Inspection Certificate

Ozgur Eker (CDCS) Inspection Certificate, Letter of Credit Documents 5 May 20187 April 2019Inspection Certificate, Letter of Credit Documents

On this page, I will try to explain “Quality Control Inspections”, “Inspection Certificates” and their applications in letters of credit.

A letter of credit transaction is all about the documents, but not the actual goods or services.

The banks reach to payment or non-payment decisions under the letters of credit only by controlling the documents presented by the beneficiaries.

The banks have no connection with the actual goods or the services.

Above explanation put importers to a serious fraud risk related to quality of goods such as:

non-delivery of goods or,
goods shipped with inferior quality.

A third party inspection, that is carried out by a reputable independent inspection company, could eliminate or at least limit the fraud risk related to quality of goods considerably.

Depending on the type and value of the goods, the inspection may be commenced when the goods are in process of being manufactured or packed and until they are on board the means of transport concerned. (1)

Place of inspection can be set either in the country of origin (at the time of loading) or in the country of destination (at the time of unloading or at the warehouses where the imported goods are received).

Types of Quality and Shipment Inspections in International Trade:

Third party inspection services can be grouped under two main categories.

Previous Shipment Inspections, which are performed before the goods are shipped from the exporter’s factory and
Post Shipment Inspections, which are performed after the goods are shipped from the exporter’s factory. (2)

Previous Shipment Inspections are as follows:

Pre-Production Inspection (PPI)
During Production Inspection (DUPRO)
Pre-Shipment Inspection (PSI)
Container Loading Inspection (CLI)

Post Shipment Inspections are as follows:

Post-Shipment Inspection

The most frequently used inspection type in international trade is the pre-shipment inspection, PSI, is a reliable quality control method for checking goods’ quality.

What is an Inspection Certificate?

An inspection certificate, sometimes called as certificate of inspection or pre-shipment inspection certificate, is a trade document used in international trade transactions, issued generally by an independent inspection company after conducting a related inspection, certifying whether or not the goods are in question are in conformity with the specifications stated on the sales contract. (3)

What are the Types of Inspection Certificates:

The certificates delivered by the inspection companies are basically of two different types:

Clean Report of Findings (CRF): This is a document required by the importing (sometimes, exporting) country, as some developing countries have a large part or all of their imports (exports) inspected prior to shipment in the country of origin, as to quantity, quality and price (Pre-Shipment Inspection – PSI). These PSI schemes, entrusted to international inspection agencies, have been established by the authorities for custom, fiscal or foreign exchange control purposes and are compulsory.
Commercial Certificate of Inspection: Stating the quantity and quality ( any measurable quality parameter requested by the principals). These Certificates are issued by an inspection agency acting as a neutral third party assessing the actual condition of a traded cargo between a seller and a buyer. A commercial certificate of inspection is necessary to build up a long-term relation between buyers and sellers. Bad quality of goods in trade can lead to loss of market share in the long run.

What are the Benefits of Inspection Certificates:

Main objective of the inspection certificate is to satisfy the importer or the government body that the goods are in conformity with the indicated specifications on the sales contract or proforma invoice.

Inspections are important tools to reduce trade risks and avoid fraud.
Shipment of low quality goods prevented.
Non-delivery fraud with fake bill of lading or any other transport document prevented.
Another fraud risk factor is the possibility of replacement inspected goods with the fraudulent ones after the inspection: basically the cargo inspected would not go into the shipment. This can be prevented by adding a numerical link on the inspection certificate to the transport document. For example, inspection certificate that is indicating the container number can prevent such a fraudulent action.

How to Demand an Effective Inspection Certificate in a Letter of Credit Transaction?

Add at least one original copy of an inspection certificate to field 46-A Documents Required as one of the necessary documents under the letter of credit.
Make sure that inspection certificate is issued by one of the well known inspection companies around the world. The most well known inspection companies are : SGS, Bivac/Bureau Veritas, Cotecna, Intertek.
Clearly indicate on the letter of credit text that inspection certificate is complying with the specifications indicated on the sales contract or proforma invoice.
Make sure that values indicated on the inspection certificate does not conflict with the values indicated on the letter of credit or other documents.
Do not forget to add a numerical link on the inspection certificate to the transport document.

References:

Documentary Credits, Nordea Trade Finance, Page:175
What is a Pre-Production Inspection (PPI)?, www.advancedontrade.com, Retrieved: 05.May.2018
What is an Inspection Certificate or Certificate of Inspection?, www.advancedontrade.com, Retrieved: 05.May.2018

Letter of Credit Documents

Ozgur Eker (CDCS) Air Waybill, Bill of Exchange, Bill of Lading, Certificate of Origin, Charter Party Bill of Lading, Commercial Invoice, Featured, Inspection Certificate, Insurance Policy, Letter of Credit Documents, Packing List, Road Transport Document, Sea Waybill 12 March 20187 April 2019Bill of Lading, Certificate of Origin, Commercial Invoice, Inspection Certificate, Insurance Policy, Letter of Credit Documents, Packing List

After reading this post, you should understand why documentation is very important under letters of credit.

Additionally, most frequently used document links have been supplied on later parts of this article.

There are many important points in a typical letter of credit transaction that need to be taken care of professionally.

However, documentation is much more important than any other aspects of the letters of credit transactions, because the documentation forms the backbone of the letters of credit structure.

In order to understand the importance of the documentation, please assume that you are an exporter, whom has just shipped an order.

How can you prove to the issuing bank that you have make the shipment according to the letter of credit terms?

Which means that;

you have shipped the goods on time, not late
you have shipped the right goods, not wrong ones
you have shipped the goods in good condition, no apparent defect on the packing
you have delivered the goods to the carrier for transportation from port of loading to the port of discharge indicated in the credit etc.

In order to prove above points to the issuing bank, you have to supply a relevant transport document.

Furthermore, let us also consider that the delivery term was CIF Incoterms 2010, which obligates the exporter, which is you, to arrange and pay the insurance for the shipment.

Once again, you have to supply an insurance policy to fulfill your insurance responsibility.

The examples can be extended, but perhaps the main idea is very clear. Letters of credit transactions are related to the documents only, not actions.

The importance of the documentation is stated in UCP 600 article 5 as follows:

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

In addition, every condition stated in the letter of credit must be connected to a document. This point is also clearly indicated in UCP 600 article 14 as below.

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.

Documents Most Frequently Used Under Letters of Credit Transactions:

Transport Documents:

Insurance Documents:

Financial Documents:

Bill of exchange (Draft) (Sample)

Commercial Documents:

Official Documents:

Inspection Certificate Discrepancies

Ozgur Eker (CDCS) Inspection Certificate Discrepancies, Letter of Credit Discrepancies 7 March 20187 April 2019Inspection Certificate, Inspection Certificate Discrepancies, Letter of Credit Discrepancies

On this page you can find most common discrepancies related to the inspection certificate, which is issued under a typical letter of credit transaction.

Discrepancy can be defined as an error or defect, according to the issuing bank, in the presented documents compared with the documentary credit, the UCP 600 rules or other documents that have been presented under the same letter of credit.

Inspection in international trade can be defined as a process of checking the quality of goods against the contractual requirements.

Inspection certificate is the document that is usually issued by the inspection company after completion of the inspection.

Inspection certificate provides data on the result of the inspection.

Inspection Certificate Discrepancies

Inspection Certificate Not Issued and Signed by the Party Required by the Letter of Credit
Total Quantity Indicated on the Certificate of Inspection is not in Accordance with the Bill of Lading and Certificate of Origin
Inspection Certificate Is not Dated within the Timeline Required by the Documentary Credit
Inspection Certificate Identifies Different Goods Inspected Inconsistent with Those Described by Commercial Invoices
Inspection Certificate Indicates That Goods Do not Comply with the specifications
Inspection Certificate Indicates That Packing is not as per L/C.
Pre-shipment Inspection Certificate Shows Date of Inspection a Later Date Than Date of Shipment

Important Points Regarding the Inspection Certificates under Letter of Credit Rules:

When a credit requires the presentation of an inspection certificate, this will be satisfied by the presentation of a signed document titled as inspection certificate, or bearing a similar title or even untitled, which fulfills its function by certifying the result of the indicated action, for example, the results of the inspection.
When a credit requires the presentation of a pre-shipment inspection certificate, which relates to an action required to take place on or prior to the date of shipment, the certificate must indicate:

a. an issuance date of the certificate is no later than the date of shipment; or
b. stating that the inspection of goods took place prior to, or on the date of shipment,
c. the exact title of the required certificate, such as, “Pre‐shipment Inspection Certificate”.

An inspection certificate should be issued by the institution stated in the credit.
When a letter of credit does not state the title of an issuer, any institution including the beneficiary could issue the inspection certificate.
When a letter of credit indicates specific requirements with respect to inspection, the data regarding the inspection mentioned on the inspection certificate should comply with those requirements.

Inspection Certificate Not issued and Signed by the Party Required by the Letter of Credit Discrepancy

inspection certificate not issued as per letter of credit

Inspection in international trade can be defined as a process of checking the quality of goods against the contractual requirements.

Because, the importer and exporter are located in different countries, and they are usually living very away from each other, as a result it would not be feasible for the importer to send someone to check the quality of goods for each shipment.

If the importer (the applicant) is not able to send a person he trusts to the place of shipment, he can ask an internationally recognized inspection company, such as the Geneva-based Société Générale Surveillance (SGS) to perform the inspection required.

The applicant will instruct the inspection company as to the manner in which it is to check the goods and what they must look for. (1)

Third party inspection services in international trade can be grouped under two main categories.

Previous Shipment Inspections, which are performed before the goods are shipped from the exporter’s factory and
Post Shipment Inspections, which are performed after the goods are shipped from the exporter’s factory.

Inspections, which are performed before the goods are shipped from the exporter’s factory are as follows:

Pre-Production Inspection (PPI)
During Production Inspection (DUPRO)
Pre-Shipment Inspection (PSI)
Container Loading Supervision (CLS) or Container Loading Inspection (CLI)

Inspections, which are performed after the goods are shipped from the exporter’s factory are as follows:

Post-Shipment Inspection (2)

Inspection certificate is the document that is issued by the inspection company after completion of the inspection. Inspection certificate provides data on the result of the inspection.

The inspection certificate should be issued by the party stated in the letter of credit.

According to the letter of credit rules and standard banking practices an inspection certificate, however named, must appear to be issued and signed by the entity stated in the letter of credit.

For example, if the letter of credit requires that pre-shipment inspection certificate should be issued by SGS, Intertek or CCIC Inspection Company, the inspection certificate that has been presented by the beneficiary must be issued and signed by one of these independent inspection companies.

If issuing bank finds out that an inspection certificate has not been issued and signed by the entity as required by the letter of credit, then the issuing bank will raise a discrepancy, which is known as inspection certificate not issued and signed by the party required by the letter of credit.

Letter of Credit Discrepancy Example: Inspection Certificate Not Issued and Signed by the Party Required by the Letter of Credit

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

Letter of Credit Conditions

Field 45A: Description of Goods and or Services: 20 mtons of %100 organic Italian Extra Virgin olive Oil. Delivery Terms: CIF Port of Newark, USA Incoterms 2010.

Field 46A: Documents Required:

Beneficiary’s dated and manually signed commercial invoice in duplicates bearing full description of goods and its quantity, net and gross weight, unit and total price.
Insurance policy covering all risks showing claims payable in USA.
3/3 full set original clean bills of lading made out to order of issuing bank, notify applicant company indicating freight prepaid stating the name, telephone and fax numbers of carrier’s agent in port of discharge. Bill of lading should evidence shipments made in refrigerated 40′ closed containers.
The original inspection certificate issued not prior to marine bill of lading date by S.G.S or its authorized agent on S.G.S letter head certifying that the goods shipped/inspected are in conformity with the quality, quantity, and packing of the goods loaded are strictly complying with specifications of the goods indicated in the relative Purchasing Instruction, the terms of the l/c and all subsequent amendments as presented to S.G.S by the importer. The inspection certificate shall verify that the goods are in conformity with USDA organic food standards.

The beneficiary presented an insurance policy as shown on the below picture.

Inspection Certificate

Discrepancy: Inspection certificate should have been issued by S.G.S or its authorized agent on behalf of S.G.S inspection company. On the other hand, the inspection certificate has been issued by another inspection company.

Reason for Discrepancy: According to letter of credit rules and standard banking practices an inspection certificate, however named, must appear to be issued and signed by the entity stated in the letter of credit.

References:

Documentary Credits in Practice, Second edition 2009, Nordea, Page:174, Reached: 07.March.2018
What is a Pre-Production Inspection (PPI)?, www.advancedontrade.com, Reached: 07.March.2018