Payment & trade finance

Country risk and transfer risk

The risk that money cannot reach the seller because of economic or political events in the buyer’s country – foreign-currency shortages, capital controls, sanctions, war or a moratorium – even when the buyer is willing and able to pay. OECD country risk classifications and sovereign credit ratings are used to gauge it. Sales to high-risk countries call for confirmed letters of credit, export credit insurance and payment in a strong currency.

Related terms

Confirmed letter of credit

A letter of credit to which a second bank, usually in the seller’s country (the confirming bank), adds its own payment undertaking on top of the issuing bank’s. It protects the seller when the issuing bank’s credit risk or the buyer country’s transfer and country risk is high. The confirmation fee is usually an annual percentage reflecting the risk, and the contract should say who pays it.

Trade credit insurance

Insurance of the seller’s receivables from credit sales against the buyer’s insolvency or protracted default (commercial risk) and against political risks such as war or transfer bans. The insurer sets a credit limit for each buyer and, after a loss, usually pays 85–95 % of the debt. Providers include export credit agencies such as Türk Eximbank and private insurers such as Allianz Trade, Coface and Atradius. A policy also makes bank financing easier and cheaper.

Sanctions and export-control screening

Checking whether the buyer, seller, banks, vessel and end user appear on UN, EU, US (OFAC) or UK (OFSI) sanctions lists, and whether the goods are going to sanctioned countries or prohibited uses. Banks may freeze payments that carry sanctions risk, and breaches lead to heavy fines and account closures. Because sanctions change often, screening should be repeated for every deal, watching for evasion signs such as ship renaming or switched-off AIS.

Explained in the trade handbook

Trade handbook