Ozgur Eker (CDCS) – Page 26 – Letter of Credit Consultancy Services

Advising Bank

Ozgur Eker (CDCS) Advising Bank, Banks 1 June 20187 April 2019Advising Bank, Banks

Advising Bank is the bank that advises the letter of credit to the beneficiary. Advising banks act upon the request of issuing banks.

Generally, advising banks are located in the same country as beneficiaries. That is why issuing banks need their services.

Letters of credit are transmitted between banks via an online platform called Swift.

Swift platform is secure and fast, but it is expensive. That is why most of the exporters and importers do not have an access to the Swift platform.

In today’s international trade world, letters of credit are transmitted from issuing bank to the advising bank via swift platform and afterwards advising banks advise the credits to the beneficiaries other means of telecommunication such as email attachments of .tif or .html files. (1)

On this post I will try to explain you one of the most important concepts in letters of credit: Advising Bank.

Here are the headlines of the article:

What is an advising bank?
Why an issuing bank need to use another bank’s services in order to advise the letter of credit to the exporter?
What are the roles and responsibilities of the advising bank in a letter of credit transaction?
What are the differences between the nominated bank and advising bank?
How advising banks authenticate letters of credit before advising them to the beneficiaries?

What is an Advising Bank?

An advising bank means the bank that advises the letter of credit to the exporter at the request of the issuing bank.

An advising bank acts upon the issuing bank’s request to advise the letter of credit to the beneficiary.

Why an Issuing Bank Needs to Use an Advising Bank’s Services in Order to Advise the Letter of Credit to the Exporter?

An issuing bank needs to utilize an advising bank’s services just for practical reasons.

Exporters and importers are generally located in different countries in international business transactions.

In order to open a letter of credit, the importer applies to his bank which is located in his own country.

Once the letter of credit is issued, it must be conveyed to the exporter.

60-70 years ago issuing banks used to write down letters of credit on their corporate letterhead papers, signed and sent them to the beneficiaries via postal services.

As technology advances, first, tested telex messages replaced the paper form of the letters of credit. Later on authenticated swift messages replaced both tested telex and paper form of the letters of credit.

At the moment the vast majority of letters of credit issued by secure online swift platform.

Letter of credit issuance statistics via Swift platform. MT 700 Swift message statistics.

The Swift platform is used by banks and big corporations. Most of the small and medium size manufacturing companies and importers do not have an access to the swift platform.

As a result issuing banks have to use advising banks’ services when advising the letters of credit to the beneficiaries.

Advising banks and the beneficiaries are located at the same country.

Usually the advising bank has a business relationship with the exporter, because the exporter informs his advising bank preferences to the importer during the negotiation phase of the transaction with the help of the sales contracts or proforma invoices.

What are the Roles and Responsibilities of the Advising Bank in a Letter of Credit Transaction?

A letter of credit can be advised to an exporter via an advising bank.
According to the letter of credit rules, the advising bank has no payment responsibility against the exporter as long as the advising bank is not a confirming bank.
The advising bank advises the letter of credit and any amendment without any undertaking to honour or negotiate.
Advising bank has two main responsibilities against the beneficiary. Firstly, the advising bank must signify that it has satisfied itself as to the apparent authenticity of the letter of credit or amendment. Secondly, the advising bank must ensure that the advice of the letter of credit accurately reflects the terms and conditions of the credit or amendment received from the issuing bank.

It is also possible to use the services of another bank (“second advising bank”) to advise the letter of credit and any amendment to the beneficiary. According to the letter of credit rules first advising bank’s and second advising bank’s responsibilities are the same against to the beneficiary. By advising the credit or amendment, the second advising bank signifies that it has satisfied itself as to the apparent authenticity of the advice it has received and that the advice accurately reflects the terms and conditions of the credit or amendment received.
Issuing banks must advise the letter of credit and subsequent amendments to the beneficiary through the same advising bank. For example, if the letter of credit advised to the beneficiary by the Advising Bank A in country Y, subsequent amendments must be advised to the beneficiary by the same bank.

If a bank is requested to advise a credit or amendment but elects not to do so, it must so inform, without delay, the bank from which the credit, amendment or advice has been received.
If a bank is requested to advise a credit or amendment but cannot satisfy itself as to the apparent authenticity of the credit, the amendment or the advice, it must so inform, without delay, the bank from which the instructions appear to have been received. If the advising bank or second advising bank elects nonetheless to advise the credit or amendment, it must inform the beneficiary or second advising bank that it has not been able to satisfy itself as to the apparent authenticity of the credit, the amendment or the advice.

Can The Issuing Bank Advice the Letter of Credit to the Beneficiary Straightforward Without Using an Advising Bank’s Services?

According to the current letter of credit rules advising bank acts as an agent on behalf of the issuing bank.

As a result the issuing bank may choose to transmit the letter of credit to the beneficiary himself.

This would be the case especially in domestic letters of credit, where both the applicant and beneficiary are the customers of the issuing bank.

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

UCP 600 article 9 defines the roles and responsibilities of the advising bank.

Advising Bank’s Liabilities have been described in article 7 under UCP 500 which was the previous set of rules for the international letters of credit.

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

Nominated Bank

Nominated bank is the bank with which the letter of credit is available as a result letter of credit expires at the counters of nominated bank.
An issuing bank authorizes a nominated bank to honor or negotiate the complying documents that are presented to the nominated bank.

Advising Bank

Advising bank has no connection with the letter of credit availability or the place of letter of credit expiry.
Advising bank has no connection with the payment of the letter of credit unless it is a nominated or confirming bank.

How Does an Advising Banks Authenticate the Letter of Credit Before Advising It to the Beneficiary?

Letters of credit received by SWIFT platform: Swift messages are authenticated message types and they need no further controls for authentication.
Letters of credit received by paper format: The signatures on the letter of credit must belong to the issuing bank’s official representatives. In order to verify this advising bank must check the signatures with specimen signatures held at the bank.

Case Study: How to define the advising bank’s responsibility in respect of “advice accurately reflects the terms and conditions of the credit or amendment received”?

Answer: Sub-article 9 (b) for the advising bank and sub-article 9 (c) for the second advising bank, recognize the responsibility of such banks to ensure that all the details of a credit or amendment are advised to the beneficiary.

It can happen that when photocopying a credit or amendment that has been received, part of the message is not copied due to the folding of the document to accommodate the photocopier.

The rules require the bank to ensure that all the details of a credit or amendment that are relevant to the beneficiary are sent to the beneficiary.

There may be information that appears in a credit or amendment that is between the two banks e.g., financing requests, interest details or bank account numbers etc. that are of no concern to a beneficiary. These may be conveyed to a beneficiary or deleted from the advice that is sent to the beneficiary.

This question replied by Gary Collyer during the XXV Latin American Foreign Trade Congress – CLACE, Guatemala, June 3-5, 2009.
Source: http://www.felaban.com/archivos/memoria_anual09
/gary_0506_3.ppt

Field 57a: ‘Advise Through’ Bank

This field identifies the bank, if different from the Receiver, through which the documentary credit is to be advised/confirmed to the beneficiary.

According to current letter of credit rules, an advising bank may utilize the services of another bank (“second advising bank”) to advise the credit and any amendment to the beneficiary.

A bank utilizing the services of an advising bank or second advising bank to advise a credit must use the same bank to advise any amendment thereto.

If a bank is requested to advise a credit or amendment but elects not to do so, it must so inform, without delay, the bank from which the credit, amendment or advice has been received.

Example 1: “Advise Through” Bank
57D: `Advise Through` Bank -Name&Addr
MEESNL2A

Example 2: “Advise Through” Bank
57A: ‘Advise Through’ Bank – Identifier Code
DENITRIS

Example 3: “Advise Through” Bank
57A: ‘Advise Through’ Bank – Identifier Code
ISBKTRIS

References:

Advising Bank, www.advancedontrade.com, Retrieved: 31.May.2018

Issuing Bank

Ozgur Eker (CDCS) Banks, Issuing Bank 31 May 20187 April 2019Banks, Issuing Bank

Letter of credit is opened and finalized by the issuing bank.

The issuing bank is the institution that gives ultimate irrevocable and conditional payment guarantee to the beneficiary.

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

For example, an advising bank advises the letter of credit to the beneficiary as per the instructions that have been received from the issuing bank.

An advising bank transmits the letter of credit to the beneficiary in the capacity of the advising bank.

Similarly a confirming bank, nominated bank and reimbursement bank are all acting as per the issuing bank’s instructions and authorization.

On this post I will try to explain you one of the most important concepts in letters of credit: Issuing Bank. Here are the headlines of the article:

What is an issuing bank?
What are the responsibilities of the issuing bank?
Which UCP 600 article regulates the issuing banks responsibilities?
How does an issuing bank open a letter of credit?
What are the main features of a well structured letter of credit?

What is an Issuing Bank?

Issuing bank means the bank that issues a credit at the request of an applicant or on its own behalf.

What are The Responsibilities of the Issuing Bank?

The issuing bank is the ultimate payer of the letter of credit.

Even if other banks do not pay to the beneficiary against a complying presentation, the issuing bank must pay the letter of credit amount.

This role of the issuing bank clearly defined under UCP 600.

Let us have a look at the issuing bank’s payment liabilities under the letter of credit rules with different availability options.

Letter of credit is available either by the nominated or issuing bank:

Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honor if the credit is available by:

sight payment, deferred payment or acceptance with the issuing bank;
sight payment with a nominated bank and that nominated bank does not pay;
deferred payment with a 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;
acceptance with a 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;
negotiation with a nominated bank and that nominated bank does not negotiate.

The issuing bank’s responsibilities will be effective as soon as letter of credit issued.

As a result an issuing bank is irrevocably bound to honor a complying presentation as of the time it issues the credit.

The issuing bank must reimburse the nominated bank which honored or negotiated a complying presentation and forwarded the documents to the issuing bank.

The reimbursement under the letter of credit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank pays the credit amount to the beneficiary before the maturity date.

An issuing bank’s undertaking to reimburse a nominated bank is independent of the issuing bank’s undertaking to the beneficiary.

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

UCP 600 article 7 defines the roles and responsibilities of the issuing bank.

The issuing bank’s liabilities have been described in article 9 under UCP 500, which was the previous set of rules for the international letters of credit.

How Does an Issuing Bank Open a Letter of Credit?

I have already covered the topic “How to open a letter of credit?” from the importers perspective.

Today I would like to explain the letter of credit issuance process from the issuing bank’s point of view.

Opening a letter of credit is a commercial decision. Banks issue letters of credit in order to make profit.

An issuing bank charges letter of credit fees from the applicant against services it offers and risks it takes.

Issuing banks evaluate letter of credit applications mainly in two categories:

Compliance with the issuing bank’s policies
Correctness of the instructions of the applicant

Letter of Credit Application’s Compliance with the Issuing Bank’s Policies: During the letter of credit issuance process, the issuing bank must ensure himself that he complies with national law and international regulations.

As a result the letter of credit’s application compliance must be checked against the issuing bank’s letter of credit issuance policies.

Some of the important points that must be controlled at this stage can be summarized as bellows:

Is there any requirement of import licenses or import approvals?
Is letter of credit application complying with the government requirements?
Is letter of credit application complying with the central bank requirements?
Is letter of credit application complying with anti money laundering regulations?
Is letter of credit application complying with international sanction regulations?
Is there any fraud risk in terms of applicant and the beneficiary of the letter of credit?

Correctness of the instructions of the applicant: Documentary credit, when issued, carries the name of the issuing bank along with its reputation. As a result issuing banks must ensure that the letter of credit is defect free.

ISBP 745 correctly states that “Many of the problems that arise at the document examination stage could be avoided or resolved by the respective parties through careful attention to detail in the credit or amendment application and issuance of the credit or any amendment thereto.”

In order to be make sure that the letter of credit does not contain errors the issuing bank must discuss with the applicant over the letter of credit structure.

The discussion would be covering below points:

Work-ability of the Letter of Credit: The letter of credit must be workable for the beneficiary, which means that the beneficiary could make the presentation and get paid against complying documents without being dependent on any other factor.
- Example: Letter of credit should not contain a joker clause.
- Example: Letter of credit should not state a wrong incoterms.
Documentary Conditions: All conditions in a letter of credit must be linked to a document to indicate compliance with the condition. UCP 600 states that “If a credit contains a condition without stipulating the document to indicate compliance with the condition, banks will deem such condition as not stated and will disregard it.”
- Example: Letter of credit should not contain a non-documentary condition.
Clear Definitions, Plain Structure: A letter of credit should not contain ambiguous terms and abbreviations that may have different meanings. Additionally, a letter of credit must be precise. Issuing bank should discourage applicants to include excessive details in the letter of credit.
- Example: Virgules (i.e., slash marks “/”) may result in different meanings and should not be used as a substitute for a word. If, nevertheless, a virgule is used and no context is apparent, this will allow the use of one or more of the options. For example, a condition in a credit stating “Pink/Brown/Green” with no further clarification will mean only Pink or only Brown or only Green or any combination of them.

Case Study: Examples of bad banking practices incorporated by issuing banks when issuing a letter of credit

Example 1: The photocopy of bill of lading will be accepted by us as presented except if not complying with the next two conditions:

1. in case of sea transport, the transport document must indicate IMO ship number of carrying vessel.

2. shipment by a shipping co and/or by ship under sanctions US/EU/UN are forbidden.”

Example 2: Documents must be presented not later than 10 calendar days after credit issuance date

Example 3: 100 percent of commercial invoice value is payable at 30 days from applicant’s authorized representative’s signature on required documents.

Example 4: One original bill of lading consigned to order and blank endorsed to be sent directly to the applicant. Courier receipt to be presented along with the shipping document.

Example 5: Claim must be submitted to us not later than 14 calendar days after expiry date.

Example 6: Negotiating bank must certify that documents were correct on first presentation.

Example 7: Documents must be correct on first presentation. Correction of documents is not permitted.

Example 8: Provided documents on first presentation are in strict conformity with the L/C terms, you are authorized to reimburse yourselves with the reimbursing bank.

Clauses specified above represent bad practice, and issuing banks should refrain from including such terms and conditions in their credit.

What happens if court stops payment of an irrevocable, confirmed letter of credit?

Ozgur Eker (CDCS) How to Work With a Letter of Credit, Letter of Credit Basics 31 May 20187 April 2019Confirmed Letter of Credit, Court Order, Deferred Payment

In many countries, applicants able to prevent payments under letters of credit by obtaining court orders on the grounds that low quality goods shipment or fraudulent actions of the beneficiaries.

Often courts issue a temporary or preliminary injunction.

On this post I demonstrate a court order that stops payment of an irrevocable confirmed deferred payment letter of credit.

Step 1: Saudi Arabian steel importer and South Korean steel supplier signed a sales contract

A multinational company’s Saudi Arabia branch signed a sales contract with a South Korean steel supplier.

The product being traded was Cold Rolled Steel Sheets. Sales contract amount was 9.700.000,00 USD and quantity of goods was 10.000 mtons.

Importer company which is the beneficiary under the letter of credit transaction is Strong Saudi Steel Import Co. Ltd and exporting company which is the applicant under the letter of credit transaction is Korean Shining Steel Exporter Ltd.

Step 2: Letter of credit issued by a commercial bank in Saudi Arabia

A Saudi Arabian commercial bank issued the letter of credit which is available by a deferred payment payable 90 days after sight.

The letter of credit is subject to UCP 600 and it is irrevocable. Letter of credit is available with a South Korean national commercial bank. Also issuing bank requested from the nominated bank to confirm the credit.

You can find important details of the letter of credit on below MT 700 swift message summary.

Step 3: Letter of credit confirmed by South Korean Bank

South Korean bank, which was initially the nominated bank, confirmed the letter of credit as per instructions received from the issuing bank.

Once South Korean bank confirmed the letter of credit, it became the confirming bank.

Under UCP 600 rules confirming banks have to honor complying presentations. Confirming banks can also discount letters of credit upon exporters’ demand.

Step 4: Complying presentation:

After having the letter of credit confirmed, the exporter arranged the shipment and made the presentation to the South Korean Bank which is not only the nominated bank but also the confirming bank.

Confirming bank checked the documents and found them complying.

Confirming bank determined that the documents have been presented was free of errors. Confirming bank sent the documents to the issuing bank.

The issuing bank also confirmed, by an authenticated swift message that, the acceptance of documents and the remittance of funds with a value maturity date.

As it was mentioned earlier, the letter of credit is payable with a deferred payment which is 90 days after sight.

The exporter applied to the confirming bank to discount the credit in order to get the payment in advance of the maturity date of the credit.

Step 5: Letter of credit discounted by South Korean confirming bank

Confirming bank and the exporter agreed on the terms and conditions of the letter of credit discount and confirming bank negotiated the credit without recourse basis.

The confirming bank purchased the deferred payment undertaking resulting from documents presented in full conformity with the terms and conditions of the letter of credit and effected payment to the beneficiary.

One week before the maturity date, the issuing bank informed the confirming that the letter of credit payment has been stopped by the court order.

In this regards the issuing bank sent two subsequent authenticated SWIFT messages to the confirming bank as follows:

Step 6: Saudi Arabian court stopped payment of the letter of credit

After sending two informative swift messages, the issuing bank sent a telefax copy of the court order to the confirming bank.

Additionally, the issuing bank sent a swift message to the confirming bank requesting to inform the issuing bank whether the confirming bank had already paid to the beneficiary or not.

The confirming bank sent its objections to the issuing bank via authenticated swift message 3 days after issuing bank’s swift messages have been received.

The confirming bank claimed that the court ordered to stopped the payment to the beneficiary, but according to UCP 600 rules the confirming banks are the owner of the receivables and entitled to receive the counter-value without any further delay.

Below you can find the summary of the swift message sent from confirming bank to the issuing bank.

Step 7: Issuing bank remained unanswered confirming bank’s swift messages.

The confirming bank believed that the issuing bank is obliged to honour the nominated bank’s reimbursement claim immediately upon maturity, even if a court order issued against the issuing bank prohibits payment to the beneficiary.

As the issuing bank remained silence the confirming bank applied to the ICC banking commission for an opinion.

Conclusion:

ICC banking commission states that local law will prevail over the letter of credit transaction.

As a result banks must act according to court orders.

However, the credit was subject to UCP 600 and apparently contained no exclusion to the rule appearing in sub-article 12 (b).

Due to the content of sub-article 12 (b) and sub-article 7 (c), the issuing bank should seek to resist such an injunction in order to preserve the integrity of its credit and the UCP.

It must be expected that the issuing bank will seek to have the injunction removed by referring the court to the appropriate articles of UCP 600 and the terms and conditions of the credit.

The issuing bank would also be well advised to inform its applicant(s) of the content and effect of sub-article 12 (b) for this and any future transactions.

It is the responsibility of the applicant to cover any issues concerning quality of goods in the documents called for and the data content required to appear on those documents, and not to seek redress that affects the right of a nominated bank to receive reimbursement in respect of a complying presentation.

This case study created by Ozgur Eker based on the information gathered from ICC Opinion R629 / TA672rev.

How to Cancel a Letter of Credit?

Ozgur Eker (CDCS) Cancellation Fee, How to Work With a Letter of Credit, Letter of Credit Basics 30 May 20187 April 2019How to Cancel a Letter of Credit?, Letter of Credit Cancellation

According to the letter of credit rules, a letter of credit should be issued in an irrevocable form, as a result it cannot be cancelled without the written consent of the beneficiary.

Definition of Irrevocability Concept and Its Effects on Cancellation of Letters of Credit:

According to letter of credit rules, a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary.

Letter of credit is a conditional payment method, which means that the payment can be made only against a complying presentation, but the terms and conditions of the credit cannot be amended or else cannot be cancelled by the issuing bank without the consent of the beneficiary.

As a result issuing banks cannot cancel letters of credit by themselves alone.

In order to cancel a letter of credit, an issuing bank has to receive a written declaration from the beneficiary certifying that the letter of credit will not be utilized.

If the letter of credit has been confirmed by another bank, the confirming bank’s written declaration should also be received before the cancellation.

How to Cancel a Letter of Credit?

There are two ways to cancel a letter of credit.

Actually the first scenario should be treated as a “termination” rather than a “cancellation”.

Cancellation of a letter of credit which is not utilized by the beneficiary within the validity period:

Every letter of credit must have a expiry date and place.

If the beneficiary elects not to use the letter of credit within the validity period, which starts with the issuance of the letter of credit and ends with the expiry date, the letter of credit will be no longer valid.

This type of cancellation should be called as termination of letter of credit by the beneficiary.

What are the factors that may have forced the beneficiary to terminate the letter of credit?

There would be couple of factors that leads to termination of an L/C. Below you can find some reasons of termination that I can think of.

The unit prices may have increased too much since the opening of the letter of credit and the beneficiary may perceive the transaction not profitable any more.
The beneficiary may find the terms and conditions of the letter of credit not doable.
Beneficiary may not be able to find required finance to perform under the letter of credit.

Cancellation of a letter of credit by the beneficiary’s written declaration within the validity period of the letter of credit:

As explained above an irrevocable letter of credit cannot be cancelled without the written consent of the beneficiary and the confirming bank, if any.

As a result, a letter of credit cancellation process should be started with the beneficiary’s written declaration.

This can be done by a letter which is issued by the beneficiary and sended direct to the issuing bank or else a swift message send by the advising bank to the issuing bank.

Case Study : Can the Issuing Bank Cancel the L/C by Himself on the Grounds That Bad Quality of Goods?

Summary: The letter of credit was issued by National Import Bank in Saudi Arabia for USD 5,500,000 allowing partial shipments.

It was planned under the sales contract that the goods will be loaded via 5 partial shipments of each equals to USD 1,100,000.

Letter of credit was available with a nominated bank located in Germany by payment. The nominated bank in Germany just advised the credit without adding its confirmation.

Additionally the nominated bank did not make any payments to the beneficiary. Its role was rather an advising bank’s role under this transaction.

The beneficiary made the 1st shipment and received the payment from the issuing bank.

On the 2nd shipment beneficiary did not get any payment from the issuing bank, although there was no advice of refusal received.

Later on the beneficiary received following message from the issuing bank via the nominated bank ‘Goods are defective, as stated by the buyer, the said L/C is cancelled.’

————————————-Message Header——————————————
Swift OUTPUT FIN 700 Issue of a Documentary Credit
Sender : NATIONALXXX
NATIONAL IMPORT BANK, THE (HEAD OFFICE) JEDDAH SAUDI ARABIA
Receiver : EXPORTXXX EXPORT BANK OF GERMANY (ALL GERMANY OFFICES) MUNICH GERMANY
————————————–Message Text ———————————————-
27 : Sequence of Total
1/1

40A : Form of Documentary Credit
IRREVOCABLE

20 : Documentary Credit Number
NATIONAL01022015

31C : Date of Issue
150102

40E : Applicable Rules
UCPURR LATEST VERSION

31D : Date and Place of Expiry
150622 GERMANY

50 : Applicant
THE NATIONAL IMPORT BANK A/C OF AL-TAJ SOAP FACTORY CO. P.O.BOX 2037 JEDDAH 21451 K.S.A

59 : Beneficiary – Name & Address
WIND TURBINES EXPORTER OF GERMANY D-28199 BREMEN, GERMANY

32B : Currency Code, Amount
Currency : USD (US DOLLAR)
Amount : #5.500.000,#

41A : Available With…By… – BIC
EXPORTXXX BY PAYMENT

43P : Partial Shipments
PARTIAL SHIPMENTS ARE ALLOWED

43T : Transhipment
TRANSSHIPMENTS ARE ALLOWED

45A : Description of Goods &/or Services
5 SETS OF WIND TURBINES

Answer: The letter of credit cannot be cancelled by the issuing bank by himself on the grounds that bad quality of goods. Only a court order could stop issuing bank to pay for the complying documents.

What happens if court stops payment of an irrevocable, confirmed letter of credit which is payable 90 days after sight due to low quality of goods?

Shipping Marks

Ozgur Eker (CDCS) How to Work With a Letter of Credit, Letter of Credit Basics 29 May 20187 April 2019Container Number, Shipping Marks

Packages, which are subject to international transportation, must be spotted and recognized at a distance with ease.

Exporters and carriers add some sort of identification marks on to the packages in order to make sure that they are handled correctly and efficiently during the whole transportation process.

The marking, also known as “Shipping Marks”, serve two main purposes: first, as identification marks for the carriers and all those engaged in the carriage and handling while in transit, and second, for the consignee to identify the corresponding order and activity to ensure correct delivery. (1)

On this post, I will explain the shipping marks and how they are used in letters of credit payments.

What is Shipping Marks? / How to Define Shipping Marks in International Freight Transportation?

Shipping marks can be defined as a symbol, word or number that is attached on to the each package unit for easy identification and handling of the cargo.

Shipping marks are vital parts of the international freight transportation.

Why Shipping Marks are Important in International Freight Transportation?

Thanks to the rapid advances in logistics technology, the global freight transportation infrastructure could handle enormous volumes of cargo annually.

In 2008, more than $16 trillion of exported freight was transported worldwide.

Maritime vessels, airplanes, trucks, and trains transported these goods from production centers to consumption markets. (Source: Freight Transportation on: Global Highlights 2010, Page:4, Bureau of Transportation Statistics)

All operations in international freight transportation must be completed smoothly from beginning to end.

Domestic transportation and custom operations in exporting country, international cargo transportation between exporting country and importing country, custom operations and domestic transportation in importing country should be handled as fast as possible to prevent any delays and occurrences of extra costs to the exporters and importers.

In order to prevent wrong delivery, accidents, losses, customs penalties or damage resulting from improper storage or incorrect handling, each package unit must be marked with the required shipping marks correctly and completely.

Shipping Marks Examples:

Example 1: Dispatching Food Sample from Italy to USA

An Italian food manufacturing company needs to send two pieces of 5kg Tin Fresh Pizza Sauce to an importer located in New York, United States.

Italian Food Company places two 5kg tins of Fresh Pizza Sauces in to a cardboard box. The dispatch will be made via express courier service.

Shipping Marks Attached on to the 5kg Tin Packages: Description of goods, lot numbers, production date, expiry date, net weight.
Shipping Marks Attached on to the Cardboard Box: Description of goods, origin of goods, handling information, inner package type and quantity, net weight. gross weight, consignee details.

Example 2: Dispatching 1 Container of Textiles from Morocco to France

A Moroccan textile manufacturing company wants to export one container of men’s’ underwear to an importer located in Paris, France.

Packing of the container will be as follows: 10 pcs of men’s underwear put into a carton box, then 70 cartons put on to a wooden pallet. 40ft container loaded with 21 pcs of 100cmx120cm pallets.

Shipping Marks Attached on to the Transparent Plastic Bags: Description of goods, lot numbers, production date, production material, label, origin of goods, washing directions etc…
Shipping Marks Attached on to the Carton Boxes: Description of goods, origin of goods, inner package type and quantity, net weight, gross weight, consignee details etc…
Shipping Marks Attached on to the Wooden Pallets: ISPM15 mark, pallet label etc…
Shipping Marks Related to the Container: Container size, container type, and container number, seal number, etc…

Which Documents Should Show Shipping Marks?

Almost all export documents could show shipping marks in a different scale.

Some documents may cover almost all of the shipping marks that is related to the shipment, whereas some documents may reference to one or two shipping marks.

The packing list should cover as much shipping marks as possible. In addition to the packing list; the bill of lading and commercial invoice should cover the related shipping marks.

Which Documents Should Not Show Shipping Marks?

Bill of exchange (draft) should not cover any shipping marks on it, except the letter of credit number.

Bill of exchange is a negotiable instrument and the format of the bill of exchange regulated by the local law.

Any unrelated reference in the bill of exchange may make the document void in terms of respected local law. As a result exporters must refrain to add any shipping marks on to the bill of exchange.

How Shipping Marks Are Used in Letters of Credit?

Shipping marks can be mentioned in MT700 Swift messages in two ways:

Shipping marks mentioned under field 46-A Documents Required
Shipping marks mentioned under field 47-A Additional Conditions

Shipping Marks Mentioned Under Field 46-A: Documents Required

Examples:

Beneficiary’s certificate stating that all cases are marked by black ink as follows: name and address of applicant, purchase order number, letter of credit number.
Beneficiary’s certificate one original stating that shipment details including date and place of loading, name, age, nationality, IMO number of the vessel, value of the goods, gross and net weights of the goods and the reference no. of the l/c have been sent to our bank’s fax no:+33 222 600 50 10 within 2 days after shipment date for information purposes.(fax report and shipment details have been attached to this doc.)

Shipping Marks Mentioned Under Field 47-A: Additional Conditions

Shipping documents must show the name and address of the buyer and the letter of credit number, packages must be marked with shipping marks and buyer’s reference. Beneficiary’s certificate stating the above has been complied with must be presented.
The letter of credit number, Form “M” number and BA no must be mentioned on all shipping documents relating to this letter of credit.

What Does The Letter of Credit Rules State in Regards to The Shipping Marks?

Current letter of credit rules are silent in regards to shipping marks.

We can find related explanations in ISBP 745 between articles A32 to A34 under the heading of “Shipping Marks”.

ISBP 745 article A32 states that “When a credit specifies the details of a shipping mark, documents mentioning the shipping mark are to show those details. The data in a shipping mark indicated on a document need not be in the same sequence as those shown in the credit or in any other stipulated document.”
ISBP 745 article A33 explains that “A shipping mark indicated on a document may show data in excess of what would normally be considered a “shipping mark”, or which is specified in the credit as a “shipping mark”, by the addition of information such as, but not limited to, the type of goods, warnings concerning the handling of fragile goods or net and gross weight of the goods.”
ISBP 745 article A34 states that;
a. Transport documents covering containerized goods often only show a container number, with or without a seal number, under the heading “Shipping mark” or similar. Other documents that show a more detailed marking will not be in conflict for that reason.
b. The fact that some documents show additional information as mentioned in paragraphs A33) and A34) (a), while others do not, will not be regarded as a conflict of data under UCP 600 sub‐article 14 (d).

Suggestions For The Exporters Who Must Deal With The Shipping Marks:

Shipping marks are a very loose term. As a result any symbol, word or number can be considered as a shipping mark in export and import transactions.
All shipping documents could contain one or more shipping marks except the bill of exchange. Only letter of credit number can be written on in the face of the bill of exchange. Each packing unit may contain different types of shipping marks. Shipping marks used for the carton boxes may differ from the shipping marks of the container.
If you are dealing with a letter of credit, you must make sure that you can supply the required documents as per letter of credit terms and conditions including shipping marks. Remember some documents will be created by official institutions according to inflexible bureaucratic methods. You may not be able to put a shipping mark on one of these documents.

References:

Shipping and Incoterms, Practice Guide, UNDP Practice Series, Page:9
Freight Transportation on: Global Highlights 2010, Page:4, Bureau of Transportation Statistics

What are the differences between received for shipment bill of lading and pre-printed shipped bill of lading?

Ozgur Eker (CDCS) Bill of Lading, How to Work With a Letter of Credit, Letter of Credit Basics, Letter of Credit Documents 28 May 20187 April 2019Bill of Lading, Letter of Credit Documents, Shipped On Board

There are two types of bills of lading circulating around the globe in terms of pre-printed notifications:

Received for shipment bills of lading: Goods have been received by the carrier but not on board of a named vessel.
Shipped on board bills of lading: Goods have been received by the carrier and laden on board of a named vessel.

Received for Shipment Bill of Lading:

This bill of lading states that goods are received by the carrier in apparent good order.

Unless received for shipment bill of lading contains an additional “on board notation”, it does not confirms that the goods have been shipped on board to a named vessel.

Traditionally, received for shipment bills of lading does not give enough assurance to the banks in letter of credit, bank guarantee or standby letter of credit transactions.

Banks prefer to have a pre-printed shipped on board bills of lading.

Alternatively received for shipment bill of lading can be accepted with an “On Board Notation“.

Received for Shipment Bill of Lading Example:

Received for shipment bills of lading clause can be seen on the face of the bill of lading generally at the right bottom side of the page.

Without an additional on board notation, received for shipment bill of lading does not confirm that goods shipped on board a named vessel.

Received for Shipment Bill of Lading Example (pdf)

RECEIVED by the Carrier from the Shipper in apparent good order and condition unless otherwise indicated herein, the Goods, or package(s) said to contain the Goods, to be carried subject to all the terms and conditions herein.

Pre-Printed Shipped Bills of Lading:

Pre-printed shipped bills of lading not only confirm that goods have been received by the carrier, but also they have been shipped on board of a named vessel.

Banks accept pre-printed shipped bill of lading in trade finance transactions such as under commercial letters of credit, bank guarantee or standby letter of credit operations.

Pre-Printed Shipped Bill of Lading Example:

Pre-printed shipped bills of lading clause can be seen on the face of the bill of lading generally at the right bottom side of the page.

Pre-printed shipped bill of lading will be accepted by banks under most trade finance solutions.

Pre-printed shipped bill of lading confirms that goods shipped on board a named vessel as required by the letter of credit rules.

Pre-Printed Shipped Bill of Lading Example (pdf)

SHIPPED, as far as ascertained by reasonable means of checking, in apparent good order and condition unless otherwise stated herein, the total number or quantity of Containers or other packages or units indicated in the box entitled “Carrier’s Receipt” for carriage from the Port of Loading (or the Place of Receipt, if mentioned above) to the Port of Discharge (or the Place of Delivery, if mentioned above), such carriage being always subject to the terms, rights, defenses, provisions, conditions, exceptions, limitations, and liberties hereof (INCLUDING ALL THOSE TERMS AND CONDITIONS ON THE REVERSE HEREOF NUMBERED 1-26 AND THOSE TERMS AND CONDITIONS CONTAINED IN THE CARRIER’S APPLICABLE TARIFF) and the Merchant’s attention is drawn in particular to the Carrier’s liberties in respect of on deck stowage (see clause 18) and the carrying vessel (see clause 19).

Stale Documents

Ozgur Eker (CDCS) How to Work With a Letter of Credit, Letter of Credit Basics 23 May 20187 April 2019Late Presentation Discrepancy, Stale Documents

Some letters of credit indicate that stale documents are not acceptable. In rare circumstances letters of credit may also indicate that stale documents are acceptable.

But what is a stale document? When does a document set turn into a stale document phase as per latest letter of credit rules?

Why an issuing bank adds a phrase when issuing an l/c stating that : “stale documents are not acceptable” or “stale documents are acceptable”.

Does ICC encourage or discourage to use the “Stale Documents” term in letters of credit?

Background:

Letters of credit terminology have 3 important definitions in regards to the dates.

These definitions are

“Date of Shipment”,
“Presentation Period” and
“Expiry Date”.

If you want to understand “stale documents” definition, you should be familiar with these terms.

Let me start explaining these definitions with the date of shipment.

Date of Shipment

When a pre‐printed “Shipped on board” bill of lading is presented, its issuance date will be deemed to be the date of shipment unless it bears a separate dated on board notation.

In the latter event, such date will be deemed to be the date of shipment whether that date is before or after the issuance date of the bill of lading.

Do you know the differences between pre-printed shipped on board bill of lading and received for shipment bill of lading?

Most commercial letters of credit demand presentation of a transport document.

According to letter of credit rules Multimodal Bill of Lading, Bill of Lading, Non-Negotiable Bill of Lading, Charter Party Bill of Lading, Air Transport Document, Road Transport Document, Rail Transport Document and Courier Receipt, Post Receipt or Certificate of Posting are considered to be a transport document.

On the other hand documents such as Forwarder’s Certificate of Receipt, Forwarder’s Certificate of Transport, Delivery Note, and Delivery Order are not considered to be a transport document under the latest version of the letter of credit rules known as UCP 600.

We can talk about the “date of shipment” term only if the letter of credit requests a transport document. Otherwise date of shipment will not be applicable.

Presentation Period

According to the letter of credit rules a presentation by or on behalf of the beneficiary must be made on or before the expiry date.

Additionally, UCP 600 states that a presentation including one or more original transport documents subject to articles 19, 20, 21, 22, 23, 24 or 25 must be made by or on behalf of the beneficiary not later than 21 calendar days after the date of shipment as described in these rules, but in any event not later than the expiry date of the credit.

These statements from the UCP 600 lead us to the definition of the presentation period.

The presentation period can be defined as a period of time which starts with the issuance of the letter of credit and ends either with the expiry date of the letter of credit or else with the expiry of the allowed period time commencing after the date of shipment in case presentation contains a transport document.

Presentation Period of a Letter of Credit When No Transport Document Must be Presented

If letter of credit does not require a transport document presentation, then the documents can be presented by the beneficiary any time between the letter of credit issuance date and the expiry date.

Presentation Period of a Letter of Credit When a Transport Document Must be Presented

If letter of credit requires a transport document presentation, then the documents must be presented by the beneficiary within a certain time frame after the date of shipment.

UCP 600 defines presentation period as 21 days.

As per UCP 600, a presentation including one or more original transport documents subject to articles 19, 20, 21, 22, 23, 24 or 25 must be made by or on behalf of the beneficiary not later than 21 calendar days after the date of shipment.

21 days period can be decreased or increased by the issuing banks.

Exporters must look at the “Field 48: Period for Presentation” in order to determine the exact presentation period under a specific letter of credit.

Presentation Period Examples
Presentation Period Example 1:
Field 48: Period for Presentation
21 DAYS AFTER SHIPMENT DATE BUT WITHIN LC VALIDITY.
Presentation Period Example 2:
Field 48: Period for Presentation
21 DAYS AFTER SHIPMENT DATE BUT WITHIN CREDIT VALIDITY.
Presentation Period Example 3:
Field 48: Period for Presentation
DOCUMENTS MUST BE PRESENTED WITHIN 21 DAYS AFTER ISSUANCE OF THE TRANSPORT DOCUMENT BUT WITHIN THE VALIDITY OF THIS CREDIT
Presentation Period Example 4:
Field 48: Period for Presentation
21 DAYS FROM THE DATE OF BILLS OF LADING.
Presentation Period Example 5:
Field 48: Period for Presentation
21 DAYS.
Presentation Period Example 6:
Field 48: Period for Presentation
DOCUMENTS TO BE PRESENTED WITHIN 21 DAYS AFTER THE DATE OF SHIPMENT, BUT WITHIN THE VALIDITY OF THE CREDIT

Expiry Date

Expiry Date is the latest date for presentation of documents for payment, acceptance, or negotiation under a letter of credit transaction.

Exporters must complete their presentations before the expiry dates. After the expiry date, the letter of credit will be perish.

The issuing bank will be relieved all of its responsibilities, if no presentation has been made until the expiry date. In case of partial shipments non-utilized portion of the letter of credit will be vanish after the date of expiry.

Stale Documents Definition and Meaning:

ISBP 745 states that “stale documents acceptable” phrase should not be used in a letter of credit, as they are not defined in UCP 600.

If, nevertheless, it is used, and its meaning is not defined in the letter of credit, it shall have the following meaning under international standard banking practice:

Stale Documents Acceptable:

If “stale documents acceptable” stated in a letter of credit, then documents may be presented later than 21 calendar days after the date of shipment as long as they are presented no later than the expiry date of the credit.

This will also apply when the credit specifies a period for presentation together with the condition ”stale documents acceptable”.

ICC’s above explanation reveals that “stale documents” term should be used in conjunction with the situations in which letter of credit requires the presentation of a transport document.

Stale Documents Not Acceptable:

In most cases “stale documents not acceptable” condition can be seen in the documentary credits.

But this condition has no effect and meaning in a “letter of credit” transaction as a result issuing banks should refrain to use it.

Case Study: Documents Refused Due to Stale Documents
Letter of Credit
Field 46A: Documents Required
SIGNED COMMERCIAL INVOICE IN TWO ORIGINALS AND THREE COPIES INDICATING SEPARATELY FOB VALUE, FREIGHT CHARGES, INSURANCE PREMIUM AND TOTAL AMOUNT CIF JEDDAH. ORIGINAL INVOICE TO BE CERTIFIED BY CHAMBER OF COMMERCE
FULL SET CLEAN ON BOARD BILLS OF LADING MADE OUT TO THE ORDER OF NATIONAL COMMERCIAL BANK, JEDDAH MARKED FREIGHT PREPAID AND NOTIFY APPLICANT
CERTIFICATE OF ORIGIN ISSUED AND CERTIFIED BY CHAMBER OF COMMERCE STATING THE NAME OF THE MANUFACTURERS OR PRODUCERS AND THAT GOODS EXPORTED ARE WHOLLY OF DOMESTIC ORIGIN
PACKING LIST IN TRIPLICATE SHOWING DETAILS OF PACKING.
Field 47A: Additional Conditions
STALE DOCUMENTS NOT ACCEPTABLE UNLESS AUTHORIZED BY US.
Field 48: Period for Presentation
DOCUMENTS MUST BE PRESENTED WITHIN 21 DAYS AFTER ISSUANCE OF THE TRANSPORT DOCUMENT BUT WITHIN THE VALIDITY OF THIS CREDIT
Presentation and Refusal of Documents:
Beneficiary presented the documents to the nominated bank on 23rd of August.2014. The bill of lading which was presented by the beneficiary had an on board date 01.August.2014. The issuing bank refused the documents based on stale documents discrepancy, because documents have not been presented within 21 days after bill of lading date.

What is Business Identifier Code (BIC) and International Bank Account Number (IBAN)?

Ozgur Eker (CDCS) Business Identifier Code, How to Work With a Letter of Credit, IBAN, Letter of Credit Basics, Swift Messages 23 May 201830 August 2019BIC, Business Identifier Code, IBAN, International Bank Account Number, Swift, Swift Messages

Whatever your payment method would be, cash in advance, open account, cash against documents, letter of credit or bank payment obligation, you need to supply your bank enough “payments reference data” in order to complete your international payment successfully.

“Payments reference data” are the sets of data that banks use when executing international money transfers.

Money transfer regulations vary from one country to another. As a result different “Payments reference data” would be required when transferring funds between different countries.

Business Identifier Code (BIC) and International Bank Account Number (IBAN) are two main “Payments Reference Data” definitions that you need to know regarding the international money transfers.

Today I am going to describe these two terms in detail.

Let us start with Business Identifier Code (BIC).

Business Identifier Code (BIC)

Business identifier code is also known as swift code or swift address.

Swift address term can be accepted as a more informal definition that is used by exporters and importers. Business identifier code (BIC) is a formal definition and preferred by the banking professionals.

What is Business Identifier Code (BIC)?

The Business Identifier Code (BIC) is a standard established by the International Organization for Standardization (ISO).

The standard is known as ISO 9362. SWIFT is the registration authority of ISO BIC codes.

As a result BIC codes can be assigned to financial and non-financial institutions only by SWIFT.

The BIC can be defined as an address of an each bank branch in authenticated swift network. Each bank branch that is using swift network has a unique BIC code.

What are the Types of Business Identifier Code (BIC)?

There are two types of BIC:

8 character BIC (also called “BIC8”) and
11 character BIC (“BIC11”).

A BIC8 identifies a financial or non-financial institution in a country or a location. A BIC11 identifies the institution’s branch.

Example of BIC8:

MIDLGB22 is the BIC code of HSBC BANK PLC UNITED KINGDOM (ALL U.K. OFFICES).
- The first four characters in BIC code identifies the bank. In this example MIDL identifies HSBC BANK PLC. According to BIC standards the first four characters must be alphabetic characters only.
- The following two characters identify the country where the bank is located. In this example GB identifies Great Britain. According to BIC standards these two characters have to be the ISO country code consists of two alphabetic characters.
- Last two digits in BIC8 code is the location code, which provides geographical distinction within a country, such as a city, state, province or time zone. In this example 22 identifies London. The location code consists of two characters that can be alphabetic or numeric.

Example of BIC11:

BIC11 is the BIC codes of the bank branches. BIC8 can be extended to an 11 character BIC by adding a branch code.

MIDLGB2103J is the BIC code of Market Hill Branch of HSBC Bank PLC, Cambridge, United Kingdom.

International Bank Account Number (IBAN)

What is International Bank Account Number (IBAN)?

IBAN is the acronym of International Bank Account Number.

IBAN is an ISO 13616 standard which is created for numbering bank accounts. SWIFT is the designated “Registration Authority” for ISO 13616 standard since 2006.

What are the Types of International Bank Account Number (IBAN)?

All International Bank Account Numbers have the same structure. Only the length of the IBANs changes from one country to another.

Within the same country all IBANs have the same length.

For example all IBANs in Belgium contain 16 characters, whereas all IBANs in Germany consist of 22 characters.

But the main structure of the IBAN is the same in all countries.

Example of IBAN

DE89 3704 0044 0532 0130 00 is an IBAN number from Germany.
- The first two characters of an IBAN number is the country code. IBAN country codes are derived from ISO country codes. DE represents GERMANY.
- The two following characters are check numbers. Banks check the IBAN number with the help of these two check numbers in order to avoid erroneous payments.
- Remaining characters are the identifiers’ of the national bank account. Its format and length varies between countries. National bank account identifiers are also called as Basic Bank Account Number (BBAN). BBAN is the identifier that uniquely identifies an individual account, at a specific financial institution, in a particular country. The BBAN includes a bank identifier of the financial institution servicing that account.

IBAN formats are submitted to the Swift registration authority exclusively by the National Standards Body or the National Central Bank of the respected country.

For example German IBAN structure has been submitted to the SWIFT by Association of German Banks, whereas Belgium IBAN structure has been submitted to SWIFT by Belgian Bankers’ Association.

Do you want to learn how to use the International Bank Account Number (IBAN) and the Business Identifier Code (BIC) when making your payments in international trade. Please have a look at above educational video, which was created by EPC.

How to Use IBAN and BIC in Open Account and Cash in Advance Payments?

The exporter should identify his bank’s BIC code or swift address on the proforma invoice or sales contract along with his company’s official name, his bank’s name, his bank’s branch name.

The exporter should also indicate his bank account number or IBAN number on the proforma invoice or sales contract as well.

How to Use IBAN and BIC in Documentary Collection Payments?

In a documentary collection payment method, the exporter should identify his bank details including his IBAN number and BIC code on the commercial invoice.

How to Use IBAN and BIC in Letters of Credit?

Issuing banks identify their BIC codes on the “message header” section of the MT 700 swift messages under the title of “Sender”.

Issuing banks also identify the advising banks’ BIC codes on the same area under the title of “Receiver”.

Nominated banks’ BIC codes are stated under the “Field 41a: Available With … By …”.

Issuing banks sometimes identify IBAN numbers of the beneficiaries under the field of “57a: ‘Advise Through’ Bank”.

What does a non-documentary condition mean?

Ozgur Eker (CDCS) How to Work With a Letter of Credit, Letter of Credit Basics 21 May 20187 April 2019Documentary Condition, Non-Documentary Condition, UCP 600

Documentary Condition and nondocumentary condition

Non-documentary condition can be defined as any instruction or condition that is not clearly attributable to a document to be stipulated in a documentary credit. (Gary Collyer, The Guide to Documentary Credits, 3rd Edition, page.157)

Letter of credit has a unique characteristic which is described as a “documentary structure”.

We can see the definition of the “documentary structure” in article 5 of the latest version of the letter of credit rules which is known as UCP 600.

UCP 600 article 5 which is titled “Documents v. Goods, Services or Performance” states that

“Banks deal with documents and not with goods, services or performance to which the documents may relate.”

UCP 600 article 14 strengthen documentary structure of the letters of credit by stating that

“A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation.”

As I have explained above banks deal only with the documents in the letters of credit transactions, when determining whether or not a presentation is complying.

This is a very straight forward and easy to understand situation.

Let me give some examples to the documentary conditions as follows:

Documentary Condition Example:
All documents must be issued or filled in English language.
Documentary Condition Example:
Certificate of origin issued in 1 original and 1 copy legalized by the local chamber of commerce attesting that goods are of China origin.
Documentary Condition Example:
Beneficiary certificate stating that ”the goods are delivered with wood packaging material which with HT or MB or DB-MB signs that confirm ISPM 15 standards. This mark (not sticker) is over packaging material, on two reverse sides and is not red or orange ‘or’ the goods are delivered without wood packaging material”

Things are getting complicated when a credit requires some conditions to be met, but does not specify a document relating to the condition.

Let me give some examples to the non-documentary conditions as follows:

Non-Documentary Condition Example:
Each piece of textile is labeled with a tag showing the following: brand, origin, material construction.
Non-Documentary Condition Example:
Exported goods must be Australian Origin.
Non-Documentary Condition Example:
Shipment details including date and place of loading, name, age, nationality, IMO number of the vessel, value of the goods, gross and net weights of the goods and the ref.no of the l/c have been sent to our bank’s fax no:+31 3180 633 50 12 within 2 days after shipment date for information purposes.

If a credit states a non-documentary condition, then things are getting complex not only for exporters or beneficiaries, but issuing and confirming banks as well.

In order to understand the consequences of the non-documentary conditions in a letter of credit transaction we need to have a closer look at the rules and international standard banking practices.

What Does the Letter of Credit Rules Say About the Non-documentary Conditions?

UCP 600 article 14-h indicates that

“If a credit contains a condition without stipulating the document to indicate compliance with the condition, banks will deem such condition as not stated and will disregard it.”

ISBP 745 paragraph A26 which is titled with “Non‐documentary conditions and conflict of data” further explains the situation and states that

“When a credit contains a condition without stipulating a document to indicate compliance therewith (“non‐documentary condition”), compliance with such condition need not be evidenced on any stipulated document. However, data contained in a stipulated document are not to be in conflict with the non‐documentary condition. For example, when a credit indicates “packing in wooden cases” without indicating that such data is to appear on any stipulated document, a statement in any stipulated document indicating a different type of packing is considered to be a conflict of data.”

Conclusion:

Issuing banks and applicants should be very careful not to insert any non-documentary conditions to the letter of credit.

They can achieve this by linking each condition to a document.

Beneficiaries should read the credit very well in terms of non-documentary conditions.

If they determine any non-documentary conditions in the credit, they should either have them deleted from the letter of credit or make sure that non-documentary conditions will not be creating a discrepancy during the presentation period.

Remember a data contained in any stipulated document should not to be in conflict with the non‐documentary conditions.

Otherwise banks determine that the presentation is not complying by referring related discrepancies.

Letter of Credit Discounting

Ozgur Eker (CDCS) How to Work With a Letter of Credit, Letter of Credit Basics 21 May 20187 April 2019Discounting a Letter of Credit, Negotiation, With Recource, Without Recource

Letter of credit is not a cheque, but rather it is a conditional payment undertaking of the issuing bank.

As a result a beneficiary first of all needs to fulfill his obligations under a letter of credit, before considering himself to be eligible of the issuing bank’s payment.

The beneficiary can fulfill his obligations under a letter of credit by making a complying presentation.

Complying Presentation and Payment Mechanism:

Once the issuing bank receives the complying presentation from the beneficiary, it must honor, which means that;

to pay at sight if the credit is available by sight payment,
to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment,
to accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.

Most of the exporters think that they could discount a letter of credit as soon as they have received it from their banks.

This belief is not correct at all.

The beneficiary needs to make a complying presentation in order to receive any form of payment under the letter of credit.

No complying presentation means no payment under the letters of credit.

What Types of Letters of Credit Are Available to Discounting?

Letter of credit discounting is related to the letters of credit which are available with deferred payment, acceptance or negotiation.

At sight letters of credit should not require any discount mechanism as issuing banks or confirming banks must honor at sight credits as soon as they determine that beneficiary’s presentation is complying.

Some examples of letters of credit which can be subject to discounting:

EXAMPLE 1:

41D AVAILABLE WITH/BY: ANY BANK BY NEGOTIATION
42C DRAFTS AT: AT 90 DAYS AFTER BILL OF LADING DATE

EXAMPLE 2:

41A AVAILABLE WITH/BY: DEIFUKISXXX BY DEF PAYMENT
42P: DEFERRED PAYMENT DETAILS: AT 60 DAYS AFTER SHIPMENT DATE

EXAMPLE 3:

41A AVAILABLE WITH/BY: EXPOUSTKXXX BY ACCEPTANCE
42C DRAFTS AT: AT 120 DAYS AFTER INVOICE DATE

Understanding the Differences Between Discounting With or Without Recourse Basis:

In trade finance the letter of credit discounting and letter of credit negotiation used used in the same manner.

However they could have different meanings in regards to banking practice and commercial law.

Negotiation is defined under UCP 600 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.

Nominated banks discount the letters of credit with recourse basis. This mechanism defined as negotiation.

Confirming banks discount the letters of credit without recourse basis. This mechanism defined as forfaiting.

With forfaiting the bank cannot demand repayment of the amount in case it is not reimbursed by the issuing or the confirming bank. Nor can the bank demand payment of interest if refund is delayed. (1)

Special Hints on Letter of Credit Discounting for Exporters:

Keep in mind that you cannot get any payment from banks unless you make a complying presentation under a letter of credit.
Letter of credit discounting is related to the letters of credit which are available with deferred payment, acceptance or negotiation.
At sight letters of credit should not require any discount mechanism as issuing banks or confirming banks must honor at sight credits as soon as they determine that beneficiary’s presentation is complying.
If you would like to discount a letter of credit you should try to get discount approval from your bank before letter of credit is issued. You can get your bank’s discount approval and discount conditions by applying them with a draft letter of credit.
Nominated banks discount the letters of credit with recourse basis. This mechanism defined as negotiation.
Confirming banks discount the letters of credit without recourse basis. This mechanism defined as forfaiting.
Confirmed letters of credit can be discounted more easily than unconfirmed letters of credit. For this reason try to have the letter of credit confirmed by your bank to ease up the discounting process.

References:

Documentary credits in practice, Second edition – 2009, Reinhard Längerich, Page: 185