Ozgur Eker (CDCS) – Page 25 – Letter of Credit Consultancy Services

Means of Conveyance and Mode of Transport

Ozgur Eker (CDCS) How to Work With a Letter of Credit, Letter of Credit Basics, Logistics 11 June 20187 April 2019Logistics, Means of Conveyance, Modes of Transport, Partial Shipment, Transshipment

Modes of Transport is a term used to distinguish substantially different ways to perform transport.

The most frequently used modes of transport in international trade are air transportation, land transportation, rail transportation, sea transportation and multimodal transportation.

Means of Conveyance is a term describing something that serves as a means of transportation, such as a vessel, truck, aircraft etc.

On this page, I will try to explain two important logistics terms: modes of transport and means of conveyance and their applications under the letter of credit rules.

Modes of Transport in Letters of Credit:

Modes of transport term used in connection with the determination of the multimodal transport documents under the letter of credit transactions.

Multimodal transportation is the movement of one unit load from origin to destination by several modes of transportation under one document without breaking up the unit load. (1)

According to the letter of credit rules, if a transport document covers at least two different modes of transport, then it is regarded as a multimodal bill of lading.

The title of the transport document is not important.

UCP 600 Article 19 – Transport Document Covering at Least Two Different Modes of Transport
a. A transport document covering at least two different modes of transport (multimodal or combined transport
document), however named,…

Example: A letter of credit asks for a full set of shipped on board multimodal ocean bills of lading marked freight payable at destination made out to the order of issuing bank marked notify applicant.

Transport Document: The bill of lading shows port to port sea shipment between a German port to Djibouti Port and a land or rail transport between Djibouti Port to Modjo Dry Port. The presented document is a multimodal bill of lading according to the letter of credit rules, regardless of the title of the transport document.

Means of Conveyance in Letters of Credit:

Means of conveyance term used in connection with the determination of the transshipment and partial shipments under the letter of credit transactions.

Transshipment:

According to the letter of credit rules transhipment means unloading from one means of conveyance and reloading to another means of conveyance (whether or not in different modes of transport) during the carriage that takes place between the route indicated in the credit.

For example, under sea shipments transhipment means unloading from one vessel and reloading to another vessel during the carriage from the port of loading to the port of discharge stated in the credit.

According to the letter of credit rules transhipment can be occurred only if,

happened during the carriage that takes place between the route indicated in the credit.
cargo is unloading from one means of conveyance and reloading to another means of conveyance (whether or not in different modes of transport).

Partial Shipments:

According to the letter of credit rules, a presentation consisting of one or more sets of transport documents evidencing shipment on more than one means of conveyance within the same mode of transport will be regarded as covering a partial shipment, even if
the means of conveyance leave on the same day for the same destination.

References:

Shipping and Incoterms, Practice Guide, UNDP Practice Series, Page: 6

Partial Acceptance of Amendments

Ozgur Eker (CDCS) How to Work With a Letter of Credit, Letter of Credit Basics 9 June 20187 April 2019Amendment, Beneficiary

According to the letter of credit rules, the beneficiary should communicate its acceptance of the amendment to the bank that advised such amendment.

The beneficiary should give notification of acceptance or notification of rejection of an amendment.

If the beneficiary fails to give such notification of acceptance, a presentation that complies with the credit and to any not yet accepted amendment will be deemed to be notification of acceptance by the beneficiary of such amendment.

As of that moment the credit will be amended.

But, what happens if a beneficiary of a letter of credit partially accepts an amendment?

Real Life Example: Kuldeep is Asking This Question From India

Question: We have opened a confirmed 100% irrevocable lc at sight to our supplier in China on 28.January.2014 from our local bank in India.

Just after the issuance of the letter of credit our supplier contacted us for demanding more shipment period.

We amend the letter of credit by extending the latest date of shipment and expiry date.

One month later, our supplier, who is the beneficiary of the commercial letter of credit, got in touch with us again and requested another extension of the shipment period. We agreed and amended the letter of credit second time.

However the exporter again demanded from us more time to shipment. This time we add additional conditions to our amendment in addition to extension of latest date of shipment and date of expiry of the credit.

The seller accepted some clauses in the 3rd amendment and rejected others.

We have warned our supplier that partial acceptance of amendments is not allowed according to the UCP 600.

We told him that partial acceptance of amendments means the rejection of that particular amendment altogether. Our supplier denied our requests and insisted on his stance.

What we would like to know is that whether our letter of credit expired or not? You can find latest date of shipment dates and expiry dates corresponding to our amendments on above figure.

Answer: Partial acceptance of an amendment is not allowed and will be deemed to be notification of rejection of the amendment.

The beneficiary neither accepted the 3rd amendment nor they have made any shipment before the latest date of shipment or presented the documents before the expiry date.

The letter of credit has expired on 21.June.2014.

What is the effectiveness date of an amendment?

Effectiveness Date of an Amendment

Ozgur Eker (CDCS) How to Work With a Letter of Credit, Letter of Credit Basics 9 June 20187 April 2019Amendment, Amendment Fee, Beneficiary, Issuing Bank

Letter of credit is an irrevocable and conditional payment obligation of the issuing bank.

As the letter of credit is irrevocable, its terms and conditions can not be changed without the consent of the beneficiary.

The beneficiary may find some of the terms and conditions of the credit unacceptable. Under such circumstances, the beneficiary has three options,

leaving the deal by not utilizing the letter of credit
making shipments with the original letter of credit by taking discrepancy risk
seeking an amendment by applying to the applicant.

Amendment in a letter of credit, a change in terms and conditions of the letter (e.g., extension of the letter of credit´s validity period, shipment deadline, etc.) usually to meet the needs of the seller. (1)

But what is the effectiveness date of an amendment?

The question comes from Vincent, who is asking a question regarding the effectiveness date of an amendment.

Here is his question as arrived by e-mail.

If the bank issues an amendment directly to the beneficiary decreasing the letter of credit amount without indicating an effective date for the amendment, is the decrease effective the date the amendment is issued or is the decrease effective the date the beneficiary agrees to the amendment.
What is your opinion, with of course no responsibility for providing such an opinion.
Regards
Vincent

Dear Vincent ,

In order to find the right answer to your question we need to look at the related part of the letter of credit rules.

Amendments are explained at article 10 in UCP 600.

UCP 600 states that “a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary.”

UCP 600 article 10 continues to clarify effectiveness date of an amendment for the issuing bank and the confirming bank as follows “an issuing bank is irrevocably bound by an amendment as of the time it issues the amendment.

A confirming bank may extend its confirmation to an amendment and will be irrevocably bound as of the time it advises the amendment.”

On the next couple of phrases explains the position of a beneficiary against amendments.

“The terms and conditions of the original credit (or a credit incorporating previously accepted amendments) will remain in force for the beneficiary until the beneficiary communicates its acceptance of the amendment to the bank that advised such amendment.”

As UCP 600 clearly indicates letter of credit will remain in force as is for the beneficiary until the beneficiary communicates its acceptance of the amendment.

But how beneficiaries can communicate their acceptance to amendments. This would be a good discussion topic for a future page.

Is it allowed partial acceptance of amendments under the letter of credit rules?

References:

Dictionary of International Trade, Amendment, https://www.globalnegotiator.com/

Clean on Board Notation on Bills of Lading

Ozgur Eker (CDCS) Bill of Lading, How to Work With a Letter of Credit, Letter of Credit Basics, Letter of Credit Documents 9 June 20187 April 2019Bill of Lading, Clean Bill of Lading, Multimodal Bill of Lading, Shipped On Board, Unclean Bill of Lading, Unclean Bill of Lading Discrepancy

What is clean on board?

A clean transport document or a “clean on board” clause relates to the condition of the goods and/or packaging.

If, on receipt of the goods, the carrier finds that the packaging or the goods are defective, he will make a notation on the transport document to this effect to avoid being subsequently held responsible for such defect.

Hence, the document is no longer clean, and any objections or claims for damages will have to be directed to the consignor. (1)

If the word “clean” appears on a bill of lading and subsequently it has been deleted, the bill of lading will not be deemed to be claused or unclean unless it specifically bears a clause or notation declaring that the goods or packaging are defective.

Clauses or notations on the bills of lading, which expressly declare a defective condition of the goods or packaging are not acceptable by the letter of credit rules.

Clauses or notations which do not expressly declare a defective condition of the goods or packaging (e.g., “packaging may not be sufficient for the sea journey”) do not constitute a discrepancy.

However, a statement on the transport document declaring that the packaging “is not sufficient for the sea journey” would not be acceptable.

One of my reader is asking below question from Belgium. She is director of a shipping company. She would like to know more about clean on board notations on bills of lading.

We have a persistent shipper who insists to have the word ‘clean’ added before shipped on board in their B/Ls. Have tried to explain that a B/L without clauses/remarks is a clean B/L. Can you refer to a certain part on your website where I can find official explication to convince them ?
Thanks in advance.
director of XYZ Shipping Company

Dear Director,

I can suggest you to inform below UCP 600 article to your shipper.

UCP 600 – Article 27

Clean Transport Document

A bank will only accept a clean transport document. A clean transport document is one bearing no clause or notation expressly declaring a defective condition of the goods or their packaging. The word “clean” need not appear on a transport document, even if a credit has a requirement for that transport document to be “clean on board”.

UCP 600 defines below documents as transport documents :

Transport Document Covering at Least Two Different Modes of Transport
Bill of Lading
Non-Negotiable Sea Waybill
Charter Party Bill of Lading
Air Transport Document
Road, Rail or Inland Waterway Transport Documents
Courier Receipt, Post Receipt or Certificate of Posting

References:

Documentary credits in practice, Reinhard Längerich, Second edition – 2009, Published by: Nordea, Page: 146
Shipping and Incoterms, Practice Guide, UNDP Practice Series, Page:12

Complying Presentation

Ozgur Eker (CDCS) How to Work With a Letter of Credit, Letter of Credit Basics 5 June 20181 June 2023Complying Presentation

What is a Complying Presentation?

If issuing bank determines that the presentation is complying then the issuing bank must honor. If credit is available by sight payment you should expect to receive your funds within couple of days after the end of the document evaluation period, which is 5 banking days.

Malik from Pakistan is asking a question regarding the responsibilities of the banks against presentations of documents. Below you can find his question.

Dear Sir,

I request you to please answer the following questions for my better understanding, and also please give example if possible.

In how many days Import L/C opening bank should send the payment or discrepancies to beneficiary of Sight L/C. Some persons saying 3 days and some saying 5 days, which one is correct under UCP 600.

Dear Malik,

A nominated bank, a confirming bank and the issuing bank must determine whether presentation is complying or not maximum five banking days following the day of presentation.

This is governed under UCP 600 article 14-b as follows:

“A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank shall each have a maximum of five banking days following the day of presentation to determine if a presentation is complying.”

There are two options available for the banks after they receive a presentation:

Option 1 : Determining a non-complying presentation
Option 2 : Determining a complying presentation

Non-Complying Presentation:

If issuing bank determines that the presentation is not complying then issuing bank may refuse to honor.

The issuing bank decides to refuse to honor, it must give a single notice to that effect to the presenter, in other terms to the beneficiary.

Once the issuing bank sends its single notice to the beneficiary within a maximum of five banking days period following the day of presentation, then its responsibility will be ended to the beneficiary under a non-complying presentation in terms of UCP 600 rules.

Complying Presentation:

If issuing bank determines that the presentation is complying, then the issuing bank must honor.

If credit is available by sight payment, you should expect to receive your funds within couple of days after the end of the 5 banking day period.

Banks in Letter of Credit

Ozgur Eker (CDCS) Advising Bank, Banks, Confirming Bank, Issuing Bank, Nominated Bank, Reimbursing Bank 5 June 20187 April 2019Advising Bank, Banks, Confirming Bank, Issuing Bank, Nominated Bank, Reimbursing Bank

Banks play a key role in letters of credit transactions. They start and end the L/C operations.

They also decide either refusal of the documents or acceptance of the presentation. Without banks we cannot talk about any L/C transactions.

Different types of banks exist in a letter of credit transaction and each of them are functioning various roles according to the authorizations granted to them.

Issuing bank, advising bank, nominated bank, confirming bank and reimbursement bank are the main banks that exist in a standard international documentary credit payment.

On this post, you can find detailed information in regards to the banks in letters of credit, especially their roles and responsibilities.

Which Banks Involved in a Letter of Credit Transaction?

Issuing bank is the core financial institution in a documentary credit process.

At least an issuing bank must be present for the existence of an L/C payment. All other banks shall be added to the transaction as circumstances required.

For example, the issuing bank will be using an advising bank’s services to advise the letter of credit to the beneficiary.

L/C may be issued so that it is available with a nominated bank which is located in the same country as the beneficiary.

Additionally, the issuing bank may demand from the nominated bank to add its confirmation to the letter of credit.

Confirming bank can claim reimbursement from the reimbursement bank against a complying set of documents.

As I have shown above, all other banks, but the issuing bank, can be added to the letter of credit transaction, if the issuing bank needs to use that particular bank’s services.

Let me explain the banks in a letter of credit transaction one by one more in detail below.

Issuing Bank’s Roles and Responsibilities in A Documentary Credit Transaction:

Issuing bank is the main bank in a letter of credit transaction.

Letter of credit is opened by the issuing bank mostly on behalf of the applicant.

Rarely issuing banks open letters of credit on their own name without having been instructed by the applicants.

All other banks are acting according to the instructions and authorization that they have received from the issuing bank.

For more details please click here.

Advising Bank’s Roles and Responsibilities in A Documentary Credit Transaction:

Advising bank is the bank that advises the letter of credit to the beneficiary.

Advising bank acts at the request of the issuing bank.

In most cases advising bank and beneficiary locate at the same country which is contrary to the issuing bank.

This is why issuing banks use another bank’s services to advice the letter of credit to the beneficiaries.

Advising bank has no obligation for payment.

For more details please click here.

Nominated Bank’s Roles and Responsibilities in A Documentary Credit Transaction:

Nominated Bank is the bank with which the letter of credit is available.

In some situations issuing banks open letters of credit that is available with any bank in beneficiaries countries. These kind of letters of credit are known as “freely negotiable l/cs”.

Nominated bank’s payment obligation is not defined in strict terms.

Beneficiaries could get their payment from nominated banks with recourse basis.

For more details please click here.

Confirming Bank’s Roles and Responsibilities in A Documentary Credit Transaction:

Confirming bank is the bank that adds its confirmation to a letter of credit.

Confirming banks could only add their confirmation if the issuing banks authorize them to do so.

Confirming bank and nominated bank are expected to be the same bank, although it is not a necessity according to UCP 600.

Confirming bank’s payment obligation is defined in strict terms. Beneficiaries could get their payment from confirming banks without recourse basis.

For more details please click here.

Reimbursing Bank’s Roles and Responsibilities in A Documentary Credit Transaction:

Reimbursing bank is the bank instructed or authorized to provide reimbursement to the nominated bank or confirming bank.

Reimbursing banks provide reimbursement to above mentioned banks according to the reimbursement authorization issued by the issuing bank.

Reimbursing banks are big and globally reliable financial institutions.

For more details please click here.

Reimbursement and Reimbursing Bank

Ozgur Eker (CDCS) Banks, How to Work With a Letter of Credit, Letter of Credit Basics, Reimbursing Bank 4 June 201822 June 2020Banks, Reimbursement, Reimbursing Bank, URR 725

What Does Reimbursement Mean?

Reimbursement is defined as a compensation paid to someone for an expense.

In order to be reimbursed by another person or organisation, first of all you have to make some expenses, then you will be qualified for a reimbursement.

The same logic apply to the reimbursement as a trade finance term.

A confirming bank or a nominated bank first honors or negotiates against a complying presentation under a letter of credit and then they will be reimbursed by the reimbursing banks in accordance with the issuing banks authorization.

Reimbursing Bank:

Reimbursing bank is the bank that, at the request of the issuing bank, is authorized to pay, or accept and pay time draft under a documentary credit in accordance with UCP 600 article 13 or if incorporated, the ICC uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits (URR 725). (1)

What is the Function of a Reimbursing Bank Under a Letter of Credit?

There are two possible reasons that makes a reimbursing bank necessary under a documentary credit transaction.

First reason may be that the confirming bank does not trust the issuing bank in terms of risk issues and demands more security. In this situation presence of the reimbursing bank is a requirement for the confirmation.

Without receiving a reimbursement undertaking from the reimbursing bank, the confirming bank may elect not to add its confirmation to the credit.

Note: Please keep in mind that confirmation process is a commercial decision and no bank is forced to add its confirmation to any letter of credit. Please read my article Confirmation and Confirmed Letter of Credit for more detail.

Second reason could be that the issuing bank and nominated bank (in case confirmed letter of credit confirming bank) do not have an account relationship, as a result they may be requiring a third bank’s service for the settlement.

What are the Rules Covering Bank-to-Bank Reimbursements Under Letters of Credit?

There are two options for the reimbursement rules.

Reimbursements must be governed either by URR 725 or UCP 600 article 13 for the letters of credit which are opened according to latest documentary credit rules.

URR 725 – The Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits – ICC Publication No. 725: This is a small size booklet published by ICC that specifically governs the bank-to-bank reimbursements. If issuing bank would like to be the reimbursement is subject to URR 725, then it must make a reference at the swift message when issuing a letter of credit.

Issuing bank put a reference to MT700 swift message under field “40E- Applicable Rules” as “UCPURR LATEST VERSION” which means that letter of credit is subject to latest version of letter of credit rules (UCP 600) and latest version of bank-to-bank reimbursements rules (URR 725).

Note: Additionally the reimbursement authorization should expressly indicate that it is subject to URR 725 – The Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits.

UCP 600 Article 13: If a credit does not state that reimbursement is subject to the ICC rules for bank-to-bank reimbursements, the UCP 600 article 13 applies.

Some important definitions from URR 725 – The Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits:

“Claiming bank” means a bank that honours or negotiates a credit and presents a reimbursement claim to the reimbursing bank. “Claiming bank” includes a bank authorized to present a reimbursement claim to the reimbursing bank on behalf of the bank that honours or negotiates.
“Issuing bank” means the bank that has issued a credit and the reimbursement authorization under that credit.
“Reimbursing bank” means the bank instructed or authorized to provide reimbursement pursuant to a reimbursement authorization issued by the issuing bank
“Reimbursement Authorization” means an instruction or authorization, independent of the credit, issued by an issuing bank to a reimbursing bank to reimburse a claiming bank or, if so requested by the issuing bank, to accept and pay a time draft drawn on the reimbursing bank.
“Reimbursement Undertaking” means a separate irrevocable undertaking of the reimbursing bank, issued upon the authorization or request of the issuing bank, to the claiming bank named in the reimbursement authorization, to honour that bank’s reimbursement claim, provided the terms and conditions of the reimbursement undertaking have been complied with.
“Reimbursement Claim” means a request for reimbursement from the claiming bank to the reimbursing bank.

Reimbursement Transaction Under a Letter of Credit:

Issuing bank issues the letter of credit and transmits it to the nominated bank via swift message.
Issuing bank gives reimbursement authorization to reimbursing bank.
Reimbursing bank issues its reimbursement undertaking and transmits it to the nominated bank via swift message.
Nominated bank advices the letter of credit to the beneficiary. (please keep in mind that step 3 and step 4 may be change their sequence)
Beneficiary presents documents to the nominated bank.
Nominated bank checks the documents and negotiate upon a complying presentation.
Nominated bank sends it reimbursement claim to the reimbursing bank. Reimbursing bank reimburse nominated bank according to terms and conditions of the reimbursement undertaking.
Nominated bank send documents to the issuing bank.
On the final stage issuing bank and reimbursing bank arrange settlement between themselves. Issuing bank gets the letter of credit amount from the applicant and releases original shipment documents.

References:

The Guide to Documentary Credits” written by Garry Collyer, 3rd Edition, Page : 36)

What Does “With Recourse” and “Without Recourse” Mean in International Finance?

Ozgur Eker (CDCS) Banks, Confirming Bank, How to Work With a Letter of Credit, Letter of Credit Basics, Nominated Bank 2 June 20187 April 2019Confirmation, Confirming Bank, Discounting a Letter of Credit, Negotiation, Nominated Bank, With Recource, Without Recource

What does "with recourse" and "without recourse" mean in international letter of credit transaction?

Recourse means the right to claim a refund of an amount paid in connection with the negotiation of a documentary credit or the discounting of a bill of exchange. (1)

With recourse and without recourse are two terms defining whether or not the paying bank shall claim refund from the beneficiary in case it could not get reimbursement from the issuing bank.

On this post I will be answering below questions with the help of the graphic illustrations.

What is the meaning of with recourse term in international trade finance terminology?
What is the meaning of without recourse in international trade finance terminology?
Which banks pay with recourse and which bank pay without recourse basis?

What is the Meaning of With Recourse and Without Recourse Terms in International Trade Finance Terminology?

With recourse term defines the situation in which the paying bank will be able to claim refunds from the beneficiary in case the letter of credit documents are not paid by the issuing bank.

In general, the nominated bank or the negotiated bank pay the letter of credit amount to the beneficiaries with recourse terms.

Without recourse term defines the situation in which the paying bank will not be able to claim refunds from the beneficiary in case the letter of credit documents are not paid by the issuing bank.

In general, the confirming bank pay the letter of credit amount to the beneficiaries without recourse terms.

Important Note: The nominated bank may also pay to the beneficiary against discrepant documents with recourse basis.

These types of payments should be covered with a formal indemnity.

References:

Documentary Credits, Nordea Trade Finance, Page: 305

Confirming Bank

Ozgur Eker (CDCS) Banks, Confirming Bank 2 June 20187 April 2019Banks, Confirmation, Confirmation Fee, Confirmed Letter of Credit, Confirming Bank

If you would like to export your goods to one of the high risk countries and you would like to eliminate default risk of the importer’s bank, then you may seek to have your letter of credit confirmed by one of the prime banks.

Confirmation is a security tool, which is develop to reduce exporters risks in letters of credit transactions.

In theory, an exporter should be able to get his money from the confirming bank against a complying presentation.

However, in real life, in some cases even the confirming banks do not pay the credit amount to the exporters, until they have been reimbursed by the issuing banks. (For further information regarding confirming banks behavior, even if the presentation is complying, please read my article titled : Confirmed L/C at Sight.)

On this post I will try to explain you one of the most frequently used term in international letter of credit transactions: Confirming Bank.

Here are the headlines of the article:

What is a confirming bank?
What are the responsibilities of the confirming bank?
Which UCP 600 article regulates the confirming banks responsibilities?
What are the differences between the confirming bank and advising bank?
What are the differences between the nominated bank and confirming bank?
Case Study: Confirming bank’s payment responsibility when documents are presented with discrepancies.

What is a Confirming Bank?

Confirming bank means the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request.

What are the Responsibilities of the Confirming Bank?

According to the latest version letter of credit rules, if the stipulated documents are presented to the confirming bank or to any other nominated bank and that they constitute a complying presentation, the confirming bank must:

honour, if the credit is available by sight payment, deferred payment or acceptance with the confirming bank;
honour, if the credit is available by sight payment with another nominated bank and that nominated bank does not pay;
honour, if the credit is available by deferred payment with another nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity;
honour, if the credit is available by acceptance with another nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity;
honour, if the credit is available by negotiation with another nominated bank and that nominated bank does not negotiate.
negotiate, without recourse, if the credit is available by negotiation with the confirming bank.

Which UCP 600 Articles Regulate the Confirming Bank’s Responsibilities?

UCP 600 article 8 defines the roles and responsibilities of the confirming bank. Additionally confirming bank’s liabilities have been described in numerous articles under UCP 600.

What are the Differences Between the Confirming Bank and the Advising Bank?

The advising bank has no payment obligations under the letter of credit rules. The advising bank has two main responsibilities: authenticating incoming letters of credit and transmitting them to the beneficiaries as a whole, intact.

Additionally, an advising bank has no connection with the letter of credit availability or the place of letter of credit expiry.

On the other hand the confirming bank has to pay the letter of credit amount to the beneficiary against a complying presentation, even if nominated bank or issuing bank refrain to pay.

In case the credit is issued that is available by negotiation with the confirming bank, then the confirming bank must negotiate, without recourse.

What are the Differences Between the Nominated Bank and the Confirming Bank?

First of all, please kindly be noted that according to the letter of credit rules it is possible that the nominated bank and the confirming bank could be different banks.

But in practice a bank would not add its confirmation to the letter of credit, if it is not available with itself.

As per the letter of credit rules, the confirming bank has clear payment obligations. If the presentation is complying, then the confirming bank must honor.

It is a very straight forward definition.

But nominated banks may or may not pay against complying presentations. If they do not, then either the confirming bank or the issuing bank must pay.

Query:
A German exporter ships 2 containers of process pumps to an importer located in Libya. Due to the internal turmoil in Libya, the issuing bank face difficulties to honor the presentation.
The letter of credit was confirmed by another bank in UK, but due to the discrepancies found on the documents the confirming bank refrain to pay the L/C amount.
The exporter explains the situation and asks the following question: “We think that a confirmed letter of credit means that the confirming bank gives his definitive undertaking in addition to that of the issuing bank, provided that the stipulated documents are presented to the confirming bank and that the terms and conditions of the documentary credit are complied with, either to pay at sight, or to accept drafts and to pay them at their maturity, or to pay on a determinable date if there is a deferred payment.”
But what happens;
1-) if documents are presented with discrepancies to the confirming bank, and the confirming bank notifies advice of refusal to the beneficiary/presenter in regards of the discrepancies, does the definitive undertaking of confirming bank cease to exist?
2-) if these documents are sent to issuing bank on an approval basis and the discrepancies are waived, does the confirming bank have to pay with its resources (or accept drafts or incur a deferred payment undertaking), or does it have to wait until it receives the funds from the issuing bank and then pay the beneficiary?
Analysis of the Case Study:
A confirmation of a letter of credit is, as you indicated, an undertaking from a bank in addition to the undertaking provided by the issuing bank. The UCP 600 states that the undertaking (confirmation) is subject to presentation of complying documents under the letter of credit.
Where documents are presented to the confirming bank, within the validity of their undertaking, and found to be discrepant, and the confirming bank provides a notice of refusal in accordance with the UCP, its undertaking would no longer exist in respect of that presentation (subject to the beneficiary being unable to correct the discrepancy(ies) within the credit timelines).
If the documents, on instructions of the beneficiary, are subsequently sent to the issuing bank on an approval basis and the discrepancies are waived, the confirming bank has no obligation to make payment unless it has indicated its willingness to do so at the time of providing its notice of refusal.
The presentation of discrepant documents to the confirming bank would end its obligation under the credit unless it has stated otherwise, and the fact that the issuing bank accepts a waiver of discrepancies would not further obligate the confirming bank. (Source:Official Opinion R520 / TA543 rev2)

Can the Confirming Bank Cancel Its Confirmation by Himself?

The confirming bank could not cancel its confirmation by himself, because the confirmation is an irrevocable undertaking of the confirming bank against the beneficiary of the letter of credit and another nominated bank, if it exists.

A confirming bank is irrevocably bound to honour or negotiate as of the time it adds its confirmation to the credit unless,

the beneficiary will not be making presentation withing the allowed time frame as stated in the credit, or
the beneficiary presented discrepant documents and could not remove discrepancy within the presentation period, or
the beneficiary is confirmed by a written statement with the confirming bank that the beneficiary will not be utilizing the letter of credit.

Must the Confirming Bank and the Beneficiary Locate in the Same Country?

Usually the confirming bank and the beneficiary are located within the same country, but there is no governing rule in the letter of credit rules that is forcing these two parties must be located in the same country.

As a result the beneficiary and the confirming bank may be located in different countries.

In practice, German banks confirm the credits issued in African countries such as Ethiopia, Nigeria, etc. for Non-German beneficiaries. The same structure applies for the French banks for the letters of credit issued in Senegal, Morocco, Algeria etc.

Does a Confirming Bank Must Add Its Confirmation to a Letter of Credit?

Adding a confirmation to a letter of credit is a commercial decision for the confirming bank.

As a result a confirming bank may or may not be adding its confirmation to a given letter of credit, based on solely its own decision.

But if the confirming bank decides to confirm, it will be irrevocably bound to honour or negotiate as of the time it adds its confirmation to the credit.

What Happens When a Confirmed Letter of Credit is Amended?

A confirming bank may extend its confirmation to an amendment and will be irrevocably bound as of the time it advises the amendment.

A confirming bank may, however, choose to advise an amendment without extending its confirmation and, if so, it must inform the issuing bank without delay and inform the beneficiary in its advice.

What Does Silent Confirmation Mean?

Under normal conditions, the confirming bank could add its confirmation to a letter of credit upon the issuing bank’s authorization or request.

If the confirming bank adds its confirmation to the credit without any request from the issuing bank, then this procedure will be called as a silent confirmation or unauthorized confirmation.

It is worth mentioning that silent confirmation is not covered under letter of credit rules.

Confirming banks pay letter of credit amount to the beneficiaries without recourse basis. Do you want to know more about without recourse term? Please click here for more information.

Nominated Bank

Ozgur Eker (CDCS) Banks, Nominated Bank, Nominated Bank 1 June 201818 April 2021Banks, Nominated Bank

Nominated bank is another important yet not well understood term in international letter of credit transactions.

May be the biggest contribution of this lack of understanding comes from the blur definitions of its roles and responsibilities comparing to the confirming bank, advising bank or issuing bank under the letter of credit rules.

On this post I will try to explain you one of the most challenging term in international letter of credit transactions: Nominated Bank.

Here are the headlines of the article:

What is a nominated bank?
What are the responsibilities of the nominated bank?
Which UCP 600 article regulates the nominated banks responsibilities?
What are the differences between the nominated bank and the advising bank?
What are the differences between the nominated bank and the confirming bank?

What is a Nominated Bank?

Nominated Bank means the bank with which the letter of credit is available or any bank in the case of a credit available with any bank.

What are the Responsibilities of the Nominated Bank?

According to the letter of credit rules a letter of credit must state the bank with which it is available.

Alternatively, it is possible to open a letter of credit to be available with any bank. These kinds of letters of credit are known as “freely negotiable letters of credit”.

The bank with which the letter of credit is available is defined as a nominated bank.

UCP 600 defines the responsibilities of a nominated bank in two main categories:

Payment Responsibility
Acceptance of Presentation Responsibility

Payment Responsibility:

Provided that the stipulated documents are presented to the nominated bank and that they constitute a complying presentation, the nominated bank should honor if the credit is available by sight payment, deferred payment or acceptance with a nominated bank.

Alternatively, the nominated bank can negotiate the complying presentation if letter of credit is available by negotiation with the nominated bank.

But it is worth mentioning that unless a nominated bank is the confirming bank, an authorization to honor or negotiate does not impose any obligation on that nominated bank to honor or negotiate, except when expressly agreed to by that nominated bank and so communicated to the beneficiary.

In daily practice, nominated banks rarely pay to the beneficiaries against the complying presentation.

What they commonly do is just to receive the documents from the beneficiaries and send them to the issuing banks by demanding reimbursement either from the issuing bank or reimbursing bank.

They transfer the letter of credit amount, which they have received from one of these two banks to the beneficiaries.

Acceptance of Presentation Responsibility:

If a letter of credit is available with a nominated bank, then the authorized nominated bank should accept the presentation of the beneficiary.

Once again please kindly keep in mind that the acceptance of presentation does not give any payment obligation to the nominated bank.

By presenting documents to a bank in their own country, beneficiaries could complete their presentations faster. This is one of the biggest advantages of using a nominated bank for the beneficiaries.

Case Study: Presentation of Documents Where the Letter of credit is Available with the Issuing Bank

———————————- Analysis of the Example ————————————-

The letter of credit is available with the issuing bank in Germany. The beneficiary is located in Hong Kong.

The beneficiary has to collect all required documents and complete the presentation within 21 days after the date of shipment.

21 days of presentation period includes express courier transit time between Hong Kong and Germany.

The problem with such a letter of credit structure is that in case the issuing bank finds discrepancies on the documents, it would be almost impossible for the beneficiary to correct the documents and re-submit the corrected documents for a timely presentation.

On below figure you can see the difference between letter of credit which is available with the issuing bank and the nominated bank.

Which UCP 600 Article Regulate the Nominated Bank’s Responsibilities?

UCP 600 article 12 defines the roles and responsibilities of the nominated bank. Additionally nominated bank’s liabilities have been described in numerous articles under UCP 600.

What are the Differences Between the Nominated Bank and the Advising Bank?

The advising bank has no payment obligations under the letter of credit rules.

The advising bank has two main responsibilities: authenticating incoming letters of credit and transmitting them to the beneficiaries as a whole, intact.

Additionally, an advising bank has no connection with the letter of credit availability or the place of letter of credit expiry.

On the other hand the nominated bank is the bank with which the letter of credit is available, as a result the letter of credit expires at the counters of nominated bank.

Furthermore the issuing bank authorizes the nominated bank to honor or negotiate the complying documents that are presented to them.

What are the Differences Between the Nominated Bank and the Confirming Bank?

First of all, please kindly be noted that according to the letter of credit rules it is possible that the nominated bank and the confirming bank could be different banks.

But in practice a bank would not add its confirmation to the letter of credit, if it is not available with itself.

As per letter of credit rules the confirming bank has clear payment obligations.

If the presentation is complying, then the confirming bank must honor. It is a very straight forward definition.

But nominated banks may or may not pay against the complying presentations. If they do not, then either confirming bank or issuing bank must pay.

Case Study: Negotiation of a draft by a nominated bank, which is drawn under a letter of credit

Negotiation under letters of credit is an old “habit” which was invented long before even the first version of the UCP existed.

I am told that negotiation was used by London merchant bankers when UK exporters shipped goods covered by credits issued in Hong Kong or Shanghai.

At that time, credits were (normally) not advised through a bank (in London), and there was no nominated bank.

The presentation of documents was to be made at the counters of the issuing bank, which, after it examined and approved the documents, transferred the relevant amount to the beneficiary.

That took a long time. To assist the exporter – and of course to make money – the merchant banks offered to negotiate the documents. They discounted the bill of exchange, mostly with recourse. (“Negotiation” seen to be no benefit to beneficiaries, Reinhard Längerich, DCInsight Vol. 10 No.2 April – June 2004)

UCP 600 defines negotiation as follows:

“Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.”

I would like to show an example of the negotiation of a draft which is drawn under a letter of credit with the face value of EUR 100.000,00 as illustrated below.

ABN AMRO Bank is the nominated bank.

The beneficiary endorses the draft to ABN AMRO Bank, and ABN AMRO Bank discounts the draft by paying to the beneficiary EUR 95.000,00.

The transfer of the funds from the ABN AMRO Bank to the beneficiary constitutes a negotiation.

ABN AMRO Bank presents the draft and other letter of credit documents to the Issuing Bank.

If Issuing Bank determines that the presentation is complying, then the issuing bank must pay EUR 100.000,00 to ABN AMRO Bank.

If ABN AMRO Bank could not get the face value of the draft from the Issuing Bank, then ABN AMRO Bank may go back to Beneficiary to recover its EUR 95.000,00 payment.

ABN AMRO Bank, which is the nominated bank, discounts and pays the discounted letter of credit amount to the beneficiary with recourse basis. Do you want to know more about with recourse term? Please click here for more information.