Due to the economic downturn, the financial pressures on export-oriented enterprises have become increasingly prominent, and more export-oriented enterprises have alleviated liquidity pressure by way of export financing. Banks that provide such loans often require effective guarantees on export financing, and export credit insurance is a common means of guarantee.
However, connected transaction and delivery of the goods cannot be identified in advance for export credit insurance, which has often caused controversy.
Identification of connected transaction. Connected transactions are always specifically excluded in insurance coverage under export credit insurance contracts. However, it’s more difficult to identify connected transactions in the export process than in domestic trade. It’s also hard to identify connected transactions with existing means of verification. The most common way of verification is to determine its relevance with domestic export enterprises through investigation of the investment and equity situations of the intended trading companies by lawyers of the country where the transaction is taken place.
However, false transactions can’t be fully and effectively avoided with this method. Although lawyers of the country where the transaction has taken place may investigate the intended transaction company, parties of the transaction who ultimately enter into a contract with export enterprises may be enterprises located in other countries and bearing the same name of the company under investigation.
The author once handled an export credit insurance case, of which the trading company under investigation by the insurance company and the bank providing loans was a Singapore company named ABC Limited. The name of the enterprise that executed the trade contract was also ABC Ltd, and upon subsequent investigation we found that the company was an enterprise registered in Hong Kong and its shareholder was the same as the export enterprise. This constitutes a kind of connected transaction.
In Singapore, Hong Kong and other free-port zones, foreign corporations may complete clearance of cargoes there, which means Hong Kong companies are able to complete clearance of imported goods in Singapore. Therefore, in practice, such malicious connected transactions may not affect the logistics as well as the delivery and clearance of the goods, thereby concealing the real situation of the transaction.
Thus, the risk of connected transactions arising from the malicious establishment of enterprises bearing the same name in other countries by the insurant cannot be fully prevented by traditional means of investigation, in advance. Therefore, it is necessary to take further measures to protect against connected transactions.
According to our experience, contact information of the original intended transaction counterparty can be obtained through independent investigation, and each transaction must be verified by a request for confirmation. Once the transaction cannot be verified, or is denied by the company under investigation, the underwriting for the export trade of the enterprise must be suspended immediately.
The above-mentioned measures must be specified in the insurance contract to better protect the interests of the parties.
Identification of the delivery of goods. The insurer will not assume insurance liabilities under the export credit insurance contract if the export enterprises fail to deliver goods. But it’s difficult to identify whether the goods are delivered or not, as the logistics in exports are always complex and diverse.
From the perspective of a trade contract, delivering goods to a carrier can be deemed as completion of the delivery of goods, but the type of shipping document issued by the carrier may affect the finding of facts of “goods delivery”. For example, the consignee on the named bill of lading, or sea waybill, is possibly not the buyer in the trade contract, and the designated consignee under surrendered bill of lading may also not be the buyer in the trade contract, and the items on the copies of the documents submitted by the insurant may not match the facts. In these circumstances, it’s hard to conclude that the goods have been delivered.
In another dispute that the authors handled, shipping documents under dozens of transactions state different things. The consignee on a sea waybill and a straight bill of lading is a party to the transaction contract, but upon investigation during the proceedings, the court found that the consignee on the sea waybill or straight bill of lading issued by the carrier was another company. Under circumstances of using order bill of lading, it transpired that the endorsement of the insurant was by the counterparty of the trade, while the endorsement on the bill of lading submitted by the carrier upon switch bill of lading was by another enterprise.
Apparently, it’s hard to make accurate judgments about the real situation of logistics using only the documents.
Since shipping documents that can be obtained by the insurer are usually copies that are often not from the carriers who deal with the shipping documents, it can result in loopholes in operations. The insurant may take advantage of these operational loopholes and provide copies of shipping documents that do not show the real trade records. Therefore, it’s necessary for the insurer to take steps to verify the delivery of the goods.
For each shipment, the insurer must verify with the carrier the authenticity of the shipping documents, including the information on the front of the documents and endorsement, upon delivery of the goods at the port of destination. Once any flaws or problems are found, the underwriting for the export trade of the enterprise must be suspended immediately. However, it must be specified in the insurance contract how to obtain the true information confirmed by the carrier and make feasible arrangements in practice.
Dai Yuxin is a senior partner and Chen Liang is an associate at Wintell & Co
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