The long shadow of the September 11 terror strike has brought added complexity to trade and project finance. In trade payments, the burden has fallen mostly on banks, which now more than ever have to subject their customers to intense scrutiny. In project finance, U.S. investors in emerging markets have had to scramble to find political risk insurance to protect their assets from potential terrorist events.

For banks, the "know your customer" rule is not really new. For years, they've been required by the Bank Secrecy Act to guard against money laundering transactions, and for two decades they have had to check their customers against the "OFAC lists," the various rosters of problem individuals, organizations, and countries maintained by the U.S. Treasury's Office of Foreign Assets Control.

But, the USA PATRIOT Act has upped the ante. OFAC's "designated nationals list" has added (so far) 320 new names to a roster of terrorists. Banks have to check their customers against the list (doing business with the people and organizations identified is prohibited).

And, just recently, exporters and importers have had to begin responding to banks' requests for basic information-their legal names, addresses, and tax identification numbers. The banks have to verify the data.

At ABN Amro Bank in Chicago, a major U.S. trade finance supplier, for example, customers are encouraged to publish this information on their web sites. "Banks have to verify information about their customers, and a web site is an acceptable place for checking its validity," says Buddy Baker, Group VP-Global Trade Risk Management.

In addition, with much of the focus on screening new accounts, banks have to decide what constitutes an "account," since the traders supported through letters of credit or wire transfers don't necessarily have to be ongoing customers.

Wire transfers are involved in a large volume of trade transactions, ten times as many as LCs. So, banks are adopting a threshold for each kind of activity, to decide how many payments constitute a client relationship. Once they decide a relationship has been established, they have to ask the basic customer identification questions to comply with the rules.

Plus, the PATRIOT Act has also forced banks to avoid doing business with "shell banks," offshore institutions that offer paper-thin information on their ownership. Quite a few relationships have been closed down as a result, not necessarily because they were shell banks, but because they were not prepared to provide the identity information required by the PATRIOT Act.

Meanwhile, the expanded information demands of the new OFAC list have helped spawn a growth market for software that can help search the names on the list. Given the geography of terror, many of the names, in less familiar languages and cultures (and multiple spellings), can be a challenge. And the OFAC list, unhelpfully, appears in 64 pages of small type with two columns to a page, in no particular order.

Language Analysis Systems in Herndon, Virginia, is a good example of how software producers have seen their sales grow since 9/11. Its name recognition and matching product helps to tackle the problem of multiple variations in the form and spelling of names.

Jack Hermansen, chief executive, stresses: "Our product includes a name reference library that generates the most common spelling variations. We've worked for federal intelligence and border patrol agencies for 18 years, and now have a library of nearly a billion name variations from more than 200 countries."

New insurance resources

But, while the terror threat has burdened trade finance with new regulatory responsibilities, it has left U.S. multinationals feeling exposed. Their overseas assets need specially tailored political risk insurance to cover the problem.

Unfortunately, 9/11 terminated the protection they had been using. Until then, most companies were able to rely on their property and casualty insurance to cover terror-related losses overseas. After 9/11, however, when their policy renewals came in, they discovered that terror was now excluded.

Fortunately, the insurance industry has come up with fresh resources. The latest innovation is a new Lloyd's of London policy developed by Berry Palmer & Lyle, a leading specialist broker that focuses on political risk and trade credit coverage.

Since the new exclusions created market demand, says Charles Berry, chairman of the London broker, the need was to come up with appropriate policy language and enlist underwriters that would offer the coverage. Five Lloyd's specialist syndicates have now agreed to support it.

The new language covers several events in which terror is involved. For example, if property in an emerging market is damaged by a terror incident, but the incident was caused indirectly by war, the terror risk is still covered. The policy does not distinguish among causes of a terror incident.

"It covers the broadest possible range of political violence acts, of which terrorism is only one," said Berry. Others include civil commotion, riot and looting, uprisings, rebellions and coups, and war and civil war. This "Global Political Violence" policy is offered as a stand-alone product, which can be tailored to the exclusions and ambiguities of existing general property policies.

Meanwhile, American International Group, in New York, a global leader in political risk underwriting, responded early to the new situation. "We saw a need and came up with a product by November 2001," says Don Nelson in AIG's World Source Division, who manages the terror cover.

The AIG insurance is offered either as a stand-alone policy or as part of a larger package. And, typically, the premium is determined by where the exposure is located. "We want an appropriate spread of risk," Nelson noted.

Uncle Sam has also gotten into the act. The U.S. Overseas Private Investment Corporation, which has been offering political risk insurance since 1971, has come up with a new stand-alone terror policy that offers protection against some highly tailored risks, and fills gaps in the private insurance market.

The new OPIC insurance covers terrorism only, not just as part of a broader political risk policy, and offers protection for up to ten years. It includes countries for which private sector insurance is not readily available, and protection against threats posed by weapons of mass destruction.

Sidebar: A Primer on Factoring

What is factoring? Factoring is a complete financial package that combines credit protection, accounts receivable bookkeeping, and collection services. It is an agreement between the factor and a seller. Under the agreement, the factor purchases the seller's accounts receivable, normally without recourse, and assumes the responsibility for the debtor's financial ability to pay. If the debtor goes bankrupt or is unable to pay it's debts for credit reasons, the factor will pay the seller. When the seller and the buyer are in different countries the service is called international factoring.

How does international factoring work? Each factoring transaction is different and is based on an exporter's needs. However, the basic service can be broken down into four stages:

1. The exporter signs a factoring contract with an export factor in its own country. Under the terms of the agreement, the exporter assigns all export receivables to the export factor. The export factor is responsible to the exporter for all aspects of the factoring service.

2. The export factor selects an FCI (Factors Chain International) correspondent to act as import factor in the country to which the exports are going. The receivables are reassigned by the export factor to the import factor.

3. The import factor will establish credit lines for each of the importers. The credit lines will be for a specific amount and terms of sales. The export factor confirms the details of the credit lines to the exporter.

4. After the exporter ships the goods and sends an invoice to the importer, the import factor handles the collection of the receivable and the prompt payment of the proceeds to the exporter's account at the export factor.

What are the benefits of international factoring? International factoring is used by exporters who sell on open account or documents against acceptance terms. International factoring eases much of the credit and collection burden created by international sales. By outsourcing the credit function, exporters can convert the high fixed cost of operating an international credit department into a variable expense. Commissions paid to the factor are based on sales volume, so costs fluctuate with actual sales, lowering operating costs during slow sales periods. In addition to relieving exporters of the time-consuming administrative burden of approving credit and collecting export sales, international factoring lets exporters safely offer their foreign customers competitive open account terms. Financing by means of loans against outstanding accounts receivable. Also international factoring provides the following benefits to exporters:

• Increase sales in foreign markets by offering competitive terms of sale.

• Protection against export credit losses.

• Accelerate cash flow through faster collections.

• Lower costs than with Letters of Credit.

• Liquidity to finance working capital.

• Enhance borrowing potential.

Source: Factors Chain International, www.factors-chain.com.