The Regulation On Principles And Procedures To Be Applied İn Factoring Operations
Introduction
The Regulation on Principles and Procedures to be applied in Factoring Operations (“Regulation”) was published by the Banking Regulation and Supervision Agency (“BRSA”) in the Official Gazette dated 04.02.2015 and numbered 29257. Notably, the Regulation entered into force prevailing as of 01.01.2015. The Regulation envisages the principles and procedures to be applied in factoring operations to be conducted by factoring companies and banks; the novelties introduced by such Regulation are examined below.
Avoidance of Duplicate Invoices and Cancellation of Invoices
The second section of the Regulation entitled “Avoidance of Duplicate Invoices and Cancellation of Invoices”, stipulates certain obligations, and envisages various procedures for banks and factoring companies that are established in Turkey. Firstly, Art. 4 of the Regulation imposes a prohibition that aims to avoid operations, which are not based on an invoice. In this sense, the Regulation sets forth that financing shall only be provided to clients in return for invoices that are issued for their goods or services. Furthermore, the Regulation sets forth that the total amount of such financing, and income (such as commission or interest) generated therefrom shall not exceed the amount noted on the invoice, subject to the factoring transaction. In the event that the factor pays 100% of the invoice amount, an additional sum for commission and interest can be recovered, separately. The clients shall not be exposed to minor differences arising out of the rounding up of the invoice amount, and the sum stipulated on the bill of exchange, or other similar instruments. Additionally, banks and factoring companies that are established in Turkey shall not issue additional invoices for exchange differences generated on the date payment is made.
Article 5 of the Regulation sets forth an enquiry system to be established by factoring companies and banks. According to this, banks and factoring companies that are established in Turkey shall be obliged to conduct the enquiry, stipulated under such article, regarding their clients and related invoices. Pursuant thereto, factoring companies and banks shall not be contented with the verbal declarations of their clients; yet, they shall provide enquiries on client information. Such enquiry shall be comprised of, at minimum, the below:
i) Inspection of invoice information, along with a compliance check of the contents with the provisions of related regulations as to format and disposition of the invoice,
ii) Establishment of an internal checking system that monitors the status of the invoices, with a Central Invoice Registration System which avoids the production of duplicate invoices,
iii) Assessment of the status of their clients, with the aid of their financial conditions and investigation of former financial operations, via consulting with the debtors of the invoices and drawers of the bills of exchange.
Know-your-customer check procedures listed in the Regulation are the minimum requirements, and the banks and factoring companies established in Turkey are not limited by them in the enquiry of their clients. They may utilize other methods, as well.
In order to avoid producing duplicate invoices, the Regulation envisages yet another special obligation in its 6th Article. As per such Article, banks and factoring companies that are established in Turkey shall be obliged to inspect the notification form signed by clients (or their signatories) along with the invoice information, and check whether the invoice being examined is a duplicate or not, through the Central Invoice Registration System. Furthermore, the images of such invoices shall be stored by banks and factoring companies in order to be used and checked against in potential audits. The expression of the “image of invoices”, stated in the aforementioned article, introduces a new concept to Turkish law. The word “image” may be interpreted as the copy of the invoice at stake, obtained in any manner. According to this interpretation, the Regulation envisages a new opportunity for factoring companies and banks allowing them to archive the images (scanned copies or digital images) of the invoices in electronic databases. However, due to the fact that a photocopy is also a form of image obtained from the original invoice, the same provision may be deemed to include the photocopy (hard copy) of the invoice in question. We consider that the application and implementation of such provision shall be clarified in time.
Another novelty the Regulation introduces concerns the cancellation of the invoices. Pursuant to Article 7 of the Regulation, the factoring companies or the banks performing factoring operations shall be obliged to obtain a letter of undertaking from their clients, stating that upon issuance of new invoices following the cancellation of initial invoices, they shall submit such new invoices to the factoring company or to the bank. As per the second paragraph of such provision, the factoring company or the bank shall inform its clients in this regard, and must obtain this undertaking in the form of a “notification form” that shall be a standard form announced by the BSRA.
Bills of Exchange and Other Bills
The third section of the Regulation entitled, “Received Bills of Exchange and Other Bills,” governs the points to consider by factoring companies and banks in the event of receiving bills of exchange or other types of bills in reference to invoice receivables. In such events, the factoring companies and banks shall investigate and bear in mind that the drawer of the bill of exchange or other type of bill shall be the same person as the person stated to be the creditor on the invoice. Additionally, the person before the drawer shall be the same person stated as the debtor in the invoice.
Additionally, Article 8 of the Regulation stipulates certain requirements in order for factoring companies and banks to receive additional bills of exchange and other bills from their clients, other than the ones related to invoices.
Transfer of Potential Receivables
Pursuant to Art. 9 of the Regulation, in order for factoring operations to account for potential receivables, (i) the transferred receivables must be certified by invoice or other documents substituted for an invoice, (ii) the factoring companies and banks will confirm the information on an invoice or other documents substituted for the invoice on the date of the commencement of the receivable.
The second paragraph of the same provision stipulates the conditions for the acquisition of receivables arising out of the sale of goods or services. Such conditions are as follows:
i) Factoring companies and banks shall conclude agreement with their clients that include the definition of the work, quality of the receivable, maximum factoring limit and payment requirements.
ii) The matters concerning the potential receivable shall be certified via other documents, such as an agreement signed by the client and the debtor, an order form, a pro forma invoice or letter of credit.
iii) The accuracy and validity of the documents and information proving the commercial relation between the debtor and the client, as well as the fact that the receivable to be transferred will arise out of such commercial relation, shall be checked and evaluated.
iv) The factoring companies and banks shall obtain the invoice or other documents substituting the invoice that shall be issued following the production of the receivable from the client, and shall submit such documents to the relevant operations file.
Preservation of the Documents
In accordance with Art. 10 of the Regulation, factoring companies and banks that are established in Turkey shall be obliged to preserve the information and documents related to the factoring operations, which are obtained upon the conclusion of their investigation and enquiries, for a minimum period of five years, provided that such period is no less than the durations envisaged under other related regulations. The preservation obligation for minimum five years, stipulated under this provision, shall not constitute a novelty for banks active in factoring operations. This is because, according to article 42 of the Banking Law numbered 5411, the banks operating in Turkey are already obliged to preserve the documents related to their operations for a period of ten years. Therefore, the preservation obligation for minimum five years, which is envisaged in the Regulation, shall solely be considered as a novelty for the factoring companies.
Conclusion
The Regulation introduced new principles and procedures for factoring companies and banks that are established in Turkey, enquiry obligations, a minimum five-year period of preservation of documents obligation, and conditions for the acquisition of receivables arising out of the sale of goods or services. Such provisions are significant for the entities that provide factoring services and should be taken into consideration by factoring companies and banks.
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