Paying a foreign counterparty: settlement methods and documents

Paying a foreign counterparty starts not with a payment order but with the contract. Most problems with the bank, currency control and returned payments are built in when the contract is signed. Below: what to check in advance, which forms of settlement exist and which documents you will need.

What to put in the contract before the first payment

The beneficiary’s bank and your currency control bank will check the payment against the contract. So the contract must contain:

• the parties, with full names and details;
• the subject: goods, work or services, with a reference to the specification;
• the price, the price currency and the payment currency, if they differ;
• the payment procedure and deadlines: prepayment, payment on shipment, payment in installments;
• delivery dates and the Incoterms basis;
• who bears the bank charges: the sender, the beneficiary or both parties;
• the option of payment by a third party, if an agent will be paying.

The last point is often missed. If the contract expressly allows payment by a third party on the buyer’s instructions, the beneficiary’s bank has fewer questions about a payment from an agent.

Forms of settlement

Bank transfer

The simplest form: the buyer transfers money to the seller’s account. It can be prepayment, payment after shipment or a mix of the two. The risk lies with the party that performs first: with prepayment it is the buyer, with deferred payment it is the seller.

Letter of credit

The buyer’s bank undertakes to pay the seller when the seller presents the shipping documents. The money does not leave until the conditions are met. A letter of credit protects both parties, but it costs more and requires precise documents and banks willing to work with this destination.

Documentary collection

The seller sends the documents for the goods through its bank, and the buyer’s bank releases them only against payment or acceptance. A documentary collection is cheaper than a letter of credit, but the bank takes on no obligation to pay: it only passes on the documents.

Payment through an agent

The buyer transfers roubles to an agent in Russia under an agency agreement, and the agent pays the seller in foreign currency from its foreign company. For the seller, it is an ordinary transfer. For the buyer, it is a way to pay when a direct transfer from their own bank does not go through.

What matters in the agency agreement is who is responsible for execution, within what term, and what happens to the money before execution. A separate payment order is signed for each payment: amount, currency, beneficiary, rate and fee.

Documents for the payment

The basic set is almost always the same:

• the contract and specification;
• an invoice with the amount, currency and purpose;
• the beneficiary’s details;
• your company’s details sheet;
• for carriage and services: the agreement, the invoice, a completion certificate or transport documents.

When paying through an agent, the agency agreement and a payment order for each payment are added. After execution, the agent issues the payment confirmation and the agent’s report and completion certificate. These documents are needed by your accounting department and by the bank where the contract is registered.

Currency control

Settlements with non-residents are governed by Federal Law No. 173-FZ “On Currency Regulation and Currency Control”. The procedure for working with the bank is set out in Bank of Russia Instruction No. 181-I. If the contract amount exceeds the threshold set by the instruction, the contract is registered with an authorized bank. The bank assigns it a number, and from then on all payments and deliveries under the contract are linked to that number. Supporting documents are submitted within the deadlines set by the same instruction. More on the procedure in the glossary entry Contract registration with the bank.

Each transaction under the contract has a currency transaction code: it shows what kind of payment it is, for example an advance for goods or payment for a service. The code must match the deal documents, so the payment purpose and the invoice need to be worded precisely.

Imports carry a separate obligation: if you paid an advance and the goods were not imported, the money must come back within the term set in the contract. Violations of currency legislation carry fines under the Code of Administrative Offenses (KoAP).

Checks before sending money

Before the first payment to a new counterparty, check the counterparty itself: its registration in its country’s register, address, website, supply history. If the company shows no signs of activity and the price is well below market, that is a reason to stop.

Before each payment, it is worth going through a short checklist:

• the bank details match the contract, not just the supplier’s letter;
• any change of bank details is confirmed through a second channel, for example by phone;
• the beneficiary name is the same in the contract, the invoice and the bank details;
• the payment amount equals the invoice amount, and it is clear who pays the bank fees;
• the payment purpose refers to the contract and the invoice.

Common errors

• Payment to the account of a company that is not in the contract.
• The payment currency does not match the contract currency, and there is no amendment.
• Underpayment: correspondent banks deducted fees from the amount along the way.
• By the time the currency control bank expects the delivery documents, they are not there.
• The payment was sent before the contract was registered.
• The invoice is made out to another company in the group, not the one that signed the contract.
• The payment purpose is written in Russian or in transliteration, and the beneficiary’s bank does not understand it.

How we help

For each payment, VEDmost selects an agent from its pool whose route to your counterparty’s bank works right now, and compares the terms. We prepare the agency agreement and the payment order, and you sign them with the agent. The agent, rate and fee are fixed before the roubles are debited. On request, the roubles wait for execution in a special escrow account at a Russian bank, for an additional fee. The payment confirmation, the completion certificate and the report come from the agent; we assemble them into the currency control package. More on the Foreign currency contract payments and Documents pages.

This is a general overview. We will give you an answer on your deal after reviewing the documents and before the roubles are transferred.