There is a great deal of misinformation circulating regarding various elements of the sugar trading business. Some of these false facts have resulted from simple misunderstandings which have then been widely propagated , and other untruths have been deliberately engineered by unscrupulous types who seek to scam honest traders.
The following seeks to clarify some of the more common myths which are likely to be encountered in the course of sugar trading, and is important reading for anyone new to buying sugar.
Letter of Intent
A LOI (Letter of Intent) is not a contract. Letters of intent serve to notify the seller that the buyer wishes to enter into negotiations to purchase sugar. They do not contractually oblige either the buyer or the seller to go through with the trade.
Letters of intent should be regarded only as an opening point. Issuing an LOI does not make the buyer culpable for anything written in it. Until a contract is agreed upon and signed, both parties are free to back out of negotiations at any time, and buyers cannot be held liable for statements made in the LOI.
Banking information is not sent with a LOI. Banking information needs to be provided so that the seller can conduct a soft probe on the buyer’s accounts, but this is not necessary at the LOI stage.
Speaking of proof of funds, it is not a legal requirement that a buyer provide proof of funds before entering into a contractual agreement with a seller. Most sellers will prefer this, and many will insist upon it, but it is not an absolute legal requirement.
Letter of Credit
You cannot buy a letter of credit. These are financial instruments which should be obtained from your bank, never from a third party. Financial instruments offered by third parties are almost always a scam.
There is no such thing as a discounted letter of credit. If you follow the previous rule, this is obvious, but many buyers are tempted into purchasing so called ‘discounted’ letters of credit in order to save money. Remember that a letter of credit is a financial instrument prepared by your bank that will be drawn on your accounts when the seller fulfills their contracted obligations. There is no way to save money on a letter of credit, other than negotiating for a lower price with the seller.
Banks do not sell or buy financial instruments.
SWIFT Messages
MT799’s are a type of SWIFT message which verifies funds in the sender’s accounts. The sending of an MT799 does not constitute a promise to pay, nor can it be considered a contractual agreement to pay. There are many sources which claim a MT799 is an unconditional financial instrument, this is unequivocally false.
There is no such thing as an MT543. At one time there was a SWIFT message with the code MT543, however this was withdrawn from the SWIFT messaging system in 2003. When the MT543 was in existence, it was a bank commitment, however it was almost never used as banks are not in the business of taking on liability on behalf of their customers.
There is also no such thing as an MT100. The MT100 has been replaced by the MT103. The MT103 is a SWIFT message type that allows a bank to wire funds from a customer’s account to the account of a customer of another bank in another country. MT!03’s are quite often known as wire transfers, SWIFT transfers, or telegraphic transfers.
Bank Liability
It is natural that both buyers and sellers seek to have documents verified, confirmed, or guaranteed by major world banks. This provides a level of security which cannot be obtained from a private entity. However there is a limit to what banks will do. A bank will issue a bank guarantee or letter of credit if the client has sufficient funds or collateral to do so. Banks will not assume liability for their customers however, which means that they will not endorse things like letters of intent or contracts.
General Information
Agreements or contracts can only be regulated by the laws of one jurisdiction. This is because international contract law states that a contract cannot be regulated in multiple jurisdictions due to potential legal conflicts in various jurisdictions making the contract unenforceable.
It is not necessary, nor is it advisable for buyers to send personally identifying information, or sensitive information via a broker. This includes things such as bank account details, passports, and so on. It is advised that this type of information is only sent directly between the seller and the buyer.
The seller should be open and forthright regarding providing proof of product and other relevant information to the buyer. There is no need for secrecy, and indeed, an unwillingness to divulge necessary or pertinent information should be considered a red flag for a potential buyer.
Fee protection agreements should always have named pay masters. Fee protection agreements which do not name pay masters are essentially useless.
The maximum amount of any international trade is $500 million. Amounts exceeding this limit will be frozen and investigated, due to the growth of terrorist activities in the past decade. It is not wise to enter into transactions which require more than $500 million to be moved at any one time.