• In Britain, fear of a dystopian surveillance state has resulted in resistance towards identity cards.
• Legal entity identifiers (LEIs) harbour similar paranoia.
• But LEIs could make British trade finance more accessible, secure, accurate, and transparent.

The issue of personal identity (ID) cards in the UK has been contentious for many years. Their purpose was to create a system for registering British citizens linked to a national identity database. ID cards have their origins in the First World War and were reintroduced during the Second, as an emergency measure in light of wartime security concerns. However, due to public concern about civil liberties, the scheme was abolished in 1952. 

The debate over ID cards is deeply intertwined with concerns about privacy, government surveillance, and civil liberties. These concerns have historically led to strong opposition against the implementation of a national ID card system in the UK, despite similar systems being commonplace in other countries – with the exceptions of Ireland and Denmark, ID cards are issued in every EU/EEA country. But public sentiment in the UK  stems from an engrained distrust of government intentions and fears of an Orwellian surveillance state.

In the UK, the historical context of ID cards in the UK reveals a pattern of resistance. The 2006 Identity Cards Act of 2006 aimed to address issues such as illegal immigration and identity fraud but faced widespread opposition due to privacy concerns and was eventually scrapped in 2010. And in 2011, the National Identity Register, built to hold the fingerprints and personal details of millions of ID card holders, was publicly destroyed.

The basis of this British distrust is mainly the extensive personal information which ID cards would likely contain, including biometric data; this is further compounded by the perception that ID cards infringe on individual liberties, a view strongly held by libertarians and civil rights groups. 

On the other hand, proponents of ID cards suggest that they could help combat illegal immigration, welfare fraud, and identity theft by providing a reliable means of verifying identity. Additionally, perceptions of data privacy have shifted considerably since the boom of social media: ID cards could, potentially, be more acceptable now than in the past.

The introduction of LEIs presents a parallel challenge. LEIs are unique identifiers for legal entities engaging in financial transactions, designed to improve transparency and reduce risk in financial markets. The rollout of LEIs might be influenced by public attitudes towards personal ID cards, as both involve centralised data collection and management.

The trust barrier     

To overcome the challenges associated with implementing LEIs, a multifaceted approach is necessary. At its forefront is the critical need to build public trust through transparency. Clear and open communication regarding the use and protection of LEI data is essential to allay privacy concerns. It is paramount that the public understands that their data will only be used for its intended purpose and that robust safeguards are in place to prevent misuse. 

In this vein, a comprehensive education and awareness campaign is essential. By educating the public about the benefits of LEIs – such as increased financial transparency and reduced risk in financial transactions – perceptions can be improved. Highlighting successful implementations of LEI systems in other countries can provide tangible examples of their value and effectiveness. This approach can help to build public support and understanding, paving the way for smoother implementation and adoption of LEIs in the UK.

Equally important is the establishment of a comprehensive regulatory framework to govern the issuance and use of LEIs; one which incorporates stringent data protection measures and outlines clear penalties for any violations. This provides assurances to the public and businesses alike, demonstrating a commitment to responsible data management and use. 

Engaging with a wide range of stakeholders is another crucial strategy. This includes not only businesses but also civil society groups and the general public. This engagement process can significantly inform policy decisions and help shape the implementation of LEIs in a way that best addresses the needs and concerns of all parties involved. 

And lastly, aligning the implementation of LEIs with international standards is also vital for enhancing the system’s credibility, thereby facilitating global acceptance. For multinational entities, in particular, this cross-border consistency reduces the complexity of operating in multiple jurisdictions.

Economic benefits of LEIs

Why go through the operose process of educating the public, changing regulations, and reaching out to stakeholders? In short, implementing LEIs could revolutionise the financial landscape, offering benefits that extend far beyond mere administrative efficiency. 

One of the most crucial factors is the enhancement of financial stability. By providing a unique identifier for each legal entity, LEIs significantly improve transparency in financial transactions, allowing financial institutions to better assess risk and manage exposures. The ability to accurately identify and track entities involved in complex financial transactions could even reduce systemic risk. In an era where financial crises can have far-reaching global consequences, the capability of LEIs to contribute to overall financial stability cannot be overstated.

The efficiency gains in payments and transactions represent another significant economic impact. LEIs offer a standardised method of identification, which can streamline payment processes and substantially reduce errors associated with misidentifying transaction parties. This streamlining can lead to considerable cost savings in transaction processing and markedly improve the efficiency of financial markets. Speed and accuracy in financial transactions are paramount, so implementing LEIs could provide the UK financial sector with a competitive edge. 

In fraud prevention and regulatory compliance, LEIs could be crucial. By ensuring that all entities involved in transactions are verified and accountable, LEIs create a more secure financial environment. This enhanced security can help prevent various forms of financial fraud, which often thrive on ambiguity and lack of transparency. Additionally, LEIs facilitate compliance with regulations such as anti-money laundering laws by simplifying the process of entity verification. Reducing costs associated with regulatory compliance could significantly benefit smaller financial institutions that may struggle with the burden of complex compliance requirements.

Leading from this, the impact of LEIs on small- and medium-sized enterprises (SMEs)  is particularly noteworthy. They can make trade finance more accessible for SMEs by providing clear identification to enhance their credibility with lenders and investors.  Improved access to finance would enable SMEs to participate more fully in domestic and global trade, rather than struggling with the complexity and cost of regulatory compliance. Given the crucial role that SMEs play in the UK economy, the potential for LEIs to boost economic growth by broadening SME participation in the economy is substantial.

Finally,  adopting LEIs would bring significant cost savings to financial institutions. LEIs reduce the need for multiple identifiers, simplifying data reconciliation and regulatory reporting processes. The potential cost savings for financial institutions globally are estimated to be between $300 million and $10 billion. 

Grey area

However,, there may be initial costs associated with obtaining and maintaining an LEI. Small businesses will need to carefully weigh these costs against the potential benefits of improved access to finance and enhanced market opportunities.

Furthermore, it cannot be ignored that LEIs have several moral and ethical implications. They certainly enhance transparency and accountability in financial markets by providing a unique identifier for legal entities involved in transactions, which aids in risk management and regulatory compliance, However, the mandatory nature of LEIs raises concerns about privacy, as entities must disclose specific data to obtain them. Additionally, the global push for LEI adoption may disadvantage entities in jurisdictions where LEIs are not widely mandated, potentially leading to unequal access to financial markets.

—

Were the UK to adopt LEIs, the financial environment would become more transparent, efficient, and stable. Benefits would trickle through the financial sector, for businesses large and small, and with reverberations across the national economy.

While there may be some initial challenges and costs associated with implementation, the long-term benefits of LEIs for the UK economy appear to be substantial. As the financial landscape continues to evolve, the role of LEIs in shaping a more robust and efficient financial system is likely to become increasingly important.

And the business-oriented nature of LEIs, compared with the much more personal ID cards, alleviates fears of a dystopic surveillance state, in favour of one concerned more with regulatory safety.

The post The challenge for LEIs in the UK financial market appeared first on Trade Finance Global.

“The Committee thought that the ICC could render a practical service to international trade by seeking to obtain international uniformity in this matter.”

Fascinatingly, the above does not refer to the Uniform Rules for Digital Trade Transactions (URDTT). In fact, it was a statement made by Wilbert Ward, the US representative at the Fourth ICC Congress that took place in Stockholm from 27 June to 2 July 1927, during which the standardisation of export commercial credits was discussed. 

Today, almost a century later, the ICC continues to develop and publish global trade rules that provide practical services to the international trade community.

The circumstances of the last two years have forced a re-think in the trade finance arena and brought digitalisation into focus as never before. Whilst we are still at the early stages, the building blocks via numerous evolving technologies are in place.

The challenge is to digitally replace what is estimated by the ICC to be four billion paper documents circulating in the trade system, with a single trade finance transaction possibly requiring more than 100 pages of documents

As was highlighted at the G7 conference in 2021, digital technology is at the heart of building back better from the pandemic, playing a vital role in improving internet safety and transforming the economy. 

One of the key interventions identified by the G7 Digital and Technology Ministers’ Declaration was greater adoption of electronic transferable records, and G7 members agreed to identify the legal and regulatory barriers which prevent the use of electronic transferable records by business to make economic savings and to generate efficiencies in time, security, and data processing. This work will leverage upon the UNCITRAL Model Law on Electronic Transferable Records or MLETR as it has come to be known.

It’s been mentioned by the G7 that transferable records, such as bills of lading, are the most important commercial documents in trade and trade finance. Currently, less than 1% of bills of lading are in electronic form. This is a huge missed opportunity, given that electronic transferable records will make it easier, cheaper, faster and greener for companies to trade.

It will bring global trade law into the 21st century by enabling businesses across the globe to move from paper-based to digital-based transactions when buying and selling internationally. The G7 countries have agreed to examine the legal barriers, and regulatory and technical issues that impede the adoption of electronic transferable records.

In line with this, ICC UK has recently established a global initiative, the Centre for Digital Trade and Innovation (C4DTI). Its core mission is to accelerate the digitalisation of trade, the implementation of open systems based on common international standards and a digital trade system that is paperless, sustainable, and secure.

Introducing the Uniform Rules for Digital Trade Transactions (URDTT)

The URDTT came into force on 1 October 2021, so are very much in their infancy. At the inception of the drafting process, the Drafting Group was given a strict mandate to develop a high-level framework outlining obligations, rules and standards for the digitalisation of trade transactions. 

This work is now supplemented by a Commercialisation sub-stream that is examining both the ICC eRules (eUCP/eURC) and the URDTT, and is developing a framework to evaluate the challenges and ideas to drive commercialisation and adoption forward.

This will result in a comprehensive plan and recommendations to be published in 2022. In the meantime, an implementation guide to the URDTT has been published. 

The guide details various generic themes which should be taken into account when utilising the URDTT. These include the buyer and seller agreement, legal issues, technology requirements, and the usage and examination of electronic records.

There is also a comprehensive section on Operational Issues. In order to gain optimal benefit from the URDTT, a clear understanding of applicable operational issues is essential.

As to the scope of the URDTT, the rules are entirely compatible with UNCITRAL Model Laws, primarily MLETR which, as mentioned earlier, is the foundation for the G7 work on the digitisation of trade.

It is important to note that any Digital Trade Transactions subject to the URDTT must be digital only – no paper! 

A major significance is that the basis of the rules is not bank-centric. Everything derives from the buyer/seller agreement and, of equal significance, the rules recognise that financial services providers in the current world are no longer restricted to banks only.

What is a Digital Trade Transaction (DTT)?

A DTT is a representation of the underlying transaction and is the process by which the terms of the commercial contract between the seller and the buyer are recorded and progressed. Intrinsically, a DTT is distinct from a commercial contract. 

In order to be subject to the rules, a DTT must specifically state so, and it should satisfactorily reflect the underlying commercial contract. 

As a matter of course, and in order to allow for the necessary examination process, a DTT must specify the terms and conditions by which compliance of an electronic record will be determined.

The rules focus entirely on a digital environment, thereby allowing the involved participants to submit and share information digitally.

As with all ICC rules, the URDTT are independent and neutral and provide a collective understanding of terms and definitions. As a result, the rules will augment the avoidance of repetition within ‘platform’ rulebooks, whilst promoting and supporting the usage of electronic records. 

Of significant importance is that the rules align with the ‘Framework for G7 collaboration on Electronic Transferable Records’ to promote the adoption of legal frameworks compatible with the UNCITRAL Model Law on Electronic Transferable Records (MLETR).

The changes in the law that will derive from MLETR will allow for possession of Digital Negotiable Instruments – possession has been the stumbling block in the past – and for this, the ICC rules are ready.

Exciting times for the rules are ahead! 

The post A new rulebook for digital trade: URDTT appeared first on Trade Finance Global.

As a result of the evaluation, authorisation was provided to proceed with an update of the existing version 1.1 of eUCP in order to ensure continued digital compliance and to draft the eURC in order to cater for digital compatibility in the presentation of electronic records under Collections.

The drafting process came to an end in January 2019, and ICC National Committees voted for approval of both sets of rules in March 2019, with the result that eUCP Version 2.0 and eURC Version 1.0 came into force on 1^st July 2019.

Owing to the pandemic, these rules have received increased interest over the past few months. There is a growing realisation by practitioners that paper documents are causing delays and disruption.

The focus of the eRules is concentrated upon the presentation of electronic records under the eUCP and the eURC, alone or in combination with paper documents, and not on to issuance of an eUCP credit or an eURC collection instruction. The principles on which the eRules have been based are the underlying principles in UCP 600 and URC 522, and the standard practice currently existing for eCommerce transactions.

Benefits of these new rules

Existing ICC rules, such as UCP 600 and URC 522, whilst being invaluable in a paper world, provide limited protection when applied to electronic transactions. As such, it is inevitable that traditional trade instruments will, over time, inexorably move towards a mixed ecosystem of paper and digital, and, ultimately, to electronic documents alone. In this respect, the eRules provide numerous benefits, some of which are listed below:

• Ensuring relevance in an evolving digital trade world
• Explicitly and unambiguously supporting the usage of electronic documents
• Extending risk mitigation to a digital environment
• Providing conformity when faced with divergent local or regional practices
• A shared understanding of terminologies
• Uniformity and consistency in customs and practice

What to keep in mind

Whilst the rules are fairly straightforward and should not cause any problems for users, it makes sense to put in place certain arrangements in order to ensure that no issues will arise: 

• Operational – the format of an electronic record is key to the entire process. As stated in the rules, each transaction must indicate the format of any required electronic document as, if the format is not indicated, it may be presented in any format. 
• Technology – essential that internal data processing systems can handle the relevant formats for electronic records, authenticate messages, and execute electronic signatures. In view of the fact that data processing systems are unlikely to be able to access all formats, it is essential that any data received is readable by the relevant data processing system(s). 
• Legal – as far as is known, no conflict exists between the eRules and eCommerce laws. It should be noted that when there is a mandatory requirement under local electronic commerce law for a higher degree of authenticity than would be required under the eRules, local electronic commerce law may impose additional requirements on an electronic presentation. UNCITRAL Model Laws, including the Model Law on Electronic Transferable Records (MLETR), create no problems with respect to the eRules. The definitions within the eRules are modelled on those in the MLETR.  
• Customer Agreements – it is important that a review of customer agreements be undertaken in order to ensure that issues such as formats for electronic documents, authentication, and electronic signature requirements are covered.
• Risk Management – review handling guidelines in order to account for changes in processing practices for eUCP credits and eURC collection instructions, as well as any additional risks deemed relevant to transaction processing.  Banks need to undertake a thorough analysis of the impact on operational risk related to the presentation of electronic records and create new procedures and risk guidelines for these practices.
• Customer Relationship – consider a specific strategy for approaching customers as to their interest and preparedness for the eRules. Moving towards a digital environment will result in cost and efficiency savings on all sides, whilst also introducing a competitive advantage

Guidance on eUCP and eURC

The ICC has made the full text of both the eUCP and the eURC available online, together with an article-by-article analysis of both sets of rules. This guidance provides an in-depth explanation for each rule, as well as the preparation and drafting process. Learn more here.

Pursuant to feedback received at the October 2019 Banking Commission meeting in Paris, the ICC published further handling guidance in respect of the utilisation of the eRules.  Learn more here.

An additional guidance paper was released on 7 April 2020 which provided technical guidance to the market on issues of force majeure, elements to consider in modifying ICC rules for specific trade finance instruments, and common scenarios experiences in the delivery of documents during the public health measures undertaken in response to COVID-19. Within the above paper, it was confirmed that the ICC would continue to promote the broader use of the eUCP Version 2.0. It further clarified that for existing credits subject to UCP 600, if all parties intend to change from paper documents to electronic records, they may do so by agreeing an amendment of the credit from UCP 600 to eUCP Version 2.0. Scanned documents will fall within the definition of an ‘electronic record’ in eUCP Version 2.0 but would need to meet the requirements for authentication as mentioned in eUCP sub-article e6.

On 23 April 2020, ICC issued a collection of rapid response measures by trade finance banks to keep trade finance and trade flowing in the face of COVID-19. This paper highlighted that, among other common adjustments to workflows during the pandemic, the adoption of eUCP Version 2.0 and eURC Version 1.0 as operating models had been growing. Organisations have been configuring internal processes for greater use of these rules. The fact that both sets of rules covered digital formats was seen to be of great advantage.

And, most recently, an in-depth Users Guide was made available for download free of charge, which you can download here.

The post Breakdown of the new ICC eRules: eUCP & eURC appeared first on Trade Finance Global.