It’s a Digital World – Embracing Technology in Trade Finance

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Following Sullivan’s recognition as a Leader in Trade for Innovation by Global Trade Review (GTR) for recent contributions to the digitalisation of trade finance, this is an opportune moment to recap the progress that has been made in this space over the past 18 months.

The various local and global lockdowns forced by the COVID-19 pandemic, which no one could have foreseen at the beginning of 2020, have put the spotlight firmly on the challenges of operating a paper-based industry—such as is international trade finance—in the 21st century and the practicalities of obtaining original documents (e.g. bills of lading and warehouse receipts) and wet ink signatures in a world where many are working from home. In considering how the industry has adapted, one thing has become clear—there is certainly scope to improve the manner in which trade transactions are conducted going forward.

Notwithstanding the scepticism that has been raised previously by some about the risk of losing the "human element" to automated processes—particularly when it comes to reviewing documentation and carrying out transactions—the pandemic has highlighted the need to embrace technology where appropriate. Indeed, much of this technology was already in development and use but was catapulted to the fore from March 2020. This will only serve to help the industry, allowing it to operate more efficiently and better protect itself from market disruption.  

In this blog post, we briefly consider a few key ways in which trade is being digitalised, noting some projects that we have been working on over the past year: electronic signatures; electronic payment undertakings; blockchain technology; artificial intelligence; and digital rules.

Electronic signatures

Although English law has recognised electronic signatures for some time now, the pandemic has certainly accelerated their use. While virtual signings have become the norm for many transactions, electronic signatures can take a number of forms. A few examples include scanned wet ink signatures, typed signatures, a mouse click, authentication codes and multiple party signatures made using electronic signature platforms. As such, it is vital that parties conduct due diligence to ensure that electronic signatures, and particularly the method that is proposed for the transaction, are considered valid in the jurisdiction where enforcement is sought. This is particularly key where documentation needs to be registered or witnessed, thus adding to the list of legal and practical considerations. In our experience, for instance, certain African jurisdictions still require wet ink signatures in order for documents to be stamped and registered. Therefore, obtaining local law advice, as appropriate, is always recommended.

Electronic payment undertakings (ePU)

While English law is well suited to adapt to commercial realities, as demonstrated by its recognition of electronic signatures, it is fair to say that there are certain instances in which it is outpaced by the technology available. The use of promissory notes (PNs) and bills of exchange (BEs) are good examples, as these two instruments are not currently usable in electronic form. This is unsurprising given that the drafters of the Bills of Exchange Act 1882, which governs PNs and BEs, clearly could not have envisaged the digitalisation of trade or have anticipated that the industry would move away from paper documentation.

For this reason, the International Trade & Forfaiting Association (ITFA) has launched its Digital Negotiable Instruments (DNI) Initiative, which seeks to fully digitalise a substantive equivalent to PNs and BEs, harnessing the latest innovations, including electronic signatures and distributed ledger technology (DLT). As part of the DNI Initiative, launched last year, ITFA, among others, lobbied the UK Government for a change in the law.

Having conferred with ITFA, the International Chamber of Commerce (ICC) UK and other stakeholders, the Law Commission of England and Wales recently announced a consultation on proposed legislative reforms to recognise electronic versions of PNs, BEs and other trade documents, some of which are documents of title.[1] This would bring interests currently based in contract law within the protection of legislation. In short, transferring possession of such trade documents is currently limited to physical paper documents. The proposed reforms would see electronic trade documents and the transfer of possession via an electronic system being recognised by English law. At this stage, a draft Electronic Trade Documents Bill has been produced, which would have to be submitted to Parliament for its legislative programme, the earliest estimate for which is 2022.

That said, while the proposals featured in the Law Commission’s consultation paper present some exciting opportunities, for the moment, viable contractual workarounds are in demand. We were delighted to collaborate with ITFA in the development of the ePU, a functional electronic equivalent to BEs and PNs that seeks to address some of the shortcomings of the existing legislation.

Blockchain technology

Blockchain, a type of DLT that has been around for well over a decade, enables transactions to be recorded in an encoded format that keeps data secure. There are numerous benefits of using this technology, including simplifying the processes by which exporters/importers (and their banks) can access relevant information, book transactions and make payments. Indeed, the proposed move away from paper would arguably render transactions more secure and less subject to fraud, potentially easing the cost and operational burdens on banks in carrying out manual document checking and compliance checks.

There are a number of service providers in the market offering digital solutions to the issues that concern traditional paper-based trade. Typically, these platforms are designed to match "trade data," e.g. data in respect of a purchase order, invoice or shipment details from a logistics provider, linking up platform participants and transactions and simplifying the manner in which documents and information is shared.

By way of illustration, once electronic trade data is successfully matched on the platform, a buyer’s bank should be able to provide an irrevocable payment undertaking (IPU) in favour of the supplier to mitigate non-payment risk, which can then be on-sold by the supplier to a bank in exchange for early payment. An IPU is a promise from buyer to financier to pay the amount owed to the seller following the sale of goods or services and creation of receivables. It generally includes a waiver by the buyer of all defences against its obligation to pay the seller and essentially splits the payment undertaking from the underlying transaction.

We recently advised on a revised rulebook and legal framework for platform provider Marco Polo developed in conjunction with TradeIX and ITFA. The rulebook is considered an important step towards realising the benefits of digitalisation of payments in trade.

Artificial Intelligence (AI)

AI is also being utilised in a number of ways in relation to contracts for the purposes of simplifying the documentation process where possible. One such method is document automation whereby contracts are created from clause databases, which could potentially be used as a template for commodity transactions, e.g. simplified bilateral facility agreements accompanied by an assignment of contractual rights or pledge over goods as security, as necessary. Another is “smart contracts”, which are essentially automated self-executing transactions written in computer code.

Digital rules

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

It is also developing Uniform Rules for Digital Trade Transactions (URDTT) with Geoffrey Wynne, head of Sullivan’s Trade & Export Finance Group, as a co-chair of the drafting group. The URDTT, currently with the ICC National Committees for approval, will cover the use of electronic records to process digital trade transactions with the adoption anticipated later this year. The rules will seek to address: (i) how parties can present electronic records to evidence a sale or payment obligation for goods; (ii) how electronic data relating to digital trade transactions must match; and (iii) what happens if it does not.

The past 18 months have been characterised by a renewed focus and increased drive towards embracing available technological solutions in certain key areas of trade. Nevertheless, it is important to bear in mind that digitalisation does not offer solutions to all of the issues faced by the industry. Despite the great deal of progress made to date, we anticipate that the transformation of trade and trade finance will give rise to new challenges and of course new technology as it emerges.

We, as a firm, are proud to have been a part of what has been an exciting time for the trade and commodity finance industry and our involvement with ITFA, the ICC and the Law Commission on the current consultation. The extent to which new technologies will be taken up by the industry remains to be seen. One thing is clear—the focus must remain on keeping up the momentum over the coming months and years.

[1] See the Law Commission Consultation Paper - Digital assets: electronic trade documents. The consultation closes on 30 July 2021.

[2] The ICC has plans to review these rules if further updates are necessary at the end of this year.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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