Mumbai: Amid sham service contracts and dubious trade deals to launder money, banks are laying down the dos and don'ts for cross-border payments to stop dodgy clients from shopping around for less-complaint institutions that are willing to look the other way.
Until now, this wasn't a problem: if a transaction looked shady, bankers referred the case to Reserve Bank of India, or checked whether the name popped up in the regulator's caution list. But, not anymore.
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Come October 1, banks will be saddled with new rules and responsibilities that some fear could be a minefield.
Banks will have to use their discretion in clearing payments, verify whether a service contract and the overseas party are genuine, certify payments, track export proceeds, choose whether to block or give a long rope to companies whose exports bills are overdue, and decide if a third-party payment - where goods are imported to one country but payment comes from another - is kosher.
"We are not in the business of investigating. How do we know for certain that a service for which payment has been either made or received has actually been delivered?," said a senior banker who is worried that a wrong call made in good faith could later put him under the glare of Enforcement Directorate (ED).
REGULATORY ARBITRAGE
Such anxieties have been stoked by a recent tax office release on dubious foreign remittances.
There's a lurking worry that some banks may lower the compliance bar to accommodate suspect clients. "Some common standards to minimise regulatory arbitrage would help. There would be companies spotting banks that don't ask too many questions. Banks have in touch with FEDAI (the industry body) which has given its guidance in certain situations," said another person.
There are different circumstances where a bank's discretion comes into play. So far, banks insisted on advance payments and letter of credit (a financial guarantee from the overseas buyer's bank) from an exporter who is in RBI caution-list. Since from now on there would be no caution-list, banks may only insist on advance and LC on exports to specific overseas parties which have not paid within a specified time.
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Currently, when an exporter ships goods to one country and receives payment from another, banks are cautious if the first country has capital controls and payments are routed to bypass restrictions; or if a supplier is from a 'high-risk' jurisdiction. Henceforth, banks would decide based on commercial considerations and client assessment.
On imports, banks can waive the bank guarantee requirement for advance remittances up to$5 million if they are satisfied with importer's track record. Under the new regime, banks have the discretion not to insist on guarantee above this limit.
TRACKING SERVICES
However, for banks, the trickiest part is handling service imports and exports. For the first time, service import and export data would be uploaded on the digital platforms mandated by RBI. Banks have to endorse the service export deal between a local company and overseas party based on former's self-declaration while rely on underlying contract and invoice for service import data.
"One thought on possible risk mitigation linked to the reporting of services by banks is giving banks access to GSTN to verify invoices and value declared to tax authorities being consistent with what is declared to the bank. This gives a third party verification akin to how Customs assesses the value of goods imported and exported," said another banker.
Besides, must put in place systems and processes to monitor and follow up with an exporter to realise export proceeds. "The idea behind the new rules is to shift responsibilities to banks so that RBI can focus on systemic issues. That's understandable, but the transition must be handled carefully," said a trade finance expert.
