International Trade and the Successful Intermediary

Davide Giovanni Papa

and

Lorna Elliott

The Intermediary An Introduction

Davide Giovanni Papa, CEO of FTN Exporting and author of this book, has twenty years experience as an intermediary both in practice as a trader and as a teacher of theory to others. In 1994 FTN Exporting, and its dealings with a certain sugar trade, was the subject of a major editorial in the Australian Sunday Herald. Two weeks after the article was published the sugar deal collapsed into a litigious mess but, as far as everyone else was concerned, FTN Exporting had made a huge amount of money from the deal. After three months of negotiation Davide Papa had secured a UCP500 Noncumulative Revolving Letter of Credit from the end buyers bank, the Bank of China in New York, to the value of $6,000,000, for a contracted supply of sugar worth more than $120,000,000 over two years. It eventually came to light that a simple misunderstanding caused the collapse of the deal in its entirety. That misunderstanding didnt become apparent until some time later when Davide Papa sought to educate himself as to what exactly had gone wrong. The meaning of the terms buyer and seller were proving to be problematic and it was this one anomaly that held the secret to successful trading as an intermediary. The term buyer or seller could indeed mean the end buyer or supplier as well as the buyer/seller, who is also an intermediary. This meant that mandate holders, brokers, agents, next-door neighbours, the bus driver, their dog and even end buyers and suppliers were all using the term seller or buyer. For the first six years of trading this simple fact had not been evident to FTN Exporting, nor to anyone else for that matter, because no publication spelt out the different meanings of these terms. Even today these issues have not been addressed sufficiently and remain a major issue of contention with the

International Trade and the Successful Intermediary

majority of internet traders. For example, Tom who drives a taxi for a living in England can offer goods as a seller in the same internet thread as the corporate lawyer from New York who is acting as a buyer for those very same goods. So what went wrong with the sugar deal? FTN had accepted an offer from another seller and not a supplier. This seller was another intermediary from California who insisted, over a period of several months, that they had the sugar in their immediate control. To make matters worse he was offering unverified goods to FTN that he had only been told about by another dubious intermediary. This created a very dangerous precedent in that FTN Exporting had accepted an offer for a product that never existed. But the worst was still to come. The US intermediary thought he was acting appropriately and with good intent. Unfortunately for him the law doesnt see it that way and although FTN managed to appease the end buyer to the extent that fraud charges were avoided, the same could not be said for the US intermediary who apparently fled to Mexico and has never been seen or heard of again. The golden rule of trading is this: never offer goods to anyone unless you have verified personally that the goods are genuine. Never! Without the requisite knowledge of correct trading procedures, you are simply wasting your time by attempting to trade. The vast majority of traders you will see on the internet dont know how to close a deal. Most dont even know how to start a deal correctly let alone bring one to a successful conclusion. Davide Papa then realized that intermediaries needed to know what had happened in order to avoid being caught in the same situation. Since the sugar deal, intermediaries from all over the world have asked him for his advice on all aspects of international trade. In terms of the methodology of trading internationally intermediaries must use the same laws, rules and procedures as end buyers and suppliers. FTN Exporting receives hundreds of offers by email each week, of which 99 per cent are deleted as either inappropriate or unworkable. Anyone attempting to do business with these types of intermediaries will also be unable to close a deal or collect a cent in commissions, no matter how long they trade for or how hard they try. There is one exception, which is if the intermediary happens to be related to someone who owns a factory producing exportable products. Perhaps they have a relative who is an export manager who works for the supplier, or they are friendly with the procurement manager in the end buyers

The Intermediary An Introduction

corporation. In this sense there will always be a handful of intermediaries who purport to have secured commissions in a deal simply by passing information down a long line of individual traders, but in our experience they are usually either lying or are related to one of the principals. Since the collapse of the sugar deal and armed with these new insights Davide Papa has spent years educating others about procedural matters, during which time the import/export arena has changed beyond recognition. Telex and facsimile machines have been replaced with the internet. For a short while this new method of doing business was a godsend: you could chat online and send countless replies without having to spend thousands of dollars per month on phone bills. Alas, with the inception of the internet another explosion soon followed. The calm order provided by a regimented trading arena was replaced with a frenzy of untrained intermediaries, to whom no guidance in the complex realm of international trade was available. The trading protocol of intermediaries had come crashing down overnight as the internet phenomenon grew and yet nobody could tell the difference: intermediaries were jumping on board a damaged and floundering vessel at an unstoppable rate. Those in the know acknowledge that there has not been a proper intermediary trading market for some years. The internet has destroyed what was a reasonably viable market, although small, which existed when facsimile and telex trading reigned supreme. It wasnt uncommon for an intermediary occasionally to get to a contract closing stage and even to documentary letter of credit (DLC) stage back then. There were problems with procedures and illinformed traders, but it was very expensive to trade in such an environment because of the high cost of telecommunications expenses. A fax from a hotel out of Switzerland sent by an intermediary chasing gold would cost 50 dollars per page. One trader would often send FTN ten faxes over a three- or four-day period. In effect these expenses allowed only the serious traders to compete. The internet changed all that. Nowadays traders can work from an internet caf from which they could attempt to sell 100 million dollars worth of crude oil (not that they ever would!). Anyone can buy a second-hand computer for a few hundred dollars and can send hundreds of simultaneous emails at literally no cost. The result? Suppliers cant be bothered to reply to dubious purchase offers or requests for quotes. Similarly end buyers wont reply to equally stupid offers. As a result the only people trading are all those misguided intermediaries

International Trade and the Successful Intermediary

chasing each others tails for deals that are, for the most part, incorrect or fake. Add to this the plethora of scam emails and the like and you have what amounts to a circus managed by clowns rather than a serious trading environment. FTN Exporting has seen thousands upon thousands of worthless offers and contracts being touted by intermediaries who obviously have no idea what they are doing, evidenced by the fact that they use terminology such as LOI, BCL, ICPO and POP. The reasons why these terms are inappropriate for intermediary use, and their correct usage in international trade procedures will be explained in this book. The following text provides a comprehensive grounding for use by intermediaries dealing in international commodities. Such intermediaries now ostensibly number in excess of at least a million traders who, for the most part, are chasing dreams and will never close a commodity transaction due to their ignorance as to how the industry works. This book seeks to address a widespread lack of knowledge in this very specialized field, which is simply not available elsewhere. Formal education on the subject of international trade is widely available but is without exception approached from the viewpoint of importers, exporters and manufacturers. Intermediaries are forced to extract and adopt trading methods from this information. International Trade and the Successful Intermediary provides the underlying trading principles that will remain relevant even when banking and delivery rules are amended in the future. For the first time, there is a uniform trading regime for global intermediary use, and which is applicable not only to the intermediary involved in international trade but also in any type of commercial business activity. This is especially the case when as consumer you are dealing with individuals or companies who serve principals. The following chapters are also intended to be a useful resource and guide to dealing in commodities for those in related industries, such as international banking and finance, stockbrokers and shipping and distribution entities. End buyers and suppliers could also benefit from this publication by gaining an understanding of the role of the intermediary and why they need to adopt certain procedures in order to close a deal safely and properly for the benefit of everyone involved. The overall premise of this publication, however, is to provide the intermediary with the requisite insight to be able to trade in a safe international trading environment. There are no short cuts in this business and only two viable options: trade correctly or dont trade at all.

The Intermediary An Introduction

With the introduction of the UCP600 banking rules in July 2007 all global intermediaries, end buyers and suppliers are reacquainting themselves with trading procedures in light of the new developments. Indeed UCP600 has irrevocably changed the trading environment again, bringing with it important and exciting changes to the way intermediaries need to do business. UCP600 will, it is assumed, be the applicable banking doctrine for the next ten or more years and its introduction has made the playing field level for everyone. As a result of their novelty, some of the issues relating to these new provisions are considered theoretically at this stage. The success or failure of any international trade intermediary depends on a variety of factors including sourcing ability, intelligence, persistence and of course, luck. Luck notwithstanding, if the trading methods contained within this book are used correctly, the intermediary still has a far better chance of closing an import/export transaction than someone who doesnt follow these rules; rules that define the trading methods that all intermediaries should use if they want to trade in exportable commodities.

A Rare Insight
There are countless private independent import/export commodity intermediaries worldwide trading from home on a daily basis. It is questionable as to whether any of them are closing any deals at all. So why are so many internet traders wasting their time on deals that simply cannot be closed? The truth is that even experienced intermediaries who apply the rules of international trade find it difficult to source genuine goods and secure a contract of sale for goods. So how are all those internet traders going to succeed using ambiguous and flawed procedures that cannot work? The simple answer is they dont! There are intermediaries on the internet offering to buy and sell crude oil, sugar, cement and many other products at unbelievable prices and in quantities that boggle the mind. The irony is that there is a vast quantity of information available regarding export and import transactions, procedures and rules of trade for corporate use by end buyers and suppliers, yet intermediaries do not realize that these are the very same rules they should be following in their own trading practices. For as long as they continue to use flawed procedures these intermediaries will not see a cent in commissions. Misguided intermediaries have begun to trade following the blind edicts of other misguided intermediaries, and so the cycle continues.

International Trade and the Successful Intermediary

International trade is the worlds biggest industry: California alone has operated yearly import/export oriented financial instruments worth a trillion dollars. Followed by China and Europe, intermediaries in the United States are perhaps the most prolific traders on earth and as such this publication pays particular attention to their requirements. There is in fact a genuine need for intermediaries. Intermediaries can source end buyer and suppliers, adding valuable financial input to countries dependent on economic growth and which export bulk or heavily manufactured value added goods. Further markets are created that otherwise could have been lost to favour only the biggest exporters, such as those supported and promoted by cash-rich government trade agencies. In the aforementioned sugar deal the end buyer was secured with the involvement of a few other intermediaries. Intermediaries are allowed to deal in commodities by securing the required funds by way of a transferable letter of credit. Intermediaries who are united in their methods of trading can also help others find a source of supply, either directly or with the assistance of others within their group. The intermediary buyer/seller must secure goods from the supplier directly. If an offer to sell goods originates from another intermediary the buyer/seller must verify it all the way to the supplier or there is no deal. By using safe trading procedures there is absolutely nothing not in practice nor in the law that would prevent a private home-based intermediary in most countries from closing a deal. The intermediary in question has to be a highly skilled and intelligent individual with an understanding as to how to apply good business principles, who is able to read and write in English reasonably well and have a good grasp of basic arithmetic. Most of the intermediaries on the internet today lack some or all of the minimum requirements. By analogy there should be plenty of room for good import/export intermediaries to trade effectively, but only if everyone works to the same rules and procedures. Even while writing this, FTN Exporting received an agency agreement to sign protecting the interests of an intermediary. Someone claiming to be a doctor of philosophy asked FTN Exporting to sign an agreement stating that upon contracts being signed for goods being offered FTN is to pay their commission. When that person was reminded that no commission is payable until delivery has been successfully recorded, they fired a barrage of email insults for three days. Such scams are easy traps for the unwary intermediary.

The Intermediary An Introduction

Recent Changes
In July 2007 the trading environment irrevocably changed as all the major banks around the world implemented the new UCP600 banking rules, which bring with them important and exciting changes to the way intermediaries need to do business. Trillions of dollars annually change hands worldwide in international commodity transactions and a uniform application serves to ensure that a small part of these activities can be reserved to those intermediaries who have learned how to trade within the realm of this instrument. This new and vigorous protocol is implemented globally in an effort to restore the once respected position of the international trade intermediary. What the intermediary requires today is not just a set of guiding rules and procedures but also the knowledge required to identify when they are dealing with an intermediate buyer or seller as opposed to an end buyer and/or supplier of goods. More importantly the intermediary has to have the ability to identify false offerings as opposed to a real supply of goods. For example, offers that FTN has rejected years earlier still turn up in the FTN Exporting email inbox, sent by sellers and buyers alike from all over the globe. An offer rejected by one person could simultaneously be adopted by another as being entirely genuine. At FTN Exporting we call these perpetual offers orbiting the planet. Once an intermediary gets hold of one of these perpetual offers it can circle the globe for years, even though the goods being offered simply no longer exist. Although this is a serious problem there are many other minefields that could land the unsuspecting intermediary in serious legal difficulties unless he adopts sound trading procedures. Even using the trading method described in this book it is still very difficult to earn 500,000 or even just 500 dollars in commissions for closing one deal. Regardless of the amount of commission involved, the procedures are exactly the same. Therefore there is no point exerting considerable efforts over a trade that will only earn a meagre amount of money: if an intermediary has to work this hard to secure commission, the reward may as well be substantial. If you are thinking about or attempting to trade in import/export deals, or if you have been trading already for some time and getting nowhere using flawed LOI, BCL, ICPO and POP procedures, as found mostly on the internet, then why not at least attempt to close a deal using proper trading rules?

International Trade and the Successful Intermediary

A Better Trading Environment

Global laws and rules allow intermediaries to trade as a buyer/seller and, in the same way that corporate traders apply UCP600 and Incoterms 2000 in their own deals, intermediaries who use these rules and the mechanisms can do so favourably in their own transactions. That is not to say, however, that closing an export deal successfully is easy. It takes a great deal of effort and skill. Rewards can indeed be great but only if you know what you are doing. Nonetheless, UCP600 now offers well-versed intermediaries a better method of closing commodity deals than the procedures that existed previously. Litigation permeates all areas of life and international trade is no exception. Two parties argue the merits of a sales contract often drawn up by their own lawyers. Even highly skilled and well-paid lawyers are not always right in the ways they apply the laws of trade. If this is the case for end buyers and suppliers then what chance has an intermediary in conducting such business safely, when clear trading information is so hard to find? By following the guidance and the rules outlined in this book the intermediary is only trading with the safe principles of trade, the very same as those used by good exporters, importers and international banks. Even many of our own trained intermediaries, who have paid for tuition over the past few years, have given up trading altogether after learning the true nature of what is required. The message here is clear: if you are not in it for the long haul then learning to grasp the fundamentals offered in this publication is a futile exercise. There are no shortcuts in international trade. Do not be surprised that most other traders will not understand the procedures you are about to learn. Some traders may even attempt to persuade you otherwise but these challenges will usually be very short lived. Remember, the majority of genuine end buyers and suppliers will understand your procedures if you trade only using the safe methods outlined in this book. The last thing you want, after a long period of trading correctly, is for a potentially viable deal to land in your lap and you let your guard down. Trivial mistakes can usually be sorted out so long as the foundations of the trade are sound: anything less than using strict trading procedures will lead you into precarious situations and even potential legal difficulties.