CBP International Banking Practices 3 — Questions and Answers
Question 1: Which incoterm places maximum responsibility on the seller for delivery costs and risks all the way to the buyer's named destination?
- EXW (Ex Works)
- FOB (Free on Board)
- CIF (Cost, Insurance and Freight)
- DDP (Delivered Duty Paid) (Correct answer)
Correct answer: DDP (Delivered Duty Paid)
Under DDP, the seller bears all costs and risks including import duties and taxes until the goods are delivered at the buyer's named place.
Question 2: A syndicated loan facility in which one bank originates the loan and then sells participations to other banks is known as:
- A club deal
- A lead-managed syndication (Correct answer)
- A participation loan
- A sub-participation arrangement
Correct answer: A lead-managed syndication
In a lead-managed syndication, the arranging bank underwrites and then distributes portions of the credit to other lenders in the secondary market.
Question 3: Under the FATF Recommendations, what is the minimum period a financial institution must retain customer due diligence records after a business relationship ends?
- Three years
- Five years (Correct answer)
- Seven years
- Ten years
Correct answer: Five years
FATF Recommendation 11 requires that financial institutions retain CDD records and transaction records for at least five years after the end of the business relationship.
Question 4: A US bank's international branch is subject to host-country regulations PRIMARILY because:
- US regulations have no extraterritorial reach
- The branch is a separate legal entity incorporated locally
- Host-country regulators have supervisory authority over operations within their jurisdiction (Correct answer)
- FATF mandates that branches comply only with host-country AML rules
Correct answer: Host-country regulators have supervisory authority over operations within their jurisdiction
Even though a branch is part of the parent bank, host-country regulators assert supervisory authority over all banking activity conducted within their territory.
Question 5: Which instrument allows an exporter to receive immediate payment from its bank by discounting a time draft accepted by the importer's bank, with no recourse to the exporter?
- Forfaiting (Correct answer)
- Factoring
- Back-to-back letter of credit
- Red clause letter of credit
Correct answer: Forfaiting
Forfaiting involves the purchase of medium-term trade receivables (usually guaranteed by bank avals or LCs) at a discount on a non-recourse basis.
Question 6: The Wolfsberg Group's Correspondent Banking Due Diligence Questionnaire (CBDDQ) is primarily used to:
- Assess credit risk of sovereign borrowers
- Standardize AML/KYC information sharing between correspondent banks (Correct answer)
- Determine transfer pricing rates for interbank loans
- Calculate capital requirements for cross-border exposures
Correct answer: Standardize AML/KYC information sharing between correspondent banks
The CBDDQ provides a standardized framework for banks to exchange due diligence information when establishing or maintaining correspondent banking relationships.
Question 7: In international trade finance, a 'red clause' letter of credit differs from a standard LC because it:
- Permits partial shipments and drawings
- Allows the beneficiary to draw pre-shipment advances (Correct answer)
- Automatically revolves after each drawing
- Requires a third-party bank to add its confirmation
Correct answer: Allows the beneficiary to draw pre-shipment advances
A red clause LC includes a clause (traditionally written in red ink) authorizing the negotiating bank to advance funds to the beneficiary before documents are presented.
CBP International Banking Practices 3
Which incoterm places maximum responsibility on the seller for delivery costs and risks all the way to the buyer's named destination?