Legal Aspects of the Electronic Financial Supply Chain
According to Wikipedia, a supply chain, logistics network or supply network, is the system of organisations, people activities, information and resources involved in moving products or services from the supplier to the customer.
Various entities form part of the supply chain depending on the type of product or services being moved through (international or domestic trade) and the end consideration that the buyer will pay (high value or low value).
Some of the entities that exist in the supply chain are logistics planning and execution players, insurance company and various agents acting on behalf of entities involved. Although supply chain deals with physical delivery of the goods and services, it is not possible to keep it going without the flow of money between various entities. Therefore, the supply chain can be divided into physical supply chain and financial supply chain. The financial supply chain spans various monetary exchanges starting with a pre-shipment credit to seller and ending with final settlement of trade transaction. The existence of the financial supply chain introduces players that manage or help manage the financial supply chain, such as banks, factors, refinancing companies doing risk mitigation for principal financing companies, etc.
As the financial supply chain is linked with the physical supply chain, it uses various events happening in the physical supply chain to trigger monetary transactions between the entities involved. Document exchanges built in with the physical supply chain are therefore very important for triggering actions in the financial supply chain.
Various systems or software applications are being used to process transactions propelling the financial supply chain. These systems are being implemented in discontinuous systems installed with various entities participating in the financial supply chain. With the advent of Internet, however, standards for exchanging information across applications and new legal structures supporting electronic information exchanges between parties, a new paradigm of e-financial supply chain has emerged.
Two principal pillars of e-financial supply chain are dematerialised documents and communication standards for exchanging these documents across different entities. With the help of the United Nations Commission on International Trade Law (UNCITRAL) model legal framework supporting e-commerce, legal systems of various countries have adopted changes required for e-commerce and have therefore paved the way for dematerialised documents. On the other hand, several agencies like RossettaNet, Bolero and SWIFT TSU have attempted to solve the problems involved in document exchange standards and security arrangements certifying the origination and recipients of the documents.
A lot has changed in the world of business within the physical supply chain, due to practices and developments such as:
But while the physical supply chain has experienced the changes that reduced typical shipment size and days of credit enjoyed by the buyer, the financial community and banks in particular have not seen many changes in the traditional trade services practices and offerings. Momentum is building for significant enhancement in services in this field and now it will be the banks’ turn to lead this evolution.
On the other hand, the real risks of trade transaction i.e. the delivery risk faced by the buyer and payment risk faced by the seller have not disappeared. So what the banks need to do is to refit their practices (operations) and offerings (products) to the new world where documents can be exchanged in dematerialised form, information can be available in the shortest possible time and discount information in no more time than it took to arrive.
One of the key aspects that banks have to consider when they look at the e-financial supply chain is the legal challenge they face when offering e-financial supply chain services. In some circumstances, these laws may not be different from the underlying legal framework for offering typical electronic banking services but there are other aspects, specific to trade business, which need to be considered when offering such services for the e-financial supply chain.
Various laws affect trade offerings in the e-financial supply chain world. The most important ones are as follows.
UNCITRAL formulated a model framework for electronic commerce transactions in 1996. The principal theme of the framework is summarised in the statement; ‘information shall not be denied legal effect, validity or enforcement solely on grounds that it is in the form of data message’. On the issue of signatures it clearly puts trust in public key cryptography that allows the sender to sign using a private key and the bank to verify using a public key. The role of the certification authority in certifying that only properly authorized persons are using the keys has been well detailed in the secured messaging structure outlined by the framework.
Various countries have adopted the model framework to strengthen their legal system and facilitate electronic commerce. Some of the important trading countries are Singapore, Australia, India, United States, Canada, France, United Kingdom, New Zealand, Thailand and China.
In many countries this law requires a physical contract to be present between the parties. Banks in most countries, however, have implemented contracts that support the offering of electronic services such as Internet banking, phone banking, mobile banking, ATM cards, etc. Banks can certainly learn a lot from these experiences while pushing their initiatives on e-financial supply chain ahead.
Another aspect to consider is the validity of the contract executed between a buyer and a seller through a medium offered by a neutral party such as a bank. It could be further complicated in situations where:
Generally, in simpler situations of goods trade, these requirements should be well covered under the electronics laws for contracting.
In the case of disputes relating to dematerialised information, banks will have to rely on the capability to produce non-repudiated data. In some countries, however, this becomes difficult when the bank is an interested party of the dispute acceptance of such data. Electronic data can be relatively easily modified, which is another issue when presenting evidence in electronic form. Many jurisdictions, therefore, do not allow electronic data as evidence and others accept it purely as circumstantial evidence.
There has been good technological progress to address the issues surrounding electronic evidence for digital transactions. The technology is based on four underlying principles:
This is another important act under which banks can present a certified copy of an entry in books of bank as prima facie evidence of the transaction resulting in the entry.
Another complication relates to laws surrounding cases where both the electronic data and physical documentation is present. In some jurisdictions, the law decrees that the physical documentation will be used as proof of the transaction.
The laws vary by countries and most of them have been recently modified to encompass the electronic evidence and therefore do not have a wealth of case law that define practice from the interpretation of wordings.
In many countries, certain trade transactions need to be or may be backed up by a negotiable instrument that can be executed in cases of disputes. Also, in many places, such an instrument is required to be in writing and on stamp paper. This hinders the smooth execution of electronic commerce transactions while handling dematerialised documents.
Most countries – who have adopted and progressed as e-commerce societies with supporting legal framework – still have many restrictions around the handling of negotiable instruments electronically.
Jurisdiction is often the tricky issue, as different jurisdictions allow for different flavours of the same concepts. However, a banker has to know them in detail and this creates variations of practices while handling business. Difference in practices often reduce the efficiency of the system, as maintaining effectiveness takes its toll on the speed of processing the documents.
There are other laws that affect the execution of e-financial supply chain solutions:
The legal framework surrounding the B2B e-commerce is hampered by:
Despite this, it is interesting that most available cases on electronic fraud pertain to frauds relating to e-commerce in the B2C space. A possible explanation is that large banks and corporates take sufficient precautions and care while handling such transactions electronically.
The e-financial supply chain, as a new area of business, can provide substantial competitive edge to those banks who embrace it early. However, there will be challenges such as those described in this article. As with bills of exchange and traditional trade services offered by banks which originated and became popular with the evolving trade environment through the 14th to the 19th century, it is not far fetched to believe that this e-financial supply chain initiative can also be the basis of commercial banking in the 21st century.