Pre-shipment Inspection Agency

Pre-shipment inspection, also called preshipment inspection or PSI, is a part of supply chain management and an important and reliable quality control method for checking goods' quality while clients buy from the suppliers.

It ensures that the production complies with your specifications and/or the terms of your purchase order or letter of credit. The Final Random Inspection (FRI), or Pre Shipment Inspection (PSI), checks finished products when at least 80% of your order has been produced and export-packed. Samples are selected at random, according to standards and procedures.

This way the buyer makes sure, he gets the goods he paid for.

Although increasing numbers of clients would like to collect suppliers' information from the Internet, this contains high risks because it is not a face-to-face transaction, and Internet phishing and fraud can corrupt it. Pre-shipment inspection can greatly avoid this risk and ensure clients get quality products from suppliers.

Process

The pre-shipment inspection is normally agreed between a buyer, a supplier, and a bank, and it can be used to initiate payment for a letter of credit. A PSI can be performed at different stages:

• Checking the total amount of goods and packing
• Controlling the quality and/or consistency of goods
• Checking of all documentation, including test reports and packaging list
• Verifying compliance with the standards of the destination country (e.g. ASME or CE mark)

The first stage is often performed by the transport company, but for the latter two stages a proper inspection company is needed. Similarly, if between the buyer and seller money transfer via a letter of credit is agreed upon, it is necessary to assign a reputable inspection company. In case of the letter of credit, after inspection of the goods, an inspection certificate is sent to the bank issuing the letter of credit and the buyer, initiating the money transfer.

46.A is a clause in the Letter of Credit (LC), that expresses the required documents that shall be provided to the bank by the seller. It is mandatory for any fund transfer. So, one of the subjects that can be expressed in 46.A clause is: "The original inspection certificate shall be issued by independent third party pre-shipment inspection company not sooner than the bill of lading date and the inspection shall be done by "the name of inspection agency" and certifying that: "The quality, quantity, and the packing of the goods dispatched are strongly conforming with provisions of the goods stated in the associated proforma invoice (PI), the terms of Letter of Credit and any attachments built thereto as submitted to "name of third party pre-shipment inspection agency" by the buyer". The clause 46.A expresses lots of documents that shall be provided to the bank to initiate payment. The certificate of inspection is simply one of them. The statement quoted above must be written exactly like this within the certificate of Inspection. Even if the original document (Letter of Credit) contains a spelling error, it shall be written in the same form. Any change in this wording will be disapproved by the bank and the funds will not be transferred to the seller. The inspection agency will submit an inspection certificate once the manufacturer/seller submit them with the following documents: Certificate of Origin (COO) and Packing List (PL). Based on above listed documents; altogether, they will issue a certificate and submit it to the manufacturer/seller. Finally, the manufacturer/seller will collect all mentioned documents and present them to the bank in order to initiate the payment.

Inspection companies are classified in two classes:

1. Free-market companies: These are privately owned companies, which sell their services to the market. Danger with these might be, especially if it is a smaller company, that they might be paid as well by the manufacturer, thus working in his interest.
2. State owned inspection companies: Only very few companies operating on the market are state-owned or partly state-owned. The shareholding of governmental institutions guarantees the independence and objectivity.

A higher form of the PSI is called expediting, in this the dates of delivery and the production are controlled as well.

Some countries, like Botswana, require PSIs for all goods entering the country in order to fight corruption. In these cases the PSI must be performed by the company designated by the country.

PSI and corruption charges

The Worldbank recommends pre-shipment inspections (PSI) as a means to fight corruption especially in developing countries. Most known is the payment to the then husband of Pakistani president Benazir Bhutto, Asif Ali Zardari. Further irregularities were published about the contracts with Paraguay and the Philippines.