Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
By K. J. Southall
Copyright 2010 FTNX/Verde Distributing Ltd.
Revision 1.10, March 2010
With special debt for clarifying many such issues to David Giovanni Andrew
Papa, CEO of FTN Exporting and one of the worlds most knowledagble physical
commodity traders, in particular in areas pertaining to intermediaries and agency.
The purpose of this report is simple, and short.
To familiarize you, dear reader, with some critical concepts that will shed light on
the matter of proof proof of product, and put it to rest - for good.
These issues have popped up (no pun intended) in the course of private coaching and
consulting provided to certain agents who were unsure what to do with request from
potential clients who found an offer very attractive, but who wanted, before starting
pouring resources into it (essentially, just passing it on to their end buyer) greater
assurances.
They wanted to ascertain that the Intermediary seller, the Trading Company who issued
the offer, has a written confirmation from a refinery that such product would be
produced and allocated to them. But they also wanted written assurance of this from the
refinery in question.
Often similar requests will be seen, for example a buyer might want verifiable pop from
sellers banks for verification or This is why my buyer is careful.. He asks for POP and
certificate of origin authorizing to sell our side.. or a similar variant.
What does this all mean for you? A catch 22. On the one hand the buyer states what
they claim to be a reasonable request we need some assurance, we dont want to
deal with time wasters, how do we know what you are selling is real? But on the other
hand, basically what their buyer is asking for is information that can and usually will lead
to circumvention.
This is not to accuse the buyers agents directly of attempting circumvention, but either
his buyer wanted reassurance that he's not dealing with utter jokers there is a
contingency in FTNs procedures that addresses this - or he wants to circumvent the
seller entirely and directly purchase from the supplier, which obviously cannot be
allowed to occur.
In Short: the buyers agent was politely advised that our group has our own specific
procedures regarding what some called Proof of Product, these procedures allowing
our principal (in this case FTN Exporting) to demonstrate what is termed PPI: Policy
Proof of (Product) Interest. PPI is an old marine insurance term, Policy Proof of
Interest establishes an insurable interest in the mater being insured, here goods, where
the actual real interest held by the party is somewhat vague.
The Policy itself becomes documentary proof of a partys interest in the goods being
insured, in effect.
A party may have some real, actual, but difficult o define interest in a body of goods
for example the party may not be the actual title holder of the goods but may have an
assurance to purchase that specific consignment, or the goods are consigned to her for
a further consignee down the line.
These are actual interests and if the goods are destroyed the parties undertake losses
on these goods based on the nature of their interests. In effect a PPI policy protected
documentary interests of a party in the goods being insured on the stated face of their
assurance of interests held.
The overall doctrine of application is extended and ingenuously used by David Papa as
a means of demonstrating an intermediarys interests vested in goods being sold. If you
are interested in more on this I refer you to David Papas International Trade and the
Successful Intermediary published by Gowar Imprints, or his privately distributed
FYBR products and courses.
In any case, here buyers want a fair verification of a sellers legal authority and ability to
re-sell the specific products. Such verifications may include such matters as allocation
numbers, and contact information for plant, refinery personnel to be contacted in
verifying such matters.
This verification is not truly POP e.g. Proof of Product POP is an idiotic term and
highly misunderstood in application and essence. Misconceptions that exist include:
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Well no, they cannot. Banks deal in finance, not in contracts or in underlying
obligations in contracts. This is explicitly delineated in several international edicts.
Frequently brokers ask for, or offer POP to bank in other words sending POP
documents to the buyers bank, or having their bank advise POP documents.
The operative psychology being this way of thinking, is the assumption that Banks have
some official, though ill defined, capacity to vet and examine deals, or to provide
confidential information, as couriers, and so on.
Well no, technically speaking, it does not. Often people have little idea what they are
talking about in such matters. You might see the phrase partial POP pop up here and
there, in the banker of confused intermediaries. Look at the matter logically, how can
proof of product be partial?
Further, what sort of documents establish partial POP and what sort of documents
establish full POP? One intermediary approached us with goods he wanted to sell,
offering us Soft POP well what exactly does he mean by soft POP? How can POP
be soft or hard, Proof of product, one presumes, is proof of product the idea of such
proof being soft or hard does not enter the picture. One wonders, whats the history of
the usage of terms like Soft POP
If Soda Pop is generated with hard water, then one can be sure that it is not Soft Pop,
Coca Cola can certainly never be Soft Pop due to its phosphoric acid content, seriously
what in the dickens are people talking about?
Do they even know, or do the words just tumble out in some inchoate order?
Terms like Partial POP versus Full POP are made up terms, without currency
whatsoever in the real world of physical commodity trading.
On a purely logical basis, how in the world can you give someone "partial proof of
product?"
This business is about documents and procedures, pure and simple.
Such documents must be excellently and clearly produced, underlying and supporting
strictly adhered to procedures. Definitions therein must be clear and understood, and
either spread by established custom or by international edict.
Typical of procedures some brokers resort to: POP: Must include tank receipts. Buyer
will not issue a financial instrument before verifying tank receipts. Payment by
MT103/23 against tank receipts.
Another misguided example: Buyers Banker confirms contract and sends POP via
SWIFT with Full Bank Responsibility, Buyer responds with DLC.
Beyond the typo, for they meant Sellers Banker not Buyers (we think) there is the
ambiguity, what in the world does with Full Bank Responsibility mean? Banks are
never, ever, ever responsible for the underlying products or contractual commitments of
their clients. Ayone who says otherwise is misinformed. Banks deal in finance and
financial documents, period.
As for paying by MT SWIFT MY code are end user transparent.
No one really refers to payment by MT codes, unless they are bankers, sitting around in
a Telex room. SWIFT MT codes are for banks not traders. The only people in the world
running around throwing around MT codes as if to make a transaction sound more
impressive are ill informed intermediaries and brokers.
More to the case, what do tank receipts really establish? Other than giving away
immediately an intermediarys undisclosed principal without any quid pro quo on the
side of the buyer?
Anyone fool hardy enough to do this should at least insist on some sort of Performance
Guarantee from the buyer ensuring that if such documents prove authentic the buyer
has a certain number of days to lodge payment lest forfeiting the performance
guarantee.
None of this is rocket science the same inquiry above stipulated Seller provides
buyer with authorization to dip test 100% of the tanks during the SPOT/contract
duration in reality these people have no idea whatsoever what they are doing or what
they are talking about.
Deals with such people should be avoided, not only do they often want to circumvent
you but they are incompetent while doing so, to moot. You must dictate to them reliable
and secure terms to follow, diplomatically but with an assured air.
You must not allow yourself to deviate from the doctrine and general procedural
approach advocated by David Papa in his works. This doctrine is based on over a
century of normative trade practice and law. They represent a distillation of the essential
fundamentals of normative trade between corporate and bank entities.
You have a choice trade right, or do not trade at all.
In reality there is no standard full or partial, hard or soft, POP document in the trade. In
reality there is no way to provide Proof of Product because of the nature of trade.
If someone purchases an oil contract on the NY Merc, and (for some reason) actually
decides to take physical possession of the product (which happens), does he ask the
commodity broker selling him the contract for "proof of product"? No, he would be
laughed at.
There are legitimate due diligence procedures that legitimate traders take recourse to,
some of this I cover in my Trade Fraud, Financial Fraud, and the Joker Broker.
Intermediaries acting as independent traders can avail of certain procedures to protect
their position for a time while still allowing their proposed trading partner to accomplish a
degree of due diligence, this will be covered further below, but such transactions will
have mechanisms set in place to ensure performance or, and if one party fails to
perform as they are bound, and properly ensure a venue for arbitration of any
contractual failings on the part of the parties involved.
Terms like "full pop" and "partial pop" are what some look at with contempt as joker
broker nonsense mostly peddled either by scam artists or those sincere, but misinformed, intermediaries who end up trading with them.
It is better to put some things plainly, at least.
One individual, when asked what is partial pop had only this to reply:
With Full POP there is a bigger bang than with partial POP isnt that obvious?
We need say no more on this.. but we shall, anyway.
Does one seriously think that the 5000 MT of bunker fuel oil one is buying will come
from the exact tanks that the supposed tank receipt establishing their proof implies?
No, of course not, tens of thousands of gallons of fuel will be emptied and re-filled in
sundry tanks at a tank farm, at the terminal in question the actual fuel one purchases
may come from this tank or that tank, or the supplier may actually fulfill the order from
an entirely different depot.
What an Intermediary Trading as a Buyer/Seller has are assurances of allocations of
specific product from a corporate entity that may fulfill its obligation to that Trader from
various sources, whilst that trader in turn fulfill its obligations from other sources.
What a Trader, an intermediary Buyer/Seller can provide is verifiable policy proof of
interest in such products, by various documentary means. The best time to do this is
after a formal contractual commitment is in place binding both buyer and seller to
performance.
It is idiotic for a buyer to request such obviously valuable confidential information
pertaining to a sellers sources and means without tendering something of
commensurate value, quid pro quo. Prior to a binding contract commitment all one has
is the buyers words and, frankly, hot air.
Ideally such disclosures should occur after the buyer advises that they are RWA, Ready
Willing and Able (for more on this matter see Davide Papas ITSI or FYBR) this, we
expect to be established either by advising a Documentary Credit for payment, or a preadvised L/C.
Since the seller is offering in transparency to fully provide verifiable documentary
evidence its allocations and its legal ostensible authority to resell such products, the
mechanism in which this is done has to enforce mutual compliance, and mutual safety.
Such mechanisms should be advised in brief on the offer, but in enough clear detail to
enable performance after Offer acceptance. They may be detailed in greater detail on
actual contracts.
All that a Seller can do is provide guarantees and verifiable documents evidencing
goods as advised on the contract. As advised on the contract is the operative phrase.
It is simple, and yet countless end buyers effectively snow intermediaries who lack the
confidence to state their position in a reasoned well informed way.
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Every buyer on the planet realizes that a Documentary Credit, DLC, is worthless
without delivery.
In other words a documentary credit can only be applied for collection upon by
presentation of documents clearly indicating delivery has taken place, and whose
presentation is formally and explicitly stipulated on the credit itself.
A Traders stated nature of business is to buy goods from sundry hard and
difficult to source suppliers, and then resell such goods to its own hard and
difficult to source End buyers. Such Traders are essentially intermediaries, no
matter how small or how large. Mitsui is an intermediary, Mitsubishi is an
intermediary,
A Trader does not waste its own time sourcing, securing, and plying highly
wanted and attractive goods, at good prices, if not for written assurance from a
supplier that the allocation would be sold to the Buyer/Seller, for the
Buyer/Sellers resale at will to buyers of its choice.
Interested readers are referred to David Papas works for more on the PPI certificate.
What is to be advised here is that calling such documentary and verifiable proof of your
interests in the products you independently sourced from your supplier, after your buyer
advises a DLC or a pre-advised DLC, should not be called Proof of Product because
this term is ambiguous, there is no proof of product only proof of your interests in the
product and your ability to sell or consign such interests you hold in the product.
Again, I must reiterate this, because the point is important. A serious buyer realizes that
the Documentary letter of Credit is all but a worthless scrap of paper without his Sellers
affecting delivery, if such a buyer is a bit more experienced and savvy he will further
realize that he can use an inexpensive option, advising a pre-advised DLC to be made
operative only upon the Sellers providing specific details.
If these details are fraudulently advised by the Intermediary seller, this implies that the
goods themselves were falsely offered, at which the buyers L/C can legitimately be
canceled and the Seller himself could face serious legal charges pertaining to fraud.
Much confusion exists about pre-advised Credits, some intermediaries ignorantly
believe that they do not exist such are fully allowed both under UCP600 and
previously under UCP500, it is right there in the text. Such procedures have been used
and tested in the past, David Papa himself has discussed such several times both in his
free advice column at All Experts, and in his works from TWIY: The World is Yours, to
FYBR: Follow the Yellow Brock Road, to his latest ITSI: International Trade and the
Successful Intermediary.
The Selling intermediary is free, at its discretion, to accept pre-advice of such a
payment instrument, for your safety it should be issued as Confirmed, from a bank
acceptable to you, subject to UCP600.
As an Intermediary Buyer/Seller you are an independent physical commodity Trader.
You are not a mandated or exclusive agent to a supplier or a group of suppliers, rather
you are an independent trading entity who purchases such goods at will, on your own
account, taking legal title and all responsibilities this is a massive and complex legal
undertaking - most of such goods are reserved as allocations. Many of such goods are
in high demand worldwide.
Such a Trader will often only have a certain time frame in which to perform and
purchase such goods from its supplier. If unsafe practices arise, in matters of contract,
then often such allocated goods will simply not be purchased.
These are matters of binding legal contractual situations in which one party may have
been unethically handled but is still legally liable to perform to the very entities that
unethically handled it, without having that capacity to perform anymore.
The Trader arranges to buy in large allocations and resells in smaller lots, at will, to
multiple end buyers.
As the Trader arranges the purchase of such large allocations and breaks them down
into smaller lots to sell, the supplier who sells part of this allocation secured by the
Trader, to an end buyer who decides to step around that Trader, endangers also that
Traders commitments to other end buyers as well if that supplier lacks the stocks to
fulfill the rest of the Traders needs.
Moreover, since the Trader is disclosing verification details after accepting a buyers
pre-advised DLC, and the act of authentically advising such verification of the Traders
interests makes the DLC operative and in his account, there is now a live active Letter
of Credit in the Sellers account.
Such can only be collected upon delivery, which entails the Sellers performance, but
here it cannot occur because the end Buyer basically gobbled up the goods directly,
from the supplier, who now expects payment from the intermediary as well.
This, in turn, will not occur because the intermediary is not going to release payment to
the supplier after all of this. The Supplier therefore is now in breach of contract, the end
Buyer is now in breach of contract, the Intermediary Trader is now in breach of contract.
This clearly is a mess. And it is avoidable.
These are not theoretical objections, they happen constantly - a cursory study of
international trade law cases would yield many examples of similar incidents.
Thus the need for simple but strict rules and procedures forcing all parties to perform
honorably and reliably, ensuring fair and honorable performance of the Intermediary
Trader, the Supplier, and the end Buyer, alike.
This is simple and strict, unless otherwise at the Intermediary Sellers discretion for
some unusual reason, disclosure of their supplier must never be made prior to a binding
contractual commitment. A real end buyer will have a very good idea of the Traders
deal is legitimate by reading his well defined offer. The procedures themselves dictate
this and dictate a safe path to follow while also providing on the face evidence of the
authenticity of the Intermediarys position.
For all of these reasons, as a Trader you can only provide evidence of your interests in
specific products once the proper procedures are in place. This will enable a truly
serious buyer to verify that you are in a legal position to sell such goods, but also
ensure your end Buyers contractual performance as well as your own contractual
performance.
No confidential disclosures whatsoever should be allowed to prevail until a the buyer is
in a contractual situation and they are ready, willing, and able to proceed. They have no
right to such disclosures prior to this point.
It is indeed a seller's right to test a buyer's financial capacity after all, payment
always comes first. Instead of the nonsense, joker broker, pseudo mechanisms of
"bank probes" and "bank comfort letters" and suchlike nonsense, you must understand
the nature of trade finance, credit, of how lines of credit, of how letters of credit are
issued, and understand that, at the end of the day, for intermediaries:
Proof of Funds is a myth
Sure, the notion of proof of funds pops up here and there, mostly in commercial Real
Estate transactions, but in this business it doesnt occur. For example, a firm buying
wheat from Cargill accepts the offer, preparations for loading is made at their terminals,
Cargill expects payment via DL/C within a certain number of days. Period, if you waste
their time you will be in serious legal difficulty. Nowhere is there a long drawn out
process of POP and then POF and then FCO and then so on, and so forth, to the most
silly nth degree.
All that really matters at the end of the day is that a buyer is willing and able to advise
payment, at the right time, at the right place, after a binding contract is signed, within the
right number of days specified for the buyer to arrange her affairs sufficiently to issue a
payment instrument.
Thus there is only one true test of your buyers capacity by way of a very simple
and yet very effective protocol that operates like a machine after the contract is signed
in hand, and the deal swings to closure.
Once a buyer accepts an offer, a contract is issued, negotiated, and signed, the buyer
simply has to advise issuance of an appropriate financial instrument within a certain
number of days.
Often, therefore, mysterious POP stipulations will actually be coming from such ill
informed Brokers, not their end Buyers.
Seriously, nine times out of ten, the only people who ask for "proof of funds" or "proof of
product" are the buyer's agents, not the end buyer itself.
Often it is the intermediaries who seek to appease their end buyers who actually
request these sort of things, out of a sincere desire not to waste their client's time, but in
a misunderstanding of the binding contractual engagements being considered.
My experience is that most of such hoop jumping is instigated by brokers and agents
who are simply afraid to present to their clients a spurious offer. There remains the
second motivation which is, of course, often bad faith and simple circumvention - pure
and simple.
Since it is not possible to view into peoples hearts and minds, one must judge on
actions. Its to be noted that the same brokers who run around asking for POP would
refuse to produce POP or POF when asked in another deal.
A real end buyer will understand the binding legal ramifications of a contractual
engagement.
Any Intermediary that is a registered business entity can be easily found, if it fails to
perform it opens itself up to massive risk of litigation An informed intermediary will only
utilize standard corporate and banking procedures, according to the doctrine of strict
compliance for all parties mutual protection and gain.
POP/Proof of Product, is a useless undertaking adds to the useless proliferation of
forms and documents, leading to the battle of the forms and should not be taken
recourse to. This is all a matter of ambiguity, ambiguity is an actual real legal situation.
I hope that you have enjoyed this document, and found it informative, if you are
interested in information on due diligence, verifying your trade and investment partners,
brokers, and other intermediaries, in knowing how to spot a bad fraudulent deal from a
good one, ten check out my Trade Fraud, Investment Fraud, and the Joker Broker
today available at http://www.importexportscam.com/ - you may also want to sign up
to my Newsletter on such topics.
Additional Resources:
If you are interested in knowing truly how to trade, in how international Commodity deals
work and in how you can participate as an independent intermediary, then there is no
other resource on the planet better than the works of Davide Andrew Papa, his ITSI:
International Trade and the Successful Intermediary, is available at amazon.com, and
his privately distributed modular Step by Step course FYBR III, IV, and V are directly
available from him. See David Papas site at http://www.itsi.itgo.com/ - note, I do not
receive commissions from such referrals and my referral is a matter of belief in the solid
high quality and depth of insight of David Papas works.
Supplemental to this, it is critical that you thoroughly read the works of the late
Professor Clive Schmittoff in particular The Export Trade the 9th edition is the most
complete.
See also, in Google Distribution of Products for David Papas Free question/answers
on all things pertaining to trade, matters of POP, POF, contracts, offers, maritime law,
finance, and more.
Please note that this work is revised and updated to better help the reader, and to
present the material in a better manner. If there is something that you are not clear
about, please do not hesitate to contact me.
K. J. Southall
April, 2010