It’s a Digital World – Embracing Technology in Trade Finance | Sullivan & Worcester

After Sullivan’s recognition as a Leader in retail for innovation published by Global Trade Review (GTR) for the latest articles on digitizing trade finance, this is a good time to summarize the progress made in this area over the past 18 months.

The various local and global lockdowns enforced by the COVID-19 pandemic, which no one could foresee in early 2020, have put the challenges of running a paper-based industry – like international trade finance – in the spotlightst Century and the convenience of getting original documents (such as bills of lading and warehouse receipts) and wet ink signatures in a world where many work from home. If you look at the adaptation of the industry, one thing is clear: the way in which trade transactions will be processed in the future can certainly be improved.

Despite the previously expressed skepticism about the risk of losing the “human element” through automated processes – especially when checking documentation and executing transactions – the pandemic has shown the need to use technology if necessary. In fact, much of this technology was already under development and in use, but was catapulted into the foreground from March 2020. This will only help the industry work more efficiently and better protect itself from market disruptions.

In this blog post, we briefly discuss some of the important ways in which retail is digitized and name some of the projects we have worked on over the past year: electronic signatures; electronic payment companies; Blockchain technology; artificial intelligence; and digital rules.

Electronic signatures

Although English law has recognized electronic signatures for some time, the pandemic has certainly sped up their use. While virtual signatures have become the norm for many transactions, electronic signatures can take a number of forms. Some examples include wet ink scanned signatures, typewritten signatures, one click, authentication codes, and multi-party signatures created with electronic signature platforms. Therefore, it is vital that the parties conduct due diligence to ensure that electronic signatures, and in particular the method proposed for the transaction, are considered valid in the jurisdiction in which enforcement is sought. This is especially important when documents need to be registered or certified, adding to the list of legal and practical considerations. In our experience, for example, certain African legal systems still require signatures in wet ink in order for documents to be stamped and registered. It is therefore always recommended to seek local legal advice if necessary.

Electronic payment company (ePU)

While English law is well suited to adapting to commercial realities, as demonstrated by the recognition of electronic signatures, it can be said that in certain cases it will be overtaken by the technology available. The use of promissory notes (Officer) and bills of exchange (BEs) are good examples as these two instruments cannot currently be used in electronic form. This is not surprising as the drafters of the Bills of Exchange Act 1882, which governs PNs and BEs, clearly could not have imagined the digitization of commerce or expected the industry to move away from paper documentation.

For this reason, the International Trade & Forfaiting Association (AMORTIZATION) has its digital negotiable instruments (DAYS) Initiative to fully digitize a substantial equivalent to PNs and BEs using the latest innovations, including electronic signatures and distributed ledger technology (DLT). As part of the DNI initiative launched last year, the ITFA, among others, campaigned for the British government to change the law.

After consultation with ITFA, the International Chamber of Commerce (ICC) of the UK and other stakeholders, the Law Commission of England and Wales recently announced a consultation on proposed legislative reforms to recognize electronic versions of PNs, BEs and other commercial documents, some of which are title documents.[1] This would bring the interests currently anchored in contract law into legal protection. In short, the transfer of ownership of such commercial documents is currently limited to physical paper documents. The proposed reforms provide for electronic commercial documents and the transfer of ownership via an electronic system to be recognized under English law. At this stage, a bill on electronic trade documents was drawn up that would have to be presented to parliament for its legislative program, the earliest estimate of which is 2022.

Although the suggestions contained in the Legal Commission’s consultation paper offer some exciting opportunities, viable contractual workarounds are currently needed. We were delighted to be working with ITFA on the development of the ePU, a functional electronic equivalent of BEs and PNs that aims to address some of the shortcomings in existing legislation.

Blockchain technology

Blockchain, a type of DLT that has been around for well over a decade, enables transactions to be recorded in an encrypted format that keeps the data secure. There are many benefits to using this technology, including simplifying the processes by which exporters / importers (and their banks) can access relevant information, post transactions and make payments. Indeed, the proposed paper move would make transactions more secure and less prone to fraud, potentially reducing the cost and operational burden for banks to perform manual document and compliance reviews.

There are a number of service providers on the market that offer digital solutions to the problems of the traditional paper trade. Typically, these platforms are designed to match “trade data”, eg data on an order, invoice or shipping details from a logistics service provider, in order to link platform participants and transactions and to simplify the exchange of documents and information.

To illustrate this, once the electronic trade data has been successfully matched on the platform, a buyer’s bank should be able to make an irrevocable payment obligation (IPU) in favor of the supplier in order to reduce the risk of payment default, which the supplier can then resell to a bank against early payment. An IPU is a promise made by the buyer to the financier to pay the amount owed to the seller after the goods or services are sold and a claim arises. It basically includes the buyer’s waiver of all objections to his payment obligation towards the seller and essentially separates the payment obligation from the underlying transaction.

We recently discussed a revised set of rules and legal framework for the platform provider Marco Polo, which was developed in cooperation with TradeIX and ITFA. The set of rules is an important step towards realizing the advantages of digitizing payment transactions in retail.

Artificial Intelligence (AI)

AI is also used in a variety of ways in contracts in order to simplify the documentation process as far as possible. One such method is document automation, where contracts are created from databases of clauses that could potentially be used as templates for goods transactions, e.g. B. Simplified bilateral facility agreements with assignment of contractual rights or pledging of goods as security. Another is “smart contracts”, which are essentially automated, self-executing transactions written in computer code.

Digital rules

In an effort to adopt the technology and enable banks to accept electronic documents and data, the ICC Banking Commission is also trying to either update existing rules or create new ones. It has already initiated this process and published its electronic supplements for 2019 to the Uniform Rules for Debt Collection (URC 522) and the Uniform Customs and Practice for Documentary Credits (UCP 600).[2]

It also develops Uniform Rules for Digital Commerce (URDTT) with Geoffrey Wynne, Head of Sullivan’s Trade & Export Finance Group, as co-chair of the editorial group. The URDTT, currently under approval by the ICC National Committees, will cover the use of electronic records to process digital trade transactions, with adoption expected later this year. The rules are designed to address: (i) how parties can provide electronic records to demonstrate an obligation to sell or pay for goods; (ii) how electronic data must match in relation to digital trade transactions; and (iii) what if it doesn’t.

The last 18 months have been marked by a renewed focus and an increased effort to use available technological solutions in certain key areas of the trade. However, it should be remembered that digitization does not offer solutions for all questions in the industry. Despite the great strides that have been made so far, we believe that the transformation of trade and trade finance will bring new challenges and, of course, new technologies.

As a law firm, we pride ourselves on having participated in an exciting time for the trade and commodity finance industry and our involvement with ITFA, ICC and the Law Commission in providing up-to-date advice. It remains to be seen to what extent new technologies will be adopted by industry. One thing is clear: the focus must continue to be on maintaining the momentum in the months and years to come.

[1] See Legal Commission consultation paper – Digital Assets: Electronic Trading Documents. The consultation process ends on July 30, 2021.

[2] The ICC plans to review these rules later this year if further updates are required.

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