed’ – and in launching a trade war with China.

A second Trump presidency seems poised to amplify the trade war with China, creating ripple effects that would deeply impact Mexico. The imposition of 60% tariffs on Chinese goods, as the president-elect has touted – would likely affect Mexican manufacturing, given its reliance on Chinese imports for key components in industries such as automotive and electronics. 

Goods manufactured in Mexico using materials imported from China could be considered of Chinese origin when exported to the USA if the imported materials constitute a significant portion of the product’s value or are insufficiently transformed during production in Mexico. Under rules of origin, such as those outlined in trade agreements like the USMCA, a product must meet specific criteria regarding local content and substantial transformation to qualify as originating from Mexico.

For example, if a car assembled in Mexico uses materials produced in China, and those components account for a substantial portion of the vehicle’s overall value, the automobile might not meet the regional value content (RVC) threshold of 75% North American content stipulated under USMCA.

USMCA: Updating NAFTA to bring trade into the 21st century. Source: Pacific Northwest Economic Region (PNWER) 

Additionally, the agreement requires that certain core parts, such as engines, transmissions, and suspensions, originate within North America. If these core parts come from outside the region (e.g., China) and the vehicle fails to undergo a sufficient transformation in Mexico, the car could be disqualified from being treated as Mexican-origin for preferential tariff purposes when exported to the US.

This assumes that the USMCA, which is scheduled for review in 2026, survives Trump’s second term. The president-elect has already threatened to impose tariffs of 25% on all goods coming from Canada and Mexico if the countries do not secure their borders to the flow of irregular migrants and illegal drugs – a scenario that some predict would shrink Canadian and US GDP by 2.6% and 1.6%, respectively.

Many experts and commenters believe that the current round of tariff threats are more like political bargaining chips than an indication of the actual future trade policy, believing that Trump is only using these threats to gain concessions in other areas. 

—

Trump in July 2015 described the Mexican government as “forcing their most unwanted people into the United States. They are, in many cases, criminals, drug dealers, rapists, etc.” Beyond a controversial social and cultural rhetoric, the impact of such strong statements against Mexican imports and economic collaboration will only be realised in time.

Whether Mexico will survive Trump is one thing. But a more pertinent question might be, ‘will the US survive another wave of Trump’s trade policies?’.

The post Can Mexico weather a second wave of Trump’s trade policies? appeared first on Trade Finance Global.

This is one of the most consequential US elections in history, which has been mainly determined by what’s at stake in an ideological or geopolitical domain.

But we at TFG think it’s essential to fully explore what Donald Trump’s second presidential victory may mean for the world of trade, treasury, and payments. It’s with this regard that President Trump can redefine the world.

We recorded an emergency livestream with four industry heavyweights:

◾ Dr Rebecca Harding, Independent Trade Economist, REBECCANOMICS LIMITED
◾ Dr Robert Besseling, CEO, PANGEA-RISK
◾ Simon Evenett, Professor of Geopolitics & Strategy, IMD Business School, Co-Chair, World Economic Forum Global Future Council on Trade & Investment
◾ Dr Alisa DiCaprio, Former Chief Economist, R3

What was covered:

• How Trump’s trade policy differs from Biden’s (if at all).
• US-China trade relations and economic wargaming – how increasing tariffs on 818 categories of Chinese goods impacts 2025 policy.
• How a second Trump presidency could impact trade relations between the US and Africa and the Middle East.
• What does the decline of multilateral trade agreements mean for ongoing negotiations and existing trade pacts (think: withdrawal from the Trans-Pacific Partnership and replacing NAFTA with the USMCA agreement)?
• Money markets: with US stocks surging and European renewable stocks falling, how Trump’s stance on climate change and energy policy might impact global commodity markets and trade flows.
• What we can expect Trump’s impact to be, on trade and SCF.
• What regions are likely to be singled out from a more combative trade policy, and what methods there are for assessing and monitoring as the effects of Trump become realised.
• The impact of protectionist trade on currency markets and international capital flows.

The post TFG hosts emergency broadcast: Global trade according to President Trump appeared first on Trade Finance Global.

A pilot program led by the Asian Development Bank (ADB) has demonstrated a promising new approach to combating trade-based money laundering (TBML). This vast and underreported financial crime enables the flow of illicit funds through the global trade system.

The 18-month pilot, conducted in partnership with the United Nations Office on Drugs and Crime (UNODC), worked with the financial intelligence units (FIUs) of five countries in Asia – Bangladesh, Mongolia, Nepal, Pakistan, and Sri Lanka – to enhance the detection and reporting of TBML activities.

At the heart of the initiative was a transformation of the suspicious transaction reporting (STR) process. Traditionally, STRs filed by banks and other regulated entities have focused narrowly on payment information, providing little detail on the underlying trade transactions that can be rife with money laundering red flags.

In Pakistan, the number of TBML-related STRs filed by banks increased by 398% during this period. Bangladesh saw a 148% jump in monthly TBML reporting. Mongolia and Nepal, which previously received few if any such reports, began identifying dozens of suspicious trade transactions.

These results were thanks to new data fields introduced into the STR reporting system, requiring banks to provide granular information on the goods being traded, shipping routes, corporate identities, and other transaction details that can signal possible TBML schemes. This enriched data enabled FIUs to better identify, analyse, and act on potential money laundering risks.

Some of the most common TBML typologies and red flags identified in the pilot program were:

1. Mispricing (over/under invoicing) and quantity manipulation
2. Inconsistent or false documentation, including falsely described goods
3. Transactions involving related parties, shell companies, and banks

Enhanced STRs also provided richer information to guide law enforcement investigations and prosecutions. Authorities were able to map out common TBML techniques, such as over- or under-invoicing, as well as identify high-risk goods and trade routes susceptible to exploitation by money launderers.

TBML enables the funding of criminal or terrorist activity, either by helping to fund such activity or by moving or hiding proceeds originating from criminal activity. According to the World Economic Forum’s estimate, the economic and tax losses from TBML in developing countries alone exceeded $9 trillion between 2008 and 2017.

Beyond financial costs, this crime has tragic human consequences. In spite of this, TBML remains a low priority for many law enforcement offices. One reason is the convoluted investigation processes, which result from the cross-border nature of the crime and the lack of reliable statistics. 

The pilot’s success has prompted calls for broader adoption of the approach. The UNODC has proposed integrating the enhanced STR model into its goAML software, which is used by FIUs in over 70 countries globally. 

ADB, meanwhile, is exploring opportunities to expand the program to additional jurisdictions. Their initiative has elucidated the need for tools and cross-border collaboration, in disrupting these illicit networks.

The post ADB initiative to combat trade-based money laundering through collaboration, technology, and intelligence-rich data appeared first on Trade Finance Global.

In Georgia, the high costs associated with providing banking services, and stringent creditworthiness or collateral requirements, pose significant challenges for many small and medium enterprises (SMEs) seeking financing through lending offers. 

This finance gap is particularly concerning because SMEs play a crucial role in driving trade, economic development, and employment in Georgia. Given these challenges, factoring can provide substantial benefits for businesses by enabling quick structuring, meeting SMEs’ objectives such as releasing cash trapped within their balance sheets and accessing alternative funding sources at competitive rates, thereby promoting inclusiveness.

The National Bank of Georgia, as a key stakeholder, is actively supporting the country’s long-term economic growth by promoting the development of factoring. This effort aims to establish a solid foundation for the broader private financial sector to provide SMEs with finance solutions through receivables finance.

Collaboration is key

Since 2020, the National Bank of Georgia has been closely collaborating with the European Bank for Reconstruction and Development (EBRD) and Investors’ Council Secretariat (ICS), alongside the Ministry of Economy and Sustainable Development, Ministry of Justice, and Ministry of Finance. 

This collaborative approach includes active participation in a Factoring Working Group facilitated by ICS, bringing together stakeholders from the factoring industry, commercial banks, micro-finance organisations, legal experts, and the public registry. 

Additionally, since 2023, the International Finance Corporation (IFC), in collaboration with the National Bank of Georgia, has worked to develop guidelines that provide capacity and knowledge to banks and DFIs, and promote growth in non-traditional lending solutions for SMEs. 

Furthermore, the World Bank and the Ministry of Economy and Sustainable Development of Georgia are developing a legal framework for secured transactions, addressing factoring issues. Under this framework, all transactions registered in the factoring registry will receive priority over other security claims. 

This reform supports the advancement of the factoring market, meeting urgent demands from the business sector and the factoring initiative is more advanced compared to developments in secured transactions. These ongoing collaborations aim to advance factoring legislation and digitalisation in Georgia.

The growth and decline of factoring in Georgia

The latest data from the Service for Accounting, Reporting, and Auditing Supervision (SARAS) indicates that in 2022, the total trade receivables of corporations in the first, second, and third categories reached approximately 8.8 billion Georgian lari (GEL). This represents a 23% increase compared to the previous year, and aligns with an annual average growth rate of 20% observed over recent years.

Many factors, including cross-company receivables, influence the amount of fundable receivables, yet the data remains promising. Despite the stable growth and high volume of trade receivables, the volume of factoring transactions remains relatively small and subject to significant fluctuations. 

In Georgia, although micro-finance organisations, micro-banks, and commercial banks are authorised to offer factoring services, only some commercial banks currently engage in this practice. These banks primarily focus on domestic factoring, but recent trends indicate a small yet growing interest in international factoring. 

In 2019, the top three banks, which are primarily factoring providers, totalled 165 factoring transactions, with international factoring accounting for two transactions and 990,000 GEL out of a total volume of 358 million GEL. 

By 2022, the number of transactions had surged to 44,000, with international factoring accounting for 17 transactions and 3.9 million GEL out of a total volume of 670 million GEL. 

However, in 2023, there was a 50% decrease in the number of transactions and a 21% decrease in volume compared to 2022.

The main reasons and shortcomings responsible for the lower uptake of factoring in Georgia may be summarised in the following types of market gaps:

• Lack of necessary legal and regulatory framework;
• Lack of technological infrastructure;
• Lack of knowledge and capacity.

Limiting factors

Factoring in Georgia is currently constrained by substantial financial and legal hurdles. 

Key issues include: 

• The debtor’s right to limit the transfer of receivables to the factor;
• Lack of robust legislation to clearly define rights and obligations in factoring transactions;
• Inadequate regulation of factoring activities;
• The absence of established criteria for registering factoring companies. 

These challenges significantly limit the potential for factoring in the region and restrict SMEs’ access to the tool.

The new law aims to address these challenges comprehensively by establishing a clear legal framework. 

It will prohibit debtors from restricting the creditor’s ability to transfer receivables to the factor or imposing additional conditions on such transfers, define eligibility criteria for receivables suitable for factoring, clarify procedures for registering ownership rights, and mandate the creation of a centralised factoring register. 

This register, linked to the Georgian Revenue Service’s electronic invoice database and under the ownership of the National Agency of Public Registry, will prevent “double factoring” and ensure the validity of ownership claims. Additionally, the law promotes the development of an electronic platform tailored for factoring transactions, providing a virtual space where parties can initiate, manage, and complete transactions securely and efficiently. 

By enhancing transaction transparency, facilitating real-time monitoring, and enabling seamless communication between stakeholders, this centralised platform aims to foster fair competition among factors and potentially reduce financing costs. 

The role of the electronic platform would be twofold. First, it would facilitate a multi-funder approach, allowing smaller or new players to access the factoring market by alleviating the significant costs associated with required technical infrastructure. Second, it aims to introduce competition through a marketplace approach on the electronic platform. 

Moreover, as factoring may be perceived as a risky undertaking, risk-sharing and insuring practices are not easily accessible. However, the registry and platform will support factoring companies in mitigating risks by enabling them to use data to better evaluate customers, thereby promoting stability in the sector. 

The work on the design of the electronic platform is currently underway in close cooperation with the IFC. Simultaneously, efforts to find a prospective financier for the platform are ongoing. The ownership of the electronic platform is likely to take the form of a Public-Private Partnership, where the state will collaborate with international organizations to deploy and operate factoring transactions, and potentially expand to include other trade finance products following secured transaction reform. 

Importantly, the draft law does not mandate the existence of a centralised or state-owned platform. The Draft Law on Factoring, incorporating all the aforementioned legal and technical provisions, is expected to be enforced in early 2025.

In addition to current regulatory efforts and planned technological improvements in factoring, a credit information bureau plays a crucial role in Georgia’s financial ecosystem. Registered with the National Bank of Georgia, Creditinfo Georgia JSC is the country’s sole credit bureau. Its functions include collecting, storing, processing, and issuing credit information about both individual persons and corporate entities, which includes details of loans and other obligations to form the user’s credit history. 

The bureau ensures customer consent before sharing any related information with third parties. Additionally, it provides financial sector representatives and other users with insights into how customers manage their financial obligations. 

Based on this credit history, the bureau determines and reports the customer’s credit score and rating, offering interested parties an assessment of the associated lending risk and the likelihood of repayment.

The post State of factoring in Georgia: An update on collaboration and regulation appeared first on Trade Finance Global.

The originate-to-distribute (OTD) model refers to the loan originator selling loans to various third parties after the loan-origination process. This can diversity banks’ funding sources, thereby reducing concentration of risk.

At the International Trade and Forfaiting Association’s (ITFA) 50th annual conference, Deepesh Patel, Editorial Director at Trade Finance Global, spoke to Marcus Miller, Managing Director, Global Lenders Solutions Group Leader, Credit Specialties at Marsh, about the OTD model and responsiveness to regulation.

“We’re pleased as an industry to be able to respond positively to the move to what we see as a harder originate to distribute or originate to share model,” he explained, “The move away by pretty much all tier-one or -two financial institutions from a buy-to-hold model whereby they were taking the yield on assets.”

For Miller, changes have been the consequence of ever-evolving regulation. They have elucidated the need for a dynamic portfolio, for two key reasons. 

“For one, to maintain or create profitability through the portfolio through risk distribution.

“And for another, it’s well understood that having a diverse portfolio through distribution increases resilience to financial shocks going forward.” The OTD mentality plays very well for willing investors here.

“And that’s where credit insurers have been very responsive in terms of providing eligibility criteria, committed capacity, and almost instant solutions to be competitive […] but also to sit next to that originate to distribute model.”

To find out more, watch the full interview.

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Economic wargaming is an important element of international economic networks, particularly today. At ITFA’s 50th annual conference in Cyprus, Rebecca Harding, Director at Rebeccanomics, explained a few reasons to Deepesh Patel, Editorial Director at Trade Finance Global (TFG).

“Since Russia invaded Ukraine, we have been using sanctions, export controls – economic measures, financial measures – to deter and coerce an adversary.”

This is not a new concept, nor is it localised. Economic wargaming has happened across Europe, America, the UK, and indeed across the world.

But Harding went on to explain, “What’s interesting about all of this is that trade finance banks are absolutely in the middle of this. Banks are the foot soldiers in these types of campaigns, so they just have to do what governments say. Increasingly, what’s happening is that banks are actually being used as weapons.”

That is to say, “Banks are tanks in this framework.”

Strategies in response involve modelling. “We need to think about where we are likely to be hit by these types of government measures. In short, we need to start gaming how these measures will affect our businesses, whether that’s digital, sustainability, treasuries, working capital, lending, etc.”

Wargaming is becoming increasingly important to this industry and demands immediate attention. Watch the full interview to find out more.

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The conference, which was initially set to conclude on 29 February, has been extended due to the challenges faced in bridging the divide between developing and developed countries on critical issues such as agriculture, fisheries subsidies, and e-commerce trade duties. 

Despite the extension, there remains no clear indication of imminent agreements on setting new global commerce rules, including the contentious points of ending fishing subsidies and the continuation of a moratorium on digital trade tariffs, positions India and South Africa have opposed.

Some of the delegates were not confident in reaching a deal by the end of the day Friday, telling Reuters that serious differences remained on a range of issues meant to address global trade, although others said the mood had improved slightly during the day.

According to Reuters, US Trade Representative Katherine Tai believed that a deal would be possible, but there would be negotiations and trade-offs to accomplish even some of the less controversial topics.

If some or all of the talks aimed at fixing global commerce rules do collapse, fragmentation among the BRICS bloc of emerging economies “will have contributed,” she told Reuters.

More complex deals, such as digital trade agreements, are causing significant delays in progress. India has refused to drop its own opposition to extending a waiver on digital tariffs.

Multiple countries, including India, have voiced their concern regarding agricultural markets and export restrictions.

According to multiple reports, there are currently two draft proposals under consideration, with one being more comprehensive than the other. India is advocating for a dedicated agreement on food security at the MC13, specifically focusing on permanent regulations for the public stockholding of food reserves. 

Conversely, nations like the United States and the European Union are calling for a more extensive package that addresses a wider range of agricultural issues.

When MC13 comes to a close today, Friday 1 March, it is expected that the fisheries subsidies deal will be announced, and news over other outcomes will be announced in the coming days.

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The United States began the process of reinstating sanctions on Venezuela on Monday, following a statement from a source within the Biden administration indicating the potential cessation of eased restrictions on the oil sector. 

This is in light of the Venezuelan Supreme Court’s decision to uphold a prohibition against the candidacy of a prominent opposition leader in the upcoming presidential elections.

In October, the US eased sanctions on Venezuela, an OPEC member, in acknowledgement of an agreement regarding this year’s elections.

This easing was contingent upon the Venezuelan government under President Nicolas Maduro releasing certain prisoners with links to the opposition and Americans, as well as advancing efforts to lift restrictions on various opposition figures.

Despite Venezuela conducting a prisoner exchange in December, the Supreme Court, aligned with Maduro, maintained a ban on opposition figure Maria Corina Machado, affirming previous judgments that she was in favour of the sanctions and a provisional government backed by the US, which the Maduro administration holds responsible for the forfeiture of Venezuelan international assets.

On the same day, the detention of several members of the opposition was verified. As an initial step in reinstating sanctions, the Treasury Department announced on Monday night that American entities engaged in transactions with the Venezuelan state-owned gold mining company Minerven must conclude their dealings by February 13.

This announcement followed a statement from an official in the Biden administration earlier that day, suggesting the Treasury permit allowing broader interactions with Venezuela’s oil sector might expire on April 18, should Machado and other opposition individuals be barred from participation.

“Unless Maduro and his representatives in Venezuela are able to get back on track, specifically with regard to allowing all presidential candidates to compete in this year’s election, we will not be in a position to renew General License 44, which provides relief to Venezuela’s oil and gas sector when it comes up for renewal in April,” stated the White House official, who requested anonymity while speaking with Reuters.

The official also mentioned the US is contemplating further, unspecified actions to reprimand the Venezuelan government.

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