Customs Bond Underwriting

Now and then, clients will ask us:  What is underwriting?  How does it work?

There are a few answers to those questions—some are industry-specific, and some are agency-specific.  Let’s start with the first and most general question, What is underwriting?  


Underwriting is a process in which a guarantor diligently researches the financial strength of the party whom they will potentially provide financial backing to.  This portion of the process is the same in almost every case, be it a real estate deal, a car loan, or a business loan.  Things begin to get more specific in the particular levels and areas of financial strength an underwriter might look for, which is determined by the type and size of financial backing that is being requested of the guarantor.

Underwriting guidelines differ by industry due to the unique risks each sector presents.  Since TRG focuses on global trade facilitation services, we’ll use a US Customs import bond as an example of a financial guarantee that can at times require conscientious underwriting.

In the United States of America, it is mandated that any inbound shipment be covered by a US Customs bond.  This is a financial guarantee between a surety, an importer, and US Customs that any duties and/or fees associated with the goods being shipped will be paid (for more detailed information on US Customs bonds, visit our own JJarosky’s superbly informative article on the basics of Customs bonds).  If an importer is unable or unwilling to pay duties administered by US Customs and Border Protection, the bond exists as recourse for Customs to easily draw the funds.  Because sureties are in the business of providing financial guarantees, rather than financial payouts, many sureties enact strict underwriting guidelines in order to protect themselves from situations in which the importers they back don’t pay their duties.

Financial underwriting is not always necessary.  For US Customs Bonds, some of the deciding factors as to whether or not underwriting will be required for an importer can be: Anti-dumping duties, FDA regulations, bankruptcy, having importing privileges revoked, and having a bond claim paid by a surety.

The underwriter assesses risk by examining the financial strength of the business, as well as its track record of duty payments, claims filed, former bankruptcies, and imported goods.  It is not likely that a business with a non-existent, checkered, or shady past regarding duty payments will make it past the first round of underwriting.

For businesses with any of the issues above, strict and exacting underwriting guidelines are likely.  There are a few documents that can provide some security for the bond’s issuing party, and allow a more risk-intensive importer to acquire an import bond:

• Corporate Indemnity and financial assessment—essentially a corporate identity’s promise to the surety that they will provide financial backing to the importer needing a bond.  An underwriter will closely examine the corporation’s income statement and balance sheet in order to determine the strength and relative risk of allowing a particular corporation to indemnify another.

 

• Personal indemnity and financial assessment—an assessment of the personal finances of a business’s owner, and a personal guarantee to the surety that duties will be paid if not by the importing business, then by its owner.

 

• Irrevocable Letter of Credit (ILOC)—a pre-specified amount of funds set aside at a bank by the importer that is available for the surety to draw from at any time.  The ILOC is generally the same size of the bond, and will remain in effect until the bond is terminated.  An ILOC will usually gain interest as it sits, but that is dependent on the policies of the bank issuing it.

With one or more of these documents in place, a surety is able to mitigate the risk involved with backing an importer with a questionable past.  Of course, the way in which duties, fees, and taxes are handled by the importer from that point on will affect the risk assessment already in place.  An ILOC is by no means a license for importers to do as they please—a surety that must draw from an ILOC to cover and importer’s unpaid duties is just about as likely to terminate a bond as one that doesn’t have an ILOC to draw from.  Just remember: keep up with duty payments, and underwriting should pose no more problems than a summer breeze.