The age-old practice of receivables assignment has contributed immensely to economic growth since its introduction, but the cumbersome process of traditional receivables assignment has kept many out of the receivables market. A receivable is all or a part of or an undivided interest in the Assignor’s contractual right to payment of a monetary sum as defined in the United Nations Convention on Assignment of Receivables in International Trade (“Convention”).
Receivables Assignment
Receivables originate from any human activity resulting in a contractual right to payment of monetary sum and maybe (i) an existing or future receivable, (ii) collectible or uncollectible receivable, or (iii) liquid or illiquid receivable, irrespective of the transaction.
Receivables assignment throughout history has been open to natural persons (that is, all human beings from all walks of life, wherever they are located around the world) and juridical persons (that is, all non-human legal entities of all sizes, wherever they are located around the world), together referred to as “Entities” or “Entity”.
Receivable’s assignment predates the Convention as it is a centuries-old economic activity that entities had engaged in since the early days of civilization when entities acquired and exchanged goods and services through barter (which still exists today) system which was based on the exchange of one monetary good or service for another. This made receivable assignment very difficult due to the barter’s main pre-requisite for exchange being the fulfillment of the double coincidence of wants. With the introduction of Commodity money, which evolved from and alongside the barter system, receivables assignment became more established and developed in international trade. However, due to the fierce competition amongst the participants that resulted in exceedingly high interest, together with the tightened and notably different regulations among nations, created a series of commercial, finance, and legal problems that adversely affected international trade. There was a global outcry for a solution to provide uniform rules for receivables assignment. The United Nations Commission on International Trade Law (“UNCITRAL”), together with the United Nations General Assembly, provided a global solution by formulating and adopting a uniform law to govern receivables assignment in December 2001 the United Nations Convention on Receivables Assignment in International Trade (“Convention”). The Convention’s net impact on receivables assignment has been to formally harmonize the activity and provide clarity.
The UN Convention Impact on Receivables Assignment
The Convention set forth modern uniform rules governing the receivables assignment for use in international trade. In particular, the Convention facilitates the use of cross-border receivables financing by: recognizing the legal effectiveness of a wide variety of modern receivables financing practices; overrides certain contractual obstacles to receivables assignment; provides clear, uniform conflict-of-laws rules to determine which country’s domestic law governs priority as between the assignee of a receivable and competing claimants; and provided uniform definitions of key terms used in receivables assignment for instance it has defined “Receivable” “Assignment” and “Subsequent Assignment” as: Receivable means of all or part of or an undivided interest in the Assignor’s contractual right to payment of a monetary sum; Assignment means the transfer by agreement from one entity (“assignor”) to another entity (“assignee”) of all or part of or an undivided interest in the Assignor’s contractual right to payment of a monetary sum (“Receivable”) from a third entity (“debtor”); and Subsequent Assignment means the assignment by the initial or any other assignee whereby the entity that makes that assignment is the Assignor and the entity to whom that assignment is made is the assignee. All these in combination allowed entities to participate more in receivables assignments and gain access to capital and credit at more affordable rates.
The Convention although is a technical solution that simplifies the global landscape through improved consistency of receivables assignment across borders, is sadly not a registration system and therefore cannot provide any recorded public information for receivables assignment. To fill in this gap left by the Convention, the United States through Article 9 of the Uniform Commercial Code (“UCC”) provided a registration system that provides a public record of information for receivables assignment. However, tracking each receivable from the origination stage, distribution stage, assignment stage, reassignment stage, and settlement stage is quite difficult on the UCC system. Further, it is difficult to check at each stage if the receivable registered on the UCC system is counterfeit-free and duplicate-free.
Technological Breakthroughs Impact on Receivables Assignment
The gap left by the Convention and the inadequacies inherent in the UCC registration system together with the progressive development of policies that require electronic invoicing, as well as the implementation of best practices, policies, technologies, and mechanisms in the field which continue to evolve around legal, structural, and due diligence issues regarding cross-border receivables assignment spurred technological breakthroughs around receivables assignment.
The technological breakthroughs include automation systems to manage receivables such as ERP systems and business software, and breakthroughs such as increased internet access, cloud technology, tokenization, blockchain, smart contracts, etc spurned interest from more entities who increased their activities in receivables assignment. These technological breakthroughs allowed: the automation of some of the processes involved in the management of receivables by eliminating manual processes such as highlighters and aging reports, prioritized workflows, automated email, and accounts receivable analytic tools; and the simplification and modernization of receivable assignment methods from the traditional receivables assignment methods where transfer of value is hampered by legal, technical, and operational complications associated with traditional Receivable Assignment methods which relied on traditional methods such as documentary credits, factoring, forfeiting, asset-based lending, refinancing, securitization, supply-chain financing, project finance, and even credit card debt, all with the requirement of observance of all legal regulations on the rights and obligations of the assignor, assignee, and debtor.
Though these technological breakthroughs resulted in a more simplified and modernized receivable assignment such that transfer of value is done without legal, technical, or operational complications associated with traditional Receivable assignment methods. There is a drawback with these technological breakthroughs in that they are not registration systems as envisaged by the Convention. However, their net effect has been positive as more participants in receivables assignment and users have continuous access to capital through dynamic marketplaces at lower cost and a permanent record of each receivable assignment is not only possible but also traceable, visible, and verifiable by users globally and from any device including mobile phone apps.
Global Adoption of the UN Convention Impact on Receivables Assignment
October 2019 marked an important and long-overdue step in advancing the global adoption of the Convention. Adoption would mean the full implementation of the Convention objectives in a simplified form that allows all to participate in receivables assignment resulting in access to capital and credit for projects in an ecosystem system that not only integrates smoothly with existing monetary and macroprudential policies but also one that guarantees mechanisms protocols policies that ensure that parties to the assignment of the receivables are identifiable and verifiable, the receivables are traceable, transparent and immutably recorded, ensuring all registered receivables from origination, distribution, assignment, reassignment, and settlement is done counterfeit free and duplicate free giving credibility for every receivable assignment.
Global adoption could have global, game-changing implications for entities to access more financing in support of international trade, particularly considering the existing challenge of lack of liquidity to convert existing receivables to cash caused directly by the low Government and Public participation in receivables assignment. Today government buys (“Absorb”) receivables gradually from the market through the write-off accounting practice. The government allows entities to write-off and deduct from their income any uncollectible receivable partially or fully in the year that the receivable becomes uncollectible. This translates to lower taxes paid to the government by the entity in that fiscal year by an amount equal to the uncollectible debt. This means that government not only loses tax revenue but is also out of pocket as it has fully reimbursed the entity the total uncollected receivable out of its own resources. It is this current practice of ineffective absorption of receivables by the government that has exacerbated the problems inherent in the receivables market.
Global adoption and full implementation of the Convention by the government is the solution. Government should absorb all existing receivables at the full value each financial year whether uncollectible or not. The net effect, when the government moves away from the current ineffective method of absorbing receivables through the write-off method and rather absorb receivables through receivables assignment, is Double Income to the Government as follows: when the government pays assignor full value of the absorbed receivable, there is Government income in the form of taxes paid by the Assignor to Government in full in the fiscal year of absorption. The benefit to the Assignor in this stage is that after absorption at full value, there is now capital to generate even higher/more income which is taxable and payable to the government; and after receivables assignment to Government by Assignor, the proceeds of assigned receivables is collected by the assignor form the debtor and handed over to the government as its income. The debtor benefits in terms of the opportunity for the debtor to continue trading to generate more income and pay higher taxes to the government.
Limited participation in receivables assignment by the public is because the majority of the entities do not know where to go to participate in Receivables Assignment. The advent of new technologies like tokenization and blockchain has seen the opening of this industry with a proliferation of platforms that allow anyone anywhere to participate in and benefit from receivables assignments.
Traditional Receivables Assignment Problem Statements
Throughout history, the following problems have plagued the receivables assignment industry; poor Literacy, Uncertainties as to applicable legal regime, Inadequate public information on receivables assignment, Lack of clarifying on Place of Settlement of receivables, Persistent unmet demand of receivables financing, Due diligence uncertainties, Lack of consistent supply of receivables in the market, and Lack of Trust in the receivables assignment market. Each problem has a solution, as discussed below.
Receivables Assignment has historically been open to and practiced by everybody (meaning all entities) since the dawn of human civilization, but there has been a high degree of ignorance among the population about Receivables and Receivables assignment at every stage as it is today. There has been a lack of knowledge amongst a vast majority of the systems and structures that exist in the receivables and receivables assignment industry. Also, although receivable’s education is a part of several courses of study in schools, there is still extraordinarily little application of the acquired knowledge in practice leading to loss of capital for trade and development. The Convention and other various literature now available as a formal source of information on receivables and receivables assignment have come a long way to provide clarity, but they’re still exists insufficient awareness of the industry. There is a need for ongoing sensitization efforts towards educating everyone on receivables assignments and their benefits.
Throughout history, there have been various classes and definitions of receivables, further exacerbating the complications that exist in the industry. The Convention provides the solution to this problem by simplifying the definitions of “Receivable,” “Assignment,” and “Secondary Assignment” as follows: Receivable means of all or part of or an undivided interest in the Assignor’s contractual right to payment of a monetary sum; Assignment means the transfer by agreement from one entity (“assignor”) to another entity (“assignee”) of all or part of or an undivided interest in the Assignor’s contractual right to payment of a monetary sum (“Receivable”) from a third entity (“debtor”); and Subsequent Assignment means the assignment by the initial or any other assignee whereby the entity that makes that assignment is the Assignor and the entity to whom that assignment is made is the assignee.
Choice of applicable legal regime is critical to the maintenance of value throughout the Receivable life cycle. The transfer of value through Receivable Assignment by Assignor to Assignee requires that all legal regulations on the rights and obligations of the Assignor, assignee, and debtor are adhered to as they significantly affect Receivables Assignment. However, there existed and still exists considerable and notable differences among national and inter-state legal regulations that create problems for Receivables Transactions within and across national borders, adversely affecting domestic and international trade. The Convention provides the solution to this problem by changing some of the fundamental aspects of the legal mechanics underpinning the Receivables Assignment by setting forth modern uniform rules governing Receivables Assignment for use in Receivable financing transactions. In particular, the Convention facilitates the use of cross-border Receivables financing by: (a) recognizing the legal effectiveness of a wide variety of modern Receivables’ financing practices; (b) overriding certain contractual obstacles to Receivables Financing; and (c) providing clear, uniform conflict-of-laws rules to determine which country’s domestic law governs priority as between the assignee of a Receivable and competing claimants.
There was and still is inadequate access to public information on Receivables Assignment. This is because of the traditional registration system for Receivables Assignment, for example, the UCC, although providing being public record of registered Receivables and their assignment, tracking each registered Receivable across the various stages of origination, distribution, assignment, reassignment, and settlement is very difficult. Further, it is difficult to check if the registered receivable is counterfeit-free and duplicate-free at each stage. Technological breakthroughs such as increased Internet access, cloud technology, blockchain technology, tokenization, smart contracts, etc solve this problem through the use of platforms harnessing these technologies. These Platforms serve as decentralized registry systems for Receivables Assignment and online marketplaces for Receivables-Financing transactions. On the platform, every registered receivable is trackable through the entire system from origination, distribution, assignment, reassignment through to settlement, ensuring that each registered Receivable is counterfeit free and duplicate free, and each Receivable Assignment is traceable, visible, and verifiable by users globally from any device including mobile phone Apps. Receivables Assignment has throughout history been and remains the most effective method of financing development, the evidence being very obvious- Nations with higher developed Receivables Assignment industry are said to be developed and those with lesser developed Receivables Assignment industry are simply poor. For Receivables Assignment to be an effective method of financing development, the Places of Settlement of Receivables is crucial. However, Receivables Assignment has throughout history been hampered by lack of clarity on Places of Settlement of Receivables, leading to creditors in some instances taking the law into their hands and demanding payment from debtors with all sorts of tactics.
Traditionally the Places of Settlement has been the debtor’s residence or office, creditor’s residence or office, the police stations, courts, and banks after their entry into the Receivables Assignment industry as originators. These traditional Places of Settlement have been inadequate, hampering the Receivables Assignment Market. The world today is in a better place due to the technological advances that have resulted in the emergence of platforms that provide modern and convenient Places of Settlement as part of its suite of offerings leading to a transparent source of information for regulatory decision making and ensuring society can have the full benefit of the natural human instincts to assign Receivables as a way of enabling development is all fields of human existence.
Receivables Assignment has been and is still the financing method for sustainable development, cash, and forward financing as it is in insurance does little to lift people out of poverty. Receivables Assignment remains the method for lifting populations out of poverty and therefore demands the full attention of authorities to enable development. The road out of poverty for populations remains the effective management of Receivables Assignment, but there have been gaps in management leading to chronically unmet demand for receivables financing, a situation which should not exist because Receivables inherently have a buyer of last resort via the current write off the system.
The uneven application of the current tax write-off system favors only the strong and creates poverty among the poor. Protecting the weak should be the ultimate duty of government, but the current buyer-of-last-resort-system favors only those who can make a comeback on their own at the expense of the population. There is an urgent need to revise the current system to allow all persons to report their contractual right to payment of a monetary sum and development of a system to absorb when the debt becomes uncollectible in a fair and equitable manner that benefits the weak and the strong, the poor as well as the rich. The selective purchasing of Receivables where buyers pick and choose which Receivables and from which industry the insufficient available cash can be applied is most likely to continue until there is clarity that allows write-offs and debt forgiveness extension to all in a fair manner. The solution is improving awareness, harmonizing legal regimes, clearly defining Receivables, and improving registration.
The Receivables Assignment should not be susceptible to fraud as there has to be a named debtor to arrive at a Receivable, but the current ineffective management environment makes room for double selling through a situation that can be addressed by increased government (buyer of last resort) participation. Receivables is traditionally paper-based and arises from the Assignor’s right to payment of a monetary sum; it is still possible for disputable Receivables to make their way to the market; as a result, the principle of caveat emptor or “buyer beware” applies equally to the purchase of Receivables in the same way as it would with the purchase of any other asset. Given the risk of fraud and the resulting serious consequences that could arise, proper due diligence on the Receivables, entities identification, document/transaction authenticity is essential to any Receivable Assignment.
In the past, due diligence on Receivables could be cumbersome but solutions exist today in the use of a combination of proper controls and protocols to procure information or evidence that the Receivables exist and have not been previously financed; together with the technological advances in the sector such as blockchain to mitigate the risk of fraud on the platform, the Receivable is registered. The platform (a) transforms invoices into digital assets with unique identities on a distributed, decentralized ledger, (b) timely approves Receivables Assignment due to increasing time pressures from customers who now expect their financing requests to be approved within a shorter time frame given the technological advances in the sector, (c) easily finance such digitized invoices on the platform reducing fraud risk as the recorded transaction between the ledger’s participants is immutable and cannot be easily erased from the system, and (d) revolutionizes Receivables Assignment processes by reducing the need for on-site Receivables audits and buyer diligence.
Lack of publicly available records on available Receivables creates what seems like a lack of consistent supply, but the opposite has always been true. There is a persistent lack of liquidity to finance available Receivables; as a result, Institutional buyers pick and choose the industry they want to participate in and the type of Receivables they want to buy, but more open receivables market is the solution to this problem.
The inability to perform as agreed or as expected regardless of the reason (voluntary or involuntary) results in existing Receivables. That is, the breach of trust results in most available Receivables, any other uncertainty in Receivables Assignment processes compounds the challenge to the industry. Receivables, like any other form of money, require that its Receivables Assignment Institutional Support System (“RAISS”) be clearly defined with each participant’s role clearly defined to engender trust market confidence and provide additional comfort to users.
Receivables Assignment is made possible via a means of exchange issued by the monetary authority. Faith in the monetary authority to maintain the value of each Receivables unit is critical to the Receivables Assignment Market. The origination process needs to be free of counterfeits and duplicates, the registration and record-keeping of Receivables need to be free of faults, Assignors needs to be extra careful not to assign non-existing Receivables unless clearly disclosed that the Receivables being assigned are non-existing and the conditions to the Receivables becoming the existing contractual right to payment clearly defined. Management platforms must ensure counterfeit and duplicate free assignments. All participants must be able to count on the Receivables and the assignment processes. The public should be able to count on availed Receivables as being free of faults, counterfeits, and duplicates. All the above trust issues are addressed by a sound absorption regime that has no ifs and buts. Sound Receivables Assignment Institutional Support System (RAISS) requires participation at every level by role players who understand their role, responsibilities, and duties fully and offer sound services or products needed for Receivables management, distribution, exchange, and transfer.
CRU Impact on Receivables Assignment
The shortcomings of traditional receivables assignments mean there is room for complements. Central CRU Organization (“CRO”) in its capacity as a global holder and manager of receivables brings to the world Central Receivable Unit (“Cru”) which is, a simplified receivable assignment that reduces reliance on traditional receivables assignment and fulfills the expectation of the United Nations Convention on Assignment of Receivables in International Trade (“Convention”). Cru originated from Resource Mobilization Inc. (“RMI”) United States (U.S.) dollar-based receivables tokenized into a unit(s) named Cru. Cru is the official currency of the Cru ecosystem, it is a unit of existing receivables used and spent as money, easily transferable from holder to holder in digital form (digital Cru), coin form (Cru coins), and notes form (Cru notes), and is a complement to Ura, fiat, traditional receivables assignment, and other forms of money. At all times, Cru in circulation and in reserve shall always remain certificates of existing receivables under the authority and management of the CRO. The general guidelines relevant to traditional receivables assignments apply to Cru. Under no circumstances is Cru guaranteeing account debtors’ obligations in the receivables, on the contrary, Cru is a certificate of debtors’ obligation being spent as currency until the debtor pays. Any receivable verified as existing from any market may be purchased and paid for in Cru. Any Cru that ceases to exist shall be burnt, meaning shall be removed from circulation on the date the account debtor pays. Cru is not a cryptocurrency but a store of the value of existing receivables and utilized as money.
