Proof of Funds and Blocked Funds in Cross-Border Transactions: What Banks Require
Introduction
“In the world of global trading, particularly in the up-and-coming route linking Malaysia and Thailand, trust is and always has been the preferred currency.” When businesses enter into global transactions, “Proof of Funds” (POF) and “Blocked Funds” are conceptualized to form the foundation of financial security. They guarantee that the buyer has the necessary funds at their disposal and that the seller is not left holding an unpaid bill.
In the context of doing business with the banking systems of Malaysia (regulated by Bank Negara Malaysia) and Thailand (regulated by the Bank of Thailand), it is vital to know these requirements.
What is a Proof of Funds (POF) document?
“Proof of Funds” or POF is a formal document, usually in the form of a bank statement or a letter of guarantee, that proves the capability of a particular party to carry out a particular transaction. The POF in Malaysia and Thailand is used as a risk-reducing tool in banks as part of the implementation of the Anti-Money Laundering policy.
Standard POF Requirements :
Though there may be a few differences for individual banks such as Maybank in Malaysia or Bangkok Bank in Thailand, a conventional POF document must include the following information:
- Official bank letterhead: The letterhead needs to be original and contain the bank’s contact information.
- Account Holder Verification: The name of the person or company holding the account needs verification against that shown in the trade contract or pro forma invoice.
- Date of POF Preparation/Circulation: Banks require POFs that must not be more than 30 to 90 days old .
- Liquidity Confirmation: The funds should be “liquid,” which can be in the form of cash or cash equivalents. It should not involve any kind of long-term investments, such as real estate, except for immediate disposal of funds.
- Signature and Stamp from Bank Officer: A digital signature would rarely be sufficient to ensure large-scale trading, while an official stamp and digital certificate would be required.
2. Blocked Funds: The Final Layer of Security:
Although a POF demonstrates the funds’ availability for payment, Blocked Funds confirm the allocation of the funds for the seller’s account reception. Essentially, in the Blocked Funds scheme, commonly organized in the Blocked Funds Letter, there is a “hold” placed on certain funds in the buyer’s account.
How It Works :
- Agreement: The agreement is reached between the buyer and the seller regarding the amount of money to be held back and the terms of release (for instance, the release of the money when the goods are shipped).
- Instruction: The buyer asks their bank to block a particular amount. This is usually CIMB, for instance, in Malaysia, and Kasikornbank in Thailand.
- Certification: The bank sends a notice to the seller’s bank, attesting to the special receipt status and non-withdrawability of these funds until a certain time or condition is fulfilled.
Just Credit Solutions utilizes this mechanism specifically in the Malaysia and Thailand trade of goods such as commodities (for example, “rubber or palm oil”), where market volatility is critical for ensuring payment certainty .
3. Local Nuances: Malaysia vs. Thailand :
Trading between these two countries often utilizes the Local Currency Settlement Framework (LCSF), which enables direct transactions in MYR and THB without using USD.
- In Malaysia: Bank Negara Malaysia (BNM) has very rigid “Know Your Customer” (KYC) practices. If the POF arrangement involves a third-party financier, extensive documentation is required from Malaysian banks to verify the “Source of Wealth” to ensure that money laundering does not occur.
- In Thailand: A “Purpose Code” has to be specified by the Bank of Thailand when making any kind of inward or outward remittance. When applicants use POFs to buy properties or acquire businesses, an FET form must be completed by the bank to monitor the incoming flow of funds.
4. Key Differences at a Glance:
Feature | Proof of Funds (POF) | Blocked Funds:
- Purpose | To demonstrate financial capability | To ensure availability for a specific deal .
- Access | The account holder can spend the funds | The funds are “frozen” for a specific time period .
- Document Type | Bank statement or comfort letter | Formal Blocked Funds Letter or MT799 .
- Usage | First phases of a deal (LOI) | Stages of closing or execution .
5. Tips for a Seamless Transaction:
To facilitate acceptance by banks in the countries in and around Southeast Asia for your POF or Blocked Funds document, you should:
- Utilize SWIFT Messages : When involving a high-value transaction, it is always preferable that communication between the banks be done through a SWIFT MT799 (unrated message for proof of funds) or a SWIFT MT760 (formal guarantee letter). This is a more credible option than a PDF document sent from a personal email.
- Match the Currency: In the case of Malaysian Ringgit (MYR) currency in the contract, it is advisable to submit the POF in the same currency or the most stable currency, which in this case is USD.
- Check Validity: The bank representative signing the agreement needs to be verified as authorized to sign the agreement for “International Trade” or “Treasury Services, “ as audits sometimes question the authenticity of signatures by retail bank managers.
Here are the points on proof of funds in Malaysia and Thailand:
Thailand:
- Cash is preferred, but credit cards and bank statements may be accepted
- Varies depending on individual circumstances
Malaysia:
- Varies depending on visa type and individual circumstances
- Check with authorities for specific requirements
Conclusion:
The ability to deal with the financing aspects of Malaysia and Thailand involves much more than having deep pockets. It requires meticulous documentation that must conform to the region’s requirements . By providing your international business partners with a convincing Proof of Funds statement or initiating a Blocked Funds agreement, you signal that you are a trustworthy counterpart.