Article

by Sarah Younger

Online trading is the name of the global game in the 21st century. It would appear that making purchases in a virtual mall is no less enjoyable than visiting the nearest real mall and, in many cases, also cheaper. Most products can be bought via websites, which enjoy massive popularity. Of course, we are talking about products that are often sent directly to the purchasers from their overseas production plants or from the warehouses of local wholesalers or retailers.

Technology has caused a revolution that has resulted in increased efficiency in the production process, the shortening of lead times and a reduction in costs. Accordingly, one could expect that, in tandem with the changes now occurring on the global scene, paper-based documentation will be replaced by electronic documentation at a lightningquick rate. It is obvious to everyone that paper documentation increases costs, slows down procedures (even when sent by courier) and is susceptible to loss and errors. In other words, it simply flies in the face of the transition to the brave new world.

Most surprisingly, even today, paperbased documents accompany goods from one place to another, which is especially true for marine bills of lading (B/L) and insurance certificates (as a result of their special status), as well as other documentation, such as air transport documents (AWB) and certificates of origin.

Air transport

At the same time, something has changed, at least in the field of air transport, with the announcement by the IATA that it had set a target of 100% e-AWB usage by the end of 2014. The use of e-AWBs currently stands at just 15% of transactions. State authorities, air transport companies, forwarders, airports and customs authorities are all involved in the preparations to meet the 100% target.

The question that arises from the IATA initiative is whether, even when the implementation of e-AWBs is fully completed, banks will continue to demand an AWB, when in reality there is only an e-AWB. Will exporters demand paperwork from the carriers or the forwarders (in addition to the e-mail) in order to present it to banks under the documentary credit when they have already made the transition to a different era?

Legislation and other preparations

What has already been done to prepare for online operations?

1. Since the 1990s, many countries, with the United States leading the way, have passed legislation relating to electronic commerce. From our perspective, as people who deal with documentation, one of the most important laws is the Digital Signature Law. This law (verified and approved) has the objective of ensuring the verification of the identity of whoever sends an electronic document, the verification of the completeness of the document (integrity) and the prevention of repudiation (non-repudiation). This is just as it would be upon presentation of a paper document.

2. International organizations, such as the UNCITRAL, created the Model Law on Electronic Commerce (MLEC), which is a model for the legislation enacted by countries on the subject. In 1996, the United Nations Economic Commission for Europe (UNECE) published the United Nations Electronic Trade Document (UNeDocs), which proposed an integrated concept of paper documents and electronic documents on an XML or EDIFACT basis.

3. In 2002, ICC distributed the eUCP, which is the supplement to the UCP for electronic presentation. The eUCP provides helpful definitions of the terms that have different meanings in the electronic and paper worlds, such as "place for presentation" and "sign". It also addresses key issues of electronic presentation such as the format in which electronic records are to be presented, how original documents are to be defined and what happens when an electronic record is corrupted by a virus or other defect. In particular, it enables the presentation of mixed documents (paper and electronic), making it possible to present paper-based documentation and electronic documents within the framework of the same documentary credit.

4. In the 1990s, a number of business entities, including banks, adopted a format for electronic transmissions- the Electronic Data Interchange (EDI). This method of communication has already been implemented between the parties to commercial transactions and between those parties and their banks. However, this has not become a channel of communication used between banks.

5. An additional option for presentation electronic documents is via banks' portals. Various banks have developed the ability to receive electronic documentation from their customers thru the portals.

Obstacles

So why are we not seeing electronic documentary credits in our operations? The reason lies in the fact that there are still obstacles present in a number of fields and they are not minor ones: legal obstacles, the need for investment in technological infrastructure, "bureaucracy" and not a little conservatism on the part of the parties involved - importers and exporters as well as banks.

For the following reasons, there has been an absence of a sufficient legal response:

• Recognition of the acceptability and the validity of electronic documents - The critical question is whether the courts will accept an electronic document as evidence. A concern arises that even if a court in Country A were to recognize an electronic document as acceptable, the evidentiary weight attached to it could be different from that in Country B. The chances of a reasonable banker or exporter having advance knowledge of the law that applies concerning the recognition of an electronic document as evidence in every country to which they export are extremely remote.

• Verification of the authenticity of an electronic document ("the original copy")

- There are those who claim that an electronic document is created on the sender's computer, whereas a copy of the original document is created on the recipient's computer. This subject is of considerable importance, primarily concerning the special status of the marine bill of lading as a negotiable document that affords its holder the right to possess the goods. In addition, the ability to duplicate electronic documents with considerable ease requires us not to waive the paperwork that is customary at present until a solution is found for this issue. The status of a maritime insurance certificate is similar.

• The retention of electronic documents - Standards do not exist in every country regarding the need to retain electronic documents. These standards link the identity of the party to a transaction required to retain them, the manner of proving that the copy retained is true to the original, as well as other issues.

• The determination of the prevailing law and the judicial authorities - In the event of a dispute concerning the documents between commercial parties based in different countries, it is not obvious which legislative framework will prevail and which judicial body will have jurisdiction in a case in which a document is sent during the course of a transaction by Party A in Country A and received by Party B in Country B, after having passed through a number of routing switches (each in a different country, none of which is in A or B) in a communications network.

• An orderly definition of criminal activities - The crime of impersonation, which is not a new one, is already causing considerable damage, with criminals impersonating suppliers and customers on the Internet. With documents at stake, this issue is crucial for electronic documents presented under documentary credits.

• Investment in the appropriate technological infrastructure - The obstacle from this perspective derives from the need for a significant financial investment by importers, exporters - which, in many cases, are small- and medium-sized companies in developing countries - and the banks.

• "Bureaucracy" - bilateral agreements between banks - One of the requirements that banks will have to comply with is the signature on bilateral agreements with each and every one of the banks used by the other parties in the documentary credit transactions they handle. These agreements are intended to include sections that cover the responsibility of the banks that send the transmission - for example, responsibility for verifying the identity of the sender of the original electronic document to the bank (sometimes the presenter is not the beneficiary of the credit, the bank's customer, but the forwarder or the shipping company). These concern the completeness of the transmission, aspects relating to data security and other elements that involve various technological issues.

Conclusion

Dr Alan Davidson, in his article "Electronic Records in Letters of Credit", wrote: "The history of mercantile law and practice shows us that either by stealth or by trial and error, the commercial parties make a due assessment of the risk at all levels and proceed onto their perceived respective commercial advantages."

The point is that the attachment by some bankers to the continued use of familiar methods is also shared by our customers. Why should we jump when we are not being pushed? Despite the problems that still exist, and which one cannot ignore, there can be no doubt but that in the not-too-distant future, reality will overcome conservatism, and this is a change we will not be able to resist.

Sarah Younger is the Head of International Trade and Payments at Bank Leumi Le-Israel. She is also the Chair of the ICC-Israeli Banking Committee. Her e-mail is sarahy@bll.co.il