Beneficiary

Presentation – Parties to the Letter of Credit

Ozgur Eker (CDCS) Presentation 28 January 20198 February 2019Advising Bank, Applicant, Beneficiary, Confirming Bank, Issuing Bank, Nominated Bank, Presentation, Reimbursing Bank

Issuing Bank

Issuing Bank is the bank that issues a letter of credit at the request of an applicant or its own behalf.
Letter of credit is issuing bank’s payment promise against a complying presentation.
Most of the time issuing issuing banks receive receive the conditions conditions of the letters of credit from applicants through LC Application Forms.
Once an issuing bank opens an LC it undertakes to honor a complying presentation of the beneficiary without recourse.

Applicant

Applicant is the buyer of the underlying transaction.
Applicant is the party on whose behalf the letter of credit is issued.
Applicants complete Letter of Credit Application Forms to pass the details details of the letter of credit to issuing issuing banks via online forms or hard copy.
Once letter of credit is issued applicant removes from the lc equation in terms of payment obligation. Issuing banks must honor complying presentations independently and irrevocably.

Beneficiary is the seller of the underlying transaction.
Beneficiary is the party in whose favor the letter of credit is issued.
Beneficiary ships the goods as required by the letter of credit and presents presents documents documents as indicated indicated.
Beneficiary will gets its money from the issuing bank as long as it complies with the letter of credit conditions.
Beneficiaries prove their compliance to the letter of credit conditions by making complying presentations to the banks.

Advising Bank

Advising bank is the bank that passes letter of credit to the beneficiary. UCP 600 describes advising bank as « the bank that advises the credit at the request of the issuing bank»
Advising banks mostly located on the same country with the beneficiaries.
Advising banks have very limited responsibilities against beneficiaries. Their main responsibility is to advise the credit to the beneficiaries.
They have no payment obligation unless they are also the confirming bank.

Nominated Bank

Nominated bank is the bank with which the credit is available.
Most of the time nominated banks are also the advising banks.
Nominated banks may honor a complying presentation. But their payment responsibility is not obvious. If they choose not to honor a complying presentation, there is no penalty mechanism defined in the letter of credit rules, UCP 600, for such an activity

Confirming Bank

Confirming bank is the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request.
Most of the time a confirming bank is also the advising bank and the nominated bank.
Confirming Confirming bank provides provides beneficiary beneficiary an additional payment guarantee separate from the issuing bank’s payment obligation.
Confirming banks are located on the same country as beneficiaries so they will eliminate country risk of the issuing banks.

Reimbursing Bank

Reimbursing Bank : Reimbursing Bank shall mean the bank instructed and/or authorized to provide reimbursement pursuant to a reimbursement authorization issued by the issuing bank.

Correct Addresses of the Beneficiary and the Applicant

Ozgur Eker (CDCS) How to Work With a Letter of Credit, Letter of Credit Basics, Letter of Credit Discrepancies 11 June 20187 April 2019Applicant, Beneficiary, Name and Address

When the addresses of the beneficiary and the applicant appear in any stipulated document, they need not be the same as those stated in the credit or in any other stipulated document, but must be within the same country as the respective addresses mentioned in the credit.

Laura from Germany is asking a question regarding the beneficiary’s address.

She would like to know whether banks can control the address indicated in the letter of credit by comparing it with their internal systems. Below you can find her question and my answer respectively.

Question:

Good day,

I would like to know whether you can advise what responsibility the bank would have if they receive an L/C for their client, to the correct NAME of the beneficiary BUT the address indicated in the L/C does not match with the address in the registry of the bank (customer’s address).

Is the bank supposed to recheck this information BEFORE accepting the L/C?

Also, when the bank receives the shipping documents from their client, again the address in the invoice, packing list, etc. is NOT the same address as they one they have in their registry.

Would very much appreciate your comments.

Thanks / regards

Laura

Answer:

Dear Laura,

“Wrong name and address of the beneficiary or applicant” is one of the most common discrepancy types under l/c transactions.

A beneficiary of the letter of credit has to present discrepancy free documents in order to get his payment from the issuing bank.

The issuing bank has to follow the letter of credit rules when checking the documents.

Related article of the letter of credit rules is mentioned below:

Article 14 – Standard for Examination of Documents
j: When the addresses of the beneficiary and the applicant appear in any stipulated document, they need not be the same as those stated in the credit or in any other stipulated document, but must be within the same country as the respective addresses mentioned in the credit. Contact details (telefax, telephone, email and the like) stated as part of the beneficiary’s and the applicant’s address will be disregarded. However, when the address and contact details of the applicant appear as part of the consignee or notify party details on a transport document subject to articles 19, 20, 21, 22, 23, 24 or 25, they must be as stated in the credit.
k. The shipper or consignor of the goods indicated on any document need not be the beneficiary of the credit.

As it is seen from above quotes, neither the address of the beneficiary or the address of the applicant has to match the addresses stated in the letter of credit. Only exception of this rule is the the consignee or notify party details on the transport documents.

Additionally, according to the letter of credit rules the shipper or consignor of the goods indicated on any document need not be the beneficiary of the credit.

Which means that 3rd party documents are acceptable.

But in some situations, the issuing bank do not allow presentation of 3rd party documents by adding special conditions to the letter of credit.

As a result it is advisable to use both beneficiary and applicant names on the documents as stated in the letter of credit.

Also try to copy the correct addresses of the beneficiary and the applicant to the documents from the letter of credit without making any mistake.

There is no ground for a bank to check a beneficiary’s address with his internal system, as long as the letter of credit do not indicate so.

I assume the issuing bank may have suspected from a fraudulent transaction.

Partial Acceptance of Amendments

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

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

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

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

As of that moment the credit will be amended.

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

Real Life Example: Kuldeep is Asking This Question From India

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

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

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

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

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

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

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

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

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

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

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

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

What is the effectiveness date of an amendment?

Effectiveness Date of an Amendment

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

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

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

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

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

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

But what is the effectiveness date of an amendment?

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

Here is his question as arrived by e-mail.

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

Dear Vincent ,

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

Amendments are explained at article 10 in UCP 600.

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

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

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

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

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

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

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

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

References:

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

Commercial Invoice Not Issued by the Beneficiary Discrepancy

Ozgur Eker (CDCS) Commercial Invoice Discrepancies, Letter of Credit Discrepancies 5 February 20187 April 2019Beneficiary, Commercial Invoice, Commercial Invoice Discrepancies, Letter of Credit Discrepancies

commercial invoice discrepancy issuer of the document

A commercial invoice is a trade document, which is generally prepared during the shipment stage.

A commercial invoice is a required document for the export and import clearance process. It is sometimes used for foreign exchange purposes.

In the buyer’s country, it is the document that is used by their custom officials to assess import duties and taxes. (Source: Export Information and Documentation: A Guide for New Exporters Page: 18)

A commercial invoice should be issued by the beneficiary of the letter of credit, according to the letter of credit rules and standard banking practices.

A commercial invoice must appear to have been issued by the beneficiary or, in the case of a transferred credit, the second beneficiary.

A commercial invoice must appear to have been made out in the name of the applicant.

If the beneficiary of a letter of credit presents a commercial invoice, which has been issued by an entity other than the beneficiary, the issuing bank raises a discrepancy, which is known as invoice not issued by the beneficiary.

Discrepancy Example: Commercial Invoice Not Issued by the Beneficiary

A letter of credit has been issued in SWIFT format, subject to UCP 600, with the following details:

Letter of Credit Conditions

Field 59: Beneficiary – Name & Address: Himmel Konig Sondermaschinen GmbH Auguste-Kessler-Str. 10 72100 Aalen Germany

Field 45A: Description of Goods and or Services: Supply of 1 pcs erosion and tool grinding machine as per Proforma Invoice No 120 dated 12.03.2014. Delivery Terms: CFR Apapa Seaport Lagos Incoterms 2010.

Field 46A: Documents Required: 2 original signed commercial invoices and 3 copies.

Field 47A: Additional Conditions: Third party documents are acceptable which means that all documents, excluding drafts and invoices, may be issued by a party other than the beneficiary.

The beneficiary presented a commercial invoice as shown on the below picture.

Commercial Invoice

Discrepancy: Invoice should have issued by “Himmel Konig Sondermaschinen GmbH”, but it is actually issued by “Maschinen Handels GmbH” .

The additional condition, which is included in field 47-A, would have no effect on determination of the discrepancy, because the draft and the commercial invoice have been excluded from the scope of this clause.

Reason for Discrepancy: Commercial invoice not issued by the beneficiary. A commercial invoice must appear to have been issued by the beneficiary or, in the case of a transferred credit, the second beneficiary.

Parties to Letters of Credit

Ozgur Eker (CDCS) Advising Bank, Applicant, Beneficiary, Confirming Bank, Issuing Bank, Letter of Credit Basics, Letter of Credit Parties, Nominated Bank, Reimbursing Bank 16 January 201810 February 2025Advising Bank, Applicant, Beneficiary, Confirming Bank, Issuing Bank, Nominated Bank, Reimbursing Bank

This page discusses the parties involved in a letter of credit. Each L/C party will be presented briefly, and its roles and responsibilities will be explained with the help of the graphic illustrations. A video on this topic is also available.

A Letter of Credit (LC) is a financial instrument in international trade that guarantees payment to the seller (beneficiary) as long as the agreed-upon terms and conditions are met.

It involves multiple parties, each playing a distinct role.

The key parties in an LC transaction include the beneficiary (seller), applicant (buyer), issuing bank, advising bank, confirming bank, nominated bank, and reimbursing bank. Understanding the roles and responsibilities of these entities ensures smooth and hassle-free letter of credit operations for businesses.