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Reserve Bank’s decision to ban LoUs will badly Impact SME

Reserve Bank’s decision to ban LoUs is a knee-jerk reaction; can backfire badly, warn traders

Article in printed with permission: 

An industry-wide practice that worked well until the end of business hours on Tuesday, which allowed D Dhanasekaran’s Tiruppur-based textiles firm — Abi Tex Mills — import machinery from Oman and boost production, has now gone haywire with the Reserve Bank of India’s (RBI) decision to bar banks from issuing guarantees in the form of letters of undertaking (LoUs) and letters of comfort. “My machinery took a year to be imported and has been installed in the factory for a few months now. But now with buyer’s credit cancelled, I am focused on how to make payments instead of my production,” Dhanasekaran said.

Calling the RBI move a ‘knee jerk’ reaction, businesses said they are perplexed by the central bank’s sudden decision, which came in the wake of the nearly Rs 13,600 crore scam in state-owned Punjab National Bank (PNB), which involves jewellers Nirav Modi and Mehul Choksi, who owns Gitanjali Gems. The central bank’s move is expected to hit sectors like gems, precious metals, plastics, oil and gas, electronic goods, solar panels and metals, as they constitute the major basket of items that are imported.

Traders in gold and precious metals seemed nonchalant about the RBI’s decision. They contend that their industry is not using LoUs or letters of comfort (LoC). “It won’t impact trade at all. No one was using it besides Nirav Modi and Mehul Choski,” said Colin Shah, the vice chairman of the diamond panel at industry lobby Gems and Jewellery Export Promotion Council (GJEPC). Buyer’s credit was being availed of by only a couple of large jewellers, said K Srinivasan, Convener, GJEPC. “They can mobilise funds from elsewhere. However, expansion activities will be impacted. But again, those who are undertaking these plans with their own funds will not be affected,” Srinivas added.

The RBI’s decision to discontinue LoUs and LoCs for trade credit for imports into India will impact the jewellery trade and other businesses. But traders ask as to why their business should face the brunt of actions of some jewellers, who cocked a snook at the system. The RBI’s decision will change the course of trade finance for importers. Borrowing costs will also increase post the ban on LoCs/LoUs, as importers will have to explore alternatives that could be more expensive as compared to LoCs/LoUs, said Rachit Sharma, deputy general manager, corporate law, at

Entrepreneurs running small and midsize firms rue that the RBI is asking banks to view businessmen, seeking buyer’s credit, with a doubting eye. “Every individual looking for buyer’s credit cannot be viewed as a potential scammer. Banking is the backbone of business. What does the RBI want businesses to do to avail funds when they ban buyer’s credit overnight?” asked Brijesh Lohia, the managing director of logistics firm Global Ocean Group.

“There will be a sudden cash flow crisis and businesses who availed LOU/LOC (popularly known as buyer’s credit) against a presentation of import documents will face tremendous heat due to this sudden change.  Generally, banks provide non-fund based banking limits against collateral securities that can be used to settle import transactions. The funding can be made by issue of LOU/LOC, where import documents are placed before banks. The cost of finance is very low as it comprises of LIBOR plus one to two basis points. Due to the restriction on issue of LOU/LOC, the cost of funds will shoot up substantially at minimum bank lending rate (BLR), making it unviable to carry out trade  due to thin operating margins,” Nikunj Turakhia, President, Steel Users Federation of India (SUFI), told Firstpost.

Across India, firms prefer to use buyer’s credit instead of  letters of credit (LC) as getting the latter is a time-consuming process while the former was available in a couple of days. Also, the rate of interest paid on buyer’s credit was much lower than the existing rates, thus making it more appealing. Buyer’s credit refers to short-term credit available to an importer from an overseas lender, such as banks and other financial institution, for importing goods. The overseas bank usually lends money to the importer based on the letter of comfort, which is a bank guarantee issued by the importer’s bank. A letter of credit is a payment mode used in import-export trade to cover third-party risk. If the importer defaults, the bank that he has an account with and has issued the LC to him will pay on his behalf.

Prashant Agarwal, who runs Delhi-based Raj Polymers, said he is surprised by the short-sighed move by the RBI. “I have a buyer’s credit which is due this month. As it is, the domestic factors in the petro-chemical sector are affecting us. Couldn’t the RBI have given us a time-line of three months or more, so that we could then move to other avenues to seek business opportunities?”

The sudden decision by the RBI is causing panic in the trader community. Importers will be left with no option now, but to start applying for LCs, said Sanjay Mandavia, a Ahmedabad-based trade finance consultant. “The instrument [buyer’s credit] is blamed for taking away the focus from the systemic failure in PNB. Instead, as a solution, the industry is proposing that the RBI bring down the buyer’s credit limit from $20 million dollars per import transaction to $1 million.”


Reuters: Indian importers face funding crunch with clampdown on credit guarantees

Article in Reuters printed with permission: 


The Reserve Bank of India announced late on Tuesday it was banning banks from issuing letters of undertaking, or LoUs, a form of credit guarantee often used between Indian banks and their offshore branches.

The central bank’s latest regulatory clampdown came weeks after Punjab National Bank (PNBK.NS) uncovered a more than $2 billion scam involving the alleged fraudulent issue of such LoUs without the bank’s knowledge.

Industry insiders warn the RBI’s move will raise the cost of borrowing especially for small importers, slow the pace of imports, and likely weaken the rupee over the next three to four months, and lead to higher loan delinquencies.

Importers, already hurt by a sharp hike in import duties in February on goods ranging from iPhones to Zippo lighters and Ray-Bans to Fitbits, now face an even bigger setback, they warn.

“This kills small traders who are pledging property to get LoUs,” said Kasim Sait, managing partner of Texim International, an importer of synthetic rubber, based in Chennai in southern India.

The RBI allowed banks to continue issuing letters of credit (LCs) – a more stringent, internationally recognized instrument, but one that comes with much higher fees.

While the gems and jewelry segment was the heaviest user of LoUs, every sector including metals, pharmaceuticals, and petroleum was likely to be hit, bankers said.

All these importers used to raise dollar funds against LoUs at 2.5 percent to 3 percent offshore, but this would go up to as much as 12 percent or more as companies would be forced to borrow from local banks in India, they said.

“It will definitely increase costs of funding,” said Nikunj Turakhia, President of the Steel Users Federation of India.


Others fear the RBI decision could make Indian exports less competitive and paralyze some companies that are already tapped out on their domestic borrowing limits.

And while using LoUs, commonly known as “buyer’s credit”, was straightforward, switching to letters of credit is more complex.

“The process for an importer has gone up drastically,” said Sanjay Mandavia, a trade finance consultant based in western Indian city of Ahmedabad. “In a buyer’s credit transaction, it would have been completed in 2-3 days, in this case it could take a month.”

As letters of credit require greater involvement from both the exporter and its banks, he said this also resulted in higher courier charges, document charges, processing and interest costs.

“The impact will be seen in credit markets, corporate funding cost rising, dollar funding being substituted by rupee loans and imports coming down over the next three-four months,” said Sajal Gupta, head of forex and rates at Edelweiss Securities, adding that every month $6 billion of LoUs were issued by Indian banks.

“There will be an additional $1 billion-$1.5 billion demand in the spot currency market every month as well as a sentiment impact which will keep the rupee exchange rate under pressure.”

The rupee INR=D2 weakened up to 65.06 to the dollar on Wednesday from its previous close of 64.89, bucking a regional appreciation trend.

Reporting by Suvashree Dey Choudhury and Devidutta Tripathy; Additional reporting by Aby Jose Koilparambil in Bengaluru; Editing by Alex Richardson

Indian Banks adds Additional Control to SWIFT System

As per Government of India revert in Rajya Sabha, PNB  has taken below steps to ensure that such unauthorised activities in SWIFT systems are not repeated (other banks may have changed accordingly):

  1. Establishment of an additional tier(off-site) as a third level of re-authorisation of SWIFT messages, wherein payment messages are re-authorised by a separate team of SWIFT Centre, Mumbai only after cross-checking the authenticity of messages in CBS (Core Banking System);
  2. Defined SWIFT-user-based limits for all SWIFT users, under close monitoring;
  3. Switching off of SWIFT server (LTE) by 10:00 p.m., and restricting SWIFT operations at branches to 6:30 p.m. and centralised back office for trade finance by 7:00 p.m.;
  4. Concurrent auditors at branches advised to ensure physical reconciliation of all SWIFT messages with CBS on daily basis;
  5. Placing of auditor at SWIFT Centre, Mumbai to carry out audit of SWIFT Operation at SWIFT Centre, Mumbai for anomaly, if any; and
  6. Monitoring of SWIFT user ID creation/resetting on the recommendation of senior level functionaries.


  1. Rajya Sabha : PNB scam
  2. PNB fraud effect: Punjab National Bank puts in place 3-tier SWIFT process post Rs 12,700 cr scam

Bank Audit – Buyers Credit and Nostro Account

A bank branch goes through four kinds of audits and inspection

  • Internal audit (done by bank staff) on regular basis
  • Concurrent audit (done by a third party), on monthly or quarterly basis
  • Statutory audit (done by the statutory auditor) on quarterly basis
  • Inspection by RBI (annual basis).

In relation to buyers credit transaction, below are the few audit point which are covered by above audits.

Buyers Credit Audit Points

Following documents are required to be verified by the statutory auditors during review of Buyers’ Credit Transaction and its accounting treatment in the Indian Bank’s books.

  1. (Loan) Agreement, if any, entered between the Indian importer (borrower), overseas bank (lender), the Indian bank (facilitator);
  2. Underlying documents for import of capital goods or raw materials;
  3. Maximum tenure of buyer’s credit as per guidelines of RBI;
  4. SWIFT messages originated by overseas bank specifying the terms of Buyer’s Credit;
  5. The calculation of contingent liability towards LoC/ LoU is inclusive of interest accrued on the Buyer’s Credit as on financial statement date;
  6. Documentation / Agreement between overseas bank and Indian bank, and, any further confirmatory documents exchanged between overseas bank and Indian bank;
  7. Review of documents specifying right of recovery against borrower, in case if the borrower defaults in repayment of Buyer’s Credit;
  8. Balance confirmations obtained from the overseas bank;
  9. Charge created in records of Registrar of Companies (RoC) related to the security offered for Buyer’s Credit vis-à-vis disclosure of Buyer’s Credit in the financials of borrowers as secured / unsecured loan;
  10. Acknowledgement of debt, if any, obtained from the borrower;
  11. The calculation of drawing power for working capital finance availed by the borrower is net of the Buyer’s Credit;
  12. Form 15CA / Form 15CB compliance made by the borrower.

Nostro Account Audit Points.

The auditor may consider the following aspects in respect of NOSTRO reconciliation:

  • Whether a system of periodical reconciliation is in place.
  • Whether the reconciliation process followed ensures matching of each item and not for overall matching of total amount
  • Whether logs are generated for any change made in entry and whether maker checker rule is implemented for authorising changes made in entry, if any, for reconciliation
  • Whether confirmations from the foreign banks are obtained on a periodic basis. This may be either through physical confirmations, swift messages, emails, etc.
  • Whether information to the controlling office is sent on a timely basis.
  • Whether long outstandings are taken up and reconciled.
  • Random check of the method of reconciliation.
  • Debits outstanding both in the mirror account and in the Nostro accounts are to be verified and recommend for provision wherever necessary.
  • Set off the credit against debits only at the permission of the head office for long outstanding entries

Nostro Account of Overseas Branches

Obtain a list of all NOSTRO Accounts maintained/ operated by the Branch from the branch Management.

  1. The auditor should obtain a list of all NOSTRO Accounts for the purpose of verification from the Branch Management.
    • (a) Are the NOSTRO Accounts regularly operated?
  2. The auditor should verify whether the NOSTRO Accounts are being regularly operated. If not give the list of NOSTRO Accounts with balances outstanding, which are not operated regularly, the date of last transaction, etc. The auditor should specifically comment on overdrafts in NOSTRO accounts, if any.
    • (b) Are periodic balance confirmations obtained from all concerned overseas branches/ correspondents?
  3. The auditor should verify whether the balance confirmation from all concerned overseas branches/ correspondents have been obtained on a periodic basis. He should report the names of the bank and the period wise outstanding balances, which remain unconfirmed.
    • (c) Are these accounts duly reconciled periodically? Your observations on the reconciliation may be reported.
  4. While examining the transaction in foreign exchange, the auditor should also pay attention to reconciliation of NOSTRO Accounts with the respective mirror account. The amount in the NOSTRO account is stock of foreign currency in the form of bank accounts with the overseas branches and correspondents. Unreconciled NOSTRO Accounts, on an examination, may reveal unauthorised payments from the foreign currency account, unauthorised withdrawals, and unauthorised debit to mirror account. The auditor should also evaluate the internal control with regard to inward/outward messages. The inward/outward messages should be properly authenticated and discrepancies noticed should be properly dealt with in the books of accounts. In case balance confirmation certificate have been received but the same have not been reconciled, the auditor should report, in respect of each bank, the balances as per books maintained by the branch and the balance as per the relevant balances confirmation certificate, stating in either case whether the balance is debit or credit.
    • (d) Whether the branch is following Head Office guidelines for reporting requirements under Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards (CRS).
  5. Does the Branch follow the prescribed procedures in relation to maintenance of Vostro Accounts?

The auditor should verify whether prescribed procedure in relation to inter-bank confirmation in the Vostro account is followed or not. In case balance confirmation certificate have been received but the same have not been reconciled, or where confirmation has not been received the same should be reported, in respect of each Vostro Account. The RBI has also issued the Master Directions FED Master Direction No.2 /2015-16 dated January 01, 2016 (updated on April 28, 2016) on “Opening and Maintenance of Rupee/Foreign Currency Vostro Accounts of Non-resident Exchange Houses”


  1. Concurrent Audit System in Commercial Banks – Revision of RBI’s Guidelines
  2. Guidance Note on Audit of Banks (2017 Edition)
  3. Guidance Note on Audit of Banks- 2018 Edition
  4. Long Form Audit Report (LFAR) and Tax Audit in Respect of Bank Branches
  5. Long Form Audit Report (LFAR) Format
  6. Why auditors in India must keep up with technology

Implication on Buyers Credit because of PNB Fraud

Latest Articles:

  1. RBI Stops Buyers Credit Transactions (LOU & LOC)
  2. Indian Banks adds Additional Control to SWIFT System
  3. Bank Audit – Buyers Credit and Nostro Account

This article gives layman summary of the PNB fraud case and its impact on buyers credit product and various stake holders like Indian Bank Overseas Branches, Local Banks in India and Importers.

Summary of Case:

Letter of Credit (LC) and Buyers Credit transactions were done without funded base or non fund based  limits and underlying security (Fixed Deposit or Assets ) in place. This was done by issuing LC and Letter of Undertaking (LOU) to overseas branches using SWIFT message without making entries in Core Banking System (CBS).  As per regulator requirement, even in case of 100% cash backed (FD) margin, bank has to create limits stating security as FD and then only any transaction is allowed.

Missed Internal Control 

  1. Swift systems not connected to Core Banking System (CBS). Branch staff was able to send LOU swift without routing transaction through CBS. RBI in its 2016 Circular to banks had mentioned problem in relation to process followed for issue and reconciliation of SWIFT messages related to Trade finance products and corrective actions banks should take to prevent any fraud.
  2. When LOU / LC is sent, bank charges LOU charges from importers account. Either this charges where not debited to importers account, which means loss in revenue for bank side or charges were debit from importers bank account then there was  trail of transactions which was missed during audit.
  3. Nostro reconciliation. All credit and debit entries goes to Nostro Mirror Account maintained in CBS. All funding for buyers credit would have reflected in Nostro and reconciled. Only in case where overseas branches funded directly to supplier (as per instruction in LOU), credit entry will not be reflected but still debit entry for repayment of principal and interest will always be there.
  4. Audit of swift messages.

Impact on Overseas Indian Bank Branches

  1. Overseas Indian Bank branches are verifying each and every buyers credit outstanding in their books with LOU issuing bank and asking for confirmations.
  2. Few banks have cancelled offer letter already issued against which funding is pending.
  3. Overseas branches are avoiding buyers credit transaction of Punjab National Bank.
  4. Few overseas branches, have temporary stopped doing buyers credit.
  5. Few overseas branches  have amended or in process of amending the LOU formats to include more details of underlying import transaction and adding additional clause to protect their interest.
  6. Increased documentation. Some banks are asking for copy of Invoice and BL copy with every transaction before funding. Some are asking invoice and BL even before issuing quote.
  7. Insisting on funding the transaction in Nostro account of LOU issuing bank only. Earlier there were banks which  had an option of funding nostro of Supplier’s Bank directly and providing a confirmation swift to LOU issuing bank.

Impact on Local Bank

  1. Updating or link system between SWIFT and CBS
  2. Centralizing SWIFT systems instead of branch based systems.
  3. Temporary local bank have or may stop issuing LOU.
  4. Few banks are insisting that whole leg of transaction is routed through them. Example: For importer enjoying limits with SBI branch, will have to approach only local SBI branch for quote. In turn, local SBI Branches will only take quote  from SBI Overseas branches.
  5. Before this incident, LOU issued for buyers credit transaction were consider under lesser risk  and thus required lesser provisioning under Basel III norms issued by RBI. There may be a change in this provision. RBI is yet to clarify on the same.

Impact on Importer

  1. As number to branches quoting have come down, fresh quote for overseas branches are hard to come by.
  2. Buyers Credit pricing have gone up and thus increasing overall costing of transaction.
  3. Operating time of getting a transaction through has gone up. Earlier which used to take 2 – 3 days to complete the whole transaction not taken 10 – 15 days.
  4. Few bank have cancelled all the existing offer letter for which funding is pending. For those importers where banks have cancelled existing offer letter, will have to get fresh offer letter from new bank; which is currently difficult to come by.
  5. Few banks are insisting that whole leg of transaction is routed through them. Example: For importer enjoying limits with SBI branch, will have to approach only SBI branch for quote. And SBI Branches will only take quote  from SBI Overseas branches.
    • Increase time of transaction processing time.
    • Branch staff is not equipped with process.
    • Branch staff overload and least priority thing for them.
    • Costing will go up as importer will not have option to negotiate on price.
  6. Importer whose import is under process and incase is not able to arrange buyers credit, will have to go to Cash Credit or Term loan depending on goods. Thus will increase overall cost.

RBI Statement on the case:

The fraud in PNB is a case of operational risk arising on account of delinquent behaviour by one or more employees of the bank and failure of internal controls. 

Regulatory Updates

  1. The Reserve Bank has set an April 30 deadline for all banks to link the Society for Worldwide Interbank Financial Telecommunications (SWIFT) with their core banking solution (CBS)
  2. RBI initiates special audit of PSBs with focus on trade finance
  3. Government: Public Sector Banks (PSBs) to consolidate 35 overseas operations without affecting international presence of PSBs in these countries; 69 ops identified for further examination. Move towards cost efficiencies and synergies in overseas market.
  4. ICAI Launches Investigation Into PNB Fraud
  5. Cabinet To Notify Audit Regulator NFRA, Approves Draft Rules 



  1. Will keep updating this article as and when further information is available.
  2. Information related to PNB case used are based on information available in public domain.


  1. RBI Statement
  2. RBI Appoints Expert Committee headed by Mr. Y M Malegam
  3. Cyber Security Controls — frauds related to trade finance transactions — misuse of SWIFT
  4. Information Technology & Cyber Risk in Banking Sector – The Emerging Fault lines – S. S. Mundra
  5. Concurrent Audit System in Commercial Banks – Revision of RBI’s Guidelines
  6. Guidance Note on Audit of Banks (2017 Edition)
  7. Guidance Note onAudit of Banks- 2018 Edition
  8. The Anatomy of the PNB fraud.
  9. PNB Fraud: Hong Kong regulator seeks status report from Indian banks 
  10. PNB fraud case: Axis Bank says ‘sold down’ LoU transactions
  11. PNB scam: Is RBI going back on its rules on letters of credits? 
  12. PNB fraud case: Officials of other banks under scanner
  13. How did everyone miss the PNB scam? An accountant explains what could have gone wrong 
  14. Nirav Modi case: Bank officials may have made close to Rs 823 crore in PNB fraud
  15. To counter PNB stand, banks likely to cite 180-day rule
  16. India Ratings Places Firestar International on RWN
  18. Banks relied on India Ratings’ A- outlook to lend to this Nirav Modi firm
  19. The gaping holes in Nostro account monitoring and the SWIFT messaging system:
  20. PNB scandal: Glossed over, auditors flagged loan default, forex violations
  21. Nimo fallout on imports
  22. Corporate banks in a world of pain 
  23. Why auditors in India must keep up with technology
  24. Loose ends and unanswered questions of the PNB scam

EU list of Non-Cooperative Jurisdictions : No Impact of Buyers Credit

On 5 December 2017, European Union (EU) Council approved and published a list of non-cooperative jurisdictions. Criteria used were:

  • Tax Transparency
  • Fair Taxation
  • Implementation of Anti – BEPS (Base Erosion and Profit Shifting) standards

List of non-cooperative jurisdiction (17 Countries)

Screenshot from 2017-12-06 10-22-59

American Samoa, Bahrain, Barbados, Grenada, Guam, Korea (Republic of), Macao SAR, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia, and United Arab Emirates

There are other 43 countries which are currently not part of Non Co operative list. These countries are at various level of implementation.  Incase if they are not able to implement Transparency, Fair Taxation or Anti-BEPS Measures, EU Council can move them to Non Cooperative Jurisdiction List in future.

Defensive Measures Implemented for Non Co operative Jurisdictions

Conclusion : No Impact of Trade Finance or Buyers Credit

As seem in above article, none of the defense measure put in place are related to Trade Finance. Thus in the current form, above non cooperative country list will not impact Trade Finance products.

Overseas Banks (Including based in EU) will be able to provide Trade finance product and Buyers Credit for good with country of origin or shipment from above countries.


  1. Taxation: Council publishes an EU list of non-cooperative jurisdictions 
  2. European Fund for Sustainable Development (EFSD), the EFSD Guarantee and the EFSD Guarantee Fund
  3. EU list of non-cooperative jurisdictions for tax purposes

Applicability of AS 11 in Buyers Credit on Capital Goods

As per Accounting Standard 11 – The effects of Changes in Foreign Exchange Rates on Import of Capital Goods / Fixed Assets are

  1. Fixed Assets are to be treated as non monetary item. It may be recorded at historical cost or net realisable value as per accounting method followed by the firm on the capitalisation date. However as on the Balance sheet date all fixed assets should be reported at closing rate (i.e. 31.03.2017)
  2. In case, the capital good procured is a Non Integral Foreign operation then unrealised foreign exchange gain / loss should be transferred to Foreign Currency Translation Reserve a/c. The same would be disclosed under Share holder’s fund (both opening and closing balance should be provided)
  3. In case, the capital good procured is an Integral Foreign operation then unrealised foreign exchange gain / loss should be transferred to Profit ans Loss a/c.
  4. In case where the importer has availed buyers credit on capital goods in foreign currency, the value of capital good / fixed asset is to be revised every time there is a forex gain/loss until the final payment is made to the funding bank.
  5. The value of the capital good  / fixed assets is also to be revised as on Balance Sheet date and reported at closing rate.

Importer Query

Can you guide us on accounting and tax treatment as on 31st March 2017 for the unrealized forex gain/loss due to exchange rate fluctuation ?

In our case, the Buyer’s Credit in Japanese Yen 10 Million is taken for acquiring capital assets (fixed assets) and was capitalized on 01 Feb 2017. The capitalization was done in INR at conversion rate  0.6105 (JPY INR) on Buyer’s Credit funding date 01 June 2016. On 31 March 2017 conversion rate was 0.58 resulting to forex gain.

Above Buyers Credit got due on 26 May 2017 and was rollover for further 1 year getting due date on 20 May 2018.

Particular Date Yen Rate
Buyers Credit Availed 1 Jun 2016 0.6105
Capitalized ** 1 Feb 2017 0.6105
Financial Year End 31 Mar 2017 0.58
Buyers Credit Expiry & Rollover 26 May 2017  
Rollover Expiry 20 May 2018  

** Capitalisation Date: The Date on which the fixed asset is capitalised in the books of accounts and put to use.

Questions ???

Do we have to capitalize our assets in INR based on forex as on 01 Feb 2017 or 01 June 2016?

Revert: Capital assets is to be capitalised on  01 Feb 2017.

Do we have to restate our fixed assets every time there is forex gain/loss until the final payment is made ?

Revert: Yes, the Fixed assets value is to be revised every time there is forex gain/loss until the final payment is made. (Also on all B/S dates)

Are we supposed to pass the accounting entry for the Forex gain/loss and give effect to P&L (although the Buyer’s Credit was for capital asset acquisition) ?

Revert: Capital goods was procured as non integral foreign operation, hence unrealised foreign exchange gain / loss should be transferred to Foreign Currency Translation Reserve a/c. No effect will come in Profit and Loss A/c.

We are finalizing Balance Sheet for 31 March 2017 and there is forex gain. What will be Income Tax treatment ?

Revert: For finalizing Balance Sheet for 31 March 2017 all Fixed Assets should be reported at closing rate (‘Closing rate’ as the exchange rate at the balance sheet date. i.e. 31 March 2017)

Note:  For companies for whom IND AS (16 & 21) is applicable, treatment will be different and will be answered in separate article.
  1. The Effects of Changes in Foreign Exchange Rates 
  2. Buyers Credit Accounting Entries

Post Libor World – Impact on Buyers Credit

In earlier article we have discussed about various aspect of Libor and its Impact on buyers credit transaction.

In brief, Libor attempts to answer a fundamental question: What is the  cost of money? It does this for a range of currencies (dollars, euros,  pounds, etc.) and for a range of maturities.

Since 2011 when news of Libor scandal had appeared, there has been many changes in Libor. Taking this further on 27th July 2017 current FCA Chief Andrew Bairley announced further changes.

One of the major change was by End of 2021 FCA will stop regulating Libor. Thus there is a good possibility that  it may stop getting published after that. Above speech gives reason why this step was taken and how market should move on to alternative benchmark.

Alternative Benchmarks

Alternatives which may replace Libor are given below. Some of these them are new or proposed. Between now and 2021 regulators and banks will have to stream line these benchmarks.

  1. UK: SONIA. Latest Rates
  2. USA: Treasury Repo Rate (Yet to be published).
  3. Europe: EONIA
  4. Swiss: SARON
  5. Japan: TONAR

Impact of Buyers Credit Market

  1. New benchmark: In current scenario, buyers credit arranged from bank based in any country but quote is linked to Libor rates and thus easier to compare. In future, if so happens instead of Libor every country financial institutions starts using another benchmark, then importer will have to keep track of each benchmark to figure out which quote is cheaper.
  2. Financing Currency may also differ based on country from which financing is been taken.
  3. The market will need guidance as to what a replacement could be and this will lead to increased volatility and possibly reduced liquidity in the near term.


There are still if’s and buts on Libor existence post end of 2021. In the same speech door has been kept open.

An obvious question is what happens to LIBOR after end-2021.

The answer to the question would be up to the benchmark’s administrator – IBA – and the panel banks. They could of course continue to produce LIBOR on its current basis if they wanted to, and were able to do so. But, under this plan, the benchmark would no longer be sustained through the mechanism of the FCA persuading or obliging panel banks to stay. The survival of LIBOR on the current basis, as a dynamic benchmark based on daily submissions and updates, could not and would not be guaranteed.

One will have to keep a track on how overall market and buyers credit market adjust to this new possibility. My view is market will move to new benchmarks and it may be sooner than 2021

There are few articles listed below which would  help in throwing some more light into the subject as it is still a developing story.


  1. Future of Libor : Speech by Andrew Bailey, Chief Executive of the FCA, at Bloomberg London : Dated: 27 July 2017
  2. The Death of Libor – A Bank Loan Perspective
  3. Libor Funeral Set for 2021 as FCA Abandons Scandal – Tarred Rate
  4. Monkeying with Libor
  5. New Treasuries ‘repo’ rate to replace Libor
  6. Alternative Reference Rate Committee: FAQ
  7. Reforming Major Interest Rate Benchmarks: Progress report on implementation of July 2014 FSB recommendations
  8. The Wheathley Review of Libor : Final Report : Dated 28-09-2012
  9. HM Treasury : The Wheatley Review
  10. Speech by Martin Wheatley – Managing Director, FSA, and CEO Designate, FCA at the Wheatley Review of LIBORDated 28-09-2012
  11. A Post Libor World: Impact and Analysis

Earlier Article of Libor:

Nostro Account and Buyers Credit

What is Nostro Account ?nostro-account

  1. In simple terms, Nostro Account is an account of Indian Bank with an another bank in foreign country.
  2. These account are opened in foreign country with foreign bank and in the currency of that country.
    • For Example: HDFC Bank having a Nostro Account with J P Morgan Chase Bank in US and in USD currency. Source: HDFC Bank
  3. Bank can more then one Nostro account for a particular currency based on its requirement.
    • For Example: HDFC Bank for USD has nostro account with JPMorgan Chase Bank, Bank of New York, Bank of America, Wells Fargo Bank N.A, and Standard Chartered Bank. Source: HDFC Bank
  4. Currency to currency, there will different account either with same bank or different Bank.
    • For Example: HDFC Bank for Eur has Nostro Account with JPMorgan Chase Bank, Barclays Bank PLC, Societe Generale, and Standard Chartered Bank. Source: HDFC Bank
  5. Nostro accounts are commonly used for currency settlement and Foreign Trades.

Nostro Account Relevance in Buyers Credit

Funding bank will transfer fund to Nostro account of LOU issuing bank on receipt of LOU.

What details are provided by LOU issuing bank to Funding Bank for Buyers Credit.

  1. Foreign Bank Name and Swift Address: For Example: J P Morgan & Chases Bank
  2. Local Bank Name and Swift Address : For Example : HDFC Bank
  3. Local Bank Account number with Foreign Bank (IBAN Number in case of EUR Nostro)
  4. Reference Number which Funding bank will have to quote at time of transferring fund to LOU issuing Bank
  5. Currency and Amount
  6. Value Date

Funding Bank Queries in relation to Nosto Account to LOU issuing Bank

  1. Nostro account details not mentioned
  2. Incomplete Nostro Account details provided
  3. Nostro account details provide of USD whereas transaction to be funded is in EUR/GBP etc.
  4. Nostro Account details of supplier provided whereas funding bank provides funding only to LOU issuing Bank

LOU Issuing Bank Queries in relation to Nosto Account during Buyers Credit Transaction.

  1. Funds not reflecting in Nostro
  2. Funds reflecting short in Nostro


  1. Nostro reconciliation: how it works in a bank

Subsidy under CLCSS Cannot be Claimed Where Buyers Credit is Availed

Trigger for this topic is a question that a reader asked:

“MSME manufacturing  unit doing expansion of machinery by purchasing machinery from abroad   get credit linked capital subsidy scheme (CLCSS) from Central Government.

MSME unit avails buyers credit for payment to overseas buyer and sanctioned term loan is not utilised . Can the unit be eligible for subsidy? ”

SubsidyBelow article gives basic details about Credit Linked Capital Subsidy Scheme and revert to above query.

Central Government and State Government runs various subsidy schemes for Indian Manufacturer for setting up new plant or expanding the existing plant. One of these subsidy scheme is Credit Linked Capital Subsidy Scheme (CLCSS).  This scheme was launched in October-2000 and has been revised over the years.

Summary and Benefit of the Scheme

  1. Eligible for new as well as existing units
  2. Ceiling on the loan amount under the scheme is Rs. 1 Crore.
  3. 15% Capital subsidy on loan amount or Rs. 15 lacs whichever is minimum.
  4. Scheme is for purchase of plant and machinery
  5. Calculation of admissible subsidy will be done with reference to the purchase price of plant and machinery instead of term loan disbursed to the beneficiary unit
  6. Replacement of existing equipment/technology with the same equipment/technology will not qualify for subsidy under this scheme, nor would the scheme be applicable to units upgrading with second hand machinery.

In the case of imported machinery, the following shall be included while calculating the value of plant & machinery, namely :-

  1. Import duty (excluding miscellaneous expenses as transportation from the port to the site of the factory, demurrage paid at the port);
  2. Shipping charges;
  3. Custom clearance charges; and
  4. Sales Tax.

Process to be Followed

  1. Bank sanctions term loan to SSI Unit
  2. Bank will enter into General Agreement (GA) with concerned SSI  unit on behalf of Government of India.
  3. SSI Unit submits application for assistance under the CLCSS as per required format.
  4. Bank (Nodal Agency) approves CLCSS subsidy for SSI unit as per CLCSS regulation.
  5. Bank release the subsidy amount with each installment of loan in a manner proportionate to the amount of term loan disbursed (on pro- rata basis), subject to the ceiling of the term loan/ subsidy amount as per applicable guidelines of the CLCSS.
  6. Subsidy amount once issued, is kept in Fixed Deposit for 3 years. The beneficiary unit shall remain in commercial production for at least three years after installation of eligible plant & machinery on which subsidy under CLCSS has been availed. If the unit fulfills the condition, the FD will be transferred to unit’s account after three years.

Documents Required

  1. Copy of SSI Registration Certificate
  2. Copy of Term Loan Sanction Letter
  3. Copy of Bank Term Loan Statement of account showing release dates.
  4. Copy of machinery invoice(s) with the bill of entry (imports).
  5. Audited Balance Sheet for the last 3 years prior to loan sanctions, or copy of project report submitted to bank
  6. Company letter head  – 6 Number
  7. Stamp Paper – Rs. 200/- in the name of the unit.
  8. Owner’s Details: Name of proprietor / partner / Directors of Company. Their age, father’s / spouse’s name, residential address. Date of installation of each machine and date of put to commercial use. Increase in Capacity after installation of Machinery – Monthly – Profit and Loss, Sales etc.

For further details CLCSS, please refer article in reference section.

Revert to Above Question: Whether Both Buyers Credit and CLCSS can be used by Importer

In CLCSS,  disbursal of Term Loan is one of the condition.  As seen in earlier articles Buyers Credit on Capital goods,  incase of buyers credit term loan is not immediately disbursed and depending on the requirement of importer, it can either disbursed at end of 3 years or before.

Incase of buyers credit, as term loan is not disbursed, Importer will not be able to claim subsidy under CLCSS.

Importer will have to choose between either one of them.


  1. Credit Link Capital Subsidy Scheme for Technology Upgradation
  2. List of Machines Covered in CLCSS
  3. SIDBI : Credit Linked Capital Subsidy Scheme
  4. FAQ on CLCSS
  5. Sample Agreement for Financial Assistance under Credit Linked Capital Subsidy Scheme for Technology Upgradation of the Small Scale Industries
  6. Application Form for CLCSS
  7. RBI Master Circular: Lending to Micro, Small & Medium Enterprise (MSME) Sector)

Permitted Methods of Import Payment

Payment_methodsThe trigger for this topic is a question that a reader asked:

Since Foreign Trade Policy allows imports in INR (Indian Rupees) also, what are the regulations related to buyer’s credit in respect of an import invoice which is in INR ?

Above question is more of an academic question as INR denominated import transaction are very limited but it will help in throwing light on concept of permitted methods of import payment.


RBI Circular on Import of Goods and Services talks about permitted methods of payment of import, which is further defined in Notification No.FEMA14/2000-RB dated 3rd May 2000. They are:

Group Permitted methods
(i) All countries other than those listed under (ii) below (a) Payment in rupees to the account of a resident of any country in this Group
(b) Payment in any permitted currency*
(ii) Member countries in the Asian Clearing Union (expect Nepal) (a) Payment for all eligible current transactions by debit to the ACU (Asian Clearing Union) dollar account in India of a bank of the participating country in which is resident or by credit to the ACU dollar account of the authorised dealer maintained with the correspondent bank in the other participating country.
(b) Payment in any permitted currency in other cases

* The expression ‘permitted currency’ is used in the Manual to indicate a foreign currency which is freely convertible i.e. a currency which is permitted by the rules and regulations of the country concerned to be converted into major reserve currencies like U.S. Dollar, Pound Sterling and for which a fairly active market exists for dealings against the major currencies.

Answer to Question

RBI has allowed making import payment in INR but Buyers Credit as a concept is to raise funds from overseas market in the currency of payment resulting in interest arbitrage and hence cost saving.


  • Transaction Value of $ 100000: Approx 10% (including overseas bank interest cost, lou charges, forward booking and arrangement fee)
  • Transaction Value of INR 6200000 (Approx INR equivalent) : INR Cash Credit Interest: Approx 13.50%
  • Resulting cost saving of 3.5% (approx)

If the import is in INR, funding arranged in INR will be at same cost and thus no cost saving. One more question which arise is, whether buyers credit in cross currency  is allowed for such transaction. According to me it is a gray area.


  1. Notification No.FEMA14/2000-RB dated 3rd May 2000
  2. Exchange Control Manual: Permitted Currencies and Method of payment
  3. Buyers Credit Cost Calculation Sheet

Relationship Management Application (RMA) and Buyers Credit

Using Swift Codes Banks and Financial Institutions send and receive swift messages. But there must have been times where you might have come across your bankers coming back to you stating that they do not have swift key arrangement with buyers credit bank. Thus they will not be able to send Letter of Undertaking (LOU) / Letter of Comfort (LOC) authenticated swift message (MT799) to buyers credit bank. Below article gives a brief about why situation arise.

Relationship Management Application (RMA)

RMA  is a system, where a sender bank and receiver bank has to authorize each other to send swift messages and also what type of swift message they can send each other. Thus making the communication system more secure.

So, in cases where banks do not have an RMA with another bank, LOU issuing bank either has to set up an RMA with Buyers Credit Bank or has to route the swift message through a bank / branch with whom both banks have an RMA. Also note, there is an additional cost which correspondent bank will charges for Relaying or Forwarding the swift message. Normally this would cost between $50 – $100 and also result in consumption of additional time to complete transaction.

RMA Example

LOU Issuing Bank ———MT799 (LOU) ———Buyers Credit Bank

Non RMA Example

LOU Issuing Bank—–MT799 (LOU) —– XYZ Bank (Relay / Forward)——–Buyers Credit Bank


RMA between institutions from Importers Perspective

  1. As a customer there is nothing much one can do than requesting his bank to get RMA setup with another bank where they do not have one.
  2. Bank would be interested in getting RMA done with another bank based on expected volume and other business which it can do.
  3. Both Banks should agree to get RMA done.
  4. Depending upon the backend process of both banks, it might take from one day to few weeks in getting the RMA setup between banks.

Swift Code & Messages Used in Buyers Credit Transaction

Latest Article:

What is SWIFT Code ?


SWIFT code (also known as ISO 9362, SWIFT-BIC, BIC code, SWIFT ID or SWIFT code) is a standard format of Business Identifier Codes approved by the International Organization for Standardization (ISO). It is a unique identification code for both financial and non-financial institutions. These codes are used when transferring money between banks, particularly for international wire transfers, and also for the exchange of other messages between banks.

SWIFT (Society for Worldwide Interbank Financial Telecommunicationdoes not facilitate funds transfer; rather, it sends payment orders, which must be settled by correspondent accounts that the institutions have with each other. Each financial institution, to exchange banking transactions, must have a banking relationship by either being a bank or affiliating itself with one (or more) so as to enjoy those particular business features.

The SWIFT code is of 8 or 11 characters, made up of: 

For Example: HDFC IN BB AHM

  1. The first four characters represent the Bank code, for example HDFC (HDFC Bank)
  2. The next two characters represent the ISO Country code, for example IN (India)
  3. The next two characters are the Location code, for example BB (Mumbai)
  4. Optionally a three character branch code can be added at the end of the address.  For example HDFCINBBCCAHM might be the Ahmedabad branch. These codes are primarily used for internal routing purposes within the bank, as the branches themselves do not have direct connection. Usage is often more common in some countries. 

Where an 8-digit code is given, it may be assumed that it refers to the primary office.

Type of Swift Message

SWIFT messages are identified in a consistent manner. They all start with the literal “MT” which denotes Message Type. A 3-digit number then follows this. The first digit represents the Category. A category denotes messages grouped together because they all relate to particular financial instruments or services. The full list is as follows:

MT0nn System Messages
MT1nn Customer Payments
MT2nn Financial Institution Transfers
MT3nn FX, Money Market & Derivatives
MT4nn Collections and cash letters
MT5nn Securities Markets
MT6nn Precious Metals & Syndications
MT7nn Documentary Credits & Guarantees
MT8nn Travellers Cheques
MT9nn Cash Management & Customer Status

The last digit is the Type and denotes the individual message. There are several hundred message types across the categories in total.

A special subset of Messages is known as the Common Group because the last two digits represent the same message in each category. For example:

MTn99 Free format
MT299 Free format relating to transfers
MT599 Free format relating to securities
MT999 General free format

Types of Swift Message used in Buyers Credit.

  1. MT799 :  Authenticated Free Format Message type.  
    1. LOU Issuing Bank: For sending letter of undertaking / letter for comfort for availing buyers credit
    2. Buyers Credit Bank: For confirmation of funding along with repayment details
  2. MT202: Requests the movement of funds between financial institutions
    1. Buyers Credit Bank: At the time of payment of buyers credit to LOU issuing Bank
    2. LOU Bank: At the time of repayment of buyers credit of principal and interest
  3. MT999 : Unauthenticated Free Format Message. Cases where there is no direct swift key arrangement, banks use this free format for basic communication.

How to Search a Swift Code of a Bank

Using the below link, one can find swift code for a particular financial institution. Filling up details of two fields i.e. Institution Name and Country, will provide the desired Swift Code.

Swift Code Search

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Myanmar Economic Sanctions – Background, Recent Relaxation & Trade Finance

Myanmar has been under various international economic sanction for more than a decade, which has crippled its international trade. Below article gives a background of economic sanctions on Myanmar, recent relaxations in these sanctions and what will be its likely impact on trade finance from Indian importers perspective.

Background on Myanmar Sanctions


Under Burmese Freedom and Democracy Act 2003 (BFDA) and Junta’s Anti-Democratic Efforts (JADE) Act 2008 and US Government placed Myanmar under economic sanctions which resulted into

  1. Restriction on Imports from Burma: With certain exceptions, goods of Burmese origin could not be imported into the United States.
  2. Blocking of Property: Blocking of all property and interests in property of the persons listed in Special Designated Nationals and Blocked Persons List (SDN List).
  3. New Investments: New Investments in Burma were prohibited by U.S. person.
  4. Exportation of Financial Services to Burma: With certain exceptions, the exportation or re-exportation of financial services to Burmawere prohibited. The term exportation or re-exportation of financial services to Burma would broadly mean (as defined in 31 C.F.R. § 537.305):
    1. Transfer of funds, directly or indirectly, from the United States or by a U.S. person, wherever located to Burma; or
    2. The provision, directly or indirectly, to persons in Burma of insurance services, investment or brokerage services (including but not limited to brokering or trading services regarding securities, debt, commodities, options or foreign exchange), banking services, money remittance services; loans, guarantees, letters of credit or other extensions of credit; or the service of selling or redeeming traveler’s cheques, money orders and stored value.

Along with US, other countries like European Union (EU), UK, Norway, Switzerland, Australia and Canada also imposed various sanctions on Burma.

From International Trade / Trade Finance perspective, 3rd condition and various other countries sanctions brought International Trade from Myanmar to a standstill. Reason: Currencies widely used in international trade among countries was now not available for Myanmar transactions.

Recent Relaxation in Myanmar Sanctions

United States (under General License) and other countries started the process of easing restrictions on imports of Burmese goods in response to the substantial and significant reforms that have taken place in that country over the past years. Some of these relaxations related to international trade are:

  1. Authorizing the Exportation or Re-exportation of Financial Services to Burma: On 11-07-2012, exportation or re-exportation of financial services to Burma, directly or indirectly,  from the United States or by a U.S. person,was authorized subject to below mentioned limitations:
    1. Exportation or Re-exportation of Financial Services to Burma as defined in 31 C.F.R. § 537.305 (as given in above paragraph).
    2. This general license does not authorize, in connection with the provision of security services, the exportation or re-exportation of financial services, directly or indirectly, to the Burmese Ministry of Defense, including the Office of Procurement; any state or non-state armed group; or any entity in which any of the foregoing own a 50 percent or greater interest.
    3. This general license does not authorize the exportation or re-exportation of financial services, directly or indirectly, to any person whose property and interests in property are blocked as per SND List.
  2. Importation of Products of Burma: On 16-11-2012, Import of goods of Burma originare authorized except
    1. For jadeite or rubies mined or extracted from Burma or article of jewelry containing jadeite or rubies mined or extracted from Burma.
    2. Import from block person or entity as per SDN list.

Note: Above relaxation are under General Licence. A general licence authorize a particular type of transaction for a class of person without the need to apply for a license. Further details are given in FAQ.

Impact of Relaxation on Bilateral Trade between India and Myanmar & Trade Finance

India bilateral trade with Myanmar in year 2010 – 11 was $1070.88 Million (Source: website of Indian Embassy in Myanmar).

India’s imports from Myanmar (US$ 876.13) are dominated by agricultural and forest based products. Myanmar is the second largest supplier of beans and pulses to India, accounting for one third of India’s total requirements of imported pulses. Myanmar contributes to nearly one fifth of India’s imports of timber.

India’s exports (US$ 194.75) to Myanmar , though small, are diverse, ranging from primary commodities to manufactured products. Primary and semi-finished steel along with steel bars and rods constitute over one third of India’s exports. In 2010-11, coupled with metals, this commodity accounted for more than 30% of India’s exports to Myanmar. Pharmaceuticals are the next most important item and accounted for 27% (nearly US$ 60 mn) of India’s exports to Myanmar in 2009-10.  The other products exported to Myanmar are Iron & Steel (US$ 43 mn), Electrical machinery, Mineral oil, Rubber and articles, Plastics etc. Export of chemicals, plant & machinery and consumer goods, though small, shows potential for growth.

From Exporters and Importers Perspective it further opens up the market and ease of using various trade finance products. For Example, Indian Importers Importing Wood log into India from Myanmar earlier were not able to take benefit of Trade Finance products like LC, Buyers Credit etc from their banks. With recent relaxation, importers will now be able to avail various benefit of trade finance products thus resulting in cost  saving.

Frequently Asked Questions (FAQ)

  1. What is OFAC ?  The Office of Foreign Assets Control administers and enforces economic sanctions programs primarily against countries and groups of individuals, such as terrorists and narcotics traffickers. The sanctions can be either comprehensive or selective, using the blocking of assets and trade restrictions to accomplish foreign policy and national security goals.
  2. What is a license? A license is an authorization from OFAC to engage in a transaction that otherwise would be prohibited. There are two types of licenses: general licenses and specific licenses. A general license authorizes a particular type of transaction for a class of persons without the need to apply for a license. A specific license is a written document issued by OFAC to a particular person or entity, authorizing a particular transaction in response to a written license application. Persons engaging in transactions pursuant to general or specific licenses must make sure that all conditions of the licenses are strictly observed. OFAC’s regulations may contain statements of OFAC’s specific licensing policy with respect to particular types of transactions.

  3. What is an SDN? As part of its enforcement efforts, OFAC publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific. Collectively, such individuals and companies are called “Specially Designated Nationals” or “SDNs.” Their assets are blocked and U.S. persons are generally prohibited from dealing with them

I will appreciate readers feedback on the content.


  1. US Department of The Treasury: Burma (Myanmar) Sanction.
  2. General License No. 16 : Authorizing the Exportation or Reexportation of Financial Services to Burma Dated: 11-07-2012
  3. General License No. 18: Authorizing the Importation of Products of Burma Dated: 16-11-2012
  4. Summary of Myanmar Sanction by EU, UK, Norway, Swiss, Australia, Canada, US OFAC Sanction and FATF Warning List
  5. Specially Designated National List
  6. FICCI: India-Myanmar Trade Relations
  7. Indian Embassy of Myanmar

Basel III – Future Impact of Trade Finance

To Avail Buyer’s / Supplier’s Credit: E:, M: +919825560186

The Basel Committee on Banking Supervision (BCBS, or Basel Committee) is an institution created by the central bank Governors of 27 members from both developed and emerging economies. The most influential publications by the BCBS are Basel Accords. The key part of  Basel framework as commonly referred to, guides banking industry how to calculate risk-weighted assets (RWA) and capital requirements. The Basel Committee gave its  final text of Basel III on Dec 2010 of details of updated global regulatory standards on bank capital adequacy and liquidity, which was agreed by the Governors and Heads of Supervision, and endorsed by the G20 Leaders at their November 2010 Seoul summit.

Implementation in India From: January 012013. The Basel capital ratio will be fully implemented as on March 31, 2018

Impact on Buyers Credit

  • LOU costing will go up
  • LOU issuing bank would prefer their branches / subsidiaries for arranging funds because of the provisioning norms. Thus would reduce options to their customers.

Trade Finance

Trade finance covers a spectrum of payment arrangements between importers and exporters. While a seller (the exporter) would like to ask the purchaser (the importer) to prepay for goods to be shipped, the purchaser (importer) may wish to reduce risk by requiring the seller to document the goods that have been shipped. Banks may assist by providing support in various forms. International Chamber of Commerce (ICC) banking commission believes that almost 90% of the world merchandise trade is supported by trade finance.

With trade finance, exporters and importers can achieve four broad functions, i.e., arrange for payment, raising fund, mitigating risks and costs, and access of credit information. Trade finance transactions can be structured in a number of ways. The structure used in a specific transaction reflects the relationship between participants, countries involved, and competition in the market.  So far, letter of credit (L/C) transactions are the norm in sales associated with emerging market countries. Collections, especially documentary collections are also important in bank trade finance.

Basel III:  Trade Finance Regulations’ Likely Impact on Banks

1. Basel III framework is biased against banks in emerging markets.

The minimum standards set for the IRB approach even at the foundational level are complex and beyond the reach of many banks. Emerging markets would face serious implementation challenges with their low technical skills, structural rigidities, less robust legal system, shortage of experienced talents, etc. The complexity and sophistication of the proposals makes its application in emerging markets highly unlikely, where the banks continue to be the major segment in financial intermediation and would be facing considerable challenges in adopting all the proposals.

Under Basel II, for banks with good quality assets, the risk weighted assets (RWA) under IRB approach will be significantly lower than under standardized approach, and that is what exactly the Basel Committee intends to encourage banks to migrate from standardized approach. It is felt that the proposals will disadvantage banks in emerging markets. Those banks play pivotal roles in extending trade finance to local traders, with those banks’ cutting finance support, the trade development for emerging market will be adversely impacted.

2. One year maturity floor  for trade finance

Basel III prescribes one-year maturity floor to the maturity of lending facilities despite of the fact that the maturity of trade finance products is usually shorter than 180 days. Since capital requirements (naturally) increase with maturity length, the capital costs of trade finance are artificially inflated as a result. Such measurement does not precisely reflect the short-term and low-risk nature of trade finance and expands the occupation of risk capital of banks, which is not conducive to the development of trade finance business.

Basel II paragraph 321 stipulates that the one-year floor does not apply to certain short-term exposures, as defined by each supervisor on a national basis. In other words, the Basel Committee permits that all national regulators have the discretion to waive this floor,  however many regulatory authorities are still reluctant to exercise this discretion, even after UK FSA waived the one-year maturity floor at the end of 2008.

3. Lack of Specific Data Puts Trade Finance in an Unfavorable Situation

Banks are allowed to use either the standardized approach or the IRB approach to measure RWA in terms of credit risk. The fundamental difference between IRB and standardized approach lies in that banks would adopt their own models to estimate parameters required for calculating RWA. The low-risk nature of trade-related Off-Balance Sheet items (OBS) should lead to low values when calculating risk parameters and demonstrate the advantage of saving risk capital compared with other lending facilities. Nevertheless, IRB requires that banks accumulate relevant historical data for at least 5 years when calculating probability of default (PD) and the calculation of loss given default (LGD) and exposure at default (EAD) be based on data even longer.

The majority of banks in the world do not have sufficient historical performance data for trade-related OBS items. The factors causing this are wide and varied, but particular problems include: (a) migration of facilities (i.e. when a trade loss results in an exposure on another facility, such as an overdraft); (b) customer-centric data collection practices; and (c) inherent biases in the data collected. Due to the common shortage of relevant record of historical performance data of trade-related OBS items, the low-risk nature is not given a full play from the values of risk components devised by Basel II. When calculating the occupation of risk capital, banks have to adopt 20% or 50% Credit Conversion Factor (CCF) made by the regulatory rules and it gives rise to the excessive occupation of risk capital as far as trade-related OBS items are concerned.

The ICC, with Asia Development Bank (ADB), decided to establish a pooled performance database for trade finance products, which is called Register on Trade & Finance (the Register). By September 2010, altogether nine banks provided portfolio-level data comprising 5,223,357 transactions worth of USD2.5 trillion, with a total throughput between 2005 and 2009. The initial finding is encouraging. Only 1,140 defaults have been reported within the full data set of 5,223,357 transactions. More important, reported default rates for off-balance sheet trade products are especially low. The Basel RWA methodology are more concerned with issues of counterparty instead of facility issues, therefore it is somewhat difficult to build that some type of facility is low in credit default. However, the ICC is determined to further their efforts to meet regulatory requirements for data collection, and the ICC will work to enhance and expand the data collected.

4. Basel III 100% CCF for Leverage Ratio Proposal Poses Threat to Trade Finance

Basel III capital standards paragraph 163 provides that the Basel Committee recognizes that OBS items are a source of potentially significant leverage; therefore banks should calculate the above OBS items for the purposes of the leverage ratio by applying a uniform 100% credit conversion factor (CCF). Increasing the CCF to 100% for trade-related contingencies for the purposes of calculating a leverage ratio could significantly disadvantage trade finance-focused banks.

When the leverage ratio becomes compulsory, a bank may choose to increase the cost of providing trade products or selectively offer these products to customers, which will undoubtedly impact the perspectives of trade finance. It is not appropriate to apply 100% CCF to trade-related OBS items such as L/Cs and L/Gs in calculation of leverage ratio under Basel III. This calculating method fails to differentiate trade finance products from other OBS fictitious financial instruments. Trade finance products are often of the short-term and self-liquidating nature and closely related to the activities of real economy with actual trade background of goods and services. In other words, this sort of transaction is based on the real-economy need of customers and totally satisfies the demand of customers for credit enhancing, settlement and financing in the trade of goods and services. Compared with OBS synthetic financial instruments, it cannot increase market risk. Consequently, it is not justified to treat trade-related OBS items as the significant source of excessive leverage and to adopt 100% CCF to restrain them.

If the risk difference of distinct OBS assets is ignored, it might encourage banks to retain high-risk and high-profit asset businesses like derivatives driven by the motive to gain more profits when stepping into the precautionary area of leverage ratio supervision, thus deviating from the original intention of leverage ratio supervision.

5. Asset Value Correlation Cover Trade Finance 

Under Basel II, there are separate Asset Value Correlations (AVC) for retail mortgage, credit cards and other retail exposures. The correlations for these products are different due to the fact that they have different tenors, behavioural and payment patterns, and influencing macroeconomic factors. For corporate banking, there is only one AVC for all corporate products, including trade finance. Trade finance exposures are diverse in nature, smaller in value, shorter in tenor, self-liquidating and exhibit different behaviour and payment patterns from other longer term corporate lending products. Defaults on trade finance obligations are generally minimal, even during stress situations. This is supported by industry data from the International Chamber of Commerce (ICC) – Asian Development Bank (ADB) Trade Finance Default Register study. The study, covering 5.2 million trade finance transactions over a period of 5 years, confirms that trade finance has historically had low default rates, even during the financial crisis. Additionally, in the rare occasions when trade loans default, loss recoveries are high. The AVC proposals recommended by the Basel Committee could increase the cost of providing credit for trade transactions and limit their availability, particularly in emerging markets that rely on sustained and affordable access to trade finance to support commercial activities.

6. Likely Implementation Issue under Basel Liquidity Standards

On top of the aforementioned capital standards in the new Basel III regime, there are new liquidity ratios that firms are forced to adhere to.  Both the short-term Liquidity Coverage Ratio and long-term Net Stable Funding Ratio allow national discretion on all other contingent funding liabilities such as trade finance and L/Cs when calculating the amount of liquid assets and stable funding required to match the potential liabilities. As with the one- year floor issue above, it is likely that some national supervisors will use this discretion to implement onerous liquidity requirements, which, when added on to other aspects of Basel III, will restrict the availability of trade credit even further.  These rules should be harmonized to avoid having irregular national rules for global business.

Basel III:  Trade Finance Regulations’ Likely Impact on Companies.

  1. Increase in cost of trade finance. According to few bankers, trade finance will becoming 15 to 37 percent more expensive.
  2. Reduced number of banks providing trade finance. Trade finance is low margin business.  As capital requirement going up, bank would prefer to increase their exposure on asset which with more earning.
  3. In order to avoid higher capital requirement, banks may start insisting customer to take funding from their overseas branches for products like buyers credit instead of other banks. Reason : Under letter of undertaking provisioning norm would be at 100% where as incase of letter of comfort it would be zero.

Related Articles

  1. Treatment of Trade Finance under Basel Capital Framework : October 2011
  2. RBI Circular: Implementation of Basel III Capital Regulations in India – Final Guidelines : May 2012
  3. Report on Findings of ICC-ADB Register on Trade & Finance : September 2010
  4. Basel III : A global regulatory framework for more resilient banks and banking system: Revised Version : July 2011
  5. Basel III: International Framework for liquidity risk measurement, standards and monitoring: December 2010

Note: Purpose of putting this article is to explain the importance of Basel III and impacts that Basel III will have on Trade finance product like Buyers Credit. This article is summary of various articles available on Basel III. Please refer to subject matter expert before using the article.

IMO Number and Its importance in case of Buyers Credit

MS Eleonora Maersk container ship (at Gdańsk D...What is IMO Number ?

The IMO ship identification number is made of the three letters “IMO” followed by the seven-digit number assigned to all ships by IHS Fairplay when constructed. This is a unique seven digit number that is assigned to propelled, sea-going merchant ships of 100 gross tons and above. It serves the purpose of identifying ships. It is a Unique number which does not change, even if when the ship’s owner, country of registry or name changes.

What is the Use of IMO Number ?

Banks are using Lloyd’s Register for checking ship details using IMO Number. Details such as owners of the ship till date, current owners, which countries flag this ship had used and  is currently using etc.

Purpose of doing this is to comply with US government sanctions on various countries under OFAC and other laws. IMO check is done at the time of every transaction, to avoid any violation of these laws.

Many buyers credit funding are done through US-based bank branches (quoting specifically US, others might also be using it), they check for IMO number of the vessel before buyers credit funding.

Issues which can arise in case of Buyers Credit

  1. Bank may refuse to fund the buyers credit transaction in case there is no IMO number available of the shipping vessel.
  2. In case of MultiModal Bill of Lading (B/L), there are more than one ship used either on international water or incase of part on international water and part on exporter’s country. Banks calls for all vessel name and BL details used during the transport of the goods, which is then further checked with Lloyd’s Register. In most of the cases ship moving on inland water of the country do not have IMO number, but some registration number given by local body of that country. In such a given case, funding will not happen.
  • Example: In one of such cases, which I had come across, goods were shipped from China to India. Part of shipment from exporter’s place to port was handled by local transport ship which did not have IMO number. An Indian Bank’s overseas branch in U.S. had refused to fund such transaction.


At the time of entering into a contract with exporters, it can be clearly specified that transport document should be either an Ocean B/L or incase of Multimodal B/L, goods to be shipped with an IMO number.


IMO Search by Vessel Name

OFAC Countries & Implication on Buyers Credit

What is OFAC Sanctions ?

  • The Office of Foreign Assets Control (OFAC) is an office of the Treasury Department of United States of America (US).
  • OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries, organizations, entities, and individuals.
  • Regulations issued under Trading With the Enemy Act (50 U.S.C. App.§§ 1-44) or by the US President under authority delegated under the International Emergency Economic Powers Act.
  • The OFAC sanctions programs are implemented through restrictions on imports and exports, prohibitions on financial transactions, freezing of assets, and other means.

Why Indian Banks restrict transaction from OFAC Sanction Countries ?

    1. Risk of getting fined by US Treasury and FED. Since 2010 Deutsche Bank, Barclays, RBS, BNP Paribas, CommerzBank, Credit Agricole etc have been fined for violating OFAC sanctions in range of USD $100 Million to USD 8.9 Billion.
    2. Global banking system and transactions involve Correspondent banks, which could be based out of US or associated with the U.S. banks.
    3. Cross-border payments could directly or indirectly involve U.S. banks, hence third countries companies or banks, often refuse to conduct transactions with companies / countries on the US sanctions list on account of settlement related issues.
    4. Sanctions from UN and European Union in line with OFAC Sanctions.

OFAC Sanction Program

The several OFAC sanctions programs can be grouped into two general categories:

Comprehensive programs: These programs target trade, investment, and commercial activities with certain geographic regions and governments.

In general, OFAC comprehensive sanction programs prohibit:

  • Exports from the United States (direct or indirect)
  • Imports into the United States (direct or indirect)
  • Other related transactions or dealings

The comprehensive sanctions programs apply to transactions involving most goods, technology and services. However, OFAC may authorize otherwise prohibited transactions, either by a general license contained within the regulations for a particular program, or by a specific license issued by OFAC.

Such programs currently apply to:

  • Cuba
  • Iran
  • Sudan
  • Burma (Myanmar)

Non-Comprehensive Programs:

  1. Limited country-specific programs;
  2. Programs targeting groups or individuals who have contributed to conflicts in or undermined democratic process in certain countries, and
  3. Programs targeting individuals or entities involved in or supporting terrorism, drug trafficking and other activities

Such programs currently apply to:

  • Western Balkans
  • Belarus
  • Cote d’Ivoire
  • Democratic Republic of the Congo
  • Iraq
  • Liberia (Former Regime of Charles Taylor)
  • Persons Undermining the Sovereignty of Lebanon
  • Libya
  • North Korea
  • Somalia
  • Syria
  • Zimbabwe
  • Counter-Terrorism Sanctions Program
  • Non-Proliferation Sanctions Program
  • Counter-Narcotics Trafficking Sanctions Program
  • Diamond Trading Sanctions Program

Implications of OFAC Regulations for Financial Institutions

Financial institutions must monitor all financial transactions performed by or through them to detect those that involve any entity or person subject to the OFAC laws and regulations.

For most situations, a financial institution should accept deposits and funds subject to OFAC regulations, but freeze the funds and accounts, so that absolutely no funds can be withdrawn (this is called “blocking”). However, there are a few situations that require the financial institution to reject the transaction or funds instead of accepting and blocking them. Exact regulations vary, in accordance with requirements imposed by the eight federal statutes and the specific sanctions. A detailed description of specific regulations for each program is available on the official OFAC web site:

In general, OFAC rules prohibit financial institutions from engaging in transactions with the governments of, or individuals or entities associated with, foreign countries against which federal law imposes economic sanctions. Federal law also imposes sanctions against certain countries associated with terrorists and narcotics traffickers and their front organizations. OFAC rules prohibit transactions with these entities as well. OFAC maintains a list of entities and individuals against whom these restrictions apply. You will need this list, known as the “SDN list” (Specially Designated Nationals) in order to comply.

Transactions Subject to OFAC Santions

Every type of financial transaction should be reviewed for OFAC compliance including, without limitation, the following:

  • Deposit accounts (checking, savings, etc.)
  • Loans
  • Lines of credit
  • Letters of credit
  • Safety deposit boxes
  • Wire transfers
  • ACH transfers
  • Currency exchanges
  • Depositing or cashing checks
  • Purchase of money orders or cashiers checks
  • Loan payments
  • Guarantors and collateral owners
  • Trust accounts
  • Credit Cards

Moreover, the names of all parties to a transaction should be checked against the list of names of individuals, entities, geographical locations or countries that have been identified by OFAC. This includes, but is not limited to the following (as applicable):

  • Beneficiaries
  • Collateral Owners
  • Guarantors / Cosigners
  • Receiving Parties
  • Sending Parties

Summary Chart Countrywise

These regulations are complex, and vary widely with respect to different countries. Below Chart provides a general guide, but note the references in the chart to guides published by OFAC that reflect that office’s official position. Also note that OFAC issued a Final Rule titled “Economic Sanctions Enforcement Guidelines” on 11/9/2009, effective immediately, that affects how OFAC sanctions are applied to financial institutions and other parties.

Sanctions Program Summary of Sanctions/Penalties Licenses, Special Notes Resource Links
Balkans – Blocking Property of Persons Who Threaten International Stabilization Efforts in the Western BalkansGet the details BLOCKING. All property and assets of designated persons are BLOCKED and may not be transferred, paid, exported, withdrawn, or otherwise dealt in.Prohibited activity. The making or receiving by a U.S. person of any contribution or provision of funds, goods, or services to or for the benefit of a designated person is prohibited. In addition, any transaction by a U.S. person that evades or avoids or has the purpose of or attempts to violate these prohibitions and any conspiracy to violate the prohibitions is prohibited.Penalties: Criminal fines for violating the Executive Order or regulations to be issued pursuant to the Executive Order may range up to the greater of $500,000 or twice the pecuniary gain per violation for an organization, or up to the greater of $250,000 or twice the pecuniary gain per violation for an individual. Individuals may also be imprisoned for up to 10 years for a criminal violation. Knowingly making false statements or falsifying or concealing material facts when dealing with OFAC in connection with matters under its jurisdiction is a criminal offense. In addition, civil penalties of up to $11,000 per violation may be imposed administratively. Executive Order (EO) 13219 (6/27/2001), modified by EO 13304 (5/29/2003).Licenses: Western Balkans General License (No. 1) – Legal Representation in Matters Pending before the International Criminal Tribunal for the former YugoslaviaLast program update: 5/30/2011
Belarus – Blocking Property of Certain Persons Undermining Democratic Processes or Institutions in BelarusGet the details Assets Blocked As of June 19, 2006, all property and interests in property of persons listed in the OFAC SDN lists with a [BELARUS] designation are blocked, “and may not be transferred, exported, withdrawn, or otherwise dealt in.Donations to or for the benefit of those same persons are prohibited. EO 13405 (6/19/2006)Licenses: All prior licenses have expired.Last program update: 2/10/2011
Burma (Myanmar)Get the details Prohibited Activity:  New investment in Burma by U.S. persons and U.S. persons’ facilitation of new investment in Burma by foreign persons.Prohibited: – With certain exceptions, the exportation or reexportation of financial services to Burma is prohibited. The term exportation or reexportation of financial services to Burma is defined broadly to mean: (i) the transfer of funds, directly or indirectly, from the United States or by a U.S. person, wherever located, to Burma; or (ii) the provision, directly or indirectly, to persons in Burma of insurance services, investment or brokerage services, banking services, money remittance services; loans, guarantees, letters of credit or other extensions of credit; or the service of selling or redeeming traveler’s checks, money orders and stored value. This defined term is unique to the Burma sanctions program. Although there are limited exceptions to the ban on the exportation of financial services, under no circumstances can payments be made from blocked accounts on the books of a U.S. bank. Blocked: All property and interests in property of the persons listed [in SDN lists citing the BURMA sanction program].Allowed: – U.S. financial institutions can operate accounts for an individual ordinarily resident in Burma, provided that the individual is not a blocked person and further provided that each transaction processed through the account is of a personal nature and not for use in supporting or operating a business, is not otherwise prohibited, and does not involve a transfer directly or indirectly to Burma or for the benefit of individuals ordinarily resident in Burma unless authorized pursuant to General License No. 15. Pursuant to General License No. 15, certain noncommercial, personal remittances to Burma are authorized. U.S. depository institutions, U.S. registered brokers or dealers in securities, and U.S. registered money transmitters are authorized to process transfers of funds to or from Burma or for or on behalf of an individual ordinarily resident in Burma in cases in which the transfer involves a noncommercial, personal remittance, provided that the transfer is not by, to, or through a person whose property and interests in property are blocked. Such transfers of funds are authorized even though they may involve transfers to or from an account of a financial institution whose property and interests in property are blocked, provided that the account is not on the books of a financial institution that is a U.S. person. Noncommercial, personal remittances do not include charitable donations to or for the benefit of any entity or funds transfers for use in supporting or operating a business. However, U.S. persons may make charitable donations to nongovernmental organizations in support of certain activities in Burma, provided that the donations are made pursuant to Amended General License No. 14-B.Prohibited: The importation into the United States of products of Burma and the exportation or reexportation to Burma of financial services from the United States or by U.S. persons, wherever located. The importation of jadeite and rubies mined or extracted from Burma (and of articles of jewelry containing such jadeite and rubies) is prohibited, and there are conditions for the importation of jadeite and rubies mined or extracted from a country other than Burma (and of articles of jewelry containing such jadeite and rubies).Penalties: Criminal conviction may result in a fine of not more than $1,000,000, or if a natural person, imprisonment for not more than 20 years, or both. A civil penalty of $250,000, or twice the amount of the transaction, whichever is greater, may be assessed for each violation. Imported articles in violation may be forfeited. Beginning May 6, 2008, largely in response to losses of life and property damage in the wake of Cyclone Nagris, OFAC has issued a series of Licenses (Nos. 14, 14-A and 14-B) authorizing certain financial transactions in support of humanitarian or religious activities in Burma. The latest of the series has no time limit.Also on May 9, 2008, OFAC issuedGeneral License No. 15, to allow U.S. financial institutions to process transfers of funds, unlimited in amount, for noncommercial, personal remittances to or from Burma, or for or on behalf of an individual ordinarily resident in Burma, subject to certain conditions. Prior to the issuance of this general license, noncommercial, personal remittances to Burma were permitted only insofar as total remittances did not exceed $300 per Burmese household in any consecutive three-month period. This new general license includes no such limitation.Guidance: Burmese Origin ImportsLast program update: 9/10/2010
Congo, Democratic Republic of the – Sanctions Against Persons Contributing to the Conflict in the Democratic Republic of the CongoGet the details Blocked. Any property of any [DRCONGO] SDN is blocked.Penalties: – Criminal fines for willful violations of the E.O. or the Regulations range, upon conviction, up to $1,000,000; individuals may also face imprisonment up to 20 years. In addition, civil penalties of up to the greater of $250,000 or twice the amount of the underlying transaction may be imposed administratively for violations of the E.O. or the Regulations. EO 13413 of 10/27/2006, effective 10/30/2006.Licenses: No general licenses have been issued.Last program update: 2/11/2011
Côte d’Ivoire(Ivory Coast)Get the details Blocked:  Transactions are prohibited with persons designated in OFAC’s list of SDNs and Blocked Persons with a descriptor of [COTED], and others. Includes money, checks, drafts, bank accounts, securities and other financial instruments, letters of credit, bills of sales, bills of lading and other evidences of title, wire transfers, merchandise and goods. Blockable property also includes any property in which there is any interest of a Côte d’Ivoire SDNs, including direct, indirect, future or contingent, and tangible or intangible interests.Penalties: Criminal fines up to the greater of $500,000 or twice the pecuniary gain per violation for an organization, or up to the greater of $250,000 or twice the pecuniary gain per violation for an individual. Individuals may also be imprisoned for up to 10 years. Knowingly making false statements or falsifying or concealing material facts when dealing with OFAC in connection with matters under its jurisdiction is a criminal offense. In addition, civil penalties of up to $11,000 per violation may be imposed administratively. EO 13396 – 2/7/2006No licenses.Last program update: 1/6/2011
Counter Narcotics TraffickingGet the detailsThis program includes persons designated under the 1999 Foreign Narcotics Kingpin Designation Act (“Kingpin Act”) as SDNTKs and those designated under EO 12978 (10/21/1995) as SDNTs. Blocking. Blocks all property subject to U.S. jurisdiction in which there is any interest of a person designated as an SDNT or SDNTK.Prohibition: U.S. persons are prohibited from engaging in any transaction or dealing in property or interests in property of [SDNTK]s and from engaging in any transaction that evades or avoids the prohibitions of the Kingpin Act. These prohibitions affect trade transactions as well as accounts, securities, and other assets.Penalties, Kingpin Act violations: Corporate criminal penalties for violations of the Foreign Narcotics Kingpin Designation Act range up to $10,000,000; individual penalties range up to $5,000,000 and 30 years in prison. Civil penalties of up to $1,075,000 may also be imposed administratively.Penalties, violation of EO 12978:  Corporate criminal penalties for violations of the International Emergency Economic Powers Act range up to $500,000; individual penalties range up to $250,000 and 20 years in jail. Civil penalties of up to $50,000 may also be imposed administratively. Kingpin Act EO 12978No licenses issued.Last program update: 7/25/2011
Counter TerrorismGet the detailsIncludes Specially Designated Global Terrorist [SDGT], Foreign Terrorist Organization [FTO] and Specially Designated Terrorist [SDT] designations. Blocked: All property and interests in property of the designated persons that are in the United States or that hereafter come within the United States, or that hereafter come within the possession or control of United States persons.Prohibited: To assist in, sponsor, or provide financial, material, or technological support for, or financial or other services to or in support of, acts of terrorism or those persons listed; and being otherwise associated with designated persons, including the making of donations to persons designated under the Order.Penalties: Corporate criminal penalties for violations range up to $500,000; individual penalties range up to $250,000 and/or 20 years in jail. Civil penalties of up to $50,000 may also be imposed administratively. EO 12947, 1/23/1995EO 13099, 8/21/1998EO 13224, 9/24/2001EO 13268, 7/2/2002EO 13372, 2/16/2005Guidelines on Transactions with the Palestinian AuthorityLicenses: Several licenses have been issued, relating to international organizations; certain transactions with the Palestinian Authority; in-kind donations of medicine, medical devices and services, etc. See the individual licenses listed on theSanctions Details page for further information and links.Last program update: 6/23/2011
CubaGet the details.NOTE: OFAC’s Program Summary is currently under revision to reflect the January 2011 policy changes. Blocking. Cuban assets, both government and private, are BLOCKED.Financial dealings with Cuba are BLOCKED.All property of Cuba, all Cuban nationals, and all Specially Designated Nationals (SDNs) of Cuba are BLOCKED.An estate account becomes BLOCKED whenever a Cuban national is an heir or is the deceased.Access to a safe deposit box is BLOCKED whenever a Cuban has an interest in the contents of the box.Life insurance proceeds are blocked if the deceased is a Cuban resident.Notes: On 9/4/2009, OFAC announced a final rule amending the Cuban Assets Control Regulations (CACR), relaxing rules on family visits, family remittances and telecommunications. On 1/28/2011, OFAC published another final rule further relaxing its regulations to continue efforts to reach out to the Cuban people in support of their desire to freely determine their country’s future. These amendments allow for greater licensing of travel to Cuba for educational, cultural, religious, and journalistic activities and expand licensing of remittances to Cuba. These amendments also modify regulations regarding authorization of transactions with Cuban national individuals who have taken up permanent residence outside of Cuba, as well as implement certain technical and conforming changes. Authorized Travel, Carrier, and Remittance Forwarding Service Providers (8/26/2011)Last program update: 8/26/2011; under revision by OFAC to reflect January 2011 policy changes.
IranGet the detailsIncludes SDN designations as IRAN, IRGC, IFSR, IRAN-HR and ISA. BLOCKED. Per an Executive OrderBlocking the Property and Interests in Property of the Government of Iran and Iranian Financial Institutions (2/5/2012), U.S. persons are required to block all property and interests in property of the Government of Iran (including the Central Bank of Iran), of all Iranian financial institutions, and of all persons determined by the Secretary of the Treasury to be owned by, controlled by, or acting for or on behalf of any of those parties, when that property comes within the United States or within the possession or control of U.S. persons. New General License A and General License B were issued under the E.O. of February 5, and modify the effect of certain pre-existing licenses.An FAQ has been published to provide details on how the 2/5/12 EO affects transactions involving Iranian banks and the Government of Iran.OFAC also added a question about the impact of the 2/5/12 EO to its general FAQ on sanctions programs. An excerpt:”As a result, transactions involving entities bearing the [IRAN] tag on OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDN List”) will now need to be blocked unless exempt or authorized by OFAC. Going forward, the [IRAN] tag will connote that a person or entity meets the definition of the term “GOI” or “Iranian Financial Institution”. OFAC will continue to update the SDN List and may add, delete, or edit existing entries as appropriate. “The E.O. of Feb. 5 blocks the property and interests in property of any individual or entity that comes within its definition of the term “Government of Iran” regardless of whether it is listed on the SDN List, and similarly it blocks the property and interests in property of all Iranian financial institutions as defined in the order regardless of whether the Iranian financial institution is listed on the SDN List.”Transactions not previously authorized by OFAC that involve property or interests in property of the Government of Iran, including the Central Bank of Iran, or of Iranian financial institutions must be blocked.U.S. Affiliates. U.S. persons (including financial institutions) with foreign affiliates may not permit the affiliate to do anything with regard to Iran that the U.S. person is prevented from doing directly.Penalties: Criminal penalties for violations of the Iranian Transactions Regulations may result in a fine up to $1,000,000, and natural persons may be imprisoned for up to 20 years. Civil penalties, which are not to exceed the greater of $250,000 or an amount that is twice the amount of the transaction that is the basis of the violation with respect to which the penalty is imposed may also be imposed administratively. Effective 11/10/2008, U.S. depository institutions may NO LONGER handle “U-turn transactions” that cover payments involving Iran.Banks may handle non-commercial family remittances involving Iran and non-commercial remittances involving humanitarian relief, provided the transfers are routed to or from non-U.S., non-Iranian offshore banks.The institution must determine prior to processing any payment orders that they do not involve prohibited transactions.Donations of articles intended to relieve human suffering are permitted.A list of banks owned or controlled by the Government of Iran is provided.Iran Sanctions Act: Implementation of Certain Sanctions Imposed on Seven Persons (11/14/2011)Designated IRGC Affiliates and Iran-Linked Financial Institutions – Extracted from SDN list.Executive Order Blocking the Property and Interests in Property of the Government of Iran and Iranian Financial Institutions (2/5/2012)FAQ regarding the 2/5/2012 Executive Order

Guidance on Iran Sanctions in National Defence Authorization Act for FY 2012 (2/14/2012)

EO 13590 – Iran Sanctions (11/21/2011)

EO 13574 – Implementation of certain sanctions in Iran Sanctions Act of 1996, as amended (eff. 5/23/2011)EO 13553 – Blocking property of certain persons with respect to human rights violations by the Government of Iran (Eff. 9/29/2010)EO 13059 – Prohibiting certain transactions with respect to Iran (8/20/1997)EO 12959 – Prohibiting certain transactions with respect to Iran (5/7/1995)EO 12957 – Prohibiting certain transactions with respect to the development of Iranian petroleum resources (3/16/1995)EO 12613 – Prohibiting imports from Iran (10/29/1987)Last program update: 2/14/12

IraqGet the details.Iraq Stabilization and Insurgency Sanctions Regulations (ISISR) – [IRAQ] designations All transactions previously prohibited are now authorized, with certain exceptions.Exceptions:All property and interests in property blocked as of May 23, 2003 are still blocked.The export or re-export from a third country to Iraq of goods or technology must be authorized by the Department of Commerce.Transactions dealing with Iraqi cultural property illegally removed since August 6, 1990 are not authorized.Financial transactions with Iraq are allowed, except for those involving individuals and entities on OFAC’s SDN list. The opening of correspondent accounts for Iraqi financial institutions is permitted.Penalties: Civil penalties of up to $250,000 or twice the amount of the underlying transaction may be imposed administratively against any person who violates, attempts to violate, conspires to violate, or causes a violation of the ISISR. Upon conviction, criminal penalties of up to $1,000,000, or imprisonment for up to 20 years, or both, may be imposed on any person who willfully attempts to commit, or willfully conspires to commit, or aids or abets in the commission of a violation of the ISISR. Absent an authorization from OFAC, any accounts, assets, investments, or any other property of any kind owned by, belonging to, or held by the Central Bank of Iraq or the Development Fund of Iraq, are immune from attachment, judgment, execution, or other judicial process in the United States. Iraqi petroleum and petroleum products and interests are immune from attachment, judgment, execution, or other judicial processes until title passes to the initial purchaser of those products.Latest program update: 5/25/2011
LebanonGet the details BLOCKED:The assets of “persons undermining the sovereignty of Lebanon or its democratic processes” are blocked. Donations to these persons are forbidden.Such assets may not be transferred, paid, exported, withdrawn or otherwise dealt in. Assets of individuals who are determined to be spouses or dependent children of such persons are also blocked.On 7/30/2010, OFAC issued regulations at 31 CFR Part 549 implementing an 8/1/2007 Executive Order.Section 549.505 of that regulation authorizes entries in blocked accounts for certain types of “normal service charges.”The block on assets bars the making of any contribution or provision of funds, goods, or service by, to, or for the benefit of any person whose property is blocked.Penalties: Criminal conviction can result in a fine of up to $1 million, and for natural persons imprisonment for up to 20 years. Civil penalties of up to the greater of $250,000 or an amount twice the amount of the transaction involved. EO 13441 Blocking Property Of Persons Undermining The Sovereignty Of Lebanon Or Its Democratic Processes And Institutions – August 1, 2007
LiberiaGet the detailsFormer Liberian Regime of Charles Taylor Sanctions Regulations [LIBERIA] BLOCKED:The assets of certain persons involved with the former Liberian regime headed by Charles Taylor are blocked. Donations to these persons are forbidden.The importation of any rough diamonds from Liberia, regardless of origin, is forbidden. This prohibition will be lifted if the Secretary of State posts a notice in theFederal Register that Liberia has become a Kimberley Process Certification Scheme participant.Penalties: Criminal fines for violating the Regulations range, upon conviction, up to $500,000 for an entity and $250,000 for an individual; individuals may also face imprisonment of up to 20 years. In addition, civil penalties of up to $50,000 per violation may be imposed administratively. On 5/23/2007, OFAC issuedregulations at 31 CFR Part 593 implementing the 7/22/2004 Executive Order targeting the regime of Charles Taylor.Section 593.510 of that regulation includes a general license for the importation of round log or timber products originating in Liberia, except in a transaction with any of the blocked parties related to the Taylor regime.EO 13348, Blocking Property of Certain Persons and Prohibiting the Importation of Certain Goods from Liberia (Effective Date – July 23, 2004)Latest program update: 12/14/2010
LibyaGet the details BLOCKED: Property and interests in property of [LIBYA] designated persons, generally senior officials of the Qadhafi Government of Libya; Colonel Muammar Qadhafi and members of his family and associates; persons who have materially assisted them.Prohibited: All transactions with [LIBYA]-designated persons, except for transactions for the conduct of the official business of the U.S. government.
  • EO 13566 – Blocking Property and Prohibiting Certain Transactions Related to Libya (Effective Date – February 25, 2011)
  • General License No. 4 with Respect to Investment Funds in Which There Is a Blocked Non-Controlling, Minority Interest of the Government of Libya
  • General License No. 5Authorizing Transactions Related to Certain Oil, Gas, or Petroleum Products Exported from Libya
  • General License No. 6 Guidance and General License with Respect to the Transitional National Council of Libya as the Legitimate Governing Authority for Libya
  • General License No. 7a with Respect to the Libyan National Oil Corporation and its Subsidiaries
  • General License No. 8a with Respect to the Government of Libya, its Agencies, Instrumentalities, and Controlled Entities, and the Central Bank of Libya
  • General License No. 9 with Respect to the General National Maritime Transport Company
  • General License No. 10, unblocking all property and interests in property of Arab Turkish Bank and North African International Bank.

Latest program updates: 12/1/2011

Nonproliferation (Weapons)Get the details[NPWMD] Prohibited activity. Any transaction by a U.S. person to finance or otherwise participate in the importation into the U.S. of goods, technology, or services produced or provided by foreign persons found by the Secretary of State to have engaged in activities related to the proliferation of nuclear, biological, or chemical weapons is prohibited.Except where otherwise provided by regulations, orders, directives, ruling or licenses, all property and interests in property in the U.S. of persons listed in the SDN lists with the identifier NPWMD are blocked, and may not be transferred, paid, exported or withdrawn. This prohibition extends to charitable contributions to the blocked person, and to any credit agreement with the blocked party, except those specifically licensed.The sanctions also affect any U.S. person financing or otherwise participating in the importation into the U.S. of goods, technology, or services produced or provided by foreign persons found by the Secretary of State to have engaged in activities related to the proliferation of nuclear, biological, or chemical weapons.Penalties: Criminal penalties for willful violations of E.O. 13382, or of any license, rule or regulation issued under it, range up to 20 years in prison, $500,000 in fines for a corporation and $250,000 for an individual. In addition, civil penalties of up to $50,000 per violation may be imposed administratively. EO 13382, Blocking Property of Weapons of Mass Destruction Proliferators and Their Supporters (6/28/2005)EO 13159, Blocking Property of the Government of the Russian Federation Relating to the Disposition of Highly Enriched Uranium Extracted From Nuclear Weapons (June 22, 2000)EO 13094, Proliferation of Weapons of Mass Destruction (July 29, 1998)EO 12938, Proliferation of Weapons of Mass Destruction (November 14, 1994)31 CFR Part 544 – Weapons of Mass Destruction Proliferation Sanctions31 CFR Part 540 – Highly Enriched Uranium Assets Control Regulations31 CFR Part 539 – Weapons of Mass Destruction Trade Control RegulationsNonproliferation and Weapons of Mass Destruction Advisory General License No. 2, authorizing certain transactions related to the arrest, detention, and judicial sale of MV Dandle and MV DecretiveGeneral License No. 4: Exportation or reexportation of agricultural commodities, medicine, or medical devices to Iran through any Iranian port operated by Tidewater Middle East Company is authorized in certain circumstances.General License No. 5 – authorizing certain transactions related to the arrest, detention, and judicial sale of the MV Dianthe (f.k.a. Horsham, f.k.a. Iran Bam, IMO No. 9323833).Latest program update: 11/3/2011
North KoreaGet the details[NORTH KOREA], [DPRK] Blocked.Property and interests in property of North Korea or a North Korean national that were blocked as of 6/16/2000, remain blocked.Property and interests of SDNs under the [NORTH KOREA] or [DPRK] programs are blocked. U.S. persons, with limited exceptions, are prohibited from transferring, paying, exporting, withdrawing, or otherwise dealing in the property and interests in property of an entity or individual named on such SDN lists, or of entities owned directly or indirectly 50 percent or more by a person on such lists.U.S. persons are prohibited from registering vessels in North Korea, obtaining authorization for a vessel to fly the North Korean flag, and owning, leasing, operating, or insuring any vessel flagged by North Korea.Goods, services, and technology from North Korea may not be imported into the United States, directly or indirectly, without a license from OFAC. This broad prohibition applies to goods, services, and technology from North Korea that are used as components of finished products of, or substantially transformed in, a third country.Treasury prohibitions on exporting goods to North Korea specifically relate to sales involving parties whose property and interests in property are blocked under E.O. 13551.PENALTIES: Criminal fines for violating the E.O.s range up to $1,000,000; individuals may also face imprisonment up to 20 years. In addition, civil penalties of up to the greater of $250,000 or twice the amount of the underlying transaction may be imposed administratively for each violation. EO 13570 Prohibiting Certain Transactions With Respect To North Korea (Effective date – April 18, 2011)EO 13551 Blocking Property of Certain Persons With Respect to North Korea (Effective date – August 30, 2010)EO 13466 Continuing Certain Restrictions With Respect to North Korea and North Korean Nationals (June 26, 2008)LATEST PROGRAM UPDATE: 6/20/2011
SomaliaGet the detailsSANCTIONS AGAINST PERSONS CONTRIBUTING TO THE CONFLICT IN SOMALIA[SOMALIA] BLOCKED: EO 13536 imposes targeted sanctions only; it does not impose any broad-based sanctions against the people or the country of Somalia. However, property and property interests of specific individuals and entities listed as SDNs with the [SOMALIA] designation are blocked. FAQ on Providing Humnaitarian Assistance in Somalia (8/4/2011)NEWEO 13536 – Blocking Property of Certain Persons Contributing to the Conflict in Somalia (Effective Date – April 13, 2010)Information on Persons Listed in the Annex to E.O. 13536 of April 12, 2010 (September 22, 2010)31 CFR Part 551 (Abbreviated Somalia Sanctions Regulations)LATEST PROGRAM UPDATE: 8/4/2011
SudanGet the details[SUDAN] [DARFUR] Blocked. All property and interests in property of the Government of Sudan that are in the United States, that come within the United States, or that are or come within the possession or control of U.S. persons, including their overseas branchesProhibited activity. No U.S. bank may finance or arrange offshore financing for, third-country trade transactions where Sudan is known to be the ultimate destination of, or the Government of Sudan is the purchaser of, the goods.Prohibited Activity. Prohibits U.S. persons from engaging in any transactions involving such property or interests in property. It also prohibits all transactions by U.S. persons relating to Sudan’s petroleum or petrochemical industries, including, but not limited to, oil field services and oil or gas pipelines.Note: In an Executive Order effective 4/27/06, President Bush directed that assets of certain persons named as threatening the peace process in Darfur, The Sudan, be blocked.All dealings in property in which an SDN has an interest must be authorized by OFAC unless they are exempt. Any bank subject to U.S. jurisdiction that receives instructions to make an unlicensed funds transfer involving a direct or indirect interest of the Government of Sudan (including any transfer routed through a Sudanese Government-controlled bank) is required to place such funds into a blocked interest-bearing account on its books and to notify OFAC. Such funds may only be unblocked after receipt of a specific authorization from OFAC. Setoffs against blocked accounts are prohibited.There are import and export restrictions affecting most of Sudan. Specified portions of Southern Kordofan/Nuba Mountains State, Blue Nile State, Abyei, Darfur and designated areas in and around Khartoum are exempted from those import and export restrictions. For details, contact OFAC.Restrictions on Financial transactions with Sudan are complex. Interested banks should consult the documents available on the OFAC web site for details, and contact OFAC with questions.PENALTIES: Criminal fines for violating the Regulations range, upon conviction, up to $1,000,000; individuals may also face imprisonment of up to 20 years. In addition, civil penalties of up to $250,000 or twice the amount of the underlying transaction may be imposed administratively for each violation. Guidance Regarding the Application of the Sudanese Sanctions Regulations to the New State to be Formed by the Secession of Southern SudanGuidance on the Donations of Food and Medicine to Iran and the Non-Specified Areas of SudanGeneral License Related to Personal Communication Services (March 2010)Amendment to Sudanese Sanctions Regulations (31 CFR 538.529) – General License for Publishing Activities (December 2004)Amendment to Sudanese Sanctions Regulations (31 CFR 538) – General License expanding the scope of an existing authorization of certain imports for diplomatic or official personnel (June 2009)Amendment to Sudanese Sanctions Regulations (31 CFR 538) – General License Authorizing Agricultural Commodities, Medicine and Medical Devices to the Specified Areas of Sudan (September 2009)EO 13412 Blocking Property and Prohibiting Transactions With the Government of Sudan (October 13, 2006)EO 13400 Blocking Property of Persons in Connection With the Conflict in Sudan’s Darfur Region (Effective Date – April 27, 2006)EO 13067 Blocking Sudanese Government Property and Prohibiting Transactions With Sudan (Effective Date – November 4, 1997)31 CFR Part 538 – Sudanese Sanctions Regulations31 CFR Part 546 – Darfur Sanctions RegulationsLATEST PROGRAM UPDATE: 6/20/2011
SyriaGet the details.[SYRIA] Exports to Syria are limited. With limited exceptions, BLOCK property and interests in property of persons designated by State and Treasury Departments as

  • contributing to Syria’s provision of safe haven to various terrorist organizations;
  • involved in Syria’s military presence in Lebanon;
  • involved in Syria’s pursuit of WMD;
  • involved in steps taken by Syria to undermine U.S. and international efforts toward stabilization and reconstruction of Iraq;
  • owned or controlled by or acting on behalf of any person whose property or interests in property are blocked by the order; or
  • involved in certain terrorist acts in Lebanon

The BLOCK order covers contributions on behalf of persons whose property is blocked.

As of 8/18/11, all property and property interests of the Government of Syria within the U.S. are BLOCKED, and new investment in Syria by U.S. persons is prohibited. Also prohibited is the importation of petroleum or petroleum products of Syrian origin. See Licenses at right.

PENALTIES: Criminal penalties for violating the sanctions range up to 10 years in prison, $500,000 in corporate fines and $250,000 in individual fines. In addition, civil penalties of up to $11,000 per violation may be imposed administratively.

Executive Order 13582 Blocking Property of the Government of Syria and Banning Import of Petroleum Producsts of Syrian Origin (8/18/11)FAQ with Regard to Syria Executive Order 13582EO 13573 Blocking Property Of Senior Officials Of The Government Of Syria (May 18, 2011)

EO 13572 Blocking Property of Certain Persons with Respect to Human Rights Abuses in Syria (April 29, 2011)

EO 13460 Blocking Property of Additional Persons in Connection With the National Emergency With Respect to Syria (February 15, 2008)

EO 13399 Blocking Property of Additional Persons in Connection With the National Emergency With Respect to Syria (Effective Date – April 26, 2006)

EO 13338 Blocking Property of Certain Persons and Prohibiting the Export of Certain Goods to Syria (Effective Date – May 12, 2004)31 CFR Part 542 – Syrian Sanctions RegulationsGeneral Licenses related to Syria. There are currently 14 General Licenses relating to the Syrian Sanctions program. See OFAC’sSyria Sanctions page for details.LATEST PROGRAM UPDATE: 10/4/11

Transnational Criminal OrganizationsGet the details[TCO] “All property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person, including any overseas branch, of the … persons [designated as ‘TCO’ SDNs] are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in.” Donations to such persons are also prohibited.PENALTIES:  To be determined. EO – Blocking Property of Transnational Criminal OrganizationsLATEST PROGRAM UPDATE: 7/25/2011
Zimbabwe – Persons that undermine democratic process or institutions in ZimbabweGet the details[ZIMBABWE] BLOCKING. All property and assets of designated persons are BLOCKED and may not be transferred, paid, exported, withdrawn, or otherwise dealt in.Prohibited activity. The making or receiving by a U.S. person of any contribution or provision of funds, goods, or services to or for the benefit of a designated person is prohibited.All persons or entities that would be affected by this sanctions program would be listed on the SDN list.In addition, any transaction by a U.S. person that evades or avoids or has the purpose of or attempts to violate these prohibitions and any conspiracy to violate the prohibitions is prohibited.PENALTIES:  Criminal fines for violating the Executive Order or regulations to be issued pursuant to the Executive Order may range up to the greater of $500,000 or twice the pecuniary gain per violation for an organization, or up to the greater of $250,000 or twice the pecuniary gain per violation for an individual. Individuals may also be imprisoned for up to 10 years for a criminal violation. Knowingly making false statements or falsifying or concealing material facts when dealing with OFAC in connection with matters under its jurisdiction is a criminal offense. In addition, civil penalties of up to $11,000 per violation may be imposed administratively. EO 13469 Blocking Property of Additional Persons Undermining Democratic Processes or Institutions in Zimbabwe (July 25, 2008)EO 13391 Blocking Property of Additional Persons Undermining Democratic Processes or Institutions in Zimbabwe (Effective Date – November 23, 2005)EO 13288 Blocking Property of Persons Undermining Democratic Processes or Institutions in Zimbabwe (Effective Date – March 7, 2003)31 CFR Part 541 – Zimbabwe Sanctions RegulationsLAST PROGRAM UPDATE: 6/21/2011

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