One of the principal sources of public financing to assist US businesses looking to finance new or expansion projects in foreign markets is the Export-Import Bank of the United States, which is the official export credit agency of the US. Commonly referred to as the “Ex-Im Bank”, this agency provides a variety of assistance in financing the export of U.S. goods and services to international markets, including working capital guarantees (pre-export financing), export credit insurance, medium- and long-term loans and guarantees to overseas buyers and limited recourse project finance support. In addition, the Ex-Im Bank provides various education programs for the business community, including regular seminars and group briefings that are offered at several locations around the U.S. Rather than competing with private sector lenders, the role of the Ex-Im Bank is to fill gaps in commercially available trade financing by assuming credit and country risks that the private sector is unable or unwilling to accept. While Ex-Im Bank assistance is available to exporters of all sizes, most of its transactions are done for the benefit of small businesses in the U.S.
The Ex-Im Bank has published guidelines on what it considers to be “best practices” in connection with financing transactions that the Ex-Im Bank takes into account when reviewing applications for assistance under one of its programs. These guidelines (see Export-Import Bank of the U.S., Transaction Due Diligence Best Practices (Jan. 10, 2008)) are not only useful to participants in Ex-Im Bank transactions–lenders, exporters, buyers, guarantors, agents and brokers–but also can be used by U.S. exporters in reviewing any cross-border transaction that requires an assessment of, and decision about, the creditworthiness of a foreign participant.
The first factor that the Ex-Im Bank takes into account is ensuring that there is a “reasonable assurance of repayment” and the Ex-Im Bank states that it will conduct a repayment analysis that encompasses all aspects of and all participants in a transaction. In addition to financial analysis, the type of information that is relevant to reasonable assurance of repayment includes whether parties operate on an arm's length basis; the applicant's ability to conduct due diligence and assess risk; exporter and supplier experience and ability; and commercial or legal concerns with respect to the relevant geographic or market sectors or with the particular parties.
The second major factor taken into account by the Ex-Im Bank is potential fraud and corrupt practices and the Ex-Im Bank conducts a thorough analysis to identify transactions tainted by fraud and corruption. The Ex-Im Bank provides a non-exclusive list of fraudulent activities including non-shipment of goods, inflated invoices, and falsified financial statements, bills of lading or exporter certifications. As for corruption, the Ex-Im Bank notes that it can take many forms including bribery and money laundering. It is the practice of the Ex-Im Bank to insist that transaction participants provide legitimate information, certifications, financial statements, and export documents and agree to comply with all applicable laws–both domestic and foreign. Ex-Im Bank also encourages transaction participants to emphasize their commitment to legal compliance to their employees, agents, and contractors. The Ex-Im Bank may decline to process or discontinue processing any application related to a transaction if Ex-Im Bank determines there is evidence of fraud or corruption or any of the participants has engaged in, or been associated with, fraud or corruption in the past.
Finally, the Ex-Im Bank has made it clear that some level of due diligence must be performed with every prospective transaction with the level and detail of analysis tied to the risks involved based on the nature and complexity of the transaction and the perceived risk level. In order to assist applicants and other transaction participants in understanding the Ex-Im Bank’s underwriting process, the Ex-Im Bank has identified the following ten questions that it considers in review every application:
• How was the export transaction generated?
• How did the lender find its customer?
• Is the obligor's financial information credible?
• Do transaction parties operate at arm's length, and, if not, what has been done to mitigate potential conflicts?
• Can the exporter perform under its contract?
• Does the volume of business associated with a particular exporter, intermediary, buyer or other party seem appropriate, given the size of the company?
• Does the buyer appear to have a demonstrated need for the export?
• Is the price of the goods or services reasonable?
• Does compensation seem reasonable and appropriate given the scope of work performed by a transaction party?
• Does any transaction participant or principal appear on a U.S. Government prohibited parties list (for example, Office of Foreign Assets Control or Excluded Parties List System)?
The Ex-Im Bank has also developed additional questions with respect to specific transaction participants. For example, the Ex-Im Bank has correctly noted that due diligence with respect to the obligor (who may not be the same party as the buyer) is critical because Ex-Im Bank relies on this party to repay the debt. Accordingly, the following questions will be considered with respect to both the obligor and the buyer:
• Is there any reason to doubt the obligor's character?
• How long has the obligor been in business?
• Is the purchase of goods related to the obligor's primary line of business or a new line of business?
• Has the applicant visited the buyer and obligor?
• Who are the obligor's shareholders? Does a government official have any ownership interest?
• Is there any common ownership between the obligor and any other party to the transaction?
• Has a background check been conducted on the obligor?
• Is the obligor overseen by a government regulatory authority?
• Have the obligor, its shareholders or its senior managers been convicted of a crime in any court of law or other tribunal?
While the Ex-Im Bank is obviously concerned about the ability of the obligor to repay any funds advanced in connection with the transaction, due diligence with respect to the exporter is also critical to assessing transaction legitimacy and the likelihood of repayment and the Ex-Im Bank will ask the following questions about the exporter:
• How did the exporter generate the sale?
• How long has the exporter been in business?
• How long have the exporter's principals been engaged in the line of business for which they are seeking Ex-Im Bank support?
• Was the exporter incorporated as a subsidiary of a foreign company for the primary purpose of facilitating Ex-Im Bank financed transactions?
• What is the exporter's reputation in the marketplace?
• What is the nature of the exporter's operational and technical expertise relative to the export product?
• Does the exporter have an existing relationship with the buyer?
• Does the export contract seem consistent with the exporter's sales history and production capability?
• What is the exporter charging the buyer relative to list price?
• Does the exporter maintain a policy regarding use of agents and/or commission payments?
• Are the exporter's principals operating through more than one company on the subject transaction?