URDG 758 - UNIFORM RULES DEMAND GUARANTEES (PRT2)

Guarantees are predominantly issued subject to local law, mainly based on historical preference. The wording of a guarantee is very often driven by the beneficiary who will provide the text, with instructions to the applicant to arrange issuance in exactly, or substantially, the same form, which may include issuance in a local language. Issuance can also be according to standard text maintained by the guarantor for each type of guarantee e.g., performance, bid or tender, advance payment, etc. Most commentators identify the early 1970's as the key period in the global uptake of the usage of demand guarantees. Increased usage of standby letters of credit in the U.S. can be tracked back a few years earlier.

ICC Rules - BACKGROUND

• 1978: URCG (Uniform Rules for Contract Guarantees), ICC Publication No. 325. Not successful in supporting the handling of demand guarantees which were, effectively, excluded from the coverage of the rules as they were focussed primarily upon demands / claims that included a judgement or arbitral award.
• 1982: The Model Forms for Issuing Contract Guarantees, ICC Publication No. 406. Supporting publication to the above Contract Guarantee rules.
• 1992: URDG (Uniform Rules for Demand Guarantees) ICC Publication No. 458. First release of an ICC publication addressing rules for demand guarantees. Achieved relative success but never attained global adoption, partially due to the article covering demands for payment, which was seen by many in the trade community as not in line with practice.
• 2010: URDG (Uniform Rules for Demand Guarantees), ICC Publication No. 758. This revision provided an opportunity to bring all comments, experiences, criticisms and feedback regarding URDG 458 and the practice of demand guarantees into a new revised and comprehensive set of rules. This version is more exact and avoids the possibility of misinterpretation that existed with URDG 458. In addition, it is made more transparent and readable by following the logical sequence of a guarantee lifecycle.

The URDG 758 (Uniform Rules for Demand Guarantees) are a set of contractual rules that apply to demand guarantees and counter-guarantees. As the URDG are contractual by nature, they apply only if the parties to a demand guarantee or counter-guarantee so choose. In simple terms, URDG offers a set of guidelines for the issue of Demand Guarantees which include Bank Guarantees in the way in which they are worded and constructed. These have recently been revised and are now clearer and more precise than their predecessor, URDG 458. The present revision (URDG 758) uses language consistent with that in the ICC’s universally accepted Uniform Customs and Practice for Documentary Credits (UCP 600). These call for new definitions and interpretation rules to provide greater clarity and precision. A clear layout of the examination of the demand process and a roadmap to handling extend or pay demands for force majeure.

Benefits with using URDG 758
Once the URDG are incorporated in the guarantee or counter-guarantee text by contractual reference to the URDG, they are deemed to be entirely incorporated, unless specific article(s) are expressly excluded or amended. When drafting a URDG guarantee or counter-guarantee, it is important to make a choice and avoid conditions whose occurrence can only be determined through a forensic examination of the underlying transactions. Guarantors and applicants should avoid using ambiguous terms in the guarantee. Sound practice can only be built upon transparency and good faith. It is in no one’s interest that the guarantee terms could only be understood through lengthy and costly litigation. Clear wording requires no judicial interpretation; therefore applicants can save considerable negotiating time and the cost of specialized legal assistance by benefiting from ready-to-use standard conditions in the model guarantee forms.

A URDG guarantee and counter-guarantee are irrevocable undertakings; this protects the beneficiary against the risk of revocation of the guarantee at a time when the guaranteed obligation is still to be completed. A URDG guarantee and counter-guarantee enter into effect as from the date they are issued, unless their terms expressly postpone their entry into effect to agree with a later date or the occurrence of an agreed event. Accordingly, no demand for payment can be presented until the guarantee enters into effect following the occurrence of a specified date or event indicated in the guarantee. The essential characteristic of a demand guarantee is that it is independent of the underlying transaction between the applicant and the beneficiary that prompted the issuance of the guarantee. Further, a demand guarantee is also independent of the instruction relationship pursuant to the applicant having requested the guarantor to issue the guarantee in favor of the beneficiary.

URDG 758 - OVERVIEW
Article 1 makes it clear that the rules apply to a demand guarantee or counter-guarantee when such instrument includes a statement as to the applicability of the rules. Those familiar with other ICC rules will recognise the premise that the rules are binding on all parties unless modified or excluded by the text of the guarantee or counter-guarantee.

As with other ICC rules, these rules contain a number of key definitions and interpretations. It is strongly recommended that practitioners read articles 2 (definitions) and 3 (interpretations) very carefully so as to understand the intentions and implications of each definition and interpretation.

Article 4 concerns itself primarily with the irrevocability of the guarantee. A guarantee is considered as issued once it is dispatched, transmitted or handed over, and irrevocability commences from that moment - even if the guarantee does not specifically state that it is irrevocable.

Article 5, relating to the independence of guarantees and counter-guarantees is indirectly lifted from the UCP where it has been tried and tested over many years.
As a natural consequence of article 5, article 6 highlights that a guarantor is only concerned with ‘documents'.

The key point within article 7 is that a demand guarantee is documentary by nature, and therefore any non-documentary conditions are to be ignored.

Article 8 addresses the recommended content of an instruction or guarantee that should always be apparent.

On occasion, a guarantor may not be in a position to issue a guarantee. This is covered by article 9.

Article 11 focuses on amendments and much of the content will be recognisable to those acquainted with the UCP.

Article 12 outlines that the liability of the guarantor extends only so far as that expressed in the terms and conditions of the guarantee, and in accordance with the rules as far as they are consistent with the guarantee, up to the maximum amount stated.

It is common practice that the amount of a demand guarantee can often be decreased (or occasionally increased) during its lifetime, either on certain dates or on the date of a particular action or event, and this is covered by article 13.

It is important that close attention is paid to article 14 (presentation), as non-adherence is likely to result in a non-complying demand. Ensure that you understand the meaning of ‘presentation' by referring to the definition given in article 2 of the rules: "means the delivery of a document under a guarantee to the guarantor or the document so delivered. It includes a presentation other than for a demand, for example, a presentation for the purpose of triggering the expiry of the guarantee or a variation of its amount".

The requirements for any demand, and information about the demand, are addressed in articles 15 and 16.

Continuing in the same vein, articles 17 and 18 cover partial, multiple and separateness of demands.

Article 19 looks at the examination process which has three facets; data is examined within the document itself, against the guarantee, and in line with the applicable rules. Absolute strict compliance of data is not required provided that any data does not conflict with other data in the document itself, any other document or the guarantee.

As outlined in article 20, a guarantor has up to five business days following the day of presentation to examine a demand in order to ascertain if it is compliant. It should be noted that this is a maximum period. Examination will, generally, be completed over a shorter period as dictated by local practice and competitive issues.

Article 21 addresses the currency of the payment, whilst article 22 focuses on transmission of copies of a complying demand.

A scenario frequently seen in the area of demand guarantees is ‘extend or pay' which relates to a beneficiary requesting an extension to the expiry or, if this is not given, settlement of its demand for payment. Article 23 expands upon this situation.

Not all demands are compliant and article 24 outlines the procedure to be followed in the event of a non-compliant demand.

Article 25 lists the three scenarios when the amount payable under a guarantee can be reduced.

It could be the case that one of the parties involved in a guarantee transaction is prevented from performing an action by a force majeure event that is outside its control. As stated in article 26, such circumstances include acts of God, riots, civil commotions, insurrections, wars, acts of terrorism or any causes beyond the control of the guarantor.

Article 27, disclaimer on effectiveness of documents, is sourced from the UCP and adapted for demand guarantees.

Based upon article 28, a guarantor is exempted from liability for the consequences of a number of transmission events including: delay or late delivery by a delivery service; disruption in the sending of electronic data; loss of a document or data; mutilation of a document; errors in the transmission of any document.

Articles 29 and 30 cover disclaimers for the acts of another party and limits on exemption from liability.

Article 31 addresses obligations and responsibilities imposed by foreign laws and usages.

Clarification of the party responsible for the payment of charges or fees is important and is covered by article 32.

Transfer and assignment are covered in detail within article 33.

As covered in article 34, unless there is a condition to the contrary within the guarantee or counter-guarantee text, the governing law of a guarantee will be that of the place of business of the guarantor, and of a counter-guarantee will be that of the place of business of the counter-guarantor.

Article 35, jurisdiction, follows a very similar approach to that expounded upon in article 34.

UNIFORM CUSTOMS AND PRACTICE 600 (UCP 600)/UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS 600 (UCPDC 600)

The Uniform Customs and Practice for Documentary Credits (UCP) is a set of rules on the issuance and use of letters of credit. The UCP is utilized by bankers and commercial parties in more than 175 countries in trade finance. Some 11-15% of international trade utilizes letters of credit, totaling over a trillion dollars (US) each year. Historically, the commercial parties, particularly banks, have developed the techniques and methods for handling letters of credit in international trade finance. This practice has been standardized by the ICC (International Chamber of Commerce) by publishing the UCP in 1933 and subsequently updating it throughout the years. The ICC has developed and moulded the UCP by regular revisions, the current version being the UCP600. The result is the most successful international attempt at unifying rules ever, as the UCP has substantially universal effect. The latest revision was approved by the Banking Commission of the ICC at its meeting in Paris on 25 October 2006. This latest version, called the UCP600, formally commenced on 1 July 2007.

The latest{July 2007} revision of UCP is the sixth revision of the rules since they were first promulgated in 1933. It is the outcome of more than three years of work by the ICC's Commission on Banking Technique and Practice. The UCP remain the most successful set of private rules for trade ever developed. A range of individuals and groups contributed to the current revision including: the UCP Drafting Group, which waded through more than 5000 individual comments before arriving at this final text; the UCP Consulting Group, consisting of members from more than 25 countries, which served as the advisory body; the more than 400 members of the ICC Commission on Banking Technique and Practice who made pertinent suggestions for changes in the text; and 130 ICC National Committees worldwide which took an active role in consolidating comments from their members.

During the revision process, notice was taken of the considerable work that had been completed in creating the International Standard Banking Practice for the Examination of Documents under Documentary Credits (ISBP),[3] ICC Publication 745. This publication has evolved into a necessary companion to the UCP for determining compliance of documents with the terms of letters of credit. It is the expectation of the Drafting Group and the Banking Commission that the application of the principles contained in the ISBP, including subsequent revisions thereof, will continue during the time UCP 600 is in force. At the time UCP 600 is implemented, there will be an updated version of the ISBP to bring its contents in line with the substance and style of the new rules.

UCP 600 Note that UCP600 does not automatically apply to a credit if the credit is silent as to which set of rules it is subject to. A credit issued by SWIFT MT700 is no longer subject by default to the current UCP; it has to be indicated in field 40E, which is designated for specifying the "applicable rules". Where a credit is issued subject to UCP600, the credit will be interpreted in accordance with the entire set of 39 articles contained in UCP600. However, exceptions to the rules can be made by express modification or exclusion. For example, the parties to a credit may agree that the rest of the credit shall remain valid despite the beneficiary's failure to deliver an installment. In such case, the credit has to nullify the effect of article 32 of UCP600, such as by wording the credit as:

"The credit will continue to be available for the remaining installments notwithstanding the beneficiary's failure to present complied documents of an installment in accordance with the installment schedule." UCP 600 is prepared by International Chamber of Commerce’s (ICC) Commission on Banking Technique and Practice. Its full name is 2007 Revision of Uniform Customs and Practice for Documentary Credits, UCP 600, and (ICC Publication No. 600). The ICC Commission on Banking Technique and Practice approved UCP 600 on 25 October 2006. 

The rules have been effective since 1 July 2007.

UCP 500 was the rules that had been in implementation before UCP 600. There are several significant differences exist between UCP 600 and UCP 500. Some of these differences are as follows; The number of articles reduced from 49 to 39 in UCP 600; In order to reach a standard meaning of terms used in the rules and prevent unnecessary repetitions two new articles have been added to the UCP 600. These newly added articles are Article 2 “Definitions” and Article 3 “Interpretations”. These articles bring more clarity and precision in the rules; A definitive description of negotiation as “purchase” of drafts of documents; New provisions, which allow for the discounting of deferred payment credits; The replacement of the phrase “reasonable time” for acceptance or refusal of documents by a maximum period of five banking days.

HISTORY OF UCP

• First uniform rules published by ICC in 1933. Revised versions were issued in 1951, 1962, 1974, 1983 and 1993. 
• 1933 – Uniform Customs and Practice for Commercial Documentary Credits.
• 1951 Revision - Uniform Customs and Practice for Commercial Documentary Credits.
• 1962 Revision - Uniform Customs and Practice for Documentary Credits.
• 1974 Revision – Uniform Customs and Practice for Documentary Credits .
• 1983 Revision – Uniform Customs and Practice for Documentary Credits.
• 1993 Revision – Uniform Customs and Practice for Documentary Credits.

Currently majority of letters of credit issued everyday is subject to latest version of the UCP. This widely acceptance is the key sign that shows the importance of the UCP, which are the most successful private rules for trade ever developed.

ICC AND THE UCP
A significant function of the ICC is the preparation and promotion of its uniform rules of practice. The ICC’s aim is to provide a codification of international practice occasionally selecting the best practice after ample debate and consideration. The ICC rules of practice are designed by bankers and merchants and not by legislatures with political and local considerations. The rules accordingly demonstrate the needs, customs and practices of business. Because the rules are incorporated voluntarily into contracts, the rules are flexible while providing a stable base for international review, including judicial scrutiny. International revision is thus facilitated permitting the incorporation of the changing practices of the commercial parties. ICC, which was established in 1919, had as its primary objective facilitating the flow of international trade at a time when nationalism and protectionism threatened the easing of world trade. It was in that spirit that the UCP were first introduced – to alleviate the confusion caused by individual countries’ promoting their own national rules on letter of credit practice. The aim was to create a set of contractual rules that would establish uniformity in practice, so that there would be less need to cope with often conflicting national regulations. The universal acceptance of the UCP by practitioners in countries with widely divergent economic and judicial systems is a testament to the rules’ success.

eUCP
The eUCP was developed as a supplement to UCP due to the sense at the time that banks and corporates together with the transport and insurance industries were ready to use electronic commerce. The hope and expectation that surrounded the development of eUCP has failed the UCP600 and it will remain as a supplement albeit slightly amended to identify its relationship with UCP600.

An updated version of the eUCP came into effect on 1 July 2007 to coincide the commencement of the UCP600. There are no substantive changes to the eUCP, merely references to the UCP600. Almost all of the presentations are being made in paper or traditional format still in today's letters of credit environment. However, as telecommunication technology is expanding its borders, it is highly expected that in the very near future traditional processes will be substituted with the electronic paperless transactions. In order to establish set of rules that governs electronic presentations the ICC Banking Commission established a Working Group consisting of experts in the UCP, electronic trade, legal issues and related industries, such as transport, to prepare the appropriate rules for electronic and mixed presentations. Supplement to the Uniform Customs and Practice for Documentary Credits for Electronic Presentation or "eUCP" is the result of the efforts of this committee.

The eUCP is not a revision of the UCP. The UCP will continue to provide the industry with rules for paper letters of credit for many years. The eUCP is a supplement to the UCP that, when used in conjunction with the UCP, will provide the necessary rules for the presentation of the electronic equivalents of paper documents under letters of credit.

CDCS
The Certificate for Documentary Credit Specialists (CDCS®) is the leading qualification for documentary credit specialists. Recognised worldwide as a benchmark of competence for international practitioners, it enables documentary credit specialists to demonstrate practical knowledge and understanding of the complex issues associated with documentary credit practice such as:

Documentary credits - types, characteristics and uses, including standby credits
Rules and trade terms, including ISBP 745, ISP 98, UCP 600, URR 725 and Incoterms 2010®
Types and methods of payment / credit used in documentary credit transactions

CDCS® was developed by the Institute of Financial Services and Bankers Association for Finance and Trade (formerly IFSA), in partnership with the International Chamber of Commerce (ICC). The qualification was first examined in 1999 and has seen a rapid growth in the uptake of the programme across the world. The Certificate is examined in over 30 countries each year and is taught through distance learning and self-study over a four-month period. The CDCS assessment involves a three-hour multiple-choice examination of 88 questions, designed to test knowledge and its application to real-life situations. Once a practitioner has achieved the qualification, they have the right to add the professional designation of ‘CDCS’ after their name for a period of three years. After the three-year period a process of Re-Certification is required where the professional has to provide evidence of Continued Professional Development to maintain the accreditation or re-sit the examination.

DUE DILIGENCE (DD)

Due diligence is an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. Due diligence is also the process of systematically researching and verifying the accuracy of a statement.

It can be a legal obligation, but the term will more commonly apply to voluntary investigations. A common example of due diligence in various industries is the process through which a potential acquirer evaluates a target company or its assets for an acquisition. The theory behind due diligence holds that performing this type of investigation contributes significantly to informed decision making by enhancing the amount and quality of information available to decision makers and by ensuring that this information is systematically used to deliberate in a reflexive manner on the decision at hand and all its costs, benefits, and risks

The term “due diligence” means "required carefulness" or "reasonable care" in general usage, and has been used in this sense since at least the mid-fifteenth century. It became a specialized legal term and later a common business term due to the United States’ Securities Act of 1933, where the process is called "reasonable investigation" (section 11b3). This Act included a defense at Section 11, referred to later in legal usage as the “due diligence” defense, which could be used by broker-dealers when accused of inadequate disclosure to investors of material information with respect to the purchase of securities. In legal and business use, the term was soon used for the process itself instead of how it was to be performed, so that the original expressions such as "exercise due diligence in investigating" and "investigation carried out with due diligence" were soon shortened to "due diligence investigation" and finally "due diligence".

As long as broker-dealers exercised “due diligence” (required carefulness) in their investigation into the company whose equity they were selling and as long as they disclosed to the investor what they found, they would not be held liable for non-disclosure of information that was not discovered in the process of that investigation. The broker-dealer community quickly institutionalized, as a standard practice, the conducting of due diligence investigations of any stock offerings in which they involved themselves. Originally the term was limited to public offerings of equity investments, but over time it has come to be associated with investigations of private mergers and acquisitions as well.

The term originated in the business world, where due diligence is required to validate financial statements. The goal of the process is to ensure that all stakeholders associated with a financial endeavor have the information they need to assess risk accurately.

When due diligence involves the offering of securities for purchase, as in an IPO (initial public offering), specific corporate officers are responsible for the proper completion of the process, including the issuer, issuer's counsel, underwriters, CFO and the brokerage firm offering shares. Because of the delicate nature and importance of such judgments to the prospects for the performance of a company's equities in the public market, there is a strong emphasis on neutral, unbiased analysis of both the current financial state and future prospects of the firm in question.

In compliance, due diligence describes the degree of effort required by law or industry standard.

In real estate, due diligence is the time period between the acceptance of an offer and the close of escrow.

In civil law, due diligence is synonymous with "reasonable care."

When a patent is issued, due diligence is the requirement that the patent holder should develop a product around the patent, and not just prevent others from doing so.

BUSINESS TRANSACTIONS AND CORPORATE FINANCE
Due diligence takes different forms depending on its purpose:

The examination of a potential target for merger, acquisition, privatization, or similar corporate finance transaction normally by a buyer. (This can include self due diligence or “reverse due diligence”, i.e. an assessment of a company, usually by a third party on behalf of the company, prior to taking the company to market.)

• A reasonable investigation focusing on material future matters.
• An examination being achieved by asking certain key questions, including, how do we buy, how do we structure an acquisition, and how much do we pay?
• An investigation of current practices of process and policies.
• An examination aiming to make an acquisition decision via the principles of valuation and shareholder value analysis.

The due diligence process (framework) can be divided into nine distinct areas:

• Compatibility audit.
• Financial audit.
• Macro-environment audit.
• Legal/environmental audit.
• Marketing audit.
• Production audit.
• Management audit.
• Information systems audit.
• Reconciliation audit.

It is essential that the concepts of valuations (shareholder value analysis) be linked into a due diligence process. This is in order to reduce the number of failed mergers and acquisitions. In this regard, two new audit areas have been incorporated into the Due Diligence framework: the Compatibility Audit which deals with the strategic components of the transaction and in particular the need to add shareholder value and the Reconciliation audit, which links/consolidates other audit areas together via a formal valuation in order to test whether shareholder value will be added.

The relevant areas of concern may include the financial, legal, labor, tax, IT, environment and market/commercial situation of the company. Other areas include intellectual property, real and personal property, insurance and liability coverage, debt instrument review, employee benefits and labor matters, immigration, and international transactions. Areas of focus in due diligence continue to develop with cybersecurity emerging as an area of concern for business acquirers. Due diligence findings impact a number of aspects of the transaction including the purchase price, the representations and warranties negotiated in the transaction agreement, and the indemnification provided by the sellers.

Due Diligence has emerged as a separate profession for accounting and auditing experts.

Foreign Corrupt Practices Act
With the number and size of penalties increasing, the Foreign Corrupt Practices Act (FCPA) is causing many U.S. institutions to look into how they evaluate all of their relationships overseas. The lack of a due diligence of a company’s agents, vendors, and suppliers, as well as merger and acquisition partners in foreign countries could lead to doing business with an organization linked to a foreign official or state owned enterprises and their executives. This link could be perceived as leading to the bribing of the foreign officials and as a result lead to noncompliance with the FCPA. Due diligence in regard to FCPA compliance is required in two aspects:

Initial due diligence – this step is necessary in evaluating what risk is involved in doing business with an entity prior to establishing a relationship and assesses risk at that point in time.

Ongoing due diligence – this is the process of periodically evaluating each relationship overseas to find links between current business relationships overseas and ties to a foreign official or illicit activities linked to corruption. This process will be performed indefinitely as long as a relationship exists, and usually involves comparing the companies and executives to a database of foreign officials. This process should be performed on all relationships regardless of location[13] and is often part of a wider Integrity Management initiative In the M&A context, buyers can use the due diligence phase to integrate a target into their internal FCPA controls, focusing initial efforts on necessary revisions to the target's business activities with a high-risk of corruption. While financial institutions are among the most aggressive in defining FCPA best practices, manufacturing, retailing and energy industries are highly active in managing FCPA compliance programs.

Human rights
Passed on May 25, 2011, the OECD member countries agreed to revise their guidelines promoting tougher standards of corporate behavior, including human rights. As part of this new definition, they utilized a new aspect of due diligence that requires a corporation to investigate third party partners for potential abuse of human rights. In the OECD Guidelines for Multinational Enterprises document, it is stated that all members will “Seek ways to prevent or mitigate adverse human rights impacts that are directly linked to their business operations, products or services by a business relationship, even if they do not contribute to those impacts”

The term was originally put forth by UN Special Representative for Human Rights and Business John Ruggie, who uses it as an umbrella to cover the steps and processes by which a company understands, monitors and mitigates its human rights impacts. Human Rights Impact Assessment is a component of this. The UN formalized guidelines for Human Rights Due Diligence on June 16 with the endorsement of Ruggie’s Guiding Principles for Business and Human Rights.

Civil litigation
Due diligence in civil procedure is the idea that reasonable investigation is necessary before certain kinds of relief are requested.
For example, duly diligent efforts to locate and/or serve a party with civil process is frequently a requirement for a party seeking to use means other than personal service to obtain jurisdiction over a party. Similarly, in areas of the law such as bankruptcy, an attorney representing someone filing a bankruptcy petition must engage in due diligence to determine that the representations made in the bankruptcy petition are factually accurate. Due diligence is also generally prerequisite to a request for relief in states where civil litigants are permitted to conduct pre-litigation discovery of facts necessary to determine whether or not a party has a factual basis for a cause of action.

In civil actions seeking a foreclosure or seizure of property, a party requesting this relief is frequently required to engage in due diligence to determine who may claim an interest in the property by reviewing public records concerning the property and sometimes by a physical inspection of the property that would reveal a possible interest in the property of a tenant or other person.

Due diligence is also a concept found in the civil litigation concept of a statute of limitations. Frequently, a statute of limitations begins to run against a plaintiff when that plaintiff knew or should have known had that plaintiff investigated the matter with due diligence that the plaintiff had a claim against a defendant. In this context, the term “due diligence” determines the scope of a party’s constructive knowledge, upon receiving notice of facts sufficient to constitute “inquiry notice” that alerts a would-be plaintiff that further investigation might reveal a cause of action.

Criminal law
In criminal law, due diligence is the only available defense to a crime that is one of strict liability (i.e., a crime that only requires an actus reus and no mens rea). Once the criminal offence is proven, the defendant must prove on balance that they did everything possible to prevent the act from happening. It is not enough that they took the normal standard of care in their industry – they must show that they took every reasonable precaution.
Due diligence is also used in criminal law to describe the scope of the duty of a prosecutor, to take efforts to turn over potentially exculpatory evidence, to (accused) criminal defendants.

In criminal law, “due diligence” also identifies the standard a prosecuting entity must satisfy in pursuing an action against a defendant, especially with regard to the provision of the Federal and State Constitutional and statutory right to a speedy trial or to have a warrant or detainer served in an action. In cases where a defendant is in any type of custodial situation where their freedom is constrained, it is solely the prosecuting entities duty to ensure the provision of such rights and present the citizen before the court with jurisdiction. This also applies where the respective judicial system and/or prosecuting entity has current address or contact information on the named party and said party has made no attempt to evade notice of the prosecution of the action.

GUIDE TO INTERNATIONAL STANDARD BANKING PRACTICE (ISBP 745)

The ISBP is an International Chamber of Commerce (ICC) publication which provides important guidance regarding the examination of documents presented against letters of credit. It is important to note that the ISBP cannot in any way change the UCP 600 rules which apply to letters of credit, but it is nonetheless a valuable companion guide to UCP. ISBP was initially approved by the ICC in 2002 and this first version acted as a companion guide to Uniform Customs and Practice (UCP) 500 which were the current rules that governed letters of credit at that time. When the rules were revised to UCP 600 in July 2007, the ISBP was duly updated by the ICC publication No.681, thus aligning the ISBP with the newly updated UCP.

A fully revised version of ISBP, ICC publication 745 was published in July 2013. This entailed a substantial update to the former version and includes a number of both new and reworded interpretations as well as some significant additions resulting from various official opinions published by the ICC. ISBP has therefore become an absolutely essential publication for anyone who is involved in letters of credit. Some of the key changes in the revised guide but it is worth emphasising why the first ISBP was produced back in 2002, both with the same objective; To encourage a uniformity of practice worldwide to reduce the number of credits rejected by banks owing to discrepancies. The ISBP provides practices that should be applied by documentary credit practitioners helping to reduce discrepant presentations.

The contents of ISBP 745 are as follows:

1. Preliminary Considerations
2. General Principles
3. Drafts and Calculation of Maturity Date
4. Invoices,
5. Transport Documents covering at least two different modes of transport
6. Bills of Lading
7. Non-Negotiable Sea Waybill
8. Charter Party Bill of Lading
9. Air Transport Document
10. Road, Rail or Inland Waterway Transport Documents
11. Insurance Document and coverage
12. Certificate of Origin
13. Packing List, Note or Slip
14. Weight List, Note or Slip
15. Beneficiary’s Certificate

Analysis, Inspection, Health, Phytosanitary, Quantity Quality and Other Certificates.
The following is a selection of, what we consider to be some important information / changes following the release of the revised ISBP. It is not intended to be a definitive guide, rather our interpretation of changes which, having discussed these with a number of our clients, are worth emphasising to ensure that documentary presentations are compliant when they are examined by banks.

1. Under Preliminary Considerations, there is an expanded paragraph on the risks that accompany a beneficiary accepting a letter of credit which requires the presentation of a document that is to be issued, signed or countersigned by the applicant. The expanded text emphasises that the beneficiary of the letter of credit should consider the appropriateness of this requirement carefully or seek an amendment. Having encountered a number of letters of credit with similar clauses in recent months, all issued by banks in the Middle East, this is a naturally a real risk. In one instance the presentation of a document which had to be signed by a specifically named individual within the applicant’s organisation, represented 30% of the total value, but competitive forces meant that the beneficiary had reluctantly made a commercial decision to allow this onerous clause to remain in the Letter of Credit. I sincerely hope that they obtain this document and get paid!

2. Under General Principles, “virgules” (ie., slash marks ( “/” ) used to separate alternatives) are discouraged, however where they do appear, eg., on a SWIFT MT700 in the goods description field 45A reads: “Red / Blue / Yellow sweatshirts according to PO number 76598654” with no further clarification, ISBP provides guidance that the documents presented could evidence only Red or only Blue or only Yellow, or any combination of them.  This is valuable clarification for every documentary credit practitioner.

3. The ISBP now states that when a certificate, declaration or statement is required by the letter of credit, the document is to be signed. Most of our clients have told me that they would of course routinely sign such documents, but again this explicit clarification is helpful. It is unusual to come across a letter of credit which does not call for some form of certificate evidencing that has taken place, so it is an important point to note.

4. Copy Transport Documents. If the letter of credit calls for copy transport documents rather than originals, the ISBP states that UCP 600 articles 19-25 which relate to transport documents do not apply. Copy transport documents are to be examined only to the extent expressly stated in the credit, otherwise according to UCP 600 sub-article 14(f), which effectively means that the document presented appears to fulfil the function of the required document and that there is no conflict regarding the data on the document, with any other document stipulated in the letter of credit.

5. The ISBP contains a sub-section which refers to Expressions not defined in UCP 600, explaining if these expressions are used, how to interpret them. New additions in ISBP 745 are “shipping company” and “documents acceptable as presented”, together with an expanded explanation of “third party documents not acceptable”. Perhaps the most onerous expression is “documents acceptable as presented” which almost seems to undermine the very use of a letter of credit. The ISBP provides clarity that if this expression is used a presentation may consist of one or more of the stipulated documents provided they are presented with the expiry date of the credit and the drawing amount is within that which is available under the credit. The documents will not otherwise be examined for compliance under the credit or UCP 600, including whether they are presented in the required number of originals or copies. This fresh interpretation does at least provide some criteria, albeit very scant, should this set phrase be encountered.

6. Shipping Marks – as a former documentary examiner for a bank, I am conditioned to want to see exact mirror images when comparing documents to letter of credit. This is not necessarily the case or indeed correct, but it is, for me, a natural reaction. With this in mind, the ISBP indicates that if a letter of credit states that the details of a shipping mark are to be evidenced on specific documents, these details must be shown but not necessarily in the exact same sequence as expressed in the letter of credit. Some of our clients have commented that this is a surprise to them as they would never consider presenting documents which contain shipping marks in any other sequence to that required in the letter of credit, but it is worth noting these revised guidelines in the ISBP.

7. Invoices. Perhaps one of the areas that causes the most debate among documentary credit practitioners is the description of goods on the invoice compared to the description as stated within the letter of credit. ISBP reinforces UCP 600 Article 18, which uses the word ‘correspond’ when stating how the goods description should be represented on the invoice compared to the letter of credit.   The ISBP expands on this by mentioning that invoices may also indicate additional data  in respect of the goods, service or performance provided that such data does not appear to refer to a different nature, classification or category of goods, service or performance. Examples are provided as follows: “Imitation Suede Shoes” where the goods description on the credit states “Suede Shoes” or “Second Hand Hydraulic Drilling Rig” where the credit has a requirement for “Hydraulic Drilling Rig”.  Such classifications would be deemed unacceptable due to a change in classification or category of the goods.  Our recommendation is that the tried and tested policy of quoting the goods description on the invoice verbatim as per the goods description required under the letter of credit is still the best course of action.

8. Bills of lading. “A bill of lading may be issued by any entity other than a carrier or master  (captain), provided it meets the requirements of UCP 600 article 20” is an important statement made within ISBP 745. In consideration of this, if a letter of credit includes a stipulation such as “Freight forwarder Bills of Lading are not acceptable” or words to this effect, this has no meaning in the context of the title, format, content or signing of a bill of lading unless the letter of credit provides specific requirements detailing how the bill of lading is to be issued or signed. In the absence of these requirements, such a stipulation will be disregarded and the bill of lading presented is to be examined according to the requirements of UCP 600 article 20. So in short, such clauses are totally superfluous and will be disregarded. This interpretation has been warmly welcomed, rather unsurprisingly by many freight forwarders as this is a very clear section and leaves the document examiner in no  doubt as to what is acceptable

9. Country named on bill of lading. A client attending our popular “Essential Guide to Letters of Credit” training course recently raised a question regarding the Port of Loading stated on a bill of lading. A well known UK bank had raised a discrepancy that the Port of Loading was stated as ‘Felixstowe’, whilst the credit stipulated ‘Felixstowe, UK’. This is quite a common question, however ISBP 745 is quite clear on this issue – A bill of lading is to indicate the port of loading stated in the credit. When a credit indicates the port of loading by also stating the country in which the port is located, the name of the country need not be stated.So the bank in question erroneously raised this as a discrepancy. This interpretation also applies to air waybills, with no requirement for the country to be stated on the document.

10. Air Waybills. There are some very important elements in ISBP 745 which relate to air waybills. The carrier is to be identified by name and not merely by its IATA code, so for example British Airways needs to be stated rather than “BA” or Singapore Airlines instead of just “SQ”. That said, the airport can be identified using its IATA code, so ‘LHR’ can be quoted instead of London Heathrow and ‘LAX’ is similarly acceptable when referring to Los Angeles.

The ten elements of ISBP referred to in this guide are not placed in order of importance nor are they intended as anything other than a brief introduction highlighting the common issues raised during our conversations with clients or delegates who attend our training courses.

BANK PAYMENT OBLIGATION (BPO)

ICC Banking Commission approved the URBPO contractual rules, which was brought into effect on July 1st 2013.The announcement created ripples in the financial services industry. Herein we shall review what BPO means, what are the uniform rules (the UR in URBPO) mandated by ICC, and what would be the implications of these rules on international trade.

WHAT IS BANK PAYMENT OBLIGATION (BPO)?
BPO, as defined by financial messaging service provider SWIFT and the banking commission of ICC is an irrevocable undertaking given by one bank to another bank that payment will be made on a specified date after successful electronic matching of data, generated by SWIFT’s Trade Services Utility (TSU) or any equivalent Transaction Matching Application, based on Uniform Rules for BPO issued by ICC. In other words, Bank payment obligation (BPO) is an irrevocable undertaking given by an Obligator Bank (typically buyer's bank) to a Recipient  Bank (usually seller's bank) to pay a specified amount on a agreed date under the condition of successful electronic matching of data according to an industry-wide set of rules adopted by ICC.

Bank payment obligation is a new payment method in international trade. Main payment methods in international trade so far was cash in advance payment, documentary collections, documentary credits and open account. As we know each payment method have strenghts and weaknesses. For example open account and cash in advance payments are very easy to use. They are simple but they are risky either for the importers or the exporters. Documentary credits are secure payment methods but they are complicated and expensive. Does international trade finance need another payment method? Can bank payment obligation be the right answer?

Essentially, BPO is an alternate payment instrument to settle international trade with automated processing and reduced risk (assurance of payment to the seller). It offers:

Automated and secure processing
Standard set of ISO 20022 messages that enable interoperability between participating banks, thereby helping them extend global market reach Straight through Processing (STP): As the ISO 20022 messages are extended to corporate users, the same can be adopted for communication between Corporates and their Banks. This message will enable end-to-end straight through processing with corporate ERP systems. An assurance on payment to the seller similar to a confirmed letter of credit, which helps mitigate risk across of the parties of the trade Flexible financing options from banks based upon confirmed purchase orders and invoices on pre-shipment and post-shipment finance respectively

How does BPO differ from traditional trade finance instruments?
In case of traditional trade finance instruments like Letter of Credit (LC), the undertaking on irrevocable payment is between the banks and their corporate clients, whereas a BPO is an irrevocable payment undertaking between the buyer’s bank and the seller’s bank.

Legacy trade finance processing and matching are paper based, manual, time consuming and expensive; whereas BPO processing is automated (electronic processing and matching) with the global standard ISO 20022 messages. While a LC guarantees exchange of goods for payment based on physical presentation of compliant documentation, a BPO guarantees exchange of goods for payment based on electronic presentation of compliant data.

Traditional trade finance instruments are characterized by high cost due to manual processing, frequent discrepancy handling and liquidity pressures. On the other hand, a BPO’s automated processing and matching reduces the processing cost and enables banks to offer competitive rate to corporate for the BPO transaction. Timely delivery of matching reports on POs and invoices enables corporates to have quicker access to liquid resources.

How will Banks benefit from BPO?
For a BPO transaction, the bank will be involved in all stages of an open account transaction, starting from the initial baseline submission and it will reduce the overall operational cost associated with the trade transaction. Banks can also offer value-added services like financing, cash forecasting, liquidity and working capital management to their corporate clients based on underlying trade transactions and reporting. Large banks can also offer white label processing tools for the banks that would not like to build their own BPO processing tool.

How will Corporates benefit from BPO?
BPO will benefit corporates operationally as there is no manual processing like document creation, verification, validation, tracking and reporting. It will also result in significant cost savings for the corporate through:

1. Early access to pre and post shipment finance needs.
2. Risk mitigation, as the undertaking is between buyer and a seller bank.
3. No need to reissue the document in case the shipment happens at a different location, due to external factors such as natural disasters.
4. No banking fees on document discrepancy handling and tracking.
5. No verification and amendments charges.
6. Early liquidity/working capital management due to faster transaction processing and settlement for the exporters
7. Importer can access the goods early, as he will receive the documents quickly.

What will be the capital and accounting treatment of BPO?
Based on the initial reference of ICC Banking Commission, the BPO has the characteristics and behavior of contingent liability and at the time of issuance; this would be an off-balance sheet item for the obligor bank and characterized as unfunded (The execution of a BPO is contingent upon agreed transaction terms between the obligor and recipient Bank). The BPO, once utilized, will be removed or liquidated from the books and balances of the obligor and the recipient bank upon the execution of a BPO for a payment “at sight”. It will be on-balance sheet item if the deferred payment undertaking changes into definitive undertaking at the time of data set match by the transaction matching application.

What could be the potential shortfalls of this system?
Banks that are willing to offer BPO services need to invest in technology infrastructure/system capable of supporting and communicating with ISO 20022 compliant messages as well as the Transaction Matching Application. Else, they may not be able to provide BPO services to their clients.

BASEL III 100% Credit Conversion Factor (CCF) - The 100% CCF in calculating the leverage ratio for contingent trade finance exposures is applicable for  most of the off balance items, and it will impact the cost of trade finance instruments like Standby LC, Trade LC and BPO. Physical trade documents are required under local legislation and to release the delivery of goods from customs.

The current state of International Trade
According to a recent WTO press release, world trade growth in 2012 fell to 2% from 5.2% in 2011 and is likely to remain at a sluggish 3.3% in 2013 due to the ongoing economic crisis and slow growth in developed economies. Slow growth in international trade has a direct impact on the balance of payments for economies and profitability of corporates, thereby exacerbating the economic slowdown. On the other hand, an HSBC trade forecast predicts that:

World trade will grow by 73% in the next 15 years and companies across the world will increase their trade activity by a combined 4.1% between 2011 and 2025. Merchandize trade volumes in 2025 will hit 41.04 € trillion, compared to today’s 23.01 € trillion.

To enable a favorable international trade growth outlook and to build confidence among international traders, financial messaging service provider SWIFT and the banking commission of ICC  have jointly introduced an innovative bank assisted trade instrument—BPO, a potential game-changing innovation shaping supply chain finance and international trade in coming years.

Some important definitions of Bank Payment Obligation (BPO) 
"Obligor bank" means buyer's bank under Bank Payment Obligations. Obligor bank issues the legally binding, valid, irrevocable but conditional and enforceable payment undertaking to Recipient Bank. Obligor bank is an equivalent term of issuing bank under letters of credit definitions. "Recipient Bank" means seller's bank  under Bank Payment Obligations.

"Trade Services Utility" (TSU) means a centralised matching and workflow engine providing timely and accurate comparison of data taken from underlying corporate purchase agreements and related documents, such as commercial invoices, transport and insurance. The URBPO, the Uniform Rules for Bank Payment Obligations ICC publication No. 750. URBPO; also referred to as ICC URBPO or ICC BPO. are the rules of Bank Payment Obligation adopted by ICC banking commission.

How does bank payment obligation work?
Bank payment obligation and letter of credit have some characteristics in common. Firstly banks play a key role on both payment methods. Secondly banks are giving irrevocable payment undertaking.

Bank Payment Obligation (BPO) transaction based on two main assumptions or expectations:
The use of minimum fields, the buyer, the seller and respective banks agree on the payment terms and conditions and on the minimum trade information required to assess the credit risk; The dispatch of documents, such as the bill of lading, certificate of origin and certificate of quality, from the seller directly to the buyer. Given the limited information required by the banks and the accelerated document exchange, corporate can expect a lower rate of discrepancies and an acceleration of the settlement process.

CERTIFICATE OF DEPOSIT (CD)

A CD, or certificate of deposit, is a type of savings tool that can offer a higher return on your money than most standard savings accounts. Better yet, there isn’t much risk involved, and CDs typically don’t have monthly fees. But before committing to a CD — and “commit” is the operative word, as you’ll see — you should know how they work and determine whether one will fit your needs.

WHAT IS A CERTIFICATE OF DEPOSIT (CD)?
A CD is different from a traditional savings account in several ways. A CD is what’s called a timed deposit. With a savings account you can deposit and withdraw funds relatively freely, but with a CD, you agree to keep your money there for a set period of time, called the term length. Term lengths can be as short as a few days or as long as a decade, but the standard range of options is between three months and five years.

The longer the term length — the longer you commit to keeping your money in the account and thus with the bank — the higher the interest rate you’ll earn.

SOME FEATURES OF CERTIFICATE OF DEPOSIT (CD)

• A larger principal should/may receive a higher interest rate.
• A longer term usually earns a higher interest rate, except in the case of an inverted yield curve (e.g., preceding a recession).
• Smaller institutions tend to offer higher interest rates than larger ones.
• Personal CD accounts generally receive higher interest rates than business CD accounts.
• Banks and credit unions that are not insured by the FDIC or NCUA generally offer higher interest rates.

TYPES OF CERTIFICATE OF DEPOSIT (CD)

1. Traditional CD
2. Bump-up CD
3. Liquid CD
4. Zero-coupon CD
5. Callable CD
6. Brokered CD
7. High-yield CD

1. Traditional CD
With a traditional CD, you deposit a fixed amount of money for a specific term and receive a predetermined interest rate. You have the option of cashing out at the end of the term, or rolling over the CD for another term. Most institutions don't allow you to add additional funds before your traditional CD matures.

Penalties for early withdrawal can be quite stiff and will cause you to lose interest, and possibly principal. Federal regulations set only the minimum early withdrawal penalty for traditional CDs. There is no law preventing an institution from enacting tougher penalties, but they must be disclosed when the account is opened. Before you pick a CD, it's important to calculate how much interest you could earn by the end of your term.

2. Bump-up CD
This type of CD allows you to take advantage of a rising-rate environment. Suppose you buy a 2-year CD at a given rate, and six months into the term the bank offers an additional quarter-point on the same investment. A bump-up CD gives you the option of telling the bank you want to get the higher rate for the remainder of the term. Institutions that offer this CD option usually allow only one bump-up per term.

The drawback is you may get a lower initial rate on a bump-up CD than on a traditional 2-year CD. The longer it takes interest rates to rise, the longer it will take to make up for the earlier, lower-rate portion of the term. Be sure you have realistic expectations about the interest-rate environment before buying a bump-up CD. See how bump-up CD deals stack up against traditional CD rates.

3. Liquid CD
These CDs offer consumers the opportunity to withdraw their money without incurring a penalty, although the depositor may have to maintain a minimum balance in the account. You can expect the interest rate on a liquid CD to be higher than the bank's money market rate. But it's usually lower than the rate on a traditional CD of the same term. You'll have to weigh the convenience of liquidity against whatever return you're sacrificing.

A key consideration when purchasing a liquid CD is how soon you can make a withdrawal after opening the account. Federal law requires that the money stay in the account for seven days before it can be withdrawn without penalty, but banks can set the first penalty-free withdrawal for any time beyond that.

4. Zero-coupon CD
These CDs are similar to zero-coupon bonds. As with the bond, you buy the CD at a deep discount to its par value (or the amount you'll receive when the CD matures). "Coupon" refers to a periodic interest payment. Zero-coupon means there are no interest payments. So, you might buy a 12-year, 84,890 € CD for 42,445 €, and you wouldn't receive any interest payments over the course of the term. You'd receive the 84,890 € face value when the CD matures.

One drawback is that zero-coupon CDs are usually long-term investments, and you take on considerable interest-rate risk. If interest rates rise during the 10-year term in question, you'll be on the losing end of that deal. Another potential problem is that you're credited with phantom income each year. No money is being put in your pocket, but you'll have to pay Uncle Sam on the earnings being accrued. In our example, you'd earn 2,546.7 € during the first year and would owe tax on the money, though you haven't actually received it. Each year, you'll have a higher base than the year before -- and a bigger tax bill. Make sure you have room in your budget to cover the taxes.

5. Callable CD
With a callable CD, the bank that issues the CD can "call" it away from you after your call-protection period expires, and before the CD matures. For instance, if you buy a 5-year CD with a six-month call-protection period, it would be callable after the first six months. Just as with the zero-coupon CD, the bank is shifting interest-rate risk on to your shoulders. If it issues the CD at 3 percent and six months later rates drop, the bank is now paying 2 percent on 5-year CDs.

The bank can call, or take back, your CD and reissue it at 2 percent. You'll receive your full principal and interest earned. But you're stuck reinvesting your money at lower rates. Usually, banks pay a premium for taking on the risk that the CD may be called. They may pay investors a quarter- or half-percent more on a callable CD than they would on a CD without the call feature. Compare CD rates now to land the best deal.

6. Brokered CD
A brokered CD is simply a certificate of deposit sold through a brokerage firm. To qualify for one, you'll need a brokerage account. Some banks use brokers as sales representatives to find investors willing to purchase the banks' CDs. Buying CDs through a brokerage can be convenient. There's no need to open accounts at a variety of banks just to get the best CD yields. Brokered CDs often pay higher rates than CDs from your local bank because banks using brokered CDs compete in a national marketplace.

Brokered CDs are more liquid than bank CDs because they can be traded like bonds on the secondary market. But there is no guarantee you won't take a loss. The only way to guarantee getting your full principal and interest is to hold the CD until maturity. Don't assume all brokered CDs are backed by the Federal Deposit Insurance Corp. It's up to you to do your due diligence and look for that on the broker's website. You should also watch out for brokered CDs that have call options.

7. High-yield CD
Banks compete for deposits by offering better-than-average rates, and Bankrate offers the best route for finding the highest rates in the nation.

Bank rate surveys local and national institutions to find banks offering the highest yields on CDs. All accounts are directly offered to the consumer by the institution but take time to compare the best CD rates then calculate your potential earnings.

CRITICISM
CD interest rates closely track inflation. For example, in one situation interest rates may be 15% and inflation may be 15%, and in another situation interest rates may be 2% and inflation may be 2%. Of course, these factors cancel out, so the real interest rate is the same in both cases.

In this situation, it is a misinterpretation that the interest is an increase in value. However, to keep the same value, the rate of withdrawal must be the same as the real rate of return, in this case, zero. People may also think that the higher-rate situation is "better", when the real rate of return is actually the same. Also, the above does not include taxes. When taxes are considered, the higher-rate situation above is worse, with a lower (more negative) real return, although the before-tax real rates of return are identical. The after-inflation, after-tax return is what's important. You don't make any money in bank accounts (in real economic terms), simply because you're not supposed to. On the other hand, bank accounts and CDs are fine for holding cash for a short amount of time.

Even if CD rates track inflation, this can only be the expected inflation at the time the CD is bought. The actual inflation will be lower or higher. Locking in the interest rate for a long term may be bad (if inflation goes up) or good (if inflation goes down). For example, in the 1970s, inflation increased higher than it had been, and banks were slow to raise their interest rates. This does not much affect a person with a short note, since they get their money back, and they can go somewhere else (or the same place) that gives a higher rate. But longer notes are locked in their rate. This gave rise to amusing nicknames for CDs. A bit later, the opposite happened, where inflation was declining. This does not greatly help a person with a short note, since they shortly get their money back and they are forced to reinvest at a new, lower rate. But longer notes become very valuable since they have a higher interest rate.

However, this applies only to "average" CD interest rates. In reality, some banks pay much lower than average rates, while others pay much higher rates (two-fold differences are not unusual, e.g., 2.5% vs 5%). In the United States, depositors can take advantage of the best FDIC-insured rates without increasing their risk.

Investors should be suspicious of an unusually high interest rate on a CD. Allen Stanford used fraudulent CDs with high rates to lure people into his Ponzi scheme.
Finally, the statement that "CD interest rates closely track inflation" is not necessarily true. For example, during a credit crunch banks are in dire need of funds, and CD interest rate increases may not track inflation.

TERMS AND CONDITIONS FOR CERTIFICATE OF DEPOSIT
There are many variations in the terms and conditions for CDs.

The federally required "Truth in Savings" booklet, or other disclosure document that gives the terms of the CD, must be made available before the purchase. Employees of the institution are generally not familiar with this information[citation needed]; only the written document carries legal weight. If the original issuing institution has merged with another institution, or if the CD is closed early by the purchaser, or there is some other issue, the purchaser will need to refer to the terms and conditions document to ensure that the withdrawal is processed following the original terms of the contract.

• The terms and conditions may be changeable. They may contain language such as "We can add to, delete or make any other changes ("Changes") we want to these Terms at any time."
• The CD may be callable. The terms may state that the bank or credit union can close the CD before the term ends.
• Payment of interest. Interest may be paid out as it is accrued or it may accumulate in the CD.
• Interest calculation. The CD may start earning interest from the date of deposit or from the start of the next month or quarter.
• Right to delay withdrawals. Institutions generally have the right to delay withdrawals for a specified period to stop a bank run.
• Withdrawal of principal. May be at the discretion of the financial institution. Withdrawal of principal below a certain minimum—or any withdrawal of principal at all—may require closure of the entire CD. A US Individual Retirement Account CD may allow withdrawal of IRA Required Minimum Distributions without a withdrawal penalty.
• Withdrawal of interest. May be limited to the most recent interest payment or allow for withdrawal of accumulated total interest since the CD was opened. Interest may be calculated to date of withdrawal or through the end of the last month or last quarter.
• Penalty for early withdrawal. May be measured in months of interest, may be calculated to be equal to the institution's current cost of replacing the money, or may use another formula. May or may not reduce the principal—for example, if principal is withdrawn three months after opening a CD with a six-month penalty.
• Fees. A fee may be specified for withdrawal or closure or for providing a certified check.
• Automatic renewal. The institution may or may not commit to sending a notice before automatic rollover at CD maturity. The institution may specify a grace period before automatically rolling over the CD to a new CD at maturity. Some banks have been known to renew at rates lower than that of the original CD.

CD RATES
As a reward for parking your cash with them for a longer time, banks and credit unions often offer higher CD rates than their savings account rates. CD rates are quoted as an annual percentage yield, or APY, which considers the frequency with which interest is paid on the account (aka the compounding period). Banks can choose to compound rates on a yearly, quarterly, monthly or even daily basis.

The average rate on a three-year CD at a bank currently stands at 0.50%. However, many credit unions and online-only banks offer certificates with rates above 1%.

CERTIFICATE OF DEPOSIT (CD) EARLY WITHDRAWAL PENALTIES
If you end your commitment early by withdrawing the money before the CD matures, you’ll likely be charged a penalty. It varies, but typically you’ll give up three to six months’ worth of interest accrued. Consumers should take note of any such penalty on a CD before choosing to withdraw early. The loss of interest may outweigh the benefits of taking the money out.

INSURANCE
CDs at most banks are backed by the Federal Deposit Insurance Corp., or FDIC, for up to 212,225 €. At credit unions, share certificates are insured up to the same amount through the National Credit Union Administration, or NCUA. Some state-chartered credit unions may operate with private insurance. This insurance does not cover penalties incurred by withdrawing funds early.

How can you tell if your bank or credit union offers insurance? All institutions with federal backing must display FDIC or NCUA signs at teller windows and on their websites. If they do, coverage is automatic. You don’t have to apply for your money to be insured.

ON AND OFF-BALANCE SHEET TRANSACTIONS

Off-balance sheet (OBS), or Incognito Leverage, usually means an asset or debt or financing activity not on the company's balance sheet. Total return swaps are an example of an off-balance sheet item.

Some companies may have significant amounts of off-balance sheet assets and liabilities. For example, financial institutions often offer asset management or brokerage services to their clients. The assets managed or brokered as part of these offered services (often securities) usually belong to the individual clients directly or in trust, although the company provides management, depository or other services to the client. The company itself has no direct claim to the assets, so it does not record them on its balance sheet (they are off-balance sheet assets), while usually has some basic fiduciary duties with respect to the client. Financial institutions may report off-balance sheet items in their accounting statements formally, and may also refer to "assets under management," a figure that may include on and off-balance sheet items.

Under current accounting rules both in the United States (US GAAP) and internationally (IFRS), operating leases are off-balance-sheet financing. Financial obligations of unconsolidated subsidiaries (because they are not wholly owned by the parent) may also be off-balance sheet. Such obligations were part of the accounting fraud at Enron.

The formal accounting distinction between on and off-balance sheet items can be quite detailed and will depend to some degree on management judgments, but in general terms, an item should appear on the company's balance sheet if it is an asset or liability that the company owns or is legally responsible for; uncertain assets or liabilities must also meet tests of being probable, measurable and meaningful. For example, a company that is being sued for damages would not include the potential legal liability on its balance sheet until a legal judgment against it is likely and the amount of the judgment can be estimated; if the amount at risk is small, it may not appear on the company's accounts until a judgment is rendered.

DIFFERENCE BETWEEN ON AND OFF-BALANCE SHEET
Traditionally, banks lend to borrowers under tight lending standards, keep loans on their balance sheets and retain credit risk—the risk that borrowers will default (be unable to repay interest and principal as specified in the loan contract). In contrast, securitization enables banks to remove loans from balance sheets and transfer the credit risk associated with those loans. Therefore, two types of items are of interest: on-balance sheet and off-balance sheet. The former is represented by traditional loans, since banks indicate loans on the asset side of their balance sheets. However, securitized loans are represented off the balance sheet, because securitization involves selling the loans to a third party (the loan originator and the borrower being the first two parties). Banks disclose details of securitized assets only in notes to their financial statements.

HOW IT WORKS
For example, let's assume that Company XYZ has a 3,392,000 € line of credit with Bank ABC. The line of credit comes with a financial covenant that requires Company XYZ to stay below a 0.5 debt-to-equity ratio at all times. Company XYZ wants to buy a new piece of equipment. The new machine costs 848,000 €, but Company XYZ does not have the cash to make the purchase. If it uses debt to buy it, the company will violate the covenant on its line of credit. Therefore, Company XYZ needs to find another way to obtain a the machine.

To solve the problem, Company XYZ creates a separate entity that will purchase the equipment and then lease it to Company XYZ via an operating lease. This way, even though Company XYZ has virtually complete control of and responsibility for the machine, it only records its monthly lease expense on its income statement; it does not have to record the additional debt on its balance sheet, and it does not record an increase in assets (because it does not legally own the equipment). XYZ used off-balance-sheet financing to acquire an asset without having to record the transaction as such on its balance sheet.

FACTORING
Factoring is the process in which a business receives an advance on its accounts receivable from a third party, the “factor,” at a discount. The business sells its invoices in return for a cash injection of between 70 and 90 percent of the total invoice value. The advantage for a small or start-up business is that it provides and immediate boost to cash flow. As no liability has been created, the business does not have to report the factoring on its balance sheet. However, factoring reduces profit margins and the company’s scope for future borrowing.

OPERATING LEASES
Many small businesses lease real estate and equipment as part of their operations. The lessee reports the lease expenses – such as rental and insurance – on his income statement, but his balance sheet is unaffected. The asset's value and liabilities remain on the lessor’s (owner’s) balance sheet. The lessee returns the asset to the lessor at the end of the lease.

CAPITAL LEASES
A capital lease allows the lessor to assume a proportion of an asset’s ownership and enjoy some of its benefits. If the lease rental payments’ present value is 75 percent or more of the asset’s value, the asset and liability must be recorded on the lessee’s balance sheet. If the rental payments amount to less than 75 percent of the asset’s value, they do not need to be recorded on the lessor’s balance sheet. In July 2011, the International Accounting Standards Board and its U.S. sister organization, the Financial Accounting Standards Board suggested that the difference between operating and capital lease should be abolished. The organizations proposed that all lease asset values and liabilities be added to the lessee’s balance sheet.

LETTER OF CREDIT
Letters of credit provide a secure method for small business exporters to obtain payments for goods and services. A bank issues a letter of credit and guarantees the payment for goods contracted by a buyer from a seller. The bank assumes the seller’s risk that the buyer will not pay for the goods. The buyer pays a fee to the bank for the service, usually about 1 percent of the contract value. In the process, the seller shifts the non-payment liability from his balance sheet to the bank.

INTEREST RATE SWAPS
Interest-rate swaps are financial derivatives that involve the exchange of a cash flow based on fixed interest rates for one based on floating interest rates in the same currency. Small companies with poor credit ratings use interest rate swaps to arrange funding at a fixed interest rate for a long-term investment, and to hedge their debt obligations. The two parties agree to swap cash flows on specific dates, called settlement dates, over a period of time, called settlement time. The credit exposure of each party in the chain is difficult to value, but it remains off the balance sheet as no equity is created

WHY IT MATTERS
Other examples of off-balance-sheet financing includes the sale of receivables under certain conditions, guarantees or letters of credit, joint ventures, or research and development activities. Often, companies set up special-purpose vehicles (SPVs) or special-purpose entities (SPEs) that have their own balance sheets, and companies then place the assets or liabilities in question on the SPEs' balance sheets.

Off-balance-sheet financing is most often used in order to comply with financial covenants. However, companies also use off-balance-sheet financing to preserve borrowing capacity (for example, when a company is close to hitting its limit on a borrowing line or would like to use its borrowing line for something else), lower their borrowing rates, or manage risk. The strategy, however, has had a bad reputation since it was famously used by former energy giant Enron.

It very important to note that off-balance-sheet financing transactions are not invisible, as many people believe. Rather, the Securities and Exchange Commission (SEC) and generally accepted accounting principles (GAAP) require companies to disclose these and other financing arrangements in the notes to their financial statements. Savvy investors know to look at these notes for information and insight. Additionally, GAAP rules are very particular regarding how to record off-balance-sheet items, and managers who do not know these rules or do not apply these rules properly can face considerable consequences.

OFF-BALANCE SHEET ACCOUNTING AND MANIPULATION METHODS
With off-balance sheet accounting, a company didn't have to include certain assets and liabilities in its balance sheet -- it was "off-sheet" and therefore not part of their financial statements. We'll talk more later about how the Sarbanes-Oxley Act changed this practice. While there are legitimate reasons for off-balance-sheet accounting, it is often used to make a company look like it has far less debt than it actually does. Some types of off-balance-sheet accounting move debt to a newly created company specifically for that purpose, which was the case with Enron. These are called special purpose entities (SPEs) and are also known as variable interest entities (VIEs).

Off-balance-sheet entities can be created for several reasons, such as when a company needs to finance a business venture but doesn't want to take on the risk, or when there is too much debt to get a loan. By starting a new SPE, they can secure a loan through the new entity. There are situations where it makes sense to start an SPE. If your company wants to branch out into another area outside of its core business, an SPE will keep that risk from affecting the main balance sheet and profitability of the company. Prior to 2003, a company could own up to 97 percent of an SPE without having to report the liabilities of the SPE on its balance sheet.

SYNTHETIC LEASES
Synthetic leases often use SPEs to hold title to a company's property and lease that property back to the company. Because of off-balance-sheet accounting, synthetic leases allowed companies to reap the tax benefits of ownership without having to list it as a liability on their balance sheets.

Synthetic leases could also be signed with some entity other than an SPE. Banks, for example, would often purchase property for businesses and lease it back to them via a synthetic lease. The company leasing the property avoids the liability on the balance sheet but still gets to deduct interest and depreciation from its tax bill.