An air waybill is a document covering the carriage of goods by plane from one airport to another.
Date of shipment is one of the key definitions in a letter of credit transaction. It is used to determine
whether shipment made on time or not (in other words a late shipment has been effected or not),
whether documents presented within the presentation period or not (in other words a late presentation has been effected or not),
maturity date of the time draft,
maturity date of a deferred payment letter of credit.
Date of shipment can be determined in two ways on an air waybill.
Option 1 => There is no actual date of shipment notation on the air waybill:
The date of issuance of the air waybill will be deemed to be the date of shipment.
Option 2=> Air waybill indicates, by notation, the actual date of shipment: Notation date will be deemed to be the date of shipment as specified below:
Date of the actual date of shipment notation/stamp => this date will be deemed to be the date of shipment.
An air waybill with a separate actual date of shipment notation. The date of shipment on this air waybill is 15.05.2014 as indicated on the notation.
Confirmation gives additional payment assurance to the exporters.
When an irrevocable letter of credit is issued, the risk of payment rests with the issuing bank. This type of letter of credit is defined as an unconfirmed letter of credit.
However, in certain circumstances, the exporter may find the issuing bank not fully trustworthy and/or the country where it is located has high political or economic uncertainty.
In this situation, the exporter should consider requesting a confirmed letter of credit.
Confirmation is a security tool for the exporters. Confirmation eliminates country risks and insolvency risk of the issuing bank.
Step by Step Explanation of Letter of Credit Confirmation Process
Step 1 – Sale Contract: The exporter and importer sign a sale contract. They choose letter of credit as a payment method.
Step 2 – Confirmation Request on Sale Contract: On the sales contract, the exporter demands a confirmed letter of credit. The exporter may wish the credit to be confirmed by a bank which is acceptable for the exporter. In order to make sure that the credit is not be confirmed by another bank, which is not suitable for the exporter, the exporter should indicate this on the sales contract with a wording similar stated bellows:
“The documentary letter of credit should be issued in a way so that it can be confirmed by a bank acceptable to the exporter”.
Step 3 – Letter of Credit Application: The importer applies to his bank to open the letter of credit.
Step 4 – Letter of Credit Issuance: The issuing bank issues the letter of credit. The letter of credit must include “May Add” or “Confirm” codes in field “Field 49: Confirmation Instructions”.
Step 5 – Confirmation: Advising bank or another bank that the beneficiary wants to have the letter of credit confirmed discuss the terms and conditions of the confirmation. If both parties agreed on the confirmation conditions, then the letter of credit will be confirmed. Confirming bank should inform to the beneficiary that it has included its confirmation to the letter of credit.
Whatever your position in an international letter of credit transaction, whether you are an export specialist in a small manufacturing company, an import responsible in a medium size international trade firm or a trade finance expert in one of the first class banks, you should always be very careful with the dates of the documents.
The dates of the documents are one of the major sources of discrepancies. This is not only my claim, but also supported by evidences.
Significant amount of ICC Opinions are issued related to this subject for the last 25 years.
How to Deal with Dates of the Documents When Working with a Letter of Credit?
Make Sure That Each Document is Properly Dated: As a general rule each letter of credit document should be dated. The documents are expected to be dated after the issuance date of the credit, but not later than the presentation date.
Important Note: The letter of credit rules allow presentation of undated documents.
Additionally, documents dated prior to the issuance date of the credit is also acceptable under the letters of credit rules.
However, the issuing banks prevent presentation of such documents via additional conditions such as:
All documents including transport documents must be dated but not dated prior to the issuance date of this credit.
All required documents date should be later than issue date of this later of credit
All documents must be dated and made out in English language
Follow the Instructions Indicated in the Letter of Credit: Some of the letters of credit may contain special conditions regarding the dates of the documents such as:
Shipment dated before 16/11/2018 not acceptable (blocking regulatory condition).
First shipment is to be effected on or before 50 days from L/C issuance date.
If the letter of credit contains a clause as indicated above, the beneficiaries must act accordingly.
Make Sure That You are Using L/C Terminology Correctly: Some word have special meanings under the letter of credit rules such as:
The term “within” when used in connection with a date excludes that date in the calculation of the period.
“within 2 days after” indicates a period from the date of the event until 2 days after the event.
“not later than 2 days after” does not indicate a period, only a latest date. If an advice must not be dated prior to a specific date, the credit must so state.
“at least 2 days before” indicates that something must take place not later than 2 days before an event. There is no limit as to how early it may take place.
“within 2 days of” indicates a period 2 days prior to the event until 2 days after the event.
Special Suggestions From the International Standard Banking Practice – ISBP 2007
Drafts, transport documents and insurance documents must be dated even if a credit does not expressly so require.
Documents must not indicate that they were issued after the date they are presented.
Any document, including a certificate of analysis, inspection certificate and pre-shipment inspection certificate, may be dated after the date of shipment. However, if a credit requires a document evidencing a pre-shipment event (e.g., pre-shipment inspection certificate), the document must, either by its title or content, indicate that the event (e.g., inspection) took place prior to or on the date of shipment.
A document indicating a date of preparation and a later date of signing is deemed to be issued on the date of signing.
Dates may be expressed in different formats, e.g., the 12th of November 2007 could be expressed as 12 Nov 07, 12Nov07, 12.11.2007, 12.11.07, 2007.11.12, 11.12.07, 121107, etc. Provided that the date intended can be determined from the document or from other documents included in the presentation, any of these formats are acceptable.
To avoid confusion it is recommended that the name of the month should be used instead of the number.
Some issuing banks add an additional condition to the letters of credit they have issued, indicating that freight forwarder’s bill of lading is not acceptable.
Why issuing banks disallow freight forwarder’s bill of lading?
What happens if issuing bank forbids presentation of a freight forwarder’s bill of lading under a letter of credit?
If an issuing bank wants to prohibit presentation of a freight forwarder’s bill of lading, can achieve this aim simply by adding a condition under field 47-A Additional Conditions.
Below you can find some example texts, disallowing presentation of freight forwarder’s bill of lading.
Sample Texts from Selected Letters of Credit
Forwarder’s bill of lading not acceptable.
Transport documents issued by freight forwarder are not acceptable.
Goods must be shipped through the nominated liner which will be advised by the applicant in a certified format with applicant’s seal, a copy of the same must be presented for negotiation and the bill of lading, (freight forwarder’s bill of lading is not acceptable) must evidence that the goods have been shipped on the liner specified therein.
Why issuing banks disallow freight forwarder’s bill of lading?
Issuing banks want to secure themselves as much as possible by requesting not a freight forwarder’s bill of lading, but a carrier’s bill of lading.
A carrier’s bill of lading, which is known as master bill of lading, give more security to the issuing banks comparing to freight forwarder’s bill of lading, which is known as house bill of lading.
What Does the Letter of Credit Rules Tell About Disallowing Freight Forwarder’s Bill of Lading?
UCP 600:
UCP 600 sub-article 14(l) states that
“A transport document may be issued by any party other than a carrier, owner, master or charterer provided that the transport document meets the requirements of articles 19, 20, 21, 22, 23 or 24 of these rules.”
UCP 600 sub-article 20(a) states that
a.A bill of lading, however named, must appear to: i. indicate the name of the carrier and be signed by: – the carrier or a named agent for or on behalf of the carrier, or – the master or a named agent for or on behalf of the master.
ISBP 745:
ISBP 745 states that
“A stipulation in a credit that “Freight Forwarder’s Bills of Lading are not acceptable” or “House Bills of Lading are not acceptable” or words of similar effect has no meaning in the context of the title, format, content or signing of a bill of lading unless the credit provides specific requirements detailing how the bill of lading is to be issued and signed. In the absence of these requirements, such a stipulation is to be disregarded, and the bill of lading presented is to be examined according to the requirements of UCP 600 article 20″.
According to latest version of international standard banking practices, “Freight Forwarder’s Bills of Lading are not acceptable” or “House Bills of Lading are not acceptable” stipulations in a letter of credit has no meaningunless banks defines how the bill of lading is to be issued and signed.
If no specific requirements have been mentioned in the letter of credit in regards to issuance and signature of the bill of lading, then banks, nominated bank, confirming bank and issuing bank, have to disregard such a stipulation.
Official Opinion R643 / TA669rev – 2005-2008:
If a transport document states “freight forwarder bills of lading are not acceptable” or “house bills of lading not acceptable”, can the freight forwarder or agent sign the bill of lading according to the requirements expressed in sub-article 20 (a) (i)?
Query
ICC Opinion TA 572 – Issue No. 1 (October 2004) describes the situation in which the documentary credit states that “Transport document issued by Freight Forwarder not acceptable”. The conclusion of the Opinion was that ” … the bank would be obliged to accept a bill of lading that was signed ‘as carrier’ irrespective of any knowledge it may have as to the capacity of the issuer” – i.e., even when the transport document was entitled “FBL BIFA Negotiable FIATA Multimodal Transport Bill of Lading”.
a-The above Opinion was given subject to UCP 500, and we ask you kindly to inform us if the same position would apply under UCP 600.
b-Also kindly advise if the conclusion above would be the same had the documentary credit stated that “House bill of lading not acceptable” or similar.
Analysis
One of the reasons behind conditions such as “freight forwarder bills of lading are not acceptable” or “house bills of lading not acceptable” is to require the issuance of a bill of lading by the carrier, albeit that the freight forwarder or agent could sign the bill of lading according to the requirements expressed in sub-article 20 (a) (i). If a freight forwarder or agent signs as carrier, the bill of lading becomes a carrier document.
Conclusion
The same position applies under UCP 600.
If the credit states “house bill of lading not acceptable” or similar, the same position will apply.
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.
What Are the Benefits of a Negotiable Letter of Credit to the Exporters?
Exporters can reach the payment sooner with negotiable letters of credit, while offering usance terms to the importers.
With the help of the negotiable letters of credit, exporters can balance their cash flows, and able to propose competitive payments terms to the importers.
Who Should Pay Negotiation Fees?
Negotiation fees generally covered by the exporters, although this is contrary to the letter of credit rules.
How to Understand if a Letter of Credit Negotiable or Not?
In order to understand if a letter of credit is negotiable or not, you need to look at field “41A-Available with/by” field in a MT700 swift message.
If letter of credit is negotiable, it must be mentioned under field 41A that the letter of credit is available by negotiation.
How Does a Negotiable Letter of Credit Work?
Step 1: Exporter and importer enter into a sales contract by agreeing on the terms and conditions of the business transaction.
Step 2: Importer contacts to the issuing bank for the issuance of the negotiable letter of credit.
Step 3: Issuing bank issues negotiable letter of credit in swift format and sends it to the nominated bank, who is also negotiating bank and advising bank.
Step 4: Negotiating bank advices the letter of credit to the exporter. Exporter checks the letter of credit conditions, if they are acceptable to the exporter, he starts production of the goods.
Step 5: Exporter ships the goods within the validity of the letter of credit and not later than latest date of shipment indicated in the L/C.
Step 6: Exporter presents the documents to the negotiating bank within the presentation period allowed under the letter of credit. Remember if presented documents contain a transport document, presentation must be completed within 21 days after date of shipment.
Step 7: Negotiating bank checks the documents presented by the exporter and, if determines that they are compliant, advances cash to the exporter. The “negotiation” is effectively the purchase of documents from the exporter at a discount.
Step 8: Negotiating bank presents the documents to the issuing bank.
Step 9: Issuing bank checks the documents and, if compliant, accepts them to be paid to the negotiating bank at maturity. At the same time, issuing bank gets in touch with the importer and delivers documents to him according to the financial agreement between the issuing bank and the importer.
Sample Negotiable Letter of Credit Swift Message
————————————- Message Header ——————————————-
Swift OUTPUT FIN 700 Issue of a Documentary Credit
Sender : COBADEFFXXX
COMMERZBANK AG
(HEAD OFFICE)
FRANKFURT AM MAIN DE
Receiver : BOBIHKHH
BANK OF BARODA, HONG KONG
Hong Kong HK
————————————- Message Text———————————————–
27: Sequence of Total
1/1
40A: Form of Documentary Credit
IRREVOCABLE
31C: Date of Issue
140922
40E: Applicable Rules
UCP LATEST VERSION
31D: Date and Place of Expiry
05FEB15 HONG KONG
41A: Available With…By… – BIC
ANY BANK
BY NEGOTIATION
42C: Drafts At
AT 90 DAYS AFTER BL
42A: Drawee
BOBIHKHH
If you are not familiar with the L/C language, you may not be able to understand what letter of credit is telling to you.
Issuing banks frequently state quantities of required document not explicitly, but with a special letter of credit jargon.
On this port you can find the meaning of one of the most frequently used L/C terms in regards to multiple documents.
Sample Texts:
Packing list in triplicate
Beneficiary’s signed commercial invoice{s) in triplicate, original of which must be certified by the chamber of commerce.
Certificate of origin in duplicate evidencing country of goods origin.
Beneficiary’s manually signed commercial invoice in quintuplicate certified by the chamber of commerce and/or industry or equivalent authority of the exporting / beneficiary country.
Signed and stamped with company’s seal commercial invoice in quadruplicate mentioning: a. name and address of the manufacturers/producers, b. relevant harmonized commodity code number(s) applicable to the products shipped under this credit, and certifying that: c. country of origin, d. all cartons and each items are marked with the words made in e. country of origin is printed/stitched on each item.
Letter of Credit Rules:
If a credit requires presentation of multiple documents by using terms such as “in duplicate“, “in two fold” or “in two copies“, this will be satisfied by the presentation of at least one original and the remaining number in copies, except when the document itself indicates otherwise.
Explanations:
“Packing list in triplicate” means that beneficiary could present 3 originals of packing lists or at least one original packing list and remaining with copies.
“Certificate of origin in duplicate evidencing country of goods origin” means that beneficiary could present 2 originals of certificates of origin or one original and one copy of certificates of origin.
Institute Cargo Clause A (All risks), Institute Cargo Clause B and Institute Cargo Clause C are the main types of cargo insurance types used in international trade
But which cargo clause is the most suitable one for letter of credit transactions?
How to eliminate non-delivery risks, war and strike risks in international trade?
Question Comes from Lus Miguel, Porto, Portugal:
Dear sirs,
First of all, congratulations for your website, it has been a great help. I’d like to ask you some questions regarding insurance versus letters of credit.
Knowing that if the credit is under the UCP 600 the insurance terms is agreed between exporter and importer (INCOTERMS) the banks sometimes ask for a Clause A plus extra coverage.
I think (and this is my doubt) that the banks at the bottom line can ask a minimum clause insurance (110%) if they trust their client financial capability to support a cargo loss/accident.
It is always a commercial decision.
Am I right at my conclusion?
The reason for my question is that nowadays we usually approve with clause A but if the commercials ask we lower the type of coverage to B or C.
I was looking for case studies, but I believe the risk when the cargo does not arrive to destiny is always on the side of importers/exporters (INCOTERMS chosen) and the bank is always defended since if the documents are good we have to pay them to the exporter.
Do you have knowledge of other situations that banks got “burned” regarding insurance problems when docs were okay?
Sincerely,
Here is the Answer:
Thanks for your question.
Analyses:
Insurance Coverage Under the Incoterms: According to the Incoterms 2010, seller has to make the insurance agreement with an insurance company and has to supply an insurance policy or certificate by paying the insurance premium under two trade terms:
Both CIF and CIP incoterms outlines a minimum insurance coverage, which is Institute Marine Cargo Clauses, C.
Exporters and importers are free to determine a more detailed insurance coverage such as Institute Marine Cargo Clauses, A (all risks).
Furthermore they can choose to include additional clauses to an all risk policy such as
WSRCC (War, strikes, riots and civil commotion) Clause,
Theft, Pilferage and Non-Delivery clause etc.
All of these extra insurance coverage must be paid by the buyer, unless otherwise determined on the sales contract.
Delivery Place Under CIF incoterms: Most of the international trader think that under CIF incoterms, the seller delivers the goods to the buyer at the port of discharge but this is not correct.
The seller delivers the goods to the buyer at the port of loading once the goods are shipped on board a named vessel under the CIF incoterms.
As a result, non delivery risks of the goods is not different between FOB and CIF incoterms from the point of the issuing bank under a letter of credit transaction.
The exporter delivers the good under both incoterms at the port of loading, and if the issuing bank receives a complying presentation, then it has to honor whether or not the goods arrive to the port of discharge. (Fraudulent shipments are the exemptions)
Insurance Coverage Under the Letter of Credit rules: The letter of credit rules, UCP 600, does not give directions either banks or their customers that what type of insurance cover must be selected.
Just on the contrary, the letter of credit rules tell that a credit should state the type of insurance required and, if any, the additional risks to be covered.
Conclusion:
Non-delivery Risk of Goods: As an issuing bank, the non-delivery risks remains unchanged under certain incoterms such as FOB and CIF.
The issuing bank has to honor complying presentations whether or not goods arrive port of discharge.
In practice, in most of the cases, the issuing banks have to decide accepting or rejecting the presentations while goods are still in transit, long before they have completed their journey.
Establishing Internal Standards: Each bank should establish an internal standards against non-delivery of goods risks.
This can be done by requesting all risks insurance policy covering additional clauses such as war, strikes, riots and civil commotion and theft, pilferage and non-delivery under CIF and CIP incoterms.
For the remaining incoterms you may indicate on the letter of credit application form that your bank will be arranging an insurance policy on behalf of your customer in order to secure delivery of goods.
Alternatively you can indemnify yourself against such risks by holding your customer fully responsible against non-delivery of goods under complying presentations.
Implementation: In order to establish a well-structured internal guidelines, an issuing bank could get in touch with local ICC Banking committee.
In our case it is ICC Portugal.
ICC Portugal
Rua das Portas de Santo Antão, 89
1169-022 Lisboa
T: +351 21 346 3304
E-mail: [email protected] Web: www.icc-portugal.com
A negotiable bill of lading is a bill of lading where the consignee’s name is preceded by the words “to order,” thus allowing the consignee to endorse the bill of lading to another party, thereby transferring title of the relative goods to another party. (1)
The importer has to present at least one original copy of the negotiable bill of lading to the carrier’s agent at the port of discharge in order to receive goods from the carrier.
What happens if letter of credit requests presentation of all original bills of lading to the carrier as follows?
Bill of lading to clearly indicate that the goods can only be delivered at destination port only on submission of all 3 sets of original bills of lading.
Question Comes from Heidi, Hayward, California, USA:
Can you please take a look at the following L/C language for the required documents of the B/Ls and confirm this will be manageable with the steamship lines?
Full Set of clean on board bills of lading made out to the order of opening bank and marked “freight prepaid” and notify applicant.
Bills of Lading to show the name and address and telephone/fax numbers of shipping company/agent representing them at port of destination.
B/L to clearly indicate that the goods can only be delivered at destination port only on submission of all 3 sets of original bills of lading.
Please advise.
Thank you,
Answer:
Thanks for your question.
Above letter of credit condition, which can be evaluated as a standard format, used by many banks under field 46-A: Documents Required.
The only part that you should be careful is the following one:
Bill of lading to clearly indicate that the goods can only be delivered at destination port only on submission of all 3 sets of original bills of lading.
Apparently the issuing bank would like to say:
Bill of lading to clearly indicate that the goods can only be delivered at destination port only on submission of all original bills of lading.
The problem with above condition is that it contradicts surrender clauses of the most, if not all, bills of lading in circulation as can be seen on below image.
Surrender clause of a typical negotiable bill of lading used in port to port container carriages.
Each original negotiable bills of lading is equally represents the title of goods, as a result when one them surrendered to the carrier, the remaining ones becomes void.
For this reason it is highly recommended either correction or deletion of this clause from the letter of credit.
Sources:
International Trade Procedures: A guide to doing business abroad, Wells Fargo Bank, Page: 70
Letter of credit control process for exporters can be grouped under 3 main categories.
Preliminary Investigation Stage: You should check your customer’s background and credibility at this stage.
Sales Contract Stage: You should draft and sign a sales contract at this stage.
Letter of Credit Control Stage: You should control the letter of credit draft at this stage.
Stage 1: Preliminary Investigation Stage:
Learn Who Your Customer Really Is: Nothing can protect you against an ill will customer.
As a result, you need to make sure that your customer is a valid company with a proven track of business and has a financial credibility to complete the transactions.
How to investigate your customer?
In order to understand that you are dealing with a genuine customer, who has a financial strength to start and complete the transaction, you should follow below steps:
Check your customer’s country risk: Customer’s country risk is one of the key elements that you should check before entering any contractual relationship with your customer. Be aware of political risks, economic risks as well as risks associated with sanctions, embargoes and anti money laundering regulations.
Check your customer’s references: Check your customer references by asking the potential customer to the other companies that you have been working with, freight forwarders, custom brokers and governmental organizations such as Commercial Counselors.
Buying a credit report: You can buy credit reports from “International Business Intelligence” companies.
Corporate credit reports tell you how much credibility your customer has.
For example, if the credit report suggests you that you could give 20,000 EUR credit to your customer, while your customer is pushing you to enter into a business with a total amount of 200.000,00 EUR, you should be alerted.
Buying a credit report is a wise thing, working with a new customer, especially when the payment will be made via an open account, documentary collection or letter of credit.
Stage 2: Sales Contract Stage:
After you investigate your customer, you can proceed to the sales contract drafting stage.
Letter of credit is not a sales contract. As a result you must have a sale contract regardless of the payment method you will be choosing.
After checking your customer’s credibility and signing a sale contract, now you can proceed to the letter of credit control phase.
Experienced exporters demand a “draft letter of credit” from the importers in order to make the revisions without paying extra costs for the amendments.
A draft letter of credit is prepared by the issuing bank in swift format contains all the aspects of the actual letter of credit with couple of exceptions.
It is not an operative instrument because the issuing bank intentionally indicates so.
Additionally the draft letter of credit does not secure the issuance of an actual letter of credit.
Step 1 – Checking Irrevocable Structure of the Letter of Credit: Irrevocable means that the issuing bank cannot amend or cancel the letter of credit without the written consent of the beneficiary. Ac per UCP 600 all letters of credit are irrevocable unless otherwise explicitly stated in the credit.
Check and Verify:
Make sure that the letter of credit issued subject to the latest version of the uniform rules of documentary credits, UCP 600.
Make sure that there is no indication in the credit that the letter of credit is “revocable.”
Step 2 – Verifying the Date of Issue, Latest Date of Shipment and Date of Expiry: Each letter of credit should contain a date of issue, latest date of shipment and date of expiry.
Check and Verify:
Make sure that the date of issue indicated in the letter of credit. Some letters of credit states that documents must not be dated before the letter of credit issuance date. You must ensure that if such a clause has been inserted into the credit. If so, you should comply with this regulation.
Make sure that you can make shipment before the latest date of shipment.
Make sure that you can present documents before the expiry date of the letter of credit.
Verify the expiry location of the letter of credit. In order to do that you should check following parts of the MT 700 swift message. “Field 31D: Date and Place of Expiry” and “Field 41a: Available With … By …”
If the letter of credit expires at the counters of the issuing bank, but not in your own country, you may require extra time for forwarding the documents to the issuing bank.
Further Reading:
MT 700 Swift Message Field 41a: Available With … By
MT 700 Swift Message Field 31D: Date and Place of Expiry
MT 700 Swift Message Field 44C: Latest Date of Shipment
Step 3 – Verifying the Issuing Bank: According to the letter of credit rules non-bank organizations could issue letters of credit, which leaves exporters vulnerable to fraud risk originated from the non-bank letter of credit issuers.
Check and Verify:
Make sure that the issuing bank is a valid and trustworthy bank whom you are comfortable to work with.
Make sure that the advising bank is a reputable bank located in your country.
Make sure that you have received the letter of credit in swift format through an advising bank in your country.
Step 4 – Checking the Beneficiary’s and Applicant’s Name and Address: Issuing banks usually indicate beneficiary’s name and address with errors.
Check and Verify:
Make sure that the full name of your company and its address are correctly stated in the letter of credit.
Make sure that the full name of the importer’s company and its address are correctly stated in the letter of credit.
Further Reading:
MT 700 Swift Message Field 50: Applicant
MT 700 Swift Message Field 59: Beneficiary
Step 5 – Checking the Letter of Credit Currency and Amount: The letter of credit amount and currency must match the amount and currency stated in the sales contract. Be aware of close currency symbols such as USD, AUD, CAD are being shown by the same USD ($) symbol.
Check and Verify:
Make sure that the letter of credit amount is correct.
Make sure that the letter of credit currency is correct.
Further Reading:
MT 700 Swift Message Field 32B: Currency Code, Amount
Step 6 – Checking the Description of Goods/Services: Description of goods and services is very important article especially when completing the commercial invoice.
According to the letter of credit rules, the commercial invoice must contain an exact description of goods and services that the letter of credit states.
Also it is not possible to write additional goods on the invoice even if you mention them free of charge.
Check and Verify:
Make sure that description of goods and services are corresponding the sales contract.
Make sure that all goods have been covered under the commercial invoice.
Further Reading:
MT 700 Swift Message Field 45A: Description of Goods and/or Services
Step 7 – Checking the Documents Requested by the Letter of Credit: Documentation is the core of the letters of credit. Banks decide to pay or reject the presentation by checking the documents only.
If you have a complying set of documents, you will be paid. If your presentation contains discrepancies you will be waiting for the applicant’s approval.
Please give enough attention to the documents which have been covered specifically under the letter of credit rules and international standard banking practices such as transport documents, insurance documents, bills of exchange, commercial invoices, packing lists and certificates.
Check and Verify:
Make sure that you can provide all documents required under the letter of credit.
Make sure that you can comply with the signature, issuance and authentication requirements of the documents.
Make sure that you can supply documents on time.
Make sure that there is no document should be issued or countersigned by the applicant.
Further Reading:
MT 700 Swift Message Field 46A: Documents Required
Letter of Credit Documents
Complying Presentation
How to Handle a Letter of Credit Which Contains a Joker Clause?
What are the Risks of a Document Which is to be Issued, Signed or Countersigned by the Applicant in a Letter of Credit Transaction?
Step 8 – Checking the Payment Terms: Payment terms in a letter of credit transaction define how sooner the beneficiary can reach to the payment. It is also known as “Tenor”.
According to the latest letter of credit rules all letters of credit must state whether they are available by sight payment, deferred payment, acceptance or negotiation.
The payment term “At Sight” indicates that the exporter will be paid within a reasonable time after documents will be found complying by the issuing bank or the confirming bank.
“Deferred Payment” indicates that the exporter will be paid after certain amount of time indicated in the letter of credit.
For example, if a letter of credit indicates that the payment is available at “90 days after bill of lading date”, the exporter will be paid 90 days after date of shipment, of coarse with the condition that the complying presentation.
The payment term “acceptance” indicates that letter of credit consists of a draft either “sight” or “usance”.
The payment term “negotiation” indicates that the beneficiary could get his payment from the nominated bank before the maturity date.
Check and Verify:
Make sure that payment terms quoted in the letter of credit agree with the sales contract.
Further Reading:
Availability of Letters of Credit
At Sight Letter of Credit
Step 9 – Checking the Incoterms: Trade terms have been grouped into two main categories under the Incoterms 2010 rules: Incoterms that can be used only by sea transportation (FAS, FOB, CFR and CIF) and Incoterms that can be used with all modes of transport (EXW, FCA, CPT, CIP, DAT, DAP and DDP).
As a result Incoterms and shipment mode must match each other in a letter of credit transaction.
Furthermore, “Freight Collect” and “Freight Prepaid” expressions must be used in conjunction with the applied Incoterms.
As an example, keep in mind that you can not use the CIF term with “Freight Collect” expression.
Finally, if Incoterms are stated in the “description of goods and services” part of the letter of credit, the commercial invoice must exactly reflect the stated Incoterms.
For example, if the letter of credit states “FOB New York Port, USA, Incoterms 2010” in the “description of goods and services” part of the L/C, the commercial invoice must show this exact definition as indicated.
Check and Verify:
Make sure that Incoterms and the shipment mode must match each other.
Make sure that “Freight Collect” and “Freight Prepaid” expressions are in accordance with the applied Incoterms.
Make sure that you know your responsibilities under the Incoterms which is stated in the letter of credit.
Further Reading:
Incoterms
Incoterms 2000
Incoterms 2010
What happens if a Letter of Credit Calls for a Wrong Incoterms?
Step 10 – Checking the Port of Loading / Port of Discharge: Port of loading and port of discharge are the two main elements of a marine bill of lading.
According to the letter of the credit rules the port of loading and port of discharge must not be in conflict with the ones stated in the letter of credit.
As a result you must make sure that the port of loading and port of discharge is consistent with your sales contract.
Keep in mind that as an exporter you may benefit from the use of a very generalized port of loading definition in the letter of credit , such as “Any U.S. West Coast Port” or “Any U.S. port” or even “Any North American Port”.
But when you dispatch the goods, you must write the actual port of loading to the bill of lading.
Check and Verify:
Make sure that port of loading and port of discharge stated in the letter of credit is consistent with your sales contract.
Further Reading:
MT 700 Swift Message Field 44E: Port of Loading/Airport of Departure
MT 700 Swift Message Field 44F: Port of Discharge/Airport of Destination
Step 11 – Checking the Letter of Credit Fees: Letter of credit is not a cheap payment option.
If you do not give enough attention to the letter of credit charges as an exporter, your profit margin may be reduced significantly.
As a result you have to understand your approximate cost of working with a letter of credit at the beginning of the transaction.
If possible try to reflect these costs into the goods when you are giving a price offer to your customer.
Now you know that letter of credit costs are high, but you may still wonder which letter of credit costs will be paid by the exporter.
In theory all L/C fees must be paid by the importer. But in reality importers pay only letter of credit issuance costs and force exporters to pay the remaining L/C charges.
As a result, exporter may be facing to pay
“Courier Fee / Postage Fee”,
“Advising Fee”,
“Discrepancy Fee”,
“Handling Fee / Negotiation Fee”,
“Amendment Commission”,
“Confirmation Fee”,
“Reimbursing Bank Charges”.
Check and Verify:
Understand and determine which fees must be paid by the exporter according to the letter of credit conditions.
Try to figure out how much money you have to pay for each sort of letter of credit fees.
Further Reading:
Letter of Credit Fees
How to deal with high banking commissions under letters of credit as an exporter
Advising Fee
Discrepancy Fee
Confirmation Fee
Step 12 – Checking the Presentation Period: Current letter of credit rules gives 21 days to the exporters to make their presentations to the nominated banks.
The 21 days presentation period starts with the date of shipment. You must complete your presentation within this allowed time frame.
In some instances issuing banks arrange special presentation periods for each letter of credit by inserting clauses such as “Documents must be presented for negotiation within 15 days after the on board validation date of the ocean bill of lading and within the validity of the letter of credit.”
If a letter of credit contains a special presentation period clause, the exporter must obey this specific presentation period for the letter of credit, but not the standard 21 day presentation period.
Check and Verify:
Determine the presentation period of the letter of credit.
Make sure that you are able to comply with this presentation stipulation.
Further Reading:
MT 700 Swift Message Field 48: Period for Presentation
Step 13 – Checking the Partial Shipments: The letter of credit rules allow partial shipments.
Able to make partial shipments is a huge advantage for the exporter. As a result you should try to keep the letter of credit in a way that it is allowing the partial shipments.
If your letter of credit is silent concerning partial shipments, it is should be understood that the partial shipments are allowed.
Check and Verify:
Make sure that partial shipments are allowed under the letter of credit and it is what you have agreed on your sales contract.
Further Reading:
What is a partial shipment?
MT 700 Swift Message Field 43P: Partial Shipments
Which one is more important: Partial shipment or transshipment?
Do partial drawings and partial shipments have the same meaning?
What are the consequences of not allowing partial shipments?
Step 14 – Checking the Transshipment: The letter of credit rules allow transshipments.
Actually, transhipments are not controlled by the exporters and almost all the container carriers do practice several transshipments between the ports of loading and ports of discharge.
For example a container vessel carrying cargo between Xiamen Port, China to Ploce Port, Croatia make transshipments at Chiwan Port, China and Gioia Tauro Port, Italy.
These transshipments are arranged by the carrier. The shipper has no influence.
You cannot say to the carrier “Hey, transhipment is prohibited as per my letter of credit terms, you can not make any transshipments!”.
What you can do is to make sure that transshipment is allowed under your letter of credit.
Transhipment should be prohibited only very rare situations in the letter of credit transactions.
Check and Verify:
Make sure that transshipments are allowed under the letter of credit and it is what you have agreed on your sales contract.
Step 15 – Checking the Reimbursement Instructions: Reimbursement instructions can be found either in;
“Field 47-A : Additional Conditions” or
“Field 78: Instructions to the Paying/Accepting/Negotiating Bank”.
Reimbursement instructions are very important to the exporter, as they determine how and when payment will be received.
There are mainly four types of reimbursement instructions used in international documentary credits. These are:
The issuing bank authorizes the nominated bank to debit its account;
The issuing bank instructs the nominated bank to claim reimbursement from a reimbursing bank;
The issuing bank requires the nominated bank to send a swift message notifying the issuing bank that the documents have been received and found to be in compliance with the LC terms, only then the issuing bank remits funds to the nominated bank;
The issuing bank requires nominated bank to send documents to the issuing bank for payment (very rare and slowest reimbursement method of payment).
Check and Verify:
Make sure that reimbursement instructions do not block you to receive payment via unreasonable restrictions.
Further Reading:
MT 700 Swift Message Field 78: Instructions to the Paying/Accepting/Negotiating Bank
URR 725 – The Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits – ICC Publication No. 725
Step 16 – Non-Documentary Conditions: A 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.
Non-documentary conditions are great source of confusion and disputes between the issuing banks and exporters.
Documentary Condition Examples:
Certificate of origin issued in 1 original and 1 copy legalized by the local chamber of commerce attesting that goods are of China origin.
Certificate of origin must show that goods are of China origin.
Non-Documentary Condition Examples:
Exported goods must be Australian Origin.
Any of the presented document must not show that goods are originated from a country other than Australia.
Check and Verify:
Make sure that you have identified all non-documentary conditions in the letter of credit.
What are the Risks of a Document Which is to be Issued, Signed or Countersigned by the Applicant in a Letter of Credit Transaction?
Step 18 – Checking the Confirmation: Confirmation means a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation.
A confirming bank is requested by the issuing bank to add its guarantee of payment or acceptance to the letter of credit instrument.
You can protect yourselves against various risks under the letter of credit transaction by having the letter of credit confirmed by a prime bank in your country.
Check and Verify:
Make sure that you can have the letter of credit confirmed by one of the prime banks in your country.
Step 19 – Checking the Reimbursement Bank: The reimbursing bank is usually named in “Field 53a: Reimbursing Bank” of a S.W.I.F.T. 700 message.
Check and Verify:
Make sure that reimbursement bank identified in the letter of credit is one of the most reputable banks around the world such as Commerzbank, HSBC Bank, The Bank of America Merrill Lynch etc..
Further Reading:
MT 700 Swift Message Field 53a: Reimbursing Bank
MT 700 Swift Message Field 78: Instructions to the Paying/Accepting/Negotiating Bank
Reimbursement and Reimbursing Bank
URR 725 – The Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits – ICC Publication No. 725
Step 20 – Conclusion: Do not assume anything when working with a letter of credit.
Always act with caution. If you do not know a term read the letter of credit rules, ask it to your bank, check reputable online sources before taking any further steps.
Let me finish this part with the sentence I have written just at the beginning of this booklet.
“Both exporters and importers are protected by letters of credit in certain amount, if they act properly.”
Shipping documents, when used as a term in a letter of credit, could create problems between the issuing bank and the beneficiary due to its obscure meaning.
It is not possible to find a “shipping documents” term under the documentary credit rules, as a result ICC Banking Commission discourages banks to use it.
But issuing banks still choose to implement this term in their credits one way or another..
You can find two examples below how shipping documents term is used in the letters of credit by the issuing banks.
Example 1:
Field 47-A Additional Conditions: Shipment date and shipping documents including bill of lading dated prior to letter of credit opening date is not acceptable.
Analysis: Using the shipping documents term in a way, as specified on above example, may create disputes between the issuing bank and the beneficiary.
According to the ISBP 745, which is the latest International Standard Banking Practices published by ICC, “shipping documents” term defined as follows: “all documents required by the credit, except drafts, tele‐transmission reports and courier receipts, postal receipts or certificates of posting evidencing the sending of documents.”
Conclusion: Under normal circumstances, it is expected that even if the drafts, tele‐transmission reports and courier receipts, postal receipts or certificates of posting have been dated prior to the issuance date of the credit, the issuing bank would accept such presentation.
These having been said, in order to be on the safe side, the beneficiary may choose to present all documents under this letter of credit will be dated after the issuance date of the documentary credit to prevent any problem with the issuing bank, because of the fact that the issuing bank’s intention, by using the term of shipping documents, may be referring all the documents that have been requested by the credit, but not just the ones as being described under the ISBP 745.
Example 2:
46-A Documents Required:
Full set of clean on board bills of lading issued or endorsed to the order of Issuing Bank, notify applicant showing freight prepaid.
Field 47-A Additional Conditions: Shipping documents should be prepared in the name of: Applicant Company.
Analysis: Using the “shipping documents” term in a way as exhibited in example 2 would be the most risky situation for the beneficiaries.
Let me try to explain the reason.
On this example, the issuing bank defines how the bills of lading should be completed under the field 46-A: Documents Required.
But the issuing bank puts another indication under the field 47-A Additional Conditions stating that “Shipping documents should be prepared in the name of: Applicant Company.”
The beneficiary may confuse at the document preparation stage as these statements contradict each other.
Under such a circumstances the best advice that can be given to the beneficiary is that applying to the applicant for an amendment to delete the so called phrase which has been inserted in field 47-A by the issuing bank.
