How to reduce the risks of cross-border shipments

Mainstream

Reducing the risks of cross-border shipments is not a choice of a reliable carrier or a contract template. This is a system of protecting the business at every stage: from the first contact with the counterparty until the moment of receiving full payment.

The main question is not how profitable the deal is. The question is whether the money or the product will come back if something goes wrong.

Effective risk management begins with three checks:

• Who are you actually getting in a relationship with?
• How the contract distributes the risks of loss, damage and non-payment.
• What mechanisms will actually force the counterparty to fulfill its obligations?

If these three blocks are not worked out before shipment, the company can deliver the goods, complete all formalities and be left without payment, without the goods and with arbitration in an inconvenient jurisdiction.

When the Risk Management Challenge

Risk management is no longer a theory in the following situations:

• First delivery to a new foreign buyer;
• work on the terms of deferred payment or open account;
• The route of delivery affects several countries, ports and modes of transport;
• the goods require special conditions of transportation, storage or installation;
• the buyer insists on its terms of delivery and acceptance;
• Settlements are made through banks in sensitive jurisdictions.
• The chain involves traders, agents or related companies;
• Sanctions or export control restrictions are applicable;
• the counterparty refers to currency restrictions or bank delays;
• After shipment, there are regular disputes about quality and quantity.
• A long-term partnership with high annual volumes is planned.

The mistake most companies make

Many exporters and importers start with the following questions:

At what price? What's the delivery basis? When's the shipment?

That's the wrong first question.

The right question is:

What protection scenario will minimize losses in case of non-payment, delay or loss of goods, and where will the goods legally end up in a crisis?

Sometimes the best result is a letter of credit. Sometimes, retaining ownership until full payment. Sometimes it is a guarantee of the bank. Sometimes – the right choice of Incoterms, in which the risk passes after acceptance in the warehouse of the buyer. Sometimes it is a parallel check of the ultimate recipient and the beneficial owner.

Risk management does not require a legal checkout before signing, but a commercial transaction architecture.

Step 1. Checking the counterparty

The first line of defense is reliable information about the buyer or supplier.

It should be established:

• full name, registration number and jurisdiction;
• Beneficial owners and controlling persons;
• Group structure and the presence of related companies;
• real business profile and business history;
• financial condition, available reporting;
• credit history and litigation;
• assets in jurisdictions where foreclosure is possible;
• inclusion in sanctions, export-control and other restrictive lists;
• reputational risks and links with government agencies.

Checking the counterparty is not a one-time option, but the first filter. If the buyer works through a company with no offshore assets and insists on an open account, no contract will protect against intentional default.

Step 2. Building the architecture of the contract

The contract should be written not only for regular delivery, but also for conflict.

Key provisions:

• accurate description of the goods, quantity, quality and permissible deviations;
• the basis of delivery (Incoterms 2020), which clearly determines the moment of transition of risks and expenses;
• the time of transfer of ownership – separately from the transfer of risks;
• price, currency prices and currency corridor;
• payment terms: prepayment, letter of credit, bank guarantee, deferment, mixed structures;
• the time at which the payment is deemed to be executed;
• the right to suspend supplies in case of late payment or signs of insolvency;
• the procedure for acceptance by quantity and quality, terms and methods;
• warranty obligations, terms and procedure for submitting claims;
• Limitation and exclusion of liability;
• penalty and interest for late payment;
• applicable law and place of dispute resolution;
• arbitration clause or prorogation agreement;
• Retention of title (retention of title) until full payment;
• a sanctions clause;
• currency clause and procedure for blocking events;
• Force majeure and hardship.

A weak contract can be partially compensated by the behavior of the parties and correspondence, but the winning scenario is built on the text of the contract.

Step 3. Ensure payment security

The best contract is useless if the payment mechanism does not create real pressure on the buyer.

Main instruments:

• Irrevocable Documentary Credit protects the seller if the buyer’s bank commits to pay against duly submitted documents.
• Bank guarantee – can cover an advance, execution or payment; It is especially effective when issued by a first-class bank in an acceptable jurisdiction.
• A letter of credit with deferred payment gives the buyer time, but retains the obligation of the bank.
• Commercial (credit) risk insurance covers losses in case of non-payment, political events or the inability to convert currency.
• Escrow Account – funds are deposited until the conditions are met.
• Triggered payment schedule – partial prepayment, payment against documents and final settlement after acceptance.

The choice of instrument depends on the jurisdiction, the amount of the transaction, the reliability of the counterparty and the cost of financing.

Step 4. To fix the transfer of ownership and risks

A huge number of problems arise from the confusion of the concepts of “risk transition” and “ownership transfer”.

• Incoterms 2020 define the time when the risk of loss or damage to the goods passes and the allocation of costs. They do not regulate the transfer of ownership.
• The transfer of ownership must be settled separately in the contract. It is critically important for the seller to retain ownership until full payment (retention of title), and in a form recognized by the law of the country of location of the goods.
• If the buyer becomes the owner before payment, the seller becomes an unsecured creditor.

In parallel, it is necessary to check whether it is possible to register the retention of ownership in the relevant registers, and how the right of retention works when reselling goods to third parties.

Step 5. Managing Logistical Risks

Physical safety of the cargo and quality of documentary support directly affect the possibility of receiving payment.

It is recommended:

• to insure cargo on the whole route, including intermediate storage and transshipment, covering not only physical loss, but also the costs of investigation, reduction of losses and return of goods;
• check carriers, freight forwarders and warehouse operators for reliability, insurance coverage of liability and the actual availability of assets;
• control the completeness and accuracy of transport and shipping documents: bills of lading, CMR-invoices, air waybills, packing sheets, certificates of origin, inspection acts;
• in the case of a letter of credit, to achieve full compliance of documents with the terms of the letter of credit before sending the originals to the bank;
• to record the condition of the cargo during transfer to the carrier and during delivery by an independent surveyor inspection;

Errors in documents are one of the most common reasons for the bank’s refusal to pay under the letter of credit and delaying the acceptance of goods by the buyer.

Step 6. Minimize sanctions and currency risks

In the current conditions, this is not a political slogan, but an indispensable element of the deal.

It is necessary:

• check the counterparty, its beneficiaries and banks for inclusion in the sanctions lists of all relevant jurisdictions (OFAC, EU, UK, UN, as well as national lists);
• include in the contract a sanctions clause giving the right to suspend performance, to demand replacement of the bank or to terminate the contract without liability;
• provide for a currency clause that takes into account possible restrictions on conversion, transfers or blocking of correspondent accounts;
• (a) consider alternative payment currencies and settlement routes, including the use of banks in neutral jurisdictions;
• Monitor regulatory changes throughout the contract.

Sanctions risks can paralyze even a commercially flawless transaction.

Step 7. Create a system of acceptance and fixation of quality

Disputes about quality and quantity are the main reason for non-payment and offsetting counterclaims.

An effective system includes:

• harmonized sampling method and quality standards (GOST, ISO, ASTM, etc.);
• independent inspection at the seller’s factory before shipment;
• Surveyor inspection at the port of loading and/or unloading;
• photo and video recording of the state of cargo and packaging;
• clear terms and procedure for sending claims on quality with the obligatory attachment of the act of independent examination;
• a mechanism for joint inspection in case of discrepancies of data.

The earlier the condition of the goods is recorded, the more difficult it is for the buyer to unreasonably refuse payment.

Step 8. Establish an effective dispute resolution mechanism

Even with perfect preparation, disputes are possible. The speed and result of their resolution depend on what is written in the contract.

Key elements:

• Arbitration clause in favor of a neutral institution (ICC, LCIA, SIAC, ICAC at the CCI of the Russian Federation) with an agreed place of arbitration, language and number of arbitrators.
• Exclusive jurisdiction of a state court, if justified by the location of the assets or goods.
• The right to interim measures before or during arbitration, including the seizure of goods in transit or in a warehouse.
• Mediation clause or escalation procedure (manager negotiations → mediation → arbitration) to reduce costs.
• The right to suspend delivery until payment delays are settled without the risk of counterclaims.

A reservation should be written in such a way as to exclude the possibility of parallel processes in different jurisdictions and delaying the recognition of a decision.

Common Mistakes in Risk Management

1. Trust instead of verification may look reliable, but verification reveals an offshore structure without assets.

2. The use of Incoterms without regulation of ownership of the Goods became the property of the buyer on board the ship, and payment did not arrive.

3. The Seller, in fact, lends to the buyer without the ability to quickly return the goods.

4. Payment hangs in the correspondent bank, and the counterparty cannot quickly find an alternative route of settlements.

5. The standard clause from the Internet leads to a dispute over competence and years of delay.

6. Lack of cargo insurance and liability A single insured event covers the profit from many transactions.

7. Claims without independent quality fixing The buyer declares marriage, the seller cannot refute documentary.

8. The buyer uses minor discrepancies as a reason for a discount, knowing that the seller does not have a ready-made protection plan.

Checklist: 15 Questions Before Cross-border Delivery

1. Who is the real partner and who is behind it?
2. Have the beneficiaries and related companies been duly diligent?
3. What assets do the contractor have in jurisdictions where they can be arrested?
4. Has the counterparty been checked on the sanctions and compliance lists?
5. Which Incoterms are selected and where does ownership transfer?
6. Is the property retained until full payment?
7. What payment mechanism is fixed and what is it provided for?
8. Who insures the cargo and does insurance cover the risks of non-payment?
9. The carrier and forwarders are checked and insured?
10. Is the quality and quantity acceptance procedure with independent parties described?
11. Are there any sanctions and currency clauses in the agreement?
12. What arbitration or judicial clause does the contract contain?
13. Does the contract give the right to suspend delivery in case of late payment?
14. Can interim measures of protection be obtained promptly with respect to goods or assets?
15. Where will the future decision be implemented and will it be recognized there?

Payment security mechanisms: comparison

Risk reduction strategy: four-level protection

A strong strategy is built not on one tool, but on four levels:

1. Counterparty verification of identity, beneficiaries, assets and compliance status. If the first level fails, the next level fails.

2. Contract Distribution of risks, property rights, penalties, sanctions and currency clauses, arbitration. The treaty creates a legal framework of coercion.

3. Logistics and documents Insurance, survey inspections, transport documents. Without this level, it is impossible to either receive payment under the letter of credit or prove a violation.

4. Dispute resolution and enforcement mechanism: Arbitration or judicial clause, access to interim measures, possibility of seizure of goods and assets. If the fourth level is not built, the previous three can only give moral satisfaction.

FAQ

It is impossible to completely exclude the risks of cross-border supplies, but it can be reduced to an acceptable level at which even the realization of the risk will not lead to critical losses.

Which is better: Credit or Bank Guarantee: There is no universal answer. The letter of credit is convenient for one-time deliveries with documentary control. Bank guarantee – for continuing relationships and deferred payment. The choice depends on the amount, frequency and jurisdiction of the issuing bank.

How to protect yourself from non-payment after the transfer of goods? preservation of ownership until full payment, bank guarantee, credit risk insurance and letter of credit. It is important that the ownership does not pass to the buyer before the entire amount is credited to the seller's account.

In terms of control over the goods - the rules of group E or F (for example, EXW, FCA), where the buyer organizes the transportation. However, from the point of view of commercial attractiveness, CIF or CIP are often used, in which the seller insures the cargo. The key is to separately prescribe the time of transfer of ownership.

What to do if the buyer claims a quality mismatch, but does not attach an independent examination?If the contract requires independent inspection and clear deadlines, the application without expertise should not suspend the obligation to pay. The seller may insist on a joint examination and not admit the claim without proper evidence.

The sanctions clause should give the seller the right to suspend delivery, demand an alternative bank or currency and not be liable for delay. In parallel, it is necessary to monitor correspondent chains before sending the goods.

Is it possible to return the goods if they are not paid, if they are already at the buyer?If the property right is retained before payment and is recognized by the law of the country where the goods are located, a refund is possible. But in practice, this often requires a court order or arrest, so it is best not to allow the transfer of ownership before receiving the money.

Related services

• International Trade, Distribution & Cross-Border Transactions
• Commercial Contracts
• Sanctions, Export Controls & International Compliance
• International Arbitration, Commercial Litigation & Cross-Border Disputes
• Corporate Investigations, Regulatory Investigations & Business Integrity
• International Regulatory Risk & Strategic Advisory
• Asset Tracing & Enforcement

Related material

• How to Choose Incoterms 2020 to Protect Your Seller’s Interests
• Checking of a foreign counterparty: seven key stages
• International contract of supply: 10 items that should not be missed
• Arbitration clause in contracts of international sale
• Sanctions and cross-border transfers: practical solutions
• Preservation of ownership when exporting to different jurisdictions
• Cargo and liability insurance: How to Avoid Coverage Gaps
• Documentary letter of credit for exporter: step-guide
• Currency clauses and settlements under restrictions
• How to suspend delivery without violating the contract

Conclusion

Reducing risks in cross-border shipments is not a legal superstructure, but a commercial basis for the transaction. It does not start with a contract template, but with an answer to the question: What will we do if the buyer does not pay, the cargo is damaged, and the bank does not make payment?

A strong defense system is built on four levels – a proven counterparty, a balanced contract, controlled logistics and a working mechanism of coercion. In international trade, it is not the best bidder who wins, but the one who has made sure that his goods or money do not disappear in the cross-border space between jurisdictions.