Risk Management in 2 Factor Environment

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Risk Management in 2 Factor Environment

• Risk Management Seminar
• Berlin, 27th. To 29th. April 2009
• Dieter Hardt
• IFG Legal Committee

2
Content

• Part 1
• GRIF DEX and the Buoyage System
• Important Rules in GRIF and DEX in relation to a
  seller
• Suitable Business and Clients for 2 Factor
  Transactions
• Part 2
• Necessary actions before starting a new 2 Factor
  Contract
• Important actions during the first 3 Months of
  a new 2 Factor Contract
• Follow-up actions during the first 6 Months of
  a new 2 Factor Contract
• Permanent monitoring of a seller relationship

3
GRIF, DEX and the Buoyage-System

• GRIF General Rules for International Factoring
• Section I General Provision
• Section II Assignment of Receivables
• Section III Credit Risk
• Section IV Collection of Receivables
• Section V Transfer of Funds
• Section VI Disputes
• Section VII Representations, warranties and
  undertakings
• Section VIII Miscellaneous

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GRIF, DEX and the Buoyage-System

• DEX Rules for Data Exchange and for Specific
  Products
• Part I General
• Part II Rules for Non Notification Factoring
  (NNF) and Bulk Export Factoring (Bulk)
• Part III Rules for Fast Cash Factoring (FCF)
• Part IV Rules for Hot Cold Backup and
  Collections (HAC)
• Part V Direct Payments to Suppliers under Fast
  Cash Factoring
• Part VI Single Transactions
• Part VII Breaches
• Appendixes

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GRIF, DEX and the Buoyage-System

• Buoyage System
• A Navigators Guide structured by Subjects
  through all important legal documents of IFG

6
Important Rules in GRIF and DEX in Relation to a
Seller

• Article 11.3 -Good Faith and Mutual Assistance-
• Each of the IF and EF undertakes that each will
  inform the other immediately of any fact or
  matter which comes to his attention and which may
  adversely affect the collection of any receivable
  or the creditworthiness of any debtor.

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Important Rules in GRIF and DEX in Relation to a
Seller

• Watch out !!!!!
• There might be problems if IF receives
  information from debtors about actions of the
  supplier, or if an EF is informed about past
  payment delays of a debtor

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Important Rules in GRIF and DEX in Relation to a
Seller

• Article 13 Validity of Assignment-
• 13.05 Whenever the assignment of a receivable
  needs special documentation or a confirmation in
  writing , at the request of the IF the EF must
  provide such documentation or confirmation in the
  prescribed way.
• 13.06 If the EF shall fail to provide such
  documentation or confirmation in relation to that
  receivable within 30 days of the receipt of the
  IF request, then the IF may reassign such
  receivable

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Important Rules in GRIF and DEX in Relation to a
Seller

• Watch out !!!!
• There is a time limit of 30 days after request
  by which the EF has to deliver the documents.
  There is no excuse for the EF if his supplier
  fails to deliver the documents to him.

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Important Rules in GRIF and DEX in Relation to a
Seller

• Article 14 -Validity of Receivables-
• 14.03 At the request of the IF and if then needed
  for the collection of a receivable the EF must
  promptly provide any of all of the following as
  proof and in any event within the following time
  periods.
• 14.03.2 30 days from the receipt of that request
• a) evidence of shipment
• 14.03.3 Should the EF fail to provide the
  requested documents within the prescribed time
  limits, the IF shall be entitled the reassign the
  receivable

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Important Rules in GRIF and DEX in Relation to a
Seller

• Watch out !!!!
• In case that the request concerns a disputed
  receivable, the time limits of settlement as
  shown under article 27 will not apply if the IF
  decides to reassign the receivable

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Important Rules in GRIF and DEX in Relation to a
Seller
Article 17.10 If it is known to the Export
Factor that the supplier and the debtor are
affiliated or connected in any way ( other than
through the supply of goods or services by the
supplier) then the Export Factor must inform the
Import Factor of this fact when applying for a
credit limit. In order to be valid any credit
limit issued in response to such application must
expressly acknowledge the Import Factors receipt
of such information. If the either the Export
Factor or the Import Factor only learns of such
affiliation after a credit limit has been issued
then it must immediately inform the other party
thereof. Unless the Import Factor thereafter
issues a further credit approval expressly
acknowledging the Import Factors receipt of such
information any previously issued credit limit
relating to the affiliated debtor shall be
treated as entirely invalid and as if it had
never been issued
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Important Rules in GRIF and DEX in Relation to a
Seller

• The Export Factor has to go deeply in due
  diligence to find out if there are relations
  between the supplier and the debtor. Sometimes it
  is like a puzzle. Even if the realtions are
  discovered at a later point in time, the IF might
  be off risk.

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Important Rules in GRIF and DEX in Relation to a
Seller
Article 20 - Rights of the IF 20.04 If the
IF 20.04.1 is unable to obtain judgements in
respect of any receivable assigned to him by way
of decision of a court or other tribunal of
competent jurisdiction of the debtors country by
reason only of a term relating to jurisdiction in
the contract of sale between the supplier and
debtor which give raise to that receivable,
and 20.04.2 informs the EF of that inability
within 365 days of the due date of the invoice
representing that receivable, 20.04.3 then the IF
may immediately reassign that receivable and
recover from the EF any amount paid in resepect
of it under Article 24.02
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Important Rules in GRIF and DEX in Relation to a
Seller

• Watch out !!!! Very Hot Item
• Some supplier contracts do only allow legal
  proceedings at the local courts of the suppliers
  country.
• Make sure that the supplier contracts contain
  place of jurisdiction and applicable law both in
  the country of supplier and country of the
  debtor. Be careful this rule applies also for
  items where a payment under approval has already
  been made.

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Suitable Business and Clients for 2-Factor
Transactions
Suitable Business B to B Transactions No
Consignment Sales No ongoing Term Contracts Max.
Payment Terms of 90 days
Suitable Clients No newcomers in new
markets Clients who have already established a
good relationsship with the debtors abroad Danger
!!!!! Fake Disputes
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Necessary Actions before starting a new 2-Factor
Contract

• It is most important to find a client whith whom
  a mutual beneficial relationship will be possible
• This is why it is absolutely necessary to detect
  and solve possible problem areas in a very early
  stage

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Necessary Actions before starting a new 2-Factor
Contract

• Analysis of Financials incl. Management Accounts
• Analysis of Creditors Ledger and Debtors Ledger
• Analysis of Shipment- and Payment Terms
• Visit of the Prospect at his premises

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Necessary Actions before starting a new 2-Factor
Contract

• Client Analyse Sheet
• Name Adress legal form of Client
• Shareholders Management
• Kind of Business
• Payment Terms
• Delivery Terms
• Turnover in the last 2 years Domestic Export
• Seasonal Variations
• Average Outstandings Domestic Export
• Number of Debtors Domestic Export
• Number of Payment Defaults Domestic Export
• Amount of Payment Defaults Domestic Export
• Number of Invoices per Year Domestic Export
• Number of Credit Notes per Year Domestic Export
• Number of employees in adminstration and
  bookkeeping

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Important Actions during the first 3 Months of a
new 2-Factor-Contract

• Export Factor
• Elaboration of Functions, Terms and Concept of
  the 2-Factor-Business to the Client
• Intensive verification of receivables (incl.
  Involvement of
• the Import Factor)

• Import Factor
• - Establishing of a close
• communication to the Debtors and
• Feed-Back to the Export Factor

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Follow-up Actions during the first 6 Months of a
new 2-Factor-Contract

• Field Audits at the premises of the Client
• High invoice values, Credit Notes, Withdrawals of
  Invoices, Value dating of Invoices, Offsets, High
  Disputes have to be reported daily to
  risk-management.
• Dispatch of Original Invoices and controll of
  Assigment Legend
• Dispatch of proof of delivery

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Follow-up Actions during the first 6 Months of a
new 2-Factor-Contract
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Permanent Monitoring of a seller relationship

• A typical Client Fraud is going to be performed
  by an honest client who is confronted with
  liquidity problems and financial difficulties.
  This can make him innovative what the design of
  receivables is concerned. There are many
  possibilities
• Pre-invoicing,
• Double invoicing,
• Double assignment to different Factors or Banks
• Fake Financials
• Fake proof of shipment
• Delayed Credit Notes or information about
  Disputes
• Undisclosure of Agreements with the Debtors
  concerning ban of assignment, consignment sales,
  Bonus ect.
• Delayed report and payment of received Indirect
  Payments from Debtors

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Permanent Monitoring of a seller relationship

• It is important to detect these fraudulant
  actions of a client in an early stage to have the
  client risk under controll. The scheme of fraud
  is commonly known and it reflects into the
  structure of ledgers
• Average invoice value increases
• The average usage of credit limits increases
• The propotion of receivables without credit cover
  decreases
• Average payment terms are increasing
• The number and value of Indirect Payments and/or
  Credit Notes is increasing

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Risk-Management in 2-Factor Environment

• Thank you for your attention
• and
• Have a good time in Berlin