The structuring of trade finance deals is more complicated than confirming credit, documentation, and shipping logistics. Successful transactions are built on a meticulous legal framework that anticipates complications, aligns with cross-jurisdictional standards, and protects the interests of all parties involved.
Mounting geopolitical shifts, regulatory tightening, and rapidly evolving risk landscapes have made this process more complicated. Fortunately, Raistone has thorough legal and compliance policies and practices to navigate our company and clients through to smoother waters.
Governing law and forum
One of the most important issues in structuring a cross-border trade finance deal is determining the appropriate governing law and jurisdictional forum. Given that trade transactions often span multiple countries, conflicts of law issues can arise, especially when disputes emerge. All operative legal documents should clearly define the governing law and appropriate forum to help mitigate conflicts of law issues.
Additionally, local counsel should be consulted to ensure that the choice of law in the country where the obligor is located is a valid and enforceable choice of law. It is often appropriate to use local law where the obligor is located as local law will be best understood by the local judges hearing the case.
Consider what could happen if an American equipment supplier sold turbines to a company in Argentina with financing provided by a U.S. bank. Complications could arise if the commercial agreement was governed by New York law, but the Argentine counterparty insisted that any disputes be resolved in locally in the Buenos Aires courts. If the obligor defaulted, the bank would face significant challenges enforcing its rights as the local Argentine magistrates or judges may have to apply unfamiliar New York law principles that may also conflict with Argentine law.
This scenario highlights the importance of mitigating legal risk by choosing an appropriate governing law and forum, and ensuring local legal counsel is consulted to advise on potential enforceability, validity, and conflict of law issues.
Regulatory compliance and sanctions
Compliance with sanctions regimes, anti-money laundering (AML) regulations, and Know Your Customer (KYC) requirements is paramount, particularly during a time of increasing regulatory scrutiny.
Lenders and financiers must conduct thorough due diligence. All counterparties in the supply chain, including buyers, suppliers and logistics providers, should all be evaluated.
Failure to comply with regulations from bodies such as the Office of Foreign Assets Control (OFAC), the Financial Crimes Enforcement Network (FinCEN), or local financial authorities can lead to losses, financial penalties and reputational damage.
For example, if a U.S.-based agricultural trader financed the export of soybeans overseas but, without the exporter’s knowledge, the buyer turned out to be an entity indirectly owned by an individual on OFAC’s Specially Designated Nationals (SDN) list, there could be severe repercussions for both the U.S exporter and its financier.
In this situation, the U.S. bank funding the transaction might halt disbursement mid-shipment, investigate, and report the matter to OFAC, causing the exporter to lose significant revenue, incur fines and in the worst-case scenario, face criminal charges. Screening ultimate beneficial owners (UBOs) of foreign counterparties, conducting enhanced due diligence in high-risk jurisdictions, and including termination rights in finance agreements in the event of sanctions violations would help alleviate these concerns.
Title, risk, and ownership structures
Trade finance often hinges on the timing and legal mechanics of title transfer. Legal clarity around when title and risk pass from seller to buyer and whether the financier has a security interest in the underlying goods is essential to proper risk management.
In some structures, particularly in receivables or inventory finance, financiers require legal title, a security interest, and/or an assignment of rights. Failure to comply with each legal requirement legal could lead to unenforceable claims and a loss of collateral value.
If an American electronics distributor sold components to a buyer in Mexico under unclear or ambiguous terms, and the cargo were damaged in transit, a dispute could arise over who bears the loss. The absence of clear title transfer mechanics could complicate insurance claims and asset recovery for the financier.
Enforceability of security interests
Trade financiers often rely on security interests in goods, receivables, or bank accounts to mitigate risk. However, not all jurisdictions recognize the same rights, and certain asset classes — such as future receivables or goods in transit — may be difficult to secure legally.
It’s important to ensure that any security interest taken is valid under local law, registered as required, and capable of enforcement. Oftentimes, preemptive legal review is necessary to confirm the validity and priority of interests.
If a U.S. apparel brand assigned its receivables due from retailers in the United Kingdom to a factoring company based in the U.S., and the agreement was governed by New York law but the factor failed to file a UCC-1 financing statement, serious issues could arise. Say the apparel company entered Chapter 11 bankruptcy, the factoring company’s purchase and/or security interest in the receivables would be unperfected, causing the factor to lose priority and be subordinated to other secured creditors. Furthermore, compliance with the applicable legal regime where the retailers are located would also be recommended in the event enforcing payment is required in the United Kingdom.
Force majeure and performance risk
Global trade is vulnerable to disruptions from pandemics and port closures to political upheaval and cyber threats. Legal teams must craft force majeure and hardship clauses that realistically reflect the operational risks inherent in international trade.
Equally important is clarity around what constitutes a default or delay under financing agreements, as well as how these events interact with contractual resolutions. Flexibility can determine whether a deal survives an unforeseen disruption or ends in dispute.
For example, if a seafood exporter secured financing to fulfill a large international purchase order, and COVID-related port closures caused the goods to spoil in transit, the exporter could fail to meet its delivery deadlines. In the absence of a force majeure clause which allocates such risk it would be unclear from a contractual perspective which party should suffer the loss.
Structuring as a strategic advantage
As deals grow more sophisticated and regulatory expectations rise, effective legal structuring has become a strategic advantage in addition to being a vital tool for ensuring compliance and mitigating risk.
Forward-thinking stakeholders — including financiers, corporates, and legal advisors — must view legal issues not as obstacles but as integral design components of a well-engineered deal. This will reduce risk and build resilience for the relevant parties and bolster the health of and trust in the global supply chain.
Raistone assists in structuring complex cross-border trade deals while staying ahead of legal developments, providing our partners, investors, and clients with a competitive advantage.
Raistone Platform Solutions
Raistone Platform Solutions (RPS) is designed to streamline trade finance operations by leveraging the strength of Raistone’s legal framework, technology, operations, and risk management tools. RPS reduces the participating investors’ overhead costs, shortens the time to revenue generation, and offers a scalable and flexible solution for their customers.
To learn more about RPS, please contact Nimo Rijhwani, VP of Platform Sales.
About the Author
Matt McAlpine serves as General Counsel and Chief Compliance Officer at Raistone. He has over 20 years of experience working in the financial industry and has held senior legal and compliance leadership positions at two of the largest global trade finance banks. He is a member of the Bankers Association for Finance and Trade, serving on the Legal Advisory Committee, and a member of the Association of Commercial Finance Attorneys. Matt has participated in numerous panel discussions relating to trade finance including on behalf of the Institute of International Banking Law and Practice.
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