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Deutsche Bank

Trade Finance - Market Trends & US Regulatory Compliance prepared for:

John Baranello

Director

Head of Americas Trade Finance Product Management

Deutsche Bank AG, New York

(212) 250-9604

john.a.baranello@db.com

December 10, 2013

1 John Baranello Deutsche Bank

Long-standing Expertise:

— Deutsche Bank was founded in Berlin in 1870 to support the

internationalization of business and to promote and facilitate

trade relations between Germany, other European countries,

and overseas markets

— A leader in Germany and Europe, the bank is powerful and

growing in North America, Asia and key emerging markets

— Deep-rooted client relationship with major players in global

trade business

Global Coverage:

— Trade Finance offices in 39 countries and 74 locations

— Main hubs in Frankfurt, London, New York, Singapore

Extensive Integration:

— Solutions for commercial trade, capital market and structured trade,

commodity and export finance to cover client’s entire sales cycle in cross-

border trade

Enhanced Technology:

— Comprehensive online tools to enable performance tracking, reporting and

optimization of trading and risk management

Recognized Leaders in the Trade Industry:

— Leadership and membership roles in all important Trade and Regulatory

Associations globally, e.g. members of BAFT - IFSA (Bankers’ Association

for Finance & Trade - International Financial Services Association), ICC

(International Chamber of Commerce)

Strengths of Deutsche Bank’s Trade Finance Business

Europe / MEA

Austria Belgium Czech Republic Egypt

Finland France Germany Hungary Italy Kazakhstan

Netherlands Nigeria

Norway Poland Portugal

Russia SaudiArabia Spain Sweden Switzerland Turkey UAE

UK

Asia-Pacific

China India Indonesia Japan Korea Malaysia Pakistan Philippines Singapore Sri Lanka Taiwan Thailand Vietnam

Americas

Argentina Brazil Mexico

US

DB Trade Finance Global Presence

Countries

Americas 4

Europe/MEA 22

Asia 13

Total 39

Locations

Americas 4

Europe/MEA 46

Asia 24

Total 74

2

Share of Mind

We are recognized leaders in the trade industry as we maintain leadership and membership roles in all the important Trade and

Regulatory Associations throughout the world.

-Chairman of the BAFT - IFSA (Bankers Association for Foreign Trade -International Financial Services Association) NY / Metro

Documentary Letter of Credit Committee

-Chairman of the BAFT - IFSA Payments and Compensation Committee

- Board of Director BAFT- IFSA

- Member of the BAFT- IFSA National Documentary Letter of Credit Committee

- Member of the BAFT- IFSA National US Regulatory Committee

- Member of the US Regulatory, Trade Committees for BAFT- IFSA

- Member of the SWIFT Cash and Treasury Committee

- Rapertoire and member of the ICC (International Chamber of Commerce)

-Trade and Regulatory resource for FIBA (Florida International Bankers Association)

-Trade Resource for the International Cotton Institute of the American Cotton Shippers Association

-Trade Resource for the FFEIC (Federal Financial Institutions Examination Council) and the Asociación Bancaria de Panamá

-Recognized by the FBI as a Trade Finance Expert Witness

-Our Trade Services team recognized as the Benchmark operation for all Trade Operations by the Federal Reserve for having

exemplary US Regulatory Policies and Procedures.

3 Deutsche Bank John Baranello

•The UCP 600,

•The UCP 500, (….and 400 & 290)

•URDG 758,

•ISP 98,

•ISBPED,

•Incoterms 2010,

•“Open Account”

•URC 522,

•URR 525,

•SWIFT – BPO - 798

•The Back, Front, & Sides of Documents,

•Atlas’s, Maps,

•Internet…

•Differing Local Commercial Law..

— Example: UCC Article V differs from State to State

Regulatory Compliance in the United States:

— US Department of the Treasury (“OFAC”)

— US Department of Commerce (“BIS”)

— Financial Crimes Enforcement Network (“FINCEN”)

— Patriot Act

— Bank Secrecy Act (“BSA”)

— Indicators of Suspicious Activity

— Politically Exposed Persons (“PEPS”)

— Suspicious Activity Reports (“SARS”)

— Fraud

— KYC

Trade Finance Practitioner Concerns:

Then:

UCP 290

Now:

4 John Baranello Deutsche Bank

Trade Finance, which supports USD14-16 trillion in annual global commerce, is crucial for international trade. It facilitates

and enables the management of cross-border trade for bank and corporate clients. These transactions are underpinned

by the movement of goods and services and evidenced by commercial contracts that document the relationship between

buyer and seller.

Data pooled within the Register supports the view that trade finance is a low-risk asset class.

Notable features of the dataset are:

o Short tenor of trade transactions. The average tenor of all products in the dataset is 147 days; the off-balance-sheet

products covered by the Register (import L/Cs, export confirmed LCs, and standby L/Cs and guarantees) have average

tenors of less than 80 days.

o Low default and loss across all product types. Fewer than 3,000 defaults were observed in the full dataset comprising

11.4 million transactions. For the three focus years of this report, default rates for off-balance sheet trade products were

especially low, with only 947 defaults in a sample of 5.2 million transactions. Using a standard calculation, ICC

calculated the following average default and loss rates within each product type over the three focus years of this report

(2008-2010):

Import L/Cs: default 0.077 percent, loss 0.007 percent

Export confirmed LCs: default 0.09 percent, loss 0.03 percent

Standbys and guarantees: default 0.013 percent, loss 0.0007percent

Import loans – corporate risk, default 0.06 percent, loss 0.07 percent

Import loans – bank risk, default 0.09 percent, loss 0.05 percent

Export loans – corporate risk, default 0.29 percent, loss 0.017 percent

Export loans – bank risk, default 0.17 percent, loss 0.01 percent

Global Risks ‒ Trade Finance An initiative of the ICC Banking Commission (cont’d)

5 John Baranello Deutsche Bank

• Trade Finance has historically been an engine of growth in world commerce, a critical source of economic growth

and a provider of hard currency to developing countries.

•Traditionally, trade finance has been considered one of the safest, most collateralized, and most self-liquidating

forms of finance. This report provides the empirical evidence that this is clearly the case.

• As demonstrated in this report, traditional trade finance has a very low loss experience. Contingent liabilities such

as letters of credit do not convert to ―on-balance sheet‖ liabilities when paid because the issuing/confirming bank

reimburses itself immediately from its client and is typically heavily collateralized. Such off-balance sheet

contingencies would support significantly lower capital allocations.

• Likewise, traditional trade loans to corporate entities and banks carry a very low loss history and should carry

lower capital allocations. In both categories, defaults do not necessarily result in write-offs since transactions are

liquidated by the sale of the underlying merchandise, and the bank is reimbursed for the amount of the transaction.

• The data in this report supports the short-term nature of trade transactions and supports using the actual maturity

of trade transactions as opposed to a one-year minimum. The data collected for this report would support lower

risk-based capital weightings; the Basel II risk-based capital Credit Conversion Factors are more than sufficient

and, at a maximum, and should be retained.

Global Risks ‒ Trade Finance An initiative of the ICC Banking Commission (cont’d)

6 John Baranello Deutsche Bank

— ICC concluded that trade finance was not the main driver behind the 2008 trade collapse.

First, the shortfall in trade finance could not be considered as a factor in the sharp 2008-2009 drop in

trade flows.

Trade finance and trade volumes dropped primarily as a result of the spillover of the financial crisis to

the real economy, resulting in lower activity and destocking.

Moreover, the crisis was caused by factors exterior to the trade finance industry.

— Based on the key findings of Global Risks – Trade Finance 2011, ICC maintains that new Basel

regulations should not constrain trade finance supply, especially for banks based in low-income

countries (as well as second- and third-tier banks in middle-income countries).

ICC has called on standards setters and policy makers to carefully study the potential

unforeseen impact of Basel III changes on trade finance.

— In particular, the report’s 2011 data supports the view that the increase in the leverage ratio

under the new regime would not reflect market realities and may significantly curtail banks’ ability to

provide affordable financing to businesses in developing countries and to SMEs in developed

countries.

In addition, the dataset confirmed that the one-year maturity floor applied to trade assets under the

advanced model should be reconsidered, and that the actual maturity of trade transactions

should be the most logical standard to be applied.

Global Risks ‒ Trade Finance An initiative of the ICC Banking Commission

7 John Baranello Deutsche Bank

A Letter of credit (documentary or standby) is a written undertaking given by a bank (issuing bank) to the

beneficiary - on the instruction of the applicant (issuing banks client) to pay the Beneficiary at sight or at a

determinable future date - up to a stated amount of money – within a defined period of time.

This irrevocable undertaking is contingent upon the Beneficiary’s documentary compliance of the terms and

conditions stated in the Letter of Credit.

A Letter of Credit by its nature is a separate transaction from the sale or other contract on which it may be based

Beneficiary looks to a bank to receive payment for their goods, services or performance – not their client.

Reasons a Bank needs to substitute its own credit for the credit of its Client…

— New economic relationship

— The credit of the buyer/applicant is weak or unknown

— Economic and political conditions are uncertain

— Security

— Convince beneficiary capital has been allocated in their favor, and provide for a,

— Clear, defined, rules based path to payment

— Local law demands:

— Recognition - Control - Tariffs

Used as the primary means to finance the buying and selling of goods, services or performance

Letter of Credit

Documentary (Commercial) Letter of Credit

8 Deutsche Bank

Documentary Letter of Credit Advised - Unconfirmed

Issuing Bank

Letter of Credit

Advised

Article 9

Advising Bank

Beneficiary

(Seller)

Issuing Bank

Irrevocably bound to

honor beneficiaries

complying

documents.

Article 2 & 7

$

Applicant

(Buyer)

9 Deutsche Bank

Documentary Letter of Credit - Confirmed

Applicant (Buyer)

Contract

Issuing Bank

1

2 Letter of Credit

Application

3 Letter of Credit

Issued via SWIFT

4

Confirming Bank

Beneficiary

(Seller)

Confirming Bank

Irrevocably bound to honour

beneficiaries complying

documents.

Assumes Issuing Bank risk

Letter of Credit

Advised

&

Confirmed

10 Deutsche Bank

Documentary Letter of Credit – “Silent” Confirmation Purchasing the Beneficiaries Documents

Advising Bank

“Silent Confirmer”

Beneficiary

(Seller)

“Silent” Confirming Bank:

Commits to honor beneficiaries complying

documents by direct arrangement detailing assumed

risks.

Not requested by Issuing Bank to add

confirmation.

Issuing Bank is not made aware of this

arrangement. $

Issuing Bank

11 John Baranello Deutsche Bank

Private Label Letter of Credit - Issuance

Issuer

(buyer)

Pass-thru bank

New York

Advising Bank

Asia

Beneficiary

(seller)

3

1 Contract

2 Letter of Credit

Letter of credit

passed thru via

SWIFT MT 710

4 Letter of credit

advised

12 Deutsche Bank John Baranello

Supplier

Purchase Order

Goods Delivered

Day 2 Day 30 Day 60

Payment Terms Produce & Ship

Goods

Approved

Payables File

Notification of

Maturity date

Discount

Request

Process

Request

Discounted

Payment

Debit Settlement

Payment

Invoice

1

2

3

4 5

6 7

8

9

Buyer

Day 1

Day 60 Day 30

Trade Value Chain

Principal

Financial Supply Chain Solution – Supplier Advanced Funds

FSC

13 Deutsche Bank

“Traditional” Methods of Settling Trade Finance Transactions

Seller Buyer

LC Advising Bank

LC Issuing Bank

Docum

ents

Contract

Documents

Docum

ents

Advic

e

Applic

atio

n

Issuance

Payment

Letter of

Credit

Bank services based on paper

document processing

ICC Rules Based

Bank Payment Obligation

Seller Buyer

LC Advising Bank LC Advising

Bank

Docum

ents

Contract

Documents D

ocum

ents

Advic

e

Le

tter o

f Cre

dit

Advice of LC

Payment

“Private

Label”

Letter of

Credit

Bank services based on paper

document processing

ICC Rules Based

Buyer Payment Obligation

Seller Buyer

LC Advising Bank

LC Issuing Bank

Docum

ents

Contract

Documents

Docum

ents

Advic

e

Applic

atio

n

Issuance

Payment

Electronic

Letter of

Credit

Bank services based on electronic

document processing

ICC Rules Based

Bank Payment Obligation

Goods Goods Goods

14 Deutsche Bank

Methods of Settling Trade Finance Transactions

Seller Buyer

Seller’s Bank

Buyer’s Bank

Payment

Open

Account

No

Documents

Bank payment processing

services .

No ICC Rules

Subject to arrangement

Buyer Payment Obligation

Data

Seller Buyer

LC Advising Bank

LC Issuing Bank

Docum

ents

Contract

Documents

Docum

ents

Payment

Open

Account

With

Documents

Bank payment services based on

limited paper document processing.

No ICC Rules

Subject to Arrangement

Buyer Payment Obligation

Contract

Docs / Goods Goods

15 Deutsche Bank

Bank Payment Obligation “BPO” – Combining the best of all worlds (?)

Seller Buyer

LC Advising Bank

LC Issuing Bank

Docum

ents

Contract

Documents

Docum

ents

Advic

e

Applic

atio

n

Issuance

Payment

Letter of

Credit

Bank services based on paper

document processing

Bank Payment Obligation

Seller Buyer

Seller’s Bank

Buyer’s Bank

Payment

Open

Account

Bank services limited to payment

processing

Buyer Payment Obligation

Seller Buyer

BPO Recipient

Bank

BPO Obligor Bank

Docs / Goods

Payment

Bank

Payment

Obligation

Bank services based on

electronic trade data exchange

Bank Payment Obligation

Data

Data

Data

Contract Contract

Docs / Goods

Data

16 Deutsche Bank

Bank Payment Obligation (BPO)

16

• What is it?

• A BPO is an irrevocable undertaking given by an Obligor bank (typically

the buyer’s bank) to a Recipient bank (the seller’s bank) to pay a

specified amount on an agreed date under the condition of a successful

electronic matching of data according to an industry-wide set of rules

adopted by the ICC.

• BPO constitutes a legally binding, valid and enforceable payment

obligation of the Obligor Bank to the Recipient Bank under the

appropriate standard of law, enforceable in accordance with its terms.

• BPO is a technology independent instrument based on ISO 20022 XML

that can be used on any open Trade Matching Application (TMA) such as

the SWIFT Trade Service Utility platform (TSU).

17 Deutsche Bank

Bank Payment Obligation (BPO)

17

• How does it work?

• Only the data required to assess the financing risk is extracted from

existing documentation – Purchase order, Commercial invoice, Transport,

Insurance Certificate

• Importer and Exporter need to agree on the use of a BPO in their

commercial agreement. Both will establish the BPO terms and conditions

in the bilateral agreement with their own bank.

• Obligor and Recipient banks rely on the ICC URBPO and the contractual

agreement of the Transaction Matching platform, such as TSU Service

Description.

18 Deutsche Bank

BPO flows for data, documents and goods

Seller Buyer

BPO

Obligor

Bank

BPO

Recipient

Bank

Carriers Delivery

of goods

1 Purchase order

Transport and

invoice data 5 6 Transport and

invoice data

(match report)

7 Confirm payment is

due on agreed date 9 Transfer funds at maturity

Transaction

Matching

Application

2

Request BPO

based on PO 3

‘Confirm’

BPO

4 Shipment

Establishe

d baseline

BPO is

due Transaction

Matching

Application

Documents

sent directly to

the client

Invoice and shipping documents 8

19 John Baranello Deutsche Bank

…….is a written undertaking given by a Bank or Guarantor to the Beneficiary - on the instruction of its Applicant or on

its own behalf - to pay the Beneficiary a stated amount of money – within a defined period of time – against certain

rules and articles…..

— This irrevocable undertaking is contingent upon the Beneficiary’s documentary compliance of the terms and

conditions stated in the Letter of Credit or Guarantee

— The instrument is separate from and independent of the underlying contract.

— The Bank or Guarantor will not investigate the underlying facts of the transaction – e.g. whether or not there was a

default or contract breach.

— References to underlying purpose and references to related agreements and contracts are “for information only”.

— Assures the beneficiary of the performance of their customer's obligation

— Bank / Guarantor stands behind monetary obligations of its client or commits itself to make payment

— Bank / Guarantor strengthens the credit worthiness of its client or commits itself to make payment

— Documents presented under a Standby/Guarantee lack any intrinsic value because they are usually a simple

certification to satisfy payment

— Capital adequacy reserves -

— Thus more expensive to issue and maintain than a documentary (commercial) letter of credit

Choice of governing rules:

— UCP 500 – UCP 600 – ISP 98 – URDG 758

— UCC Article 5 (US regional law)

Standby Letter of Credit / Guarantee….

20 Deutsche Bank

Standby Letter of Credit / Guarantee Issuing Procedure – Motivating College Student (Performance)

Standby Letter of Credit

Requested Motivate

Student Son

Issuing Bank

…Standby Issued in Son’s favor

payable against copy of Son’s

Report Card

1

3

Lucky Student Paying Dad

2

21 Deutsche Bank

Standby Letter of Credit / Guarantee Payment Processing

Lucky Student

Issuing Bank

2 Presents copy of

Report Card

$

2a

$ - Payment to son -

value predicated on his scholastic

Performance (GPA)

3

Paying Dad

1

Report Card

22 John Baranello Deutsche Bank

Forms of Guarantees & Standby’s

Counter Guarantee /

Standby

Issued to support issuance of a separate

Standby or Guarantee or other such

undertaking by the beneficiary of the

Counter Standby. Mainly issued by a Bank

in one Country to request a Bank in another

country to issue their local undertaking.

100% of the value of the

transaction

30 days after the expiation of

the instrument it is supporting

Lease / Rental Security for landlord / leaser in the event

lessee or renter unable to make payment

100% of contract / lease

value

Until expiry of lease. Can

revolve on a monthly basis.

Direct Pay

Support payment when due of an

underlying payment obligation typically in

connection with a financial standby

without regard to default. This standby is

also used to directly pay an obligation

where the only conditions of payment are

the passage of the term and presentment

of payment.

100% of the value of the

transaction

Economic lifetime depends

on nature of underlying

transaction

Insurance This instrument is an insurance or

reinsurance obligation of the applicant. 25% - 75% of risk quotient

Until expiry of contract or end

of contractually obligations +

further claim period

Reclamation Covering the cost of repairing environmental

damages caused by worked conducted by

the applicant

50% - 100% of estimated

damages Until end of warranty period

Margin

Cover brokerage firm’s margin requirements

50% - 100% of trading limits

Until end of trading activity

23 John Baranello Deutsche Bank

Forms of Guarantees & Standby’s

Function Typical Amounts Validity

Bid / Tender Bond Security for beneficiary that terms of tender will

be fulfilled by the applicant if their bid has been

accepted

20 - 30% of contract value Until the end of tendering or

contracting

Advance Payment Guarantee Security for beneficiary that the down payment

will be paid back if terms of contract are not

fulfilled by the applicant

Amount of down payment

(sometimes incl. interest)

Date of expected delivery/

performance + further claim

period

Delivery Guarantee Security for beneficiary that delivery as per

contract will be or has been effected 20% - 30% of contract value

Until delivery/ performance +

further claim period

Commercial Supports the obligations of an applicant to pay

for goods or services in the event of non-

payment by a business debtor

100% of the value of the

transaction

Economic lifetime depends on

nature of goods and services

provided

Performance Bond

Secures payment of the guaranteed sum when

the party whose performance is guaranteed by

the guarantee fails to perform or discharge in full

his contractual obligations

10% - 15% of contract value

Until expiry of contract or end of

contractually obligations + further

claim period

Guarantee for Warranty

Obligations Covers risk of buyer that goods are of bad quality

or breach of warranty 25% - 50% of contract value Until end of warranty period

Payment Guarantee Security for the beneficiary in case that the

debtor (applicant) fails to pay Contract value

Due date of payment + further

claim period

24

•Issued by the ICC

•Effective July 2010

•Replaces the URDG 458

•Internationally acclaimed

•Consists of 35 articles

•Reflects International practice in the use of demand guarantees

•Sets out the liabilities and responsibilities of the parties to a demand guarantee

•Shares Independence and Documentary nature with the UCP 600 and ISP 98

•Details vital phases in the lifecycle of a demand guarantee

•Offers model guarantee and counter-guarantee forms

URDG 758 – Uniform Rules for Demand Guarantees

25

Side – by – Side……..

Demand Guarantee

•Irrevocable Undertaking

•ICC issued Rules Based

•Recognized Internationally including the US

•Independent of the underlying Relationship

•Issued by Guarantor

•At request of Instructing Party

•In favor of Beneficiary

•Guarantor deal with documents and not with goods,

services or performances to which the documents may

relate

•Provide for payment against complying documentary

demand

•Finite Expiration

•Finite Amount

•Defined Payment / Documentary Rejection Process

•Transferrable / Assignable

Standby Letter of Credit

•Irrevocable Undertaking

•ICC issued Rules / Articles Based

•Recognized Internationally including the US

•Separate from sale / contract

•Issued by Issuing Bank

•At request of Applicant

•In favor of Beneficiary

•Banks deal with documents and not with goods, services or

performances to which the documents may relate

•Honor complying documentary

presentation

•Finite Expiration

•Finite Amount

•Defined Payment / Documentary Rejection Process

•Transferrable / Assignable

26 Deutsche Bank

Foreign Guarantee Issued - Supported by Our Guarantee

Guarantee

Requested To Support

(Foreign) Financial

Arrangement

Issuing Bank

Counter Guarantee Issued

in Favor of Our Foreign Correspondent / Branch

Our Client

Guarantee Issued

1

2

Trading Partner

Cross border business arrangement

Business can be conducted

Guarantee on both sides

Basel Accords Requirement Basel I Basel II

2013 Basel III

2015

2019

Common Equity 2.0% of RWA 3.5% of RWA 4.5% of RWA 4.5% of RWA

Tier 1 Capital 4.0% of RWA 4.0% of RWA 4.5% of RWA 6.0% of RWA 6.0% of RWA

Total Capital 8.0% of RWA 8.0% of RWA 8.0% of RWA 8.0% of RWA 8.0% of RWA

Capital Conversion Buffer -0- -0- +2.5% of RWA

Counter Cyclical Buffer +Up to 2.5% of RWA

Leverage Ratio (based on Tier 1 Capital) Observation Observation 3% of direct and contingent assets

Liquidity Coverage Observation 30 days 30 days

Net Stable Funding Observation Observation 1 year

Additional Loss Absorbency +1% to 2.5% of RWA

The amount of Risk-Weighted Assets (“RWA”) is computed by multiplying the amount of each asset and contingent asset by a risk weighting and a Credit Conversion Factor (“CCF”) Under Basel I, risk weightings are set: 0% for sovereigns, 20% for banks where tenors ≤ one year, 50% for municipalities and residential mortgages, 100% for all

corporate obligors Under Basel II, risk weightings are based on internal or external (rating agency) risk ratings with no special distinction for banks; capital requirements for exposures to

banks are increased by as much as 650% (from 20% to as much as 150%) The Credit Conversion Factor for Letters of Credit varies under Basel I vs. Basel II and Basel III

Under Basel I, this is 20% for commercial L/Cs, 50% for performance standbys and 100% for financial standbys; confirmation of a commercial letter of credit has a capital requirement of 0.32% (8% x 20% x 20%)

Under Basel II and III, “Sophisticated Banks” are required to do a statistical analysis of losses based on structure (and, due to limited losses, there are insufficient loss data for any bank in the world to do this for letters of credit, resulting in using the default CCF of 100%; under Basel II, the capital requirement to confirm a letter of credit can jump from 0.32% to 12%, viz., 8% x 150% x 100%; under Basel III, it can be as high as 23.25%, viz., 15.5% x 150% x 100%)

In the US, Basel II only applies to “Large, Internationally-Active Banks”—the 9 largest commercial banks fit the definition—and has never been fully implemented. Basel III-Advanced is expected to be applicable to the same banks while Basel III-Standardized will apply to all US banks.

The Leverage ratio does NOT apply risk weightings or credit conversion factors; the ratio is 100% for all direct and contingent assets. (The ECB has modified this for Europe.)

The Additional Loss Absorbency requirement applies only to “Globally Systemically Important Banks” Depending on the bank and the point in the economic cycle, under Basel III, the total capital requirement for a bank in 2019 may be as much as 15.5% of Risk-Weighted

Assets (“RWA”), compared with 8% under Basel I and Basel II

29

The Laws and Regulations of the United States apply to all United States Persons….

And you are "a U.S. Person" if…

— You are a(n):

— Individual, Corporation, United States Government, Bank located in the United States or,

— Located outside the United States if Controlled-in-Fact by a United States concern

— You are a company liable to U.S. law

— A U.S. citizens in or outside the USA as well as non U.S. citizens staying in the USA

— You are an individual or economic entity, located in the USA, especially financial institutions, their subsidiaries,

branches, agencies, representatives and all their directors, staff etc.

— Note: This definition includes both the singular and plural,

You are Controlled-in-Fact by a United States concern:

— Owns substantial stock, appoints officers and / or

— Controls:

— general policies, or,

— the day-to-day operations of foreign concern,

You are a Foreign Division or entity of a U.S. Concern.

Not the Head Office or any Foreign Branch of a Branch of a Foreign Bank in the United States.

— US Laws apply only to DBNY

Article 37d of the UCP 600 – Article 18d of the UCP 500:

— The Applicant shall be bound by and liable to indemnify a bank against all obligations and responsibilities imposed by

foreign laws and usages.

30

Trade Transactions are Reviewed for Compliance with:

Department of the Treasury:

Office of Foreign Assets Control (OFAC):

OFAC Country Sanction Programs

OFAC List-Based Sanctions Programs

SDN List

Bureau of Industry and Security US Department of

Commerce:

Denied Person

Unverified List

Entity List

Debarred List

Anti-boycott Compliance

Others:

KYC

Politically Exposed Persons

FFIEC - Bank Secrecy Act Anti-Money Laundering Examination

Manual, 2010

European Union List

31

OFAC, is a Division of the US Department of the Treasury, administers and enforces

economic and trade sanctions based on US foreign policy and national security goals

against targeted foreign countries, terrorists, international narcotics traffickers, and

those engaged in activities related to the proliferation of weapons of mass

destruction….

As part of its enforcement efforts, OFAC publishes a list of individuals and companies

owned or controlled by, or acting for or on behalf of, targeted countries. It also lists

individuals, groups, and entities, such as terrorists and narcotics traffickers

designated under programs that are not country-specific. Collectively, such

individuals and companies are called "Specially Designated Nationals" or "SDNs."

Their assets are blocked and U.S. persons are generally prohibited from dealing with

them.

Many of the sanctions are based on United Nations or other international mandates,

are multilateral in scope, and involve close cooperation with allied governments.

OFAC acts under Presidential wartime and national emergency powers as well as

under the authority granted by specific legislation to impose controls on transactions

and to "freeze” or “block" assets under U.S. jurisdiction

OFAC – Office of Foreign Assets Control

32

OFAC Sanctioned Entities…...

Anti Terrorism Sanctions

Counter Narcotics Trafficking

Sanctions

Diamond Trading

Nonproliferation

Blocked Persons

Certain Countries

Certain Named Ocean Vessels….

Vessels…

The Casablanca, Celtic, Cotty,

Huntsland, Violet or West or Rose

Islands, Sand Swan, and the

Ravens…

All fly the flag of…Cuba

The Pilot, Police 1, 2, or 3, Sky Sea,

and the Antara…

All fly the flag of…..Iran

33

The United States Department of Commerce... The Bureau of Industry and Security (“BIS”)

The mission of the (BIS) is to:

— Advance U.S. national security, foreign policy, and economic interests

BIS’s activities include:

— Regulating the export of sensitive goods and technologies in an effective and efficient manner

— Enforcing export control

— Public safety laws

— Cooperating with and assisting other countries on export control and strategic trade issues

— Assisting U.S. industry to comply with international arms control agreements

— Monitoring the viability of the U.S. defense industrial base and seeking to ensure that it is capable of satisfying U.S.

national and homeland security needs

— Requires us to enforce export controls on dual use goods and technology (primarily commercial goods which have

potential military applications) not only to fight proliferation, but also to pursue other national security, short supply, and

foreign policy goals (such as combating terrorism)

— Requires us to enforce sanctions against imports and exports of goods and services to certain Denied / Embargoed

Persons

During the mid-1970's the United States adopted two laws that seek to counteract the participation of U.S. citizens in other

nation's economic boycotts or embargoes. These "antiboycott" laws are the 1977 amendments to the Export

Administration Act (EAA) and the Ribicoff Amendment to the 1976 Tax Reform Act (TRA).

— The antiboycott laws were adopted to encourage, and in specified cases, require U.S. firms to refuse to

participate in foreign boycotts that the United States does not sanction.

— They have the effect of preventing U.S. firms from being used to implement foreign policies of other nations

which run counter to U.S. policy.

34

Requirements….. Concerned with United States Commerce

The export of goods or services from the United States and the import of goods or services into the United States are

activities in United States commerce

In addition, the action of a domestic concern in specifically directing the activities of its controlled in fact foreign subsidiary,

affiliate, or other permanent foreign establishment is an activity in United States commerce

Primary Impact

The Arab League boycott of Israel is the principal foreign economic boycott which impacts U.S. persons

Each of the following is currently a member of the Arab League:

Algeria, Bahrain, Iraq, Jordan, Lebanon, Libya, Mauritania, Morocco, Oman, Qatar, Saudi Arabia, Somalia, Sudan, Tunisia,

United Arab Emirates, Yemen, Egypt, Palestine, Comoros, Syria, Djibouti, Kuwait

There are actually three levels of boycott:

Primary boycott:

— Examples:

— Syria refuses to trade with Israel

— Kuwait asks a U.S. Company not to ship Israeli goods to Kuwait

— …In these examples, U.S. persons may comply, but must report their receipt.

Secondary boycott:

— Example: Syria refuses to trade with anyone who does business with Israel and develops a "blacklist" of those trading

with Israel

Tertiary boycott:

— Example: Syria refuses to trade with anyone who does business with names on Syria’s "blacklist"

For the Secondary and Tertiary boycotts, U.S. persons may not comply and must report receipt of

requests to comply to the United States Department of Commerce

35

Recent Examples of Boycott Requests Permissible Reportable

Shipment of goods of Israeli Origin prohibited, or, shipment contains no Israeli Material N Y

Certificates of origin acceptable from any country other than Iraq and Syria Y Y

Furnish a certificate that neither the manufacturer nor supplier are blacklisted N Y

Manufacturer is a 100% U.S. factory and has no foreign partnerships Y N

A certificate of origin stating that the goods are wholly of U.S. origin Y N

A certificate of origin stating that the goods are wholly of U.S. origin and contain no

foreign parts Y N

We certify that no raw materials of Israeli origin have been used for the production or

preparation of the goods mentioned in this invoice N Y

Certificate from the owners or masters or agents of the ship stating that the carrying

vessel is allowed to enter Kuwaiti Ports according to it Maritime Laws and Port

Regulations

Y N

In case of shipment by steamer, bill of lading should evidence that carrying vessel is

allowed to enter UAE ports N Y

Shipment on Israeli flag vessel is strictly prohibited Y N (war risk 7.60.3)

Provide a certificate from the owner, captain or agent of the vessel carrying the goods

that is not Israeli owned, will not call at Israel on the way to Oman or other boycotting

country and that it is allowed by Arab authorities to enter Arab waters

N Y

John Baranello

36

Indicators of Suspicious Letter of Credit Activity

Suspicious activities or transactions may present themselves in many different forms. The scenarios listed below are considered to

be "Red Flags" that you should be aware of and alert to for possible money laundering activities in Trade Finance:

— Letter of Credit does not provide for a description of the goods, services or technology being furnished,

— Transactions that have no apparent business or lawful purpose, are not expected of a particular customer, and the Bank

knows no reasonable explanation for the transaction after examining the available facts,

— Changing the Letter of Credit beneficiary name and address just before payment is to be made, including requests for

assignment of proceeds or transfer at the time documents are presented,

— Changing the Letter of Credit place of payment,

— Standby Letter of Credit fails to reference underlying project or contract, or designates an unusual beneficiary,

— A freight-forwarding firm is listed as the products final destination,

— The shipping route and destination appears to be abnormal for the product…

— Transactions which appear to lack reasonable economic substance or intent,

— Inadequate or unreliable information / documentation provided by the client to support a transaction,

— Transactions for which the source of funds is not readily apparent and / or is otherwise suspicious,

— Unusual transactions involving inherently risky industries or geographical areas where the client typically does not do

business,

— Transactions or business opportunities that seem "too good to be true“ or that can not pass the "Smell test“

— Transactions which appear to be inconsistent with the clients financial status,

— Transactions which appear unnecessarily or unusually easy to complete,

— Pricing inconsistent with previous transactions,

— Identify trends and patterns,

— "…Know, suspect or have reason to suspect unlawful activity…“

37

Bank Secrecy Act / Anti-Money Laundering Examination Manual………..updated 2010

Trade Finance practitioners must review all documentation to detect:

Items shipped that are inconsistent with the nature of the customer’s business (e.g., a steel company that starts

dealing in paper products, or an information technology company that starts dealing in bulk pharmaceuticals).

Customers conducting business in higher-risk jurisdictions.

Customers shipping items through higher-risk jurisdictions, including transit through noncooperative countries.

Customers involved in potentially higher-risk activities, including activities that may be subject to export/import

restrictions (e.g., equipment for military or police organizations of foreign governments, weapons, ammunition,

chemical mixtures, classified defense articles, sensitive technical data, nuclear materials, precious gems, or

certain natural resources such as metals, ore, and crude oil).

Obvious over- or under-pricing of goods and services.

Obvious misrepresentation of quantity or type of goods imported or exported.

Transaction structure appears unnecessarily complex and designed to obscure the true nature of the transaction.

Customer directs payment of proceeds to an unrelated third party.

Shipment locations or description of goods not consistent with letter of credit.

Significantly amended letters of credit without reasonable justification or changes to the beneficiary or location of

payment. Any changes in the names of parties also should prompt additional OFAC review.

38 Deutsche Bank John Baranello

Fraud / Scam Key Phrases / Buzz Words

Banking Coordinates

Buy-Sell

"Cash" Wire Transfer

C&F ASWP

Comfort Letter

"Conditional" Swift Payment

CUSIP Number

Cutting House

X % Performance Bond

Validation of the MCC

(Master Collateral Commitment)

Verbiage

With Full Bank Responsibility

Zero-Coupon Letter of Credit

Discounting L/C’s

Due 1, 5, or 10 years and 1 day

First-cut Paper

Fresh-cut paper

Foreign Bank Advice

Good, clean, cleared funds

Good, clean, cleared funds of non-criminal origin

ICC Investment Program

ICC Promissory Notes

ICC 322 Program

ICC 3039/3034

International Certificate of Deposit (ICD)

Irrevocable Bank Purchase Order (IBPO)

39 Deutsche Bank John Baranello

More Key Phrases / Buzz Words…

Middleman

Non-circumvention

— or, Non-disclosure Agreement

Prime Bank Financial Instrument

Prime Bank Guarantees

Prime Bank Notes

Prime World Bank

Proof of Funds

Proof of Product

Irrevocable and confirmed

Divisible, Assignable, Fractionable

Revolving, Credit

Payable 100% at Sight,

Key Tested Telex (KTT)

Mandate

Market to Buy or Sell Credits

Ready, Willing and Able (R,W, & A)

Roll Program

Secondary Market

— (in letters of credit, prime bank notes, guarantees)

Soft Probe

Pay Order

Top 50 – 100

— or any number

— World Bank

Transaction Tranche

Third Party Documents Acceptable

Name dropping :

— within their organization,

— within your organization,

— regarding their “connections”

— regarding their referrals

Seeking Banks Letterhead

Seeking Bank Correspondence

Seeking “road-map”

Letters of Credits signed

by John Baranello

40

The information contained herein is strictly for informational purposes only and does not constitute and shall not be construed to constitute any

contractual or non-contractual obligation or liability of Deutsche Bank AG or any of its affiliates, including Deutsche Bank Trust Company Americas

(collectively "Deutsche Bank"), nor shall this [brochure/presentation]or the content herein be construed as advice, an offer or a solicitation of any

nature whatsoever nor is this brochure or its contents intended to be relied upon by any person. Deutsche Bank makes no representation as to the

accuracy, completeness, or timeliness of such information. Deutsche Bank shall not be held liable for the authentication of or compliance with the

information contained herein nor does Deutsche Bank assume any obligation to update any such information. No part of this brochure may be copied

or reproduced in any way without the prior written consent of Deutsche Bank. Copyright © 2013 Deutsche Bank AG. All Rights Reserved.

John Baranello Director

Documentary Trade Product Management

Deutsche Bank AG

Global Transaction Banking

60 Wall Street

New York, NY 10005

Telephone +1 (212) 250-9604, Fax +1 (212) 797-0780

E-Mail: john.a.baranello@db.com

Documentary Trade Contact….