Legal Definitions - foreign draft

A foreign draft is a type of financial instrument, similar to a check, that involves parties or payment locations in different countries. More broadly, a "draft" is an unconditional written order from one party (the "drawer") to another party (the "drawee"), instructing the drawee to pay a specific sum of money to a third party (the "payee") or to the bearer, either on demand or at a specified future date.

What makes a draft "foreign" is its international character. This typically means:

• The drawer and the drawee are located in different countries.
• The draft is drawn in one country but is payable in another country.
• The currency of the draft is different from the currency of the country where it is drawn or where the drawer resides.

Foreign drafts are commonly used in international trade and finance to facilitate payments across borders, providing a secure and verifiable method for transferring funds.

Examples of Foreign Drafts:

• International Business Transaction: An electronics distributor in the United States purchases a large shipment of components from a manufacturer in South Korea. To pay for the goods, the U.S. distributor instructs their bank to issue a foreign draft, payable in Korean Won, to the South Korean manufacturer. The draft is drawn on a U.S. bank but is payable through a correspondent bank in South Korea.

  This illustrates a foreign draft because the drawer (U.S. distributor's bank) and the payee (South Korean manufacturer) are in different countries, and the payment is made in a foreign currency (Korean Won), facilitating an international trade transaction.

• Sending Funds to a Relative Abroad: A person living in Canada wants to send money to their elderly parent residing in Portugal to help with living expenses. They visit their Canadian bank and request a foreign draft made out in Euros, payable to their parent. The Canadian bank issues the draft, which can then be mailed to Portugal and deposited into the parent's local bank account.

  This demonstrates a foreign draft because the drawer (Canadian bank) and the payee (parent in Portugal) are in different countries, and the draft is issued in a foreign currency (Euros), providing a secure way to transfer funds internationally.

• Settling Inter-Company Debt: A subsidiary of a multinational corporation, located in Australia, owes money to its parent company's headquarters in the United Kingdom for shared services. The Australian subsidiary's finance department issues a foreign draft, drawn on an Australian bank, payable in British Pounds Sterling to the parent company's bank account in London.

  This example highlights a foreign draft as it involves entities (Australian subsidiary and UK parent company) in different countries, and the payment is made in a currency (British Pounds Sterling) foreign to the country where the draft is issued, streamlining inter-company financial settlements across borders.