The payment instrument and the compliance file are the two things a trade cannot proceed without, and they are the two most often left until the contract is already drafted.

A signed contract does not move a cargo. A bank does. Where the payment structure has not been tested with a bank before drafting, the parties discover at the last moment that the instrument on offer cannot be confirmed, and weeks of negotiation are written off. This is the single most avoidable form of failure in the trade.

The same is true of compliance. Sanctions screening is not a document produced at closing; it is a condition for the trade existing at all, and it covers more parties than most buyers expect — the counterparty, its beneficial owners, the vessel, the origin of the cargo and every intermediate party touching the money.

Choosing an instrument that will actually be honoured

A documentary letter of credit remains the standard instrument for physical cargoes, and its value depends entirely on confirmation. An unconfirmed credit from a bank without correspondent relationships transfers the issuing bank's risk to the seller, which is often the risk they were trying to avoid. Confirmation by a first-class bank is what makes the instrument worth its cost.

Standby credits and bank guarantees serve a different purpose: they secure performance rather than pay against documents. They are useful alongside a payment mechanism, not instead of one, and treating an SBLC as the payment route is a common source of misunderstanding between parties from different market traditions.

Telegraphic transfer against documents is faster and cheaper, and it is used where the parties know each other or where an inspection regime and title documents give both sides enough comfort. Escrow sits between the two, and works when the release conditions are drafted against documents that actually exist — a bill of lading and an independent quality certificate, not a subjective standard.

Whichever route is used, align the document list in the credit with the documents the trade will genuinely produce. Discrepancy rates on first presentation in commodity trade finance are notoriously high, and almost all discrepancies are self-inflicted: a credit calling for a document nobody can issue in the form specified.

• Instrument confirmed by a bank you have spoken to.
• Document list in the credit matched to real documents.
• Beneficial owners identified, not just the trading entity.
• Vessel and its ownership screened before nomination.
• Cargo origin evidenced and screened.
• Screening repeated at each material change to the deal.

Compliance as a condition, not a formality

Screening should be run against the lists that apply to you and to your banks, and it should cover the beneficial owners rather than stopping at the entity named on the contract. Ownership structures in this trade are frequently layered, and an entity that screens clean can be controlled by one that does not.

Vessels need the same treatment. Ownership, management, flag and recent port-call history all matter, and a vessel with gaps in its transponder record is a question that must be answered before nomination rather than after loading. The consequences of getting this wrong fall on the cargo owner and, in practice, on their banking relationships.

Re-run the screen when anything material changes — a new vessel, a new beneficiary, a change of discharge port. A clear result obtained six weeks ago against a different set of facts is not a defence. Building it into the workflow, rather than treating it as a closing item, is what allows a trade to move quickly when the commercial window is short.

About the author

Regi Atlantic Trading Desk

Regi Atlantic Energy Limited

Notes from the people who source, trade, store and ship the cargo — written to answer the questions counterparties actually ask us before a contract goes firm.