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NEW EUROPE MASTER IN BANKING AND ENTREPRENEURSHIP – IV Edition
“Documentary Credits in theory and practice”
SUPERVISORS: Prof. Matej Lah Fulvio Zampieri
STUDENT: Igor Vitomir
ACADEMIC YEAR 2006 – 2007 CONTENTS
1.DEFINITON OF THE DOCUMENTARY CREDIT................................................4 Definition......................................................................................................................4 Historical development................................................................................................4 How the documentary credit works?.........................................................................5 Cycle 1 - The documentary credit.............................................................................5 Cycle 2 - Shipment of goods.....................................................................................7 Cycle 3 - Presentation and honouring of documents.................................................7 Cycle 4 – Customs and clearance of the goods ........................................................7 Why use a Letter of Credit?.......................................................................................7 2.TYPES OF DOCUMENTARY CREDITS.................................................................9 Sight or term/usance documentary credits...............................................................9 Revocable or irrevocable documentary credits........................................................9 Unconfirmed or confirmed documentary credits...................................................10 Documentary credits available by payment and by negotiation...........................11 Special types of a documentary credit.....................................................................13 Red clause documentary credit................................................................................14 Green clause documentary credit............................................................................15 Transferable documentary credit.............................................................................15 Back to back documentary credit............................................................................17 Deferred payment documentary credit....................................................................17 Other types of documentary credits.........................................................................18 Standby letters of credit...........................................................................................18 3.BENEFITS OF A LETTER OF CREDIT................................................................20 Benefits for the Exporter/Seller................................................................................20 Benefits for the Importer/Buyer...............................................................................20 Disadvantages of the documentary credits..............................................................21 Risks in using documentary credits.........................................................................22 4.GOVERNING LAW AND RULES FOR DOCUMENTARY CREDITS.............23 Uniform Customs and Practice for Documentary Credits (UCP)........................23 General Principles of UCP........................................................................................24 Legislation and documentary credits.......................................................................24 Basis for opening a documentary credit..................................................................25 5.THE ISSUANCE OF DOCUMENTARY CREDIT................................................29 Issuance and handling by the issuing bank.............................................................29 Liability of the issuing bank.....................................................................................30 Contents of the documentary credit.........................................................................30 Advising the letter of credit and obligation of the advising bank.........................32 Amendments of the documentary credit.................................................................33
DOCUMENTARY CREDIT TRANSACTION..........................................................36 Import/nostro letter of credit....................................................................................36 Export/loro letter of credit........................................................................................37 7.DOCUMENTS USUALLY REQUIRED UNDER A LETTER OF CREDIT......39 Draft (bill of exchange or tenor bill)........................................................................40 Commercial Invoice...................................................................................................41 Consular or Customs Invoice...................................................................................42 Transport documents ...............................................................................................42 Bill of Lading...........................................................................................................43 Air Waybill..............................................................................................................48 Rail consignment note (CIM)..................................................................................50 Road consignment note (CMR)...............................................................................51 Inland waterway transport document......................................................................52 Freight forwarder’s certificate.................................................................................53 Post and courier receipts..........................................................................................53 Other documents........................................................................................................53 Insurance Policy or Certificate................................................................................53 Certificate of Origin.................................................................................................55 GSP certificate (GSP: Generalized System of Preferences)....................................55 Movement certificate (EUR)...................................................................................55 Import and export licenses ......................................................................................55 Health or phyto-sanitary certificate.........................................................................56 Inspection Certificate...............................................................................................56 Packing List.............................................................................................................56 Quality certificate....................................................................................................57 Warranty..................................................................................................................57 Shipping company’s declaration.............................................................................57 8.PRESENTATION OF DOCUMENTS.....................................................................58 Honouring documents under documentary credit.................................................58 Examination of documents .....................................................................................58 Discrepancies in the presented documents..............................................................60 Refusal of documents ...............................................................................................61 Guidelines for dishonouring the documents...........................................................63 9.SOLVING DISPUTES AND FRAUDS IN DOCUMENTARY BUSINESS ........64 Courts decisions, arbitration and expert decisions.................................................64 Fraud and forgery.....................................................................................................64 10.A BRIEF EXPLANATION OF TRADE TERMS.................................................66 11.PARTIES INVOLVED IN A DOCUMENTARY CREDIT TRANSACTION. .67 LITERATURE AND SOURCES:................................................................................69
especially in international trade. Expressed more fully. Once these documents have been presented and approved. 500 (the UCP 500) 4 . Publication No. and in accordance with the buyer's (applicant) instructions to effect payment — that is by making a payment. a documentary credit is an instrument that provides: • • • a guarantee that payment to the beneficiary is to be effected. It is a way of reducing the payment risks associated with the movement of goods. At first it took a form of barter or exchanging goods for goods. Maybe one of the best definitions is provided in Article 2 of the ICC (International Chamber of Commerce in Paris) rules of the Uniform Customs and Practice for Documentary Credits. Publication No.”1 As we can see from this definition. a letter of credit is a bank undertaking of payment separate from the sales or other contracts on which it is based. The documentary credit can also be used as security for any other transaction in the same way as a traditional bank guarantee. When the documentary credit has been issued. against stipulated documents and within a prescribed time limit. Such a documentary credit is called stand-by letter of credit. Historical development Trading as an activity arose at a very early stage in the development of the different societies.1. 500 (the UCP 500) which says: “A documentary credit is an arrangement whereby a bank that acts according to instructions received from a customer (the applicant) commits itself to pay an amount to a third party (the beneficiary) against that party’s presentation of stipulated documents complying with the credit. money 1 Article 2 of the ICC (International Chamber of Commerce in Paris) rules of the Uniform Customs and Practice for Documentary Credits. DEFINITON OF THE DOCUMENTARY CREDIT Definition In simple terms. a bank’s payment undertaking has been established. or by accepting or negotiating bills of exchange (drafts) — up to a stated amount. arranges that payment ensures that agreed term of payment is applied As it can be seen basic functions of a documentary credit (letter of credit) are guarantee and instrument of payment. payment is conditional upon the presentation of complying documents. Later. it is a written undertaking by a bank (issuing bank) given to the seller (beneficiary) at the request. but it can be also used as a means of finance.
especially when wars are threatening to destroy normal trade relations between some countries. As the societies became more developed and civilized. but this assumption was wrong. It is the buyer who arranges for the credit to be issued. Cycle 1 . The documentary credit is primarily used in the international trade although sometimes it is used within one country that is usually of vast size. As it has a function of a guarantee it is often used in times of political unrest. while turnover in terms of value has risen significantly. trade was arranged among people in a much more professional way. In fact it took the same shape. as we know it today. evaluate the client’s creditworthiness following its procedure and decide whether to issue or not the 5 . turnover relative to global trade turnover is declining. These cycles can be named as: 1) The documentary credit 2) Shipment of goods 3) Presentation and honouring the documents 4) Customs clearance of the goods In practice all of these cycles can be overlapped by each other and not necessarily divided.as a mean of exchange was invented to improve trade. It was also believed that after World War II the use of documentary credits would decrease.The documentary credit It starts with agreement between the buyer and the seller. If the buyer was unknown at the seller’s place. With the invention of money and different means of transport it became possible to trade with countries from all over the world. It is believed that the documentary credit emerged in the late 18th century. it could be hard to effect the trade and in that manner such a buyer turned to well-known commercial house in that market to accept his bill of exchange. The bank will. of course. Some of these commercial houses evolved into acceptance houses or confirming houses or what is known today as merchant banks. However. The buyer has to fill in application form based on the written trade agreement and submit this form to his bank. The number of documentary credits issued decreased only a little. while the governing rules became more detailed over time. How the documentary credit works? The documentary credit can be shown as a process that is functioning in 4 cycles.
even in case of failure of the buyer or issuing bank. The application form must contain all the information required for the bank to issue the credit. Confirmation of the advising bank means its liability to pay the funds denoted in that particular documentary credit.com – S. If those two banks do not have SWIFT electronic keys exchanged. then the letter of credit is transmitted to one of the correspondent banks of the issuing bank. he must ask the buyer to amend the terms and conditions of the credit. Having checked the buyer’s application and clarified any questions of doubt.F.I. which then finds the shortest way to send the documentary credit to the beneficiary bank.T. If the buyer states a specific bank through which the credit is to be advised.e. The letter of credit is a type of placement where the exposure to risk lasts till the payment is being made by the applicant i. although it is still possible to send it by post office or different couriers in paper form. The seller should examine the received letter of credit to see if it is in accordance with the sales contract or any other agreed terms and conditions. 2 www.W. as the bank does not know the contents of the agreement. the issuing bank will use that bank if possible. will then advise the seller (the beneficiary) of the issuance of the credit by transmitting it to the seller. till the maturity date for payment (usually not over 360 days). The documentary credit is now usually transmitted electronically by teletransmission. The buyer should know that a documentary credit is binding when issued.swift. and it can be amended only with the consent of the seller. (Society for Worldwide Interbank Financial Telecommunication) 6 . Usually the issuing bank (buyer’s bank) will send electronically the letter of credit directly to the beneficiary’s bank (seller’s bank). not only for the issuing bank but also for the buyer. the bank will issue the documentary credit and send it to its correspondent bank at the seller’s place. If the seller will not accept the credit. Advising bank has no commitments in this regard in case of transmitting the credit without adding its confirmation. The advising bank.documentary credit in favor of the client/applicant. after making sure that documentary credit is genuine or appears to be genuine. The credit will be advised with or without confirmation of the advising bank. The bank usually defines application form and it is made in such way to eliminate possible misunderstandings. Today banks use SWIFT network2 regarding all necessary actions under documentary credits.
Cycle 2 . After releasing the goods by carrier. he will present the transport document to the carrier in order to obtain the goods. the applicant (the buyer) takes over the goods and makes all necessary steps through the customs procedure. When the goods have been shipped. effect the payment to the beneficiary. Then the issuing bank will reimburse the nominated bank in accordance with received payment instructions from the nominated bank. When the buyer has received these documents.Presentation and honouring of documents After the shipment of the goods seller should have all the stipulated documents in its possession and should present them to the nominated bank.Shipment of goods After receiving letter of credit. the issuing bank will send the documents to the buyer (the applicant). depending on the relevant credit. When the bank has examined the documents it will usually. He will specifically need the documents giving the title or ownership over the goods (some transport documents such as bill of lading) and those needed for customs or ones needed to pay lower custom tariffs. The nominated bank will after that. If the buyer agrees to approve the documents as conforming or if the documents meet all stipulated conditions. At the same time the issuing bank will demand payment from the buyer (the applicant). Cycle 4 – Customs and clearance of the goods It often happens that the buyer needs some of the stipulated documents required under the credit to get access to the goods and to have them cleared through the customs. the seller will receive the transport document from the carrier and arrange for the issuance of all the other documents stipulated in the credit. transmit the documents to the issuing bank in order to receive payment. which by his opinion is in order and all conditions are met. The issuing bank will also examine the documents to ensure that the terms and conditions of the documentary credit have been fulfilled. Cycle 3 . Why use a Letter of Credit? The need for a letter of credit is a consideration in the course of negotiations between the buyer and seller when the important matter of method of payment is being 7 . the seller (the beneficiary of the letter of credit) will arrange the shipment of goods.
8 . the seller can. When the seller has doubts about the credit-worthiness of the buyer and wishes to ensure prompt payment. Furthermore. by open account whereby the buyer remits payment at an agreed time after receiving the goods. or by documentary collection through a bank in which case the buyer pays the collecting bank for account of the seller in exchange for shipping documents which would include.discussed. request its own bank — or a bank of international repute — to assume the risk of the issuing bank by confirming the letter of credit. the seller can insist that the sales contract provides for payment by irrevocable letter of credit. with the approval of the issuing bank. Payment can be made in several different ways: by the buyer remitting cash with his order. if the bank issuing the letter of credit (issuing bank) is unknown to the seller or if the seller is shipping to a foreign country and is uncertain of the issuing bank's ability to honour its obligation. In the aforementioned methods of payment. in most cases. the document of title to the goods. the seller relies entirely on the willingness and ability of the buyer to effect payment.
90. TYPES OF DOCUMENTARY CREDITS There are many features of letters of credit. In this case the buyer (the applicant) wishes to defer payment. Those periods are very often calculated from the transport document date (shipment date). 60. but there are also longer or even shorter periods stipulated. 1994 Edition 9 . That is why 3 ICC Guide to Documentary Credit Operations for the UCP 500. depending on a type of business covered by particular documentary credit. Period for deferred payment is usually 30. They can be divided following different rules. With a sight documentary credit the beneficiary will receive payment after the presentation of complying documents. or at a future date as established in the sales contract (term/usance letter of credit). then we have confirmed and unconfirmed whether a third bank has added its confirmation. drawings negotiated before notice of cancellation or amendment must be honoured by the issuing bank. Revocable letters of credit are not used in practice or its use is very rare. 120 or 180 days. However. An irrevocable letter of credit cannot be cancelled without the consent of the beneficiary. 3 This means that they can be cancelled or amended at any time by the issuing bank without notice to the beneficiary. Revocable or irrevocable documentary credits Letters of credit can be revocable. by a possibility to revoke we have revocable and irrevocable letters of credit. With a usance letter of credit the beneficiary will receive payment on a certain date in future established by the conditions of a letter of credit. but other calculations can be applied depending on specific conditions. because it can be changed or revoked without consent of the beneficiary or even without notifying the beneficiary until payment made by the issuing bank.2. 515. which gives no security for the beneficiary and that is the reason why they were not used in practical life. ICC Publication No. Sight or term/usance documentary credits Letters of credit can permit the beneficiary to be paid immediately upon presentation of specified documents (Sight letter of credit). By time of payment we have sight or term documentary credits. Some of them are described below. There are also credits available by payment or negotiation and other special types which will be also explained in this text. Charles del Busto. Revocable documentary credit is giving to the buyer flexibility.
it has not only the promise of the issuing bank. First Edition 2000. “An unconfirmed letter of credit is no better than the issuing bank and/or its country. In this case it can happen that beneficiary bank is both confirming and advising bank. In this case the beneficiary not wanting to request for the confirmation and amendment of a credit from the issuing bank can obtain guarantee for the payment from the bank in his own country and this is so called “silent confirmation”.e.4 Unconfirmed or confirmed documentary credits An unconfirmed letter of credit carries the obligation of the issuing bank to honour all drawings. Reinhard Langerich. When the beneficiary receives confirmed letter of credit. The beneficiary can choose for his bank to be confirming bank. but the issuing bank and the applicant did not request for confirmation of the credit. Some banks are prepared to add its confirmation 4 ICC (International Chamber of Commerce in Paris) rules of the Uniform Customs and Practice for Documentary Credits. the UCP 600. 6 Article 9b of the ICC (International Chamber of Commerce in Paris) rules of the Uniform Customs and Practice for Documentary Credits. Publication No. Consequently. Confirming bank in this case has added its confirmation and guarantees the payment to the beneficiary thus decreasing the risk of the issuing bank. There are only irrevocable letters of credit under new rules i. A confirmed letter of credit has the obligation of another bank that is normally located in the beneficiary's country. Publication No. provided that the terms and conditions of the letter of credit have been complied with.”5 According to the UCP500. confirmation of a credit is made by a bank upon authorization and request of the issuing bank. Article 9b. The beneficiary usually requires confirmed letter of credit when the risk of the issuing bank is high and political risk of the buyer country is high. but also the obligation of the confirming bank to pay when presents complying documents. 500 (the UCP 500) 10 . Publication No. confirmed letters of credit are more expensive than unconfirmed ones. Unconfirmed letter of credit simply means that the third or a beneficiary bank did not put its confirmation and does not guarantee the payment under specified documentary credit. thereby giving the beneficiary the comfort of dealing with a bank known to him. 600 (the UCP 600) 5 Documentary Credits in practice.under new rules of the ICC (International Chamber of Commerce in Paris) Uniform Customs and Practice for Documentary Credits. 600 (the UCP 600) there are no irrevocable letters of credit and there is no such division of letters of credit.6 Sometimes it happens that a beneficiary wants a confirmation by a bank in his country.
Article 10 b ii says: “Negotiation means the giving of value for drafts(s) and/or document(s) by the bank authorized to negotiate. The term “giving value” is especially not clear. then the negotiating bank will have the right of recourse against the seller according to the relevant national laws on bills of 7 Documentary Credits in practice. The nominated bank has no obligation to pay after presentation of conforming documents under an unconfirmed letter of credit. 8 Article 10b ii of the ICC (International Chamber of Commerce in Paris) rules of the Uniform Customs and Practice for Documentary Credits. even to the bankers. A bank issuing a “silent confirmation” is not protected by the Article 9b of the UCP 500. Concept of negotiation is not clearly defined in the UCP 500. If the bank chooses to negotiate the draft presented with the documents and the seller (the beneficiary) has been reimbursed (paid). Credit available by negotiation is not clearly defined. Reinhard Langerich. the negotiating bank will negotiate (purchase) the documents (and the drafts drawn on a bank) presented by the seller (the beneficiary of the letter of credit) if it finds that documents are fulfilling all the conditions of the documentary credit. In some countries it is just the relevant practice that chooses which of these two types will be used. Usually. and even without informing that bank.”8 This explanation has caused many discussions in the world of documentary credits. while others are against it as they believe it opposes international rules on documentary credits. Mere examination of the documents without giving of value does not constitute a negotiation. even if the nominated bank has found the documents in order. It can be available at a named bank or at any bank. Different banks in different countries have different approach to the meaning of the “negotiation”. 500 (the UCP 500) 11 . Some banks are in favor of this method. First Edition 2000.7 Documentary credits available by payment and by negotiation The difference between these two types of credits is not so clear. When the negotiating bank has been reimbursed by the issuing bank it will pay the stipulated amount to the beneficiary (seller) of the documentary credit. Documentary credit available by payment means that the nominated or the issuing bank will release the payment after receiving credit conform documents from the beneficiary. Publication No. If nominated bank has paid to the beneficiary then the nominated bank cannot later turn to beneficiary if the issuing bank did not pay to the nominated bank.without a request of an issuing bank.
the issuing and payment of funds also goes from the applicant (buyer) to the beneficiary (seller). the payment made by the negotiating/confirming bank (can be two different banks) is made without recourse to the beneficiary. According to the Articles 9 a iv and 9 b iv of the UCP 500 credits available for negotiation can also be issued without a draft and in this case the recourse right will be based only if the negotiating bank has expressly stated its right of recourse both when advising and honouring the credit itself. that is. APPLICANT BENEFICIARY ISSUING BANK NEGOTIATING BANK Figure 2 . When talking about confirmed credit available by negotiation. This right of recourse lasts until the drawee bank has paid the draft. the confirming bank has no right of recourse (article 9 b iv) and in practice there is no difference between a confirmed credit available by negotiation and a confirmed credit available by payment.9 The credit must state whether negotiation is to be done by a named bank or by any bank. ISSUING BANK 9 Articles 9 a iv. when the negotiating bank has been reimbursed by the issuing bank.exchange (drafts) in the country of the seller. 500 (the UCP 500) 12 . 9 b iv and 10 b ii of the ICC (International Chamber of Commerce in Paris) rules of the Uniform Customs and Practice for Documentary Credits. However. APPLICANT BENEFICIARY NEGOTIATING/ CONFIRMING BANK Figure 3 – Acceptance of the Term (usance) Documentary Credit: On presentation of the documents called for under the letter of credit. The UCP 500 explains the concept of negotiation in Article 10 b ii without stating recourse. Figure 1 – Unconfirmed Sight Documentary Credit: With an unconfirmed sight letter of credit.Confirmed Sight Documentary Credit: With a confirmed sight letter of credit. issuing the letter of credit and payment of funds goes (information flow) from the applicant (buyer) to the beneficiary (seller). It means that the negotiating bank can negotiate without stating its right of recourse depending on specific agreement. Under the UCP 500 the issuing bank cannot make a credit available at its own place if it calls for negotiation. Publication No.
the accepting bank will pay the beneficiary or the discounting bank and claim reimbursement from the issuing bank that will charge the applicant's account and will remit the proceeds. the beneficiary's bank. there are various specialized formats that meet particular sets of circumstances. The chart below tracks this procedure. there are some letters of credit providing security to a third party to a certain extent. will send the documents and the draft to the accepting bank for acceptance. The accepted draft may be held by the accepting bank until it matures or it may be returned to the beneficiary at the beneficiary's option. The applicant (buyer) pays the issuing bank that in turn pays the beneficiary or discounting bank through the paying bank. Main aim of the letter of credit is to provide security of the beneficiary.provided they are in compliance with its terms. The discounting bank would be any bank which had purchased the accepted draft at a discount. who may hold it until maturity or discount it at the best rate with any bank. That possibility is often used in case when the beneficiary is not producer 13 . presents these items to the accepting bank for acceptance. The chart below shows the term draft and documents to the beneficiary's bank which. BENEFICIARY/ DISCOUNTING BANK APPLICANT ISSUING BANK PAYING BANK Special types of a documentary credit Up to now we have seen basic types of letters of credit used to cover the shipment of goods. BENEFICIARY BENEFICIARY’S BANK ACCEPTING BANK Figure 4 – Payment of the Term (usance) Documentary Credit: On maturity of the accepted draft. which may be the advising bank. in turn. In addition to these basic types.
but has to buy the goods from the producer or sub supplier. The lending bank will want to have some security for the loan granted. The name for this type of credit comes from a special clause that used to be highlighted in red ink.of the goods. Reinhard Langerich. The advance. Beneficiaries of red clause letters of credit are invariably brokers/agents of buyers in a particular field. The nominated bank may make such advance against the beneficiary’s receipt and declaration stating that he will present the documents in compliance with the stipulations of the documentary credit before expiration. he will receive payment not before presentation of documents. If the beneficiary fails to ship the goods or cannot do so before the expiry of the letter of credit. Such advances will be deducted from the amount due to be paid when the documents called for are presented under the letter of credit. This enables the purchase and accumulation of goods from a number of different suppliers. Variations of such credits may also require that any advances be secured by temporary warehouse receipts until shipment is effected. which authorizes the bank acting as the negotiating or paying bank to pay the beneficiary in advance of shipment. and if the payment is to be made by documentary credit. traditionally written in red. First Edition 2000.”10 This wording means that the nominated bank can demand payment from the issuing bank in case that beneficiary fails to present documents. and the arrangement of shipment in accordance with the letter of credit terms. We (the issuing bank) undertake to reimburse the nominated bank in case the amount advanced should not be repaid. 14 . including interest. typically it will take security in documentary credit. recovering its payment from the applicant. he may need to take a loan from his bank for the raw materials for example. UCP 500 and the UCP 600 do not contain provisions concerning this type of credit. the issuing bank is bound to reimburse the negotiating or paying bank. Red clause documentary credit A red clause letter of credit incorporates a clause. This clause in the credit could read as follows:” The beneficiary may ask for an advance of up to X% of the credit amount in order to make possible the purchase of the goods. All advances must be notified to us. is to be deducted from the proceeds of the negotiation/payment under this credit. Sometimes when the beneficiary is the producer. or if 10 Documentary Credits in practice.
a letter of credit must be so marked by the issuing bank which can only do so on the applicant's specific instructions. Green clause documentary credit It is very similar to red clause letter of credit. A warehouse receipt should be issued by a independent warehouse and the nominated bank would usually be indicated as one to take the possession over the goods. fractional amounts may be transferred to more than one beneficiary. The difference is the security provided in the goods. Transfer of a letter of credit can be made on specific application by the original beneficiary to the authorized transferring bank To be transferable. who is often unknown to the applicant. Depending on whether the letter of credit permits partial shipments. may be reduced and less than in the original letter of credit (the difference being the original beneficiary's 15 . The same as with the red clause letter of credit it is used to enable the beneficiary to obtain advance payment based on the wording of the credit. The green clasue provides more security to the issuing bank and to the applicant since they have access to the goods showing their warehouse receipt. Transferable documentary credit A transferable letter of credit allows the beneficiary to act as a middleman and transfer his rights under a letter of credit to another party or parties who may be suppliers of the goods. The amount of the letter of credit. In case of a transferable documentary credit the shipment is made by a third party. The terms and conditions of the transferred letter of credit must be identical to those of the original letter of credit with the following exceptions: • • The original beneficiary may be shown as the applicant on the transferred credit.documents are not in conformity with the terms of the credit. Each of these beneficiaries can reject the possible future amendments just for the fractions concerning them. This type of documentary credit is used today especially in Asian countries where the applicant is willing to take the risk of the beneficiary’s not delivering the goods. and unit prices if any. With a green clause credit the beneficiary should present a receipt for the goods in addition to a receipt for payment and the statement that he would repay the amount in case of not presenting docuiments or presenting non conforming documents.
This means that if it not expressly stated in the credit it cannot be transferred by second beneficiary to a third party. the first beneficiary can freely choose in whose favor and in which country the credit can be transferred at. Article 48 of the UCP 500 says that if all other rules and conditions are met. but it can be retransferred to a first beneficiary and then again transferred to a third party. Unless it is not stated in the credit it can be transferred only once. especially dealing with amendments where the second beneficiary can reject the amendment in case of approval of the first beneficiary. if any and expiry date as shown on the original letter of The percentage of insurance coverage. Publication No.profit margin). even though bears a significant handling risk due to more complex structure of such a credit. Therefore the first beneficiary can give the instructions to the transferring bank whether he has to be asked from the side of the transferring bank about its amendments to the second beneficiary or those amendments can be done without the consent of the first beneficiary. The applicant does not know the buying price. invoices for those of the second beneficiary for up to the amount and unit prices available under the original letter of credit. The first beneficiary does not want for the applicant to know the third party because in this way they could bypass the first beneficiary doing business independently. Only the nominated bank as transferring bank can transfer the credit. If it is not differently stated in a credit. if any. • • • The latest shipment date. A documentary credit can only be transferred if it is expressly stated as “transferable” by the issuing bank according the Article 48 of the UCP 500. There can be some problems when there are several beneficiaries. the transferring bank does not bear any credit risk. and likewise the third beneficiary/supplier does not know the selling price. and draws the difference as profit. the original beneficiary normally substitutes his credit can be changed to an earlier date requirements of the original issued documentary credit. The transferring bank does not have to effect the transfer itself and many banks demand that the credit should be available at themselves in order to make the transfer. should be increased to meet the When a drawing takes place. If the credit is not marked as transferable it will not prevent 11 Article 48 of the ICC (International Chamber of Commerce in Paris) rules of the Uniform Customs and Practice for Documentary Credits.11 Transferred letter of credit is often regarded as two closely connected payments and security instrument rather than one. 500 (the UCP 500) 16 .
different letters of credit are actually issued. The difference between back-to-back letters of credit and transferable letters of credit is such that in a transferable letter of credit. One reason an exporter might extend credit terms to an importer could be the 17 .its proceeds to be assigned to the third party. the applicant does not pay until a future date determined in accordance with the terms of the letter of credit. In a back-to-back transaction. Such transactions originate when a seller receives a letter of credit covering goods that must be obtained from a third party that in turn requires a letter of credit. "back-to-back" is a term used in transactions involving two letters of credit. The beneficiary also want to leave the impression that he does not need this kind of security to obtain the goods from the third party and he wants to have the possibility to make changes in the credit that is to be issued to the third party. The credit proceeds can be transferred in two ways: by assignment of proceeds by notification and by issuing irrevocable payment order. banks tend to discourage their use. Back to back documentary credit Although not written on a letter of credit wording. It is not even mentioned in the UCP 500 or UCP 600. Deferred payment documentary credit Under a deferred payment letter of credit. There are several reasons for using back-to-back letters of credit. Because technical problems can arise in back-to-back transactions. the rights under the existing letter of credit are transferred. First of all the applicant would lose some security and control over the transferable credit. both subject to the UCP 500 or the latest version the UCP 600 (usually for credits issued after 1st of July 2007 being the date of coming into force of the UCP 600). Both credits are independent instruments. The "second" issuing bank looks to the first issuing bank for reimbursement after paying under the second letter of credit. which avoids "stamp duties" charged by some countries on bills of exchange (drafts). The main difference with transferable documentary credit is that a back-to-back credit is separate credit based on another issued documentary credit. but within the national law frame regarding assignments. No drafts are called for.
and a written demand for payment. A standby letter of credit can be defined as a bank guarantee taking the shape of a documentary credit and being subject to the UCP rules.12 Even if the applicant claims to have performed. usually a sight draft. but mainly it can be the obligation of returning the money to the beneficiary which was lent (or advanced) to the applicant. 1994 Edition 18 . Standby letters of credit may be used as a substitute for performance guarantees. As in commercial letter of credit the beneficiary should present the documents. but in the case of standby letter of credit instead of presenting invoices. They are used in the same way as bank guarantees. transport documents and other. Standby letter of credit represents the obligations of the issuing bank to the beneficiary. ICC Publication No. 12 ICC Guide to Documentary Credit Operations for the UCP 500. the beneficiary is permitted to draw under the letter of credit. This written demand can often be accompanied with other documents depending on the stipulations of each standby letter of credit.competitiveness of the market and the need for the exporter to finance the importer if the exporter is to make the sale. Other types of documentary credits The letters of credit described thus far cover the movement of goods from one destination to another. In the event of default. There are other types of letters of credit that are not specifically related to the movement of goods. to make the payment to the beneficiary or to make a payment to any party if the applicant does not effect the payment. This obligation can take various forms. Like the bank guarantee a standby letter of credit is not to be used unless parties do not fulfill their obligations. The principal one is as follows: Standby letters of credit Standby letters of credit may apply in general to transactions that are based on the concept of default by the applicant in fulfilling contractual obligations. This type of letter of credit was firstly used in the USA to substitute bank guarantees. thereby securing payment to the creditor in the event the other party fails to repay its obligation on the due date. Charles del Busto. the seller/the beneficiary should present a written demand for payment saying that the applicant did not meet his contractual obligations. 515. or issued to guarantee loans granted by one firm to another. the bank issuing the letter of credit is obliged to make payment provided the beneficiary produces complying documents.
First Edition 2000 19 .Today may prefer to use a standby rather than an ordinary guarantee since the standby is subject to the ICC Uniform Customs and Practice for Documentary Credits and the ICC International Standby Practices (ISP98). Today they can issue a bank guarantee. We have already said that standby letter of credit was created in the USA and most standbys are issued by US banks and in countries influenced by US banking. such as East Asia for example. As with bank guarantees. although between European countries it is not so common.The use of standbys is now very spread. standbys can state that particular national laws are applicable in case of dispute. because the ICC Uniform Rules for Demand Guarantees (URDG 458) has not yet gained international acceptance to the wanted level. Reinhard Langerich. obligations under issued bonds or mergers and acquisitions. 13 Documentary Credits in practice. Standbys used in USA are subject usually to the US Uniform Commercial Code (UCC). As for the rules governing standbys letters of credit they are basically the same as with commercial letter of credit (UCP 500 or UCP 600). US banks were then not allowed to issue bank guarantees under US law. but only if they are payable against the presentation of documents (demand guarantees). overdraft facilities. but as from January 1999 specific rules took effect (ISP98). International Standby Practices (ISP98) is separate set of rules for standby letters of credit and they are introduced because the UCP500 was not detailed enough regarding standbys. ISP98 were published jointly by the ICC and the Institute of International Banking Law and Practice. 13 In the USA particularly it is spread financial standby letter of credit used to secure various financial transactions such as loans.
the seller/exporter secures his liquidity and cash flow by knowing the exact time of incoming cash flows under issued letters of credit. the buyer/importer will not ask for the documentary credit. • In addition the seller can rest assured that he will receive payment on time as agreed in terms and condition of the sales contract and letter of credit. 20 . Payment for the goods shipped can be remitted to your own bank or a bank of your choice. • • • A bank is substituted for the buyer as the source of payment for goods or services exported. Financing opportunities. such as pre-shipment finance secured by a letter of credit and/or discounting of accepted drafts drawn under letters of credit. Since the documentary credit is issued by the bank (issuing bank). there are also some advantages on the buyer’s side. provided all the terms and conditions stipulated in the letter of credit are complied with. the risk to the buyer is transferred to the issuing bank that irrevocably undertakes to pay to the seller/exporter for the shipped goods. are available in many countries. Usually if trading on open account basis is available. BENEFITS OF A LETTER OF CREDIT Benefits for the Exporter/Seller • Letters of credit open doors to international trade by providing a secure mechanism for payment upon fulfillment of contractual obligations. But. Benefits for the Importer/Buyer Basically. Thus. Today a great deal of international trade is done by parties not knowing enough of each other and in this way risk in international trade is reduced. The issuing bank undertakes to make payment. letter of credit is known as the “seller’s instrument”.3. • Payment will only be made to the seller when the terms and conditions of the letter of credit are complied with. This guarantee element in the letter of credit is one of the most important. • • Bank expertise is made available to help complete trade transactions successfully.
This usually happens when partners get to know each other and where is no need to use documentary credit based on the previous experience. • Sometimes the seller may have a need to finance buying raw materials or parts for the goods to be exported later under documentary credit. • In some countries it is necessary for the importer to demand issuance of the documentary credit. 21 . It is legally binding for the importer if he wants to import the goods. • After some time partners in international trade may agree to leave the documentary credit as a mean of payment and switch to an open account that is cheaper and more efficient. while in others may be applied only on specific type goods. as stipulated in letter of credit. All the documents have to meet conditions stipulated in the credit. If he is creditworthy he can obtain an advance from his bank based on the documentary credit. Cash resources are not tied up. usually in South America. This is secured as in previous point when the terms and conditions of documentary credit are in compliance with the stipulated documents presented. Bank’s departments take care of such details. But. In this way buyer can obtain low cost finance and improve his liquidity and cash flow situation. which is in good order.14 Disadvantages of the documentary credits • Documentary credits can be expensive tool of payment and security in international trade. no matter if they seem not important for the beneficiary (seller). This regulation in some countries is applied to all imports. These regulation are often used in countries with large misbalance in trade. Sometimes the buyer can stipulate deferred payment only in case of trading done through documentary credit that greatly reduces risk for the seller. Asia and Africa. 14 Documentary Credits in practice. • • The importer can control the shipping dates for the goods being purchased. in some cases they continue to use documentary credits because they do not want to bother with the dates of payment.• Buyer is receiving goods instead of money so he is interested to secure obtaining goods. First Edition 2000. since they mean considerable workload. Reinhard Langerich.
Seller usually has to wait for the issuance of the documentary credit in order to dispatch the goods. The buyer also bears the risk of documents being lost in the transit. Because all of this. Documentary credit is as good as the bank that guarantees the payment. The issuing bank has to assess the credit ability of the buyer before issuing documentary credit. In such case amendment can be done only with the consent of both sides. 22 . The buyer bears the risk of receiving the goods in a poor state or not receiving the goods at all. There is also a risk of the fraud. especially regarding dispatch of the goods. For example. which is also time taking. This could be problem when seller and the buyer have already agreed exact dates for the shipment of the goods.• Issuance of the documentary credit can take time and this time may seem long for the seller as well as for the buyer. but this risk is very low. Frauds in documentary credit business are very rare. Issuing bank is most commonly buyer’s bank in a distant country. or other market change cannot be overlapped in case of the complying presentation of the documents. This risk can be avoided by issuing confirming documentary credit. which in this way takes the risk of the issuing bank. In some countries import license or payment license is required by the national banks and this takes time. • In general some advantages for the seller are disadvantages for the buyer. Risks in using documentary credits Seller’s risk is basically the risk of the issuing bank. This type of the letter of credit is confirmed by the third bank (or beneficiary bank). change in the price of the goods. seller may not be able to meet the terms and conditions.
The first version of the ICC Uniform Customs and Practice for Documentary Credits was adopted at the ICC congress in Amsterdam in 1929. such as London banks rules.org . are binding on the parties who have adopted them. Banking commission is founded to bring and interpret uniform rules relating to documentary credits. but this was not enough. One of the 15 www. 15 The aim of this organization was to promote international trade and to provide some general rules for cross border trade.iccwbo. when not in contravention of local laws. Paris banks rules and etc. documentary collections and banking guarantees. The ICC is represented in more than 130 countries. It is divided into several commissions. They are not statutory rules and as such they have only legal effect on an agreement.They have been revised several times and are now used by banks all over the world. The Uniform Customs and Practice for Documentary Credits. since there were not general rules that could be applied.4. Banks began to establish rules in this field. We should mention that back then existed many national rules. In the early 20th century banks in different countries agreed to set up national rules for handling documentary credits. Today the ICC developed into a powerful organization supported internationally. After the revision in 1962 British banks adopted the rules and so did the other banks influenced by trade with Great Britain. International Chamber of Commerce (the ICC) was founded in 1919 by a small group of international business people as a private international trade organization. GOVERNING LAW AND RULES FOR DOCUMENTARY CREDITS In the beginning there were no rules governing documentary credit business.International Chamber of Commerce (ICC) – The world business organization 23 . Only limited number of countries used these rules and the first revision was adopted in Vienna in 1933. currently applicable. The authority of UCP lies in its universal acceptance that is acknowledged by a statement on the letter of credit itself. is a set of rules which. That was the major breakthrough so these rules became truly international. Relationships between two parties were based on their mutual agreement. Uniform Customs and Practice for Documentary Credits (UCP) The Uniform Customs and Practice for Documentary Credits (UCP) is an internationally agreed set of rules for all parties involved in all types of documentary credit transactions.
even though in practice newly issued letters of 24 . 500 often referred to as the UCP 500. But. for the goods described in the documents. The ISP98 was published jointly by the ICC. 1993 Revision.latest revisions took place in 1993 with the official title being ICC Uniform Customs and Practice for Documentary Credits. Before payment or acceptance of drafts is effected. 2007 Revision. and banks are in no way involved with or bound by such contracts. Legislation and documentary credits We need to say that only few countries have specific rules concerning documentary credit transactions. Banks bear no responsibility for: the form or genuineness of documents. Many of these judges are also making wrong decisions because they have not enough experience and knowledge on UCP rules and documentary credits in general. The UCP 500 with its provisions also deals with Standby Letters of Credit. 600 referred to as the UCP 600. banks and lawyers in the USA wanted to have more specific rules regarding Standby Letters of Credit. ICC Publication No. which can be described as a banking guarantee taking form of a documentary credit. the US banking organization for international banks. banks bear the responsibility for examining the documents to ensure that they appear on their face to be in accordance with the terms and conditions of the letter of credit. ICC Publication No. Both of these methods are making some problems in practice. First one is based on court decisions of the judges that are making decisions not in accordance with UCP rules. the Institute of International Banking Law and Practice and the IFSA. or the performance of the seller of the goods. even if reference to them is included in the letter of credit. We have to also mention some other rules such as International Standby Practices or ISP98. all parties deal with documents and not with the underlying contracts to which the documents may relate. In letters of credit transactions. General Principles of UCP Letters of credit are separate transactions from the sales or other contracts on which they may be based. Other problem concerning countries putting UCP rules as a part of their legislation is that after revisions those laws are still on power. At the contrary there are few countries that consider Uniform Customs and Practice (UCP) within their own law thus giving them more power. The latest revision happened in 2007 and took effect from the 1st July 2007 being the ICC Uniform Customs and Practice for Documentary Credits.
expiry date and latest date of shipment. The Article 5 of UCC has also been revised stating that if the credit has been issued in accordance with ICC UCP rules. In many lawsuits documentary credit is considered to be an ordinary contract. but usually being a sales/purchase written contract or accepting an offer by the buyer in a more informal way (in a case when buyer and seller know each other very well). even those one clearly stated that are subject to ICC international rules. It is not signed by two parties as a contract. The USA has had its own trade legislation for many years. basic information on documentary credit such as the type. while others which are still existing are based on older revision. terms of delivery (INCOTERMS or other terms). This specific legislation has had big influence on judicial decisions regarding documentary credits. It is only a promise given by the bank to the seller that is to be fulfilled in case all conditions are met. charges (who bears the charges). total and unit price including discounts and different charges (freight charges for example). Basis for opening a documentary credit Before an opening of a documentary credit there has to be an agreement between the buyer and the seller taking various form. Such contract normally includes information about description of the goods (including percentage of tolerance in quantity and value).credits are subjected usually to the latest revision. 25 . Documentary credit cannot replace a purchase agreement or a sales contract. documents required and etc. In recent years we have seen reinforcement of the ICC rules in USA and judges are increasingly paying attention to this. those rules are to be applied. nominated bank. The buyer must provide all necessary details to the issuing bank regarding opening of the documentary credit if they are missing from the sales contract or order accepted by the buyer. date of delivery. After the contract is done it will make a basis for the application form of the buyer to the issuing bank for the opening of a documentary credit. information on whether partial shipment is allowed. Fortunately vast majority of the documentary credit transactions are settled without any problems. It is called the Uniform Commercial Code (UCC) and Article 5 deals with documentary credits. confirming bank if needed. terms of payment.
he will want to keep amount as low as possible. The most important documents that are usually required are: o Invoice o Transport document (Bill of lading. appropriate term of delivery should be chosen. Each letter of credit should suit specific needs of the seller and the buyer. There is no standardized perfect wording of the one documentary credit. the period for presentation of the documents should not be too short. then if the buyer is the one that pays the charges he would want the goods to be shipped from a place with the lowest charges. it is in buyer’s best interest to demand detailed and many documents. While determining documents required. then the seller should choose whether partial shipment and transshipment are permitted.The documentary credit should fulfill some requirement as for the seller as well as for the buyer. As in documentary credit operations parties deal with the documents and not with the goods. a seller should state whether the credit is to be issued for a fixed amount. The most important thing for the buyer is to receive goods at the price and time agreed and in agreed quality and quantity. documents required should also be agreed before opening of a documentary credit. The buyer has to consider insurance as a security for the goods. the seller should also demand that the description of the goods should be brief and general and should prevent the buyer to put the article that pro-forma invoice forms an integral part of a documentary credit (too detailed description of the goods could lead to problems when drafting documents). The seller should ensure that the amount of the documentary credit is fair and correct. which prove that everything is in order with his goods. The buyer will want the credit to be issued as cheap as possible. the buyer is interested in having those documents to ensure that the transaction will be executed as agreed and that he gets the access to the goods in order to have them cleared through the customs. additional payments should be taken into consideration and entered into letter of credit. air waybill or other) o Insurance document (Insurance policy or insurance certificate) Other documents demanded by the buyer are the ones needed for the customs: o Certificate of origin 26 . All other terms should be also considered and agreed upon. a maximum amount or an approximate amount (with percentage of tolerance allowed in value). the seller should take care to put realistic date(s) of shipment and date(s) of expiry.
latest date for the presentation of the documents plus period for presentation of documents (if nothing is stated 21 days are applied) which gives the date of expiry. bank 27 . Other things that banks are demanding are different.o Health certificate o Import or export license o Consular invoice o EUR 1 . Applicant is not a party in the letter of credit transactions. These details usually are full and correct name and address of the applicant and the beneficiary. who is paying bank charges and other details depending on the bank. The application form is prepared by the issuing bank. place for presentation of the documents. the date of expiry. documents required. The buyer/applicant should fulfill application form for the opening of a documentary credit. agreed terms of delivery and payment.Certificate of origin Sometimes buyer will demand some other documents needed for his own use or for other reasons and those documents can be: o Inspection certificate o Packing list o Guarantee issued by the seller or producer There is no restriction considering the number of the documents required. the amount and currency of the credit. the place of shipment. description of the goods. The applicant has the obligation to reimburse the bank for all the payments and expenses connected with the documentary credit and that is why it is important to have a contract between the applicant and the issuing bank. That is why the bank should establish clear agreement with the applicant. After submitting application form. The application form serves to inform the bank about all necessary details in connection with the documentary credit. but the buyer should take into account not to demand many documents. Bank has to have some arrangements and determined relationship in form of contract with the applicant. name of the advising and confirming bank. Issuing bank is the one obliged to fulfill obligations coming from documentary credit. whether partial shipment and transshipment is allowed or not. because this can be annoying to the seller or make problems in executing the transaction. type of credit. By signing the application the applicant accepts all rules regarding documentary credit (UCP 500 or UCP 600).
in which case payment is not made and the goods rest in possession of the beneficiary. If the bank is noted as consignee in the Bill of Lading that means it is legal owner over the goods. because damaged goods cannot serve as security in this case. Another important point is that the applicant pledges the documents (representing the goods) to the issuing bank. The applicant should be able to pay the amount of the issued letter of credit on a due date that can be also in future (long term due date of the letter of credit).should examine the application and if it is correct and precise it should issue the letter of credit in question. and in this manner those goods can serve as security or collateral for the issuing bank. because the bank can without the knowledge of the applicant take possession over the goods. 28 . If the bank wants to have easy access over the goods it should be noted as consignee in negotiable documents proving ownership over the goods such as Bill of Lading. of course after all procedural things being completed and in order. Reinhard Langerich. They can also serve as a security for the bank. Having in mind the above mentioned. Also insurance should be taken into consideration. First Edition 2000.16 16 Documentary Credits in practice. The applicant has the right to refuse non complying/non conforming documents. the bank should examine the creditworthiness of the applicant before going into procedure of issuing of the letter of credit. Issuing bank should effect the payment to the beneficiary of the letter of credit after conforming documents being received. Under a documentary credit we saw that issuing bank is obligated to meet all obligations (correctness and payment).
F.I. Issuing bank has to go through one of its correspondent banks. documentary collections. (Society for Worldwide Interbank Financial Telecommunication) 29 . which will find a way to advise the credit to the beneficiary bank named in the 17 www. but the buyer instructs his bank to issue the letter of credit based on agreement with the seller. bonds and commercial papers trade. In the 1980s S.W. Each credit has to be booked and evidenced in issuing bank’s system. network in communication between each other (payments. reduced telecommunication costs and now the most number of banks are using S. documentary credits and bank guarantees. THE ISSUANCE OF DOCUMENTARY CREDIT The issuance of the letter of credit is most often required by the seller. bilateral keys exchanged) than it cannot transmit documentary credit directly to the beneficiary bank.5.I.W.F. was enabled to work with documentary credits. Before the development of electronic means.I.com – S. usually formatted uniquely and through a very secure network.T.F.T. (Society for Worldwide Interbank Financial Telecommunication) is based in Brussels.T.F. term and overnight deposits. documentary credits were printed out on paper and sent to the advising bank by air mail.F. Issuance and handling by the issuing bank Issuance is based on the applicant’s instructions and most banks have their own application form serving as gathering information from the applicant on the features and conditions of the documentary credit wanted by the applicant.I. It serves to establish and maintain an electronic network connecting all interested banks.F.W. Sometimes the credit was issued using telex or cable communications (higher costs). The text of the credit was written on bank’s special form.W.T. its wording and correctness and in that manner it has to take care not to make mistakes while issuing documentary credit. S. If the issuing bank has no direct relationship with the beneficiary bank (S.T. The use of S. The bank has to provide each credit with the unique reference number in order not to have confusion while handling with the credit and interacting with parties involved such as other banks.W.17 These banks can send each other various information.swift. The issuing bank is responsible for the credit. statements and other).T. Belgium and was founded and owned by many world banks.W.I.I. cheques. Application form can be filled out manually or electronically depending on the issuing bank.
form. in order to advise the beneficiary of the credit. Majority of issued credits are transmitted by the issuing bank to one of its correspondent banks instructing them to advise the credit to the beneficiary. Today the biggest international banks run a network consisting of several thousand banks found all over the world. Article 4 of the UCP 500 says that all parties involved are dealing with the documents and not with goods. invoice or pro-forma invoice. Article 3 of the UCP 500 states that documentary credits are separate transactions from all the contracts and agreements on which they are based. contents wording and payment under documentary credit. Very important is Article 9 a of the UCP 500 describing the liability of the issuing bank. According to the Article 5 of the UCP 500 all wording and amendments must be precise and complete. Than each credit should be assigned by unique number which is important for future handling and correspondence. There has to be a wording stating rules applied for particular letter of credit such as the UCP 500 or UCP 600. provided that the stipulated documents are presented to the nominated bank and that the terms and conditions of the credit are complied with. If the applicant does not request the use of specific bank.application form. the issuing bank will choose one bank based on its previous experience and knowledge of the banks in the country of the beneficiary. each credit can be easily identified. By assigning unique number. meaning that the bank must approve credit conform documents even if there are suspicions that there is something wrong with the goods. It says that documentary credit constitutes a definite payment undertaking of the issuing bank. Issuing bank cannot be responsible for the beneficiary’s ability to meet credit requirements. 500 (the UCP 500) 30 . Publication No. The credit can be issued and transmitted directly to the beneficiary bank only in case if the 18 ICC (International Chamber of Commerce in Paris) rules of the Uniform Customs and Practice for Documentary Credits. 18 Contents of the documentary credit Contents of the documentary credit will vary from credit to credit. The applicant can choose preferred advising bank instructed usually by the beneficiary. This means that the issuing bank has to pay to the beneficiary in case of presentation of credit conform documents. Liability of the issuing bank We have already said that the issuing bank is responsible for the issuance. Over detailing and misinterpretation should be avoided.
The issuing bank’s payment to the honouring bank will be effected according to three principles: • • The issuing bank authorize the nominated bank to authorize its account The issuing bank authorizes a third bank (reimbursement bank) to honour the nominated bank’s claim under the credit The issuing bank transfers the amount upon a request from the nominated bank19 • The credit often states how the documents are to be send to the issuing bank.F. The credit must clearly state the full name and the address of the beneficiary of the credit. Description of goods should be written as briefly and precisely as possible with stated terms of delivery (FOB. 31 . There is instruction about whether the credit is confirmed or unconfirmed. do not have to state whether they are revocable. Incoterms 2000 is the authoritative text for determining how costs and risks are allocated to the parties. by acceptance or by negotiation. Today. Incoterms 2000 contains 19 Documentary Credits in practice. The issuing bank does not take the responsibility if the documents are sent to the wrong address.W.T. and the address on which the documents are supposed to be sent. The beneficiary should be the right one because sometime the goods are not produced and sold by the same company. FAS. it should inform the applicant and suggest another bank. FCA or CIF for example). Since. First Edition 2000. usually being INCOTERMS 2000 which are International Commercial Terms defining the responsibilities of buyer and seller for delivery of goods under sales contracts. If the issuing bank has bad business experience with the bank noted in the credit by applicant as advising. EXW. the issuing bank has to pay after presentation of credit conform documents. bilateral keys) and if the credit does not have stated third advising or confirming bank. Things regarding type and form of the credit usually come from the application. Other contents of the letter of credit are coming from the agreement between the buyer and the seller. than the credit must clearly state if it is available by sight payment or deferred payment.I. credits issued under the UCP 600. Reinhard Langerich. since there is no more possibility to issue revocable letters of credit.issuing and the beneficiary bank have exchanged list of authorized signatures and telegraphic keys (S. it is good to have reimbursement instructions or how the issuing bank will pay to the nominated bank.
The credit should clearly indicate which documents are to be presented by the beneficiary. ICC Official Rules for the Interpretation of Trade Terms ICC Publication No. The tolerance of less 5% in a credit amount is allowed provided the partial shipments are not allowed. That is done by advising bank. Generally. It represents the amount that should be paid to the beneficiary after presentations of the documents. the advising bank has no obligations under the credit. Issuing bank has the obligation to pay to the beneficiary. Applicant quotes needed documents in the issuing bank application form. From Article 7 of the UCP 500 the advising bank may elect to advise the credit. The credit amount should not exceed stated amount if not differently stipulated. it has to inform the issuing bank without delay. 2000 Edition 21 Article 7 of the ICC (International Chamber of Commerce in Paris) rules of the Uniform Customs and Practice for Documentary Credits.the official ICC text of the thirteen trading terms taking into account the latest development in commercial practice. Description of the documents should be clear and not ambiguous. the advising bank must establish the apparent authenticity of the credit. That way beneficiary can be certain that the issued credit is genuine. If there are no specific conditions about the quantity of the credit. The beneficiary usually receives notification of issued letter of credit in his favor by his bank. Publication No. There is a field “percentage amount tolerance” which determines eventual percentage of tolerance in the amount being more or less. meaning it can reject to advise the credit. the credit is advised to the beneficiary. Also with accordance of this article. He does not have to check authenticity of the credit and authorized signatures of the issuing bank. If there is only currency and the amount it means that the credit is issued for that amount precisely. 500 (the UCP 500) 32 . If the credit has the wording “not exceeding” it means that the amount could be lower than stipulated. 20 Amount of the credit should be denoted in the correct currency. For example. 560. If it cannot establish apparent authenticity of the credit it must without delay inform about that the issuing bank. If it does so. Advising the letter of credit and obligation of the advising bank After the issuing bank has transmitted the credit to one of its correspondent banks. a tolerance of 5% more or less is allowed in quantity. the advising bank may have had poor previous experience with the issuing 20 Incoterms 2000.21 The reasons for rejecting of the advising by the advising bank may be different.
The beneficiary should examine the credit as soon as he receives it.I. If the advising bank has confirmed the credit or has given the” silent confirmation” than it has obligations under that credit as the confirming bank. it will ask for an amendment.T. or at the latest upon presentation of the documents.F.I. 33 . If the beneficiary establishes that the credit is not issued under terms and conditions agreed or it is erroneous.F. Amendments of the documentary credit Amendments of the credit are common practice in today’s world of documentary credits. forbidden chemicals etc.bank. If the beneficiary finds that the credit has not been issued in accordance with the terms and conditions than it should ask the amendment of the credit. The beneficiary should check if it complies with sales contract. If the purpose of the letter of credit cannot be determined by the advising bank it may refuse advising in order not to be involved in money laundering activities. the advising bank will check the authorized signatures on the credit with the ones received from the issuing bank. The purpose is to prepare correct documents and to check whether the credit conforms to all the terms and conditions agreed before. there is a question of the country where operates the issuing bank and the legislation of that country or imposed possible embargos and political situation.W.).W. pro-forma invoice or other documents and conditions agreed. The banks take care only for details in the credit itself and not to any agreement between the seller and the buyer. It can also happen that the seller and the buyer agreed in the meantime about changing their agreement. When receiving the credit by telecommunication means (S. Then it will forward the credit to the beneficiary. or telex) the advising bank will first check the authenticity of the credit by verifying test keys.T. it will usually ask the issuing bank to confirm the authenticity of the credit by S. In addition. If the credit is issued by letter. or issuing bank didn’t handle very well the credit. But the nominated bank has to respect 7-day rule under the UCP 500. Then. A nominated bank that does not want to honour or examine the documents must inform the beneficiary accordingly when advising the credit. Also the type of goods may be problematic (weapons. The advising bank is not liable to examine the documents presented even if it has advised the credit. concerning refusal of non-conforming documents.
The terms of the original letter of credit will be in force until the beneficiary accepts the amendment. after the presentation of the documents based on the amendment.I. If the issuing bank amend the credit only on beneficiary’s demand or by instructions of the advising bank it will risk that the credit amendment will not be accepted by the applicant and that the documents will be rejected by the applicant as non conforming. Example 1 – Issuance of the documentary credit by S. the beneficiary has to ask the applicant to arrange an amendment with the issuing bank.T. If the confirming bank rejects to accept the amendment it is still liable by the original credit according to the Article 9 d of the UCP 500 and it has to inform the issuing bank and the beneficiary about it. In the procedure of amending the letter of credit. Publication No.T. address of the issuing bank) Ost Bank AG Karlstrasse 54 Vienna. Then. When advising the amendment the issuing bank must use the same bank as with the issuance of that credit according to the article 11 b of the UCP 500. 500 (the UCP 500) 34 . If the beneficiary stays silent.This change can also call for an amendment.F. The issuing bank is prepared to amend the credit after the instructions received by the applicant.F. confirming bank (if any) and the beneficiary.22 Any amendment made by the issuing bank is bounding for the issuing bank. it is considered that amendment is accepted. the delay in production or other difficulties can cause an amendment of the letter of credit in stake. GR :27: SEQUENCE OF TOTAL 1/1 :40A: FORM OF DOCUMENTARY CREDIT IRREVOCABLE TRANSFERABLE :20: DOCUMENTARY CREDIT NUMBER 55/LC/1234N :31C: DATE OF ISSUE 070523 22 Articles 11 b and 9 d of the ICC (International Chamber of Commerce in Paris) rules of the Uniform Customs and Practice for Documentary Credits. if the credit is confirmed.Article 9 d of the UCP 500 says that an amendment can be made only with the agreement of the issuing. AT RECEIVER: ARBAGRAA (issuing bank’s correspondent bank) Argo Bank Athens.W. The partial acceptance of an amendment is not permitted.W. Those amendments are also bounding for the confirming bank.I. MT 700 – Message type 700 SENDER: OSBAATWW (S.
Austria 35 . ITALY :44C: LATEST DATE OF SHIPMENT 071101 :45A: DESCRIPTION OF GOODS 111222 PCS OF TEXTILE GARMENTS ACCORDING TO THE PROFORMA INVOICE NO. Vienna. SIGNED AND STAMPED BY THE APPLICANT + PACKING LIST IN THREE COPIES + FULL SET CLEAN ON BOARD BILL OF LADINGISSUED TO THE ORDER.2007.:31D: DATE AND PLACE OF EXPIRY 071121 CHINA :50: APPLICANT AUTON EXPORT AG VERSTRASSE 45 VIENNA.00 WILL BE CHARGED BY US IN CASE OF DISCREPANCIES FOUND IN THE DOCUMENTS + ONE EXTRA COPY FOR ALL THE DOCUMENTS NEEDED FOR OUR FILES :57A: ACCOUNT WITH EXBABECN (EXPORT BANK OF CHINA) :71B: CHARGES ALL CHARGES OUTSIDE AUSTRIA ARE FOR THE BENEFICIARY’S ACCOUNT :48: PERIOD FOR PRESENTATION 21 DAYS :49: CONFIRMATION INSTRUCTIONS WITHOUT :49: INSTRUCTIONS TO THE PAYING/ACCEPTING/NEGOTIATING BANK UPON RECEIPT OF CREDIT CONFORM DOCUMENTS AT OUR COUNTERS WE WILL REMIT FUNDS AS PER YOUR PAYMENT INSTRUCTIONS :72: SENDER TO RECEIVER INFORMATION PLEASE FORWARD THE DOCUMENTS BY COURIER TO OUR ADDRESS: Ost Bank AG. AT :59: BENEFICIARY CHINA CHAIN CORP. + FOB ANY CHINESE PORT (INCOTERMS 2000) :46A: DOCUMENTS REQUIRED + INVOICE IN THREE COPIES. FENG STR. 18 BEIJING. Karlstrasse 54. BLANK ENDORSED. 123 DTD 11. AMOUNT EUR111000.01. MARKED FREIGHT COLLECT + CERTIFICATE OF ORIGINE IN THREE COPIES + GSP CERTIFICATE OF ORIGIN FORM A IN THREE COPIES :47A: ADDITIONAL CONDITION + THIS DOCUMENTARY CREDIT IS ONLY TRANSFERABLE WITH THE ADVISING BANK + GSP CERTIFICATE OF ORIGIN CAN BE ISSUED ON LANGUAGE OTHER THAN ENGLISH + DISCREPANCY FEE IN THE AMOUNT OF EUR 50.00 :39A: PERCENTAGE CREDIT AMOUNT TOLERANCE 10/10 :41A: AVAILABLE WITH OSBAATWW BY PAYMENT :43P: PARTIAL SHIPMENTS ALLOWED :43T: TRANSSHIPMENT ALLOWED :44A: SHIPMENT FROM ANY CHINESE PORT :44B: FOR TRANSPORTATION TO VENICE. NOTIFY APPLICANT. CHINA :32B: CURRENCY CODE.
6. it is important that the application be completed fully and accurately. Import/nostro letter of credit Before everything the creditworthiness of the applicant should be evaluated and there has to be a decision on granting the issuance of the letter of credit for the applicant’s account. we will briefly explain the meaning of those two different terms. The letter of credit must be issued exactly in accordance with the customer's instructions. The issuing bank prepares the documentary credit as specified in the application and forwards it by tele-transmission or airmail to the advising bank. the unit price. when executed. The first thing that should be done is the sales contract. pro-forma invoice or even the order itself. and the method of payment. the amount. both on the side of export and import. and normally takes the form of an authorization to debit the customer's account. Instead of it partner can have only invoice. the currency. the time allowed for shipment and presentation of documents. (a branch or correspondent of the issuing bank). It is also the customer's instruction to the issuing bank. so as to avoid the inconvenience of having to have the letter of credit amended. The following text will briefly show major steps while handling documentary credit. constitute a payment and reimbursement contract between the issuing bank and its customer. Basically when talking about import or export credit we have to know that one letter of credit is import/nostro credit for the issuing bank and export/loro for the beneficiary bank. 36 . The issuing bank instructs the advising bank as to whether or not to add its confirmation. The agreement constitutes an undertaking by the customer to reimburse the issuing bank for drawings paid in accordance with the terms of the letter of credit. therefore. The sales contract is the formal agreement between the buyer and seller specifying the terms of sale that both parties have agreed upon. the terms of delivery. MAJOR STEPS IN AN IMPORT/NOSTRO AND EXPORT/LORO DOCUMENTARY CREDIT TRANSACTION Before moving on to the steps regarding import and export letter of credit. as per their customer's instructions. The contract should include: a description of the goods. The bank's letter of credit application and agreement forms.
However. the beneficiary will then be in a position to assemble and ship the goods. if the advising bank has been asked to confirm the letter of credit and agrees to do so. Figure 5 – Steps in an import documentary credit SELLER Advice (confirmation) BUYER Application ADVISING/ CONFIRMING BANK Request to advise/ confirm l/c ISSUING BANK Export/loro letter of credit Upon receiving the letter of credit. 37 . with the description of goods shown exactly as stipulated in the letter of credit. it will incorporate a clause undertaking to honour the beneficiary's drafts. Then the documents are sent to issuing/nominating bank for checking. and are presented to the advising/confirming/negotiating bank. The beneficiary obtains the bill of lading and/or other transport documents from the carrier and prepares and/or obtains all other documents required by the letter of credit. after which payment is usually made or eventually refusal of documents. The beneficiary prepares an invoice in the number of copies required. provided the documents evidence that all terms and conditions of the letter of credit have been complied with. the beneficiary should request the applicant to arrange an amendment to the letter of credit. drawn on the bank indicated and at the term stipulated in the letter of credit. Payment is being made following the payment instructions of the beneficiary. Once completely satisfied. If this is not possible. These are attached to the draft. After payment the documentary credit transaction is considered to be over and necessary steps are being made in the book keeping and internal procedure of the banks involved. the beneficiary should examine it carefully and be satisfied that all the terms and conditions can be complied with.The advising bank forwards the letter of credit to the beneficiary (seller) stating that no commitment is conveyed on its part.
If the documents meet the requirements of the letter of credit. ADVISING/ CONFIRMING/ NEGOTIATING BANK Documents ISSUING BANK Reimbursement 38 . The issuing bank will also check the documents for compliance and then deliver them to the applicant either against payment or as an undertaking to pay on maturity of the drawing under the letter of credit. that bank will send them to the issuing bank. claiming reimbursement and paying the seller. Figure 6 – Steps in an export documentary credit Goods SELLER Documents Payment BUYER Delivers documents and debits acc.The advising/confirming/negotiating bank checks the documents presented by the seller against the letter of credit.
it means that it calls for at least one original of the required document. Each credit will require documents which are needed for a specific individual transaction. the beneficiary should. Period for presentation is period from the shipment to the expiry date of the credit within which documents must be presented. The following is a list of documents most commonly seen in a letter of credit transaction. the beneficiary should immediately request the applicant to arrange for an appropriate amendment to the letter of credit. We have seen that under the UCP 500 the parties involved in documentary credit transactions deal with the documents. ICC Publication No. Banks do not take any responsibility as to the genuineness or correctness of the documents received. The documents presented under a documentary credit have to be originals unless stated differently. examine it carefully and be satisfied that all the documentary requirements can be complied with. If that period is not stated it is considered to be 21 days. Unless the documentary requirements can be strictly complied with. the beneficiary may not receive payment from the issuing bank. on first being advised of the letter of credit. If the document is being copied it is often marked as original or if it is produced by automated systems. If there are any requirements that cannot be complied with. 645.23 A document written by hand with a pen or a document written on a traditional typewriter is an original. Originals are accepted instead of copies if it not stated differently. “triplicate” etc. DOCUMENTS USUALLY REQUIRED UNDER A LETTER OF CREDIT There is no limit to the number and variety of documents that letters of credit may stipulate. “one piece or copy”. 2003 Edition (supplement of the UCP 500 for the examination of documents under documentary credits) 39 .7. As already stated. Each required document must be in at least one original if there is no stipulation saying that a document can be presented only in copy. ICC banking commission has issued its decision stating that if the documents are printed via PC it is 23 International Standard Banking Practice (ISBP). If documents have apparent authenticity. Each document is described in brief with a checklist for preparing the document. Documents must be presented at the nominated bank on or before the expiry date within normal working hours. On their surfaced it is usually stamped “original” or “duplicate”. for the banks that will be enough not to reject documents because of forgery. When there is wording in the credit requiring “one copy”.
ICC Publication No.24 Draft (bill of exchange or tenor bill) A draft is a bill of exchange and a legally enforceable instrument which may be regarded as the formal evidence of debt under a letter of credit. This authentication must include issuer’s signature or initials. Drafts. The use of drafts is reduced nowadays due to imposing the stamp duty (form of tax) by several countries (Italy for example). than the signature is needed. It is more common to base payment undertaking on the credit rather than on bill of 24 International Standard Banking Practice (ISBP). Corrections and alterations of the documents must appear to be authenticated by the issuer. it is expected that documents issued by the beneficiary will be in the language of the credit. are payable on their indicated due date. it must clearly show in which capacity this third party has authenticated the correction of the document. after acceptance by the drawee. 645. Dates may be expressed in a different format. If it is authenticated by some other party. Signatures are accepted not only as handwritten. Also a photocopy with the issuer’s signature is considered to be an original. As far as signatures are concerned we have to say that drafts. Each of those corrections on one document has to be authenticated separately or one authentication must be linked with all the corrections in an appropriate way. but also as facsimile signatures. If the document states that it is not valid without signature. Drafts drawn at sight are payable by the drawee on presentation. 2003 Edition (supplement of the UCP 500 for the examination of documents under documentary credits) 40 .considered as original appearing to be one. Under international standard banking practice. perforated signatures or any other electronic or mechanical authentication. stamps. certificates and declarations by their nature require a signature. transport documents and insurance documents must be dated even if the credit itself does not require that. In the conditions it can be stated that other languages are accepted for all or for specific documents required by the credit. the use of generally accepted abbreviations (Ltd instead of limited for instance) does not make a document discrepant. Documents presented under a credit must not be inconsistent with each other. Term (usance) drafts. the UCP 600 and their provisions. Transport and insurance documents must also be signed in accordance with the UCP 500. Regarding abbreviations.
. CIF Tokyo Incoterms 2000). If the credit states shipping terms subject to INCOTERMS or other source of the trade term.g. letter of credit. • • The amount in words and figures must correspond to the letter of credit and in The amount must be in accordance with the total amount of the invoices unless the same currency as the letter of credit. must be as stipulated in the letter of credit. 41 .exchange. The terms of the draft must be expressed in accordance with the tenor shown in letter of credit under which they are drawn. Commercial Invoice The commercial invoice is an itemized account issued by the beneficiary and addressed to the applicant. at sight or at a stated number of days after bill of lading/shipment date.. the letter of credit stipulates that drafts are to be drawn for a given percentage of the invoice amount. Drafts need to have: • • • Drafts must show the name of the issuing bank and the number and date of the Drafts must be drawn and signed by the beneficiary of the letter of credit.. Extensions and totals should be checked for arithmetical correctness. • • An invoice need not to be dated or signed unless stipulated differently. FOB. the letter of credit. i. Invoice has to have: • • • The invoice description of the goods must be identical to that stipulated in the The invoice must be made out by the beneficiary of the credit and it should be Unit prices and shipping terms. than it should be fully stated in an invoice (e. e. etc. addressed to the applicant. and must be supplied in the number of copies specified in the letter of credit.e.g. An invoice must not show over-shipment and merchandise not asked in the credit (including samples and advertising material). CIF. The advantages of using drafts in connection with usance credit is that they can be used for refinancing transferring them to other parties than those in credit.
645. Transport documents can be divided into waybills (consignment notes) and negotiable transport documents. air waybill. Ocean bill of lading is an example of the negotiable transport document as it gives title to the goods and the goods will be handed over to the named person or company in the transport document (consignee). It is done on a special form available at the embassy or consulate of the relevant country. rail or inland waterway transport documents. 25 International Standard Banking Practice (ISBP). The transferring is done by endorsing the document. Waybills do not provide access to the goods. They are numerous and changeable over time.• The quantity of the goods may vary +/-5% if it is not stipulated otherwise. Requirements for the consular invoice are: • Consular invoices must be visaed (officially stamped) and signed by a consular officer of the importing country and be supplied in the official form and number of copies as stipulated in the letter of credit. Transport documents Transport documents are one of the most problematic in the world of documentary business. Transport documents usually are: bill of lading.25 Consular or Customs Invoice A consular or customs invoice is prepared by the beneficiary on forms either supplied by the buyer or local consulate offices. so it is hard to set some ground rules for examining them. Transport field is changing rapidly and transport documents take different forms and are subject to many changes. The consignee is actual owner of the goods. road (CMR). The consular invoice is then to be legalized by that embassy or consulate. Negotiable transport documents can be transferred to a new holder or the ownership over the goods can be transferred. The value of goods required must agree with that shown on the commercial invoice. In the case of non negotiable transport documents. but they state the consignee. Many articles of the UCP 500 and the UCP 600 deal with transport documents. the issuing bank does not have security in the goods. 2003 Edition (supplement of the UCP 500 for the examination of documents under documentary credits) 42 . • • All headings of the forms must be completed. ICC Publication No.
Otherwise. For example if the credit stipulates CIF trade terms it means that freight charges have been paid already and the transport document in that case usually has notification “freight prepaid. Carrier is the party responsible for the transport of the goods. The transport document has to be “clean” whether or not bears the notation “clean on board”. Carrier actually deals with transport issued and it is actual transporter of the goods. Bill of Lading A bill of lading is a receipt issued by a carrier for goods to be transported to a named destination. First Edition 2000. road consignment note (CMR). Transport document issued by a freight forwarder will be accepted if it is so stipulated in the credit or if freight forwarder acts as a carrier or his agent.Transport documents are issued by or on behalf of the carrier. rail consignment note (CIM).26 Freight charges in the transport document have to be consistent with the terms of the credit and with used trade terms such as Incoterms 2000. The container can be full or the goods can be placed with the goods of other consignees. if it bears notification “freight payable at destination”. Here we will mention transport documents such as: bill of lading. inland waterway transport document. while the freight forwarder is only intermediary arranging the transport. but transport document should not bear the clause “part load” or similar clause meaning that the access to the goods is provided presenting all other transport documents in connection with that container to the carrier. Banks in general do not pay attention to these codes. Container can be loaded on deck and this is allowed. Reinhard Langerich. Banks will also not accept a transport document showing that the goods are loaded on deck. Such transport is very risky for the goods that can be easily damaged. LCL means less than container load and in this case the carrier is responsible for loading and unloading. 43 . In the case of goods 26 Documentary Credits in practice. air waybill. Transport by sea is usually done in a container transport which protects the goods. it is discrepant. If the documents bear no declaration or notation showing defective goods or packaging it is considered to be “clean”. which details the terms and conditions of transit. It means that goods shipped on board are not defective or packaging of the goods is not defective. freight forwarder’s certificate and post and courier receipts. Code FCL means full container load and such container is to be loaded and unloaded by parties other than the carrier.
shipped by sea. The similar rule applies for “place of final destination” and “port of discharge”. meaning the holder of the bill of lading has title to the goods. Given that each bill of lading must be either "straight" or "order". it is the document of title which controls the physical custody of the goods. If an agent signs a bill of lading on behalf of a carrier. usually three signed originals comprising a complete set. If the credit requires a bill of lading to show that the goods are to be consigned to the named party (a straight consignment). Letters of credit usually call for an order bill of lading blank endorsed. 645. There are two different types of bill of lading: • • A STRAIGHT BILL OF LADING is one that names a specific consignee to An ORDER BILL OF LADING is one that is written "to order" or to order of a whom goods are to be delivered. It is a non-negotiable document. Publication No. If the credit stipulates that the goods are to be consigned to the order of a named party than the bill of lading must not show that the goods are consigned straight to the named party. named party making the instrument negotiable by endorsement. It is allowed for the bill of lading to have the field “place of receipt” filled instead of “port of loading” when it is clear that the goods are to be transported from the place of receipt by vessel and where is on board notation evidencing the goods were loaded on that vessel.27 Name of the carrier must appear on the face of the bill of lading and it must be identified as the carrier. Date of “on board” notation will be deemed as date of shipment. If a credit calls for a “marine” or “ocean” bill of lading Article 23 of the UCP 500 is applied. the agent must be identified as agent.28 27 Article23 of the ICC (International Chamber of Commerce in Paris) rules of the Uniform Customs and Practice for Documentary Credits. ICC Publication No. “clean on board”. Transport document must indicate the number of originals that have been issued. Bill of lading usually has “on board” notation meaning that the goods are placed on board the ship or intended vessel. 2003 Edition (supplement of the UCP 500 for the examination of documents under documentary credits) 44 . the following is a list of more common types of bill of lading: • An OCEAN BILL OF LADING is one issued by an ocean carrier in sets. the bill of lading must not contain words such as “to order of” or similar. any one of which gives title to the goods. 500 (the UCP 500) 28 International Standard Banking Practice (ISBP). or other similar phrases which all mean the same. “On board” notation can take various forms such as “laden on board”. Ocean bills of lading may be issued in "straight" or "order" form. It is usually covering port-to-port shipment.
necessarily identical with the description specified in the letter of credit and other documents. lease the carrying vessel for a stated time or specific voyage under a charter party contract with the owner. or by marked or stamped "on board" notation indicating the date the goods were loaded on board. one of which is typically by sea. because today this kind of transport is more and more used. Unlike the ocean bill of lading. no matter if it is not allowed in the credit conditions and if it covers the entire voyage. Goods carried are then covered under a form of bill of lading issued by the charterer and indicate as being shipped. when large or bulk cargoes are concerned. 29 ICC (International Chamber of Commerce in Paris) rules of the Uniform Customs and Practice for Documentary Credits. It is also known as “combined transport document”. subject to the term and conditions of the charter party.29 Transport documents should have the following characteristics: • • • Ensure that the port of loading and port of discharge are as stipulated in the letter The shipment must be consigned in the manner stipulated in the letter of credit. • If the letter of credit calls for an "on board" bill of lading. Publication No.• A SHORT FORM BILL OF LADING is one issued by a carrier which does not indicate all the conditions of the contract of carriage. • A CHARTER PARTY BILL OF LADING is one which shippers may. multimodal transport document need not to bear an on board notation. it must be evidenced by a "shipped on board" bill of lading. Charter party bills of lading are not acceptable unless specifically authorized by the letter of credit. The multimodal transport document is negotiable document and full set has to be presented if not differently stipulated. 600 (the UCP 600) 45 . It is subject to the terms and conditions of a charter party. Under the new UCP 600 multimodal transport document took the central role leaving behind ocean bill of lading. This is acceptable unless otherwise specified in the letter of credit. A general description of the goods is acceptable if consistent with but not of credit. Transshipment is of course accepted because it covers two different modes of transport. • A MULTIMODAL TRANSPORT DOCUMENT is one covering shipments by at least two different modes of transport.
and any gross weight must agree with those on the commercial invoice and other documents. Any “dirty” clause indicating a defect in the packaging or condition of the goods makes the bill of lading "unclean" and unacceptable. particulars of the shipment are shown. • • Bills of lading indicating goods shipped "on deck" are not acceptable unless The total number of packages comprising the shipment.• If the letter of credit stipulates that freight is to be prepaid. the name of the agent as well as the the letter of credit. • The bill of lading must be "clean". or if the invoice is priced CIF or CFR. name of the carrier must be shown. in the case of a shipped bill of lading or other shipping document. 46 . signing the bill of lading. Expressions such as "freight to be paid" or "freight payable" are not acceptable. 21 days after the date of issue. or if the ocean freight has been added to the FOB or FAS value: the bill of lading must be marked "freight paid" or "freight prepaid". or. • • • • The bill of lading is to cover only goods described in the invoice and specified in Any correction or alteration must be initialed and authenticated by the party The name of the carrier must appear on the front of the bill of lading where the If the bill of lading is signed by an agent. If no such period is specified. • Letters of credit should stipulate a period of time after date of issue of the bill of lading or other shipping document for presentation of drawings. banks will refuse documents if presented later than 21 days after the date of "on board" endorsement. shipping marks and specifically allowed in the letter of credit. numbers.
SEND BILL TO Name: Company: Street: City State Zip: DESCRIPTION OF COMMODITY SPECIAL MARKS & EXCEPTIONS QUANTITY UNIT OF MEASURE US $ PAID LOT NUMBER CHARGES 47 .Figure 7 – Sample of Bill of Lading BILL OF LADING TRAILER/CAR NUMBER: _________________ FROM BILL DATE: __________________ TO Shipper/Producer: Origin: Street: City State Zip: Special Instructions: Consignee: Destination: Street: City State Zip: Route: SHIPPER‘S INSTRUCTIONS FOR PAYMENT.
If on its route.D. packaged. otherwise to deliver to another carrier on the route to said destination. TO: C. priced CIF or CFR.D. described.O. AMOUNT: $ C. FEE COLLECT PREPAID TOTAL CHARGES $ If this shipment is to be delivered to the consignee without recourse on the consignor.” _____________________________________________________________________ _ (Signature of Consignor) ADDRESS: NOTE: Where the rate is dependent on value. state of the goods or packaging is not acceptable. except as noted (contents and condition of packages unknown). marked and labeled and are in proper condition for transportation in accordance with all appropriate NOP organic standards and applicable regulation of the Department of Transportation. or if the invoice is the air waybill. Features of an Air Waybill should be: • • • Only the goods invoiced and specified in the letter of credit may be covered by The air waybill should be clean meaning that any clause evidencing defective If the letter of credit stipulates that freight is to be prepaid. 48 . shippers are Freight Charges are collect unless marked prepaid. This is to certify that the above named materials are properly classified. Shipper/Producer Signature: Per (Company): Carrier Signature: Per (Company): Air Waybill An air waybill is non-negotiable air transport document issued by an airline (carrier) or its agent.D. Shipper hereby certifies that he or she is familiar with all the Bill of Lading terms and conditions in the governing classification and the said terms and conditions. the property described above in apparent good order. or if freight is otherwise included in the invoice: the air waybill must indicate that freight has been paid. The agreed or declared value CHECK BOX IF PREPAID of the property is hereby specifically stated by the shipper to be not exceeding $ RECEIVED subject to the classifications and tariffs in effect on the date of the issue of this Bill of Lading.O. It is mutually agreed as to each carrier of all or any of said property. marked consigned and destined as indicated above which said carrier (the word carrier being understood through this contract as meaning any person or corporation in possession of the property under the contract) agrees to carry to its usual place of delivery as said destination. It is a receipt issued by an air carrier indicating receipt of goods to be transported by air and showing goods consigned to a named party. Shipper Signature: REMIT C.Container/Trailer has been inspected and determined to be free of contaminants.O. the consignor shall sign the following statement: “The carrier shall not make delivery of this shipment without payment of freight and all other lawful charges. that every service to be performed hereunder shall be subject to all the Bill of Lading terms and conditions in the governing classification on the date of shipment. required to state specifically in writing the agreed or declared value of the property. over all or any portion of said route to destination and as to each party at any time interested in all or any said property.
consistent with the other documents. letter of credit.• • • The airport of departure and airport of destination must be as stipulated in the The number of packages and gross weight shown on the air waybill must be An air waybill issued by a forwarder is not acceptable. Figure 8 – Sample of Air Waybill 49 .
signed and issued by the carrier or his agent 50 . A rail consignment note evidences that the goods are received by a railway company for transport.Extra Copy WHITE . It is issued by railway company.Delivery Receipt WHITE .For Destination Agent's Copy WHITE . The rules regarding CIM are more or less very similar to the rules applying for other transport documents so we will just briefly mention some of the things that should be incorporated.Extra Copy • • • • • • • • Rail consignment note (CIM) CIM is used when the goods is transported by rail.Extra Copy WHITE .Carbon copies attached: • • BLUE Original 1 For Shipper GREEN Original 1 For Issuing Carrier WHITE Invoice WHITE Remittance Copy PINK Original 2 For Consignee GOLDENROD . It should have: • The name of the carrier.
Concerning rules on how a CMR 51 . The date of the issuance will be deemed as the date of shipment. unless there is a reception stamp.• It must indicate the place of shipment and the place of destination as stipulated in the credit Figure 9 – Sample of CIM Road consignment note (CMR) It is also issued by a carrier and it is used for a transport by truck evidencing that the goods is received by carrier for transport.
52 .Sample of CMR Inland waterway transport document It is used for river transport as a non-negotiable document very similar to other transport documents concerning applicable rules described in the Article 28 of the UCP 500.should look like they are almost identical to other transport document. One thing that should be mentioned is that a CMR is issued in the language of the country where it is being issued and that is accepted if a CMR has explanation of all the fields in the language of the credit. Figure 10 . especially a CIM.
the beneficiary is obliged to arrange insurance and furnish the buyer with the appropriate insurance policy or certificate. Any other freight forwarder’s document will also be accepted if it is evidencing that a forwarder acts as carrier. Since the topic of marine insurance is extremely specialized and with conditions varying from country to country. It usually shows that a forwarder acts as carrier and as such it can be used in documentary credit transactions (even if credit does not stipulate its use). Then. Both of them must be properly stamped bearing pick-up dates which are considered to be the dates of the dispatch. Insurance Policy or Certificate Under the terms of a CIF contract. but it is allowed to have documents issued by a forwarder if a credit allows it. Post and courier receipts They are used for goods limited in volume and weight. the services of a competent marine insurance broker are useful and well-advised. At the end there are documents wanted by an applicant for various reasons. The extent of coverage and risks should be agreed upon between the buyer and seller in their initial negotiations and be set out in the sales contract. Some banks will not issue a credit if the goods are not insured because they want a security for the goods. The International Federation of Freight Forwarders’ Associations (FIATA) has its own document referred to as Negotiable FIATA Multimodal Transport Bill of Lading (FBL). They are evidencing receipt of the goods for dispatch. Post receipt is issued by a post office. we will see documents issued for the customs authority or documents needed for tax exemption.Freight forwarder’s certificate As we have already said transport documents should be signed by a carrier. Other documents Other documents presented and explained here are first of all in connection with the insurance. What one Insurance policy or certificate generally ahs to fulfill: 53 . while a courier receipt is issued by the relevant courier service. Those banks will demand applicant to present insurance coverage in case that beneficiary is not obliged to insure the goods.
• • Any alterations or corrections to the insurance document must be initialed by the The insurance document must be signed by an authorized person. • The date of the insurance document should not be later than the date of shipment as shown by the bill of lading or other transport document.• If the letter of credit calls for an insurance policy. agree with those shown on the bill of lading. if required by the letter of credit. the insurance document must be endorsed by the party to whose order it is made so as to be in negotiable form. numbers must agree with those shown on the invoice and bill of lading. both Unless the amount to be insured is stipulated in the letter of credit. on the bill of lading.. party signing the document. • • • • • The description of the goods insured must be consistent with that in the other The number of packages comprising the shipment and shipping marks and The name of the carrying vessel.e. the amount should be for the greater of the draft amount or the total invoice value plus 10%. port of loading and port of discharge must The insurance document must cover transshipment if transshipment is indicated The insurance document must cover specifically those risks stipulated in the documents although not necessarily identical. • credit. should cover at least the CIF value plus 10 percent if invoiced in those terms. The amount insured must be expressed in the same currency as the letter of 54 . However. which must be separately shown as covered. The "all risks" clause in the insurance document does not cover risks of war. the amount copies must be presented. Broker's cover notes are not acceptable unless specifically allowed in the letter of credit. • • If the insurance policy or certificate indicates that it is issued in duplicate. the insurance document may be dated after the date of shipment provided it evidences that cover is effective from date of dispatch i. by way of "warehouse to warehouse" clause. Otherwise. an insurance certificate is not acceptable and the policy must be provided. • Unless the letter of credit specifies to whom loss is to be payable. letter of credit.
A certificate of origin is often issued by a chamber of commerce. the customs authorities or other body authorized for making it. It also evidence that export of the goods to the importing country are in compliance with the rules on the “generalized system of preferences for goods”.30 GSP certificate (GSP: Generalized System of Preferences) GSP certificate is based on Generalized System of Preferences established by UNCTAD and it is issued to allow the use of the scheme for customs preferences. It must appear to relate to the goods from the invoice. EUR certificate is issued by customs authorities or exporter if it is authorized by customs authorities. Certificate of Origin As the name suggests. Certain 30 International Standard Banking Practice (ISBP). 2003 Edition (supplement of the UCP 500 for the examination of documents under documentary credits) 55 . Movement certificate (EUR) It is introduced as a result of a trade agreement between the EU and certain non EU countries. The following may also be asked for to satisfy government requirements or for the convenience of the buyer. and must be signed and dated. This certificate is issued by the exporter who certifies that the goods have been manufactured in the relevant country. Those countries enjoy a tariff preference or a customs relief when exporting goods to the EU. EUR 2 etc. ICC Publication No. a certificate of origin certifies as to the country of origin of the goods described and should comply with any stipulations in the letter of credit as to originating country and by whom the certificate is to be issued. The certificate should be consistent with and identified with the other shipping documents by shipping marks and numbers.• The foregoing are the most common documents usually called for in an export letter of credit.). It is usually issued only in the language of the relevant country so this should be taken into account when stipulating a documentary credit. The document must be signed by the authorities of the exporting country as well. Import and export licenses Some countries have strict control of import or export for various reasons. For some it is the way to control the types of goods importing or exporting from the country. 645. There are various forms of the EUR certificate depending on the value of the goods (EUR 1.
There are some recognized international companies. Inspection Certificate When a letter of credit calls for an inspection certificate it will usually specify by whom the certificate is to be issued. There can also be a limit for export or import of certain type of goods. The applicant itself can send its representative to inspect the goods. It must show the shipping marks and number of each package. It is not usually required to be signed. It can show the net and gross weight of the goods.type of goods can be exposed to such regime of licenses. As a preventative measure against fraud or as a means of protecting the buyer against the possibility of receiving unwanted or defective goods. but sometimes it can inefficient and expensive. Often it is issued by a veterinary. otherwise. survey or inspection certificates issued by a reputable third party may be deemed as efficient. The applicant in this case will instruct the inspection company to perform an inspection issuing the inspection certificate. such as Societe Generale Surveillance (SGS) in Switzerland which is dealing with inspection. Weight list or certificate can be accepted instead of the packing list if they have all needed data. veterinary authorities or ministry of agriculture. The applicant may stipulate or require these certificates even for their own control to ensure that the goods are in good condition. the same general comments as in the case of the certificate of origin apply. Packing List A packing list is usually requested by the buyer to assist in identifying the contents of each package or container. Health or phyto-sanitary certificate Health certificate shows health and sanitary conditions of the goods. Such certificates indicate that the goods have been examined and found to be as ordered. 56 . Some countries for some type of goods require this kind of certificate for importing that kind of goods. Phyto-sanitary certificate is used for import of live plants.
This declaration is issued by a carrier.Quality certificate Sometime the applicant wants a declaration regarding the quality of the goods. 57 . Warranty If a warranty has been agreed between the seller and the buyer. wars etc. Shipping company’s declaration The applicant may demand for several reasons that the goods are not to be shipped by a certain type of vessel or not going into countries and ports not wanted by the applicant. than this document has to be presented together with other documents. It is normally issued by the producer or the beneficiary and it serves to establish the liability of the issuer towards the buyer under the sales contract or other agreement as to the goods sold. Such document is typically issued by a beneficiary or by a producer. It has to be signed by the issuer and contain data as stipulated in the credit. For example it may be demanded for a vessel not to be older than a certain number of years for safety reasons or that the vessel should not enter some ports and countries for a reason of embargo or political instability.
PRESENTATION OF DOCUMENTS
Presentation of documents is an important step in a documentary business. Here we will explain some steps after the presentation of documents such as honouring, examining, discrepancies in documents and refusal of the documents. Honouring documents under documentary credit Honouring the documents means that after examining the documents presented by the beneficiary, the relevant bank will honour the documents if they are conforming to the terms and conditions of the credit. Actually the relevant bank will “release” the documents thus saying the documents will be paid upon the maturity. Apart from the presenting documents, they have to be presented in the place and in due time to the bank authorized to honour the documents (nominated bank). The beneficiary may, according to the UCP 500 and the UCP 600, present the documents either in the nominated bank or direct to the issuing bank. Documents must be presented within the expiry date of the credit and within allowed period for presentation of documents often being 21 days. If the place of expiry is in the beneficiary’s country this means that the documents should be sent at the latest on the date of expiry by the beneficiary’s bank (this date is the date on the covering letter of the beneficiary’s bank). If the place of expiry is in applicant’s country, the documents should reach issuing or the nominated bank by the date of expiry (if it is Saturday or if the nominated bank is closed on that day, this period is prolonged to the next working day). Documents must never be presented after the date of expiry whatever is the period for presentation. After the honouring of documents, the nominated bank will inform the beneficiary that it will make payment if the credit is confirmed by it. If the credit is not confirmed the nominated bank will inform the beneficiary that it will settle the amount after receiving the funds from the issuing bank. The nominated bank can finance the documents by paying the beneficiary before it has received the funds from the issuing bank. Examination of documents As we have seen the relevant bank will check the documents upon their presentation. Checking the documents is being done in compliance with all the rules for which the credit is subject to. Today almost all banks use and stipulate ICC UCP rules for examining documents. The banks will check the documents whether they appear on
their face to be in conformity with the terms and conditions of the credit as they deal with the documents and not with the goods. The banks will examine documents stipulated in the credit, without examining other documents which can be returned to the sender. All the data in the documents should be consistent with one another. Data in one document such as Certificate of Origin for instance, should not be inconsistent with the data in any other document presented. Sometimes there are requirements or stipulations in the credit that are specific, but not calling for any specific document to be presented (e.g. the goods must be of polish origin). That creates confusion and it is hard to satisfy some of those conditions if there is no specific document stipulated. Article 13 c in the UCP 500 states that: “If a credit contains conditions without stating the documents(s) to be presented in compliance therewith, banks will deem such conditions as not stated and will disregard them.”31 We should mention two basic principles applied when it comes to examining of the documents presented. Those two principles are substantial compliance and strict compliance. Concept of the substantial compliance means that it is essential that the goods in order reaches the buyer, that prices and periods are as stipulated, rather than that all the documents must be precise. The problem is to determine form bank to bank what is reasonable and what are things that have to be considered while examining and that is why this principle nowadays is more theory than practice. Principle of strict compliance means that all conditions and details must be in strict compliance with the credit and international rules and that all documents must be consistent with one another. Strict compliance should not be understood literally and there are rules regarding the types of errors or other details that are explaining what is acceptable. When the nominated or the issuing bank receives the documents it has some time limits for examining them established by international rules. Firstly it was set by international rules that period for handling and examining documents should be done in “reasonable time”. Such not precise term caused many different interpretations. At the end it was inserted in the UCP 500 that this period should not exceed seven banking days following the day of receipt of the documents. Some banks take this for granted and effect payment under credits after 7 banking days, not taking into consideration
Article13 c of the ICC (International Chamber of Commerce in Paris) rules of the Uniform Customs and Practice for Documentary Credits, Publication No. 500 (the UCP 500)
“reasonable time”. That is misinterpretation of this rule because the “reasonable time” depends on many factors such as complexity of the credit, the number and size of the documents and some specific things concerning the relevant bank in question. This time should be enough for the issuing bank to obtain waiver of discrepancies from the applicant in case of discrepancies noted in credit. Under the new UCP 600 (taking into force as from 01. July 2007) this time limit was reduced to 5 banking days and that is probably the main difference with the UCP 500.32 If not fulfilled by the issuing or confirming bank this rule will cause that those bank cannot refuse the documents and must effect the payment under the credit. The nominated bank which has not confirmed the credit is obliged to follow this rule also, but it is not obliged to pay as it has not assumed payment undertaking. Discrepancies in the presented documents There are many reasons for presenting discrepant or the documents not complying with the credit terms and conditions. International banks have estimated that around 70% of the sets of documents presented are with discrepancies. One of the reasons is not clear agreement between the seller and the buyer or absence of that agreement which leads to discrepancies in the documents presented. The beneficiary should check the credit received in order to see if it is possible for him to meet all the requirements. If that is not the case he should ask for an amendment of the credit. Sometimes it happens that the applicant does not arrange for the amendment for various reasons. Usually the beneficiary fails to send proper documents because of the lack of knowledge on the documentary credits and the international rules applying to it. The beneficiary has the possibility to correct the documents if there is time for it. The usual discrepancies showing in the documents are : period for presentation and/or date of expiry are exceeded, the amount of credit over the limits or not fully utilized, dispatch from a place other than stipulated in the credit, description of goods inconsistent, the bill of lading does not have notation “on board”, carrier is not indicated in the transport document, transshipment or partial shipment are made in case they are not allowed by the credit, the insurance documents contains a date later than the date of shipment, the insurance
ICC (International Chamber of Commerce in Paris) rules of the Uniform Customs and Practice for Documentary Credits, Publication No. 600 (the UCP 600)
according to the agreement with the beneficiary.T. This way the issuing bank will have to take up the documents (release or honour them) or to refuse documents.F. Refusal of documents First of all we must add that a documentary credit is an instrument of payment and as such should serve to that purpose. If the documents received have severe discrepancies and the issuing bank (or the applicant) is not ready to accept them. Reasons for refusing documents may be different. then the refusal of documents is understandable. send a request (usually by S. There are some example of such cases: if the importer of Christmas decoration receives the goods later than it is stipulated by the credit it is a good ground for refusal because it is not possible for him to sell decoration after Christmas or wrong spare parts sent (wrong 61 . Payment to the beneficiary at the earliest can be expected if the beneficiary bank is willing to pay after the message of the issuing bank saying that the documents are taken up and that the issuing bank is ready to pay despite discrepancies. IF the documents cannot be corrected the nominated bank may.policy does not contain stipulated risks and does not cover 110% of CIF or CIP value etc. If the documents are lost in transit none of the banks has the obligation to pay. If none of this is an option the beneficiary will forward the documents through a nominated bank to the issuing bank which is most common. the best option is to send the documents back to the beneficiary. The issuing bank will probably leave this decision to be made by the applicant.I. One consider that the credit does not exist in this case and that presentation is to be considered a documentary collection and the other consider late presentation as a discrepancy under that credit. If the discrepancies in the documents are such that reduce applicant’s possibility to take over the goods or weaken his position in this transaction. Only in few cases documents are refused with nonpayment as a result and this is proof that documentary credit is really an instrument of payment.) to the issuing bank asking it to accept the documents despite discrepancies described. The applicant cannot take possession over the documents in case he did not approved the discrepancies and this means he cannot take over the goods and have them cleared through the customs.W. There is one disagreement between banks in regard to receiving the documents after expiry date. After that the beneficiary may redirect the goods to himself or to another buyer.
but if the issuing bank has contributed to the goods being handed over to the applicant. Under UCP rules the issuing bank may approach to the applicant for a waiver of discrepancies. than the issuing bank bears a risk and has to reimburse the beneficiary.). because the issuing bank is the one taking separate payment undertaking and the applicant takes no part from a documentary credit point of view and the rules applied. The beneficiary has to take prompt action as to the goods in stake in order not to have them sold by customs authorities. 62 . This rule is in accordance with UCP rules. Refusal of documents means that no payment will be made under letter of credit. store them somewhere or return them. the applicant may not want the goods changing his mind.specification and description of the goods) for a machine used by the applicant for production. there is no difference between confirmed and unconfirmed credit. The notification of refusal must be done immediately by telecommunication means (in majority of cases by S.T. case where market price has fallen causing not probable future cooperation between the buyer and the seller (although the reason stated is discrepant documents). In case where the nominated bank has found no discrepancies and paid to the beneficiary. Although this is possible.F. In this case risk of non-payment by the issuing bank falls on the nominated bank and not on the beneficiary. Reasons for refusal in practice can be any defection in the goods. He has to redirect the goods to another buyer. the issuing bank will seldom take the decision opposite to the applicant’s instructions. The issuing bank must take the decision and notify the presenting bank or the beneficiary within prescribed time limits (within reasonable time not exceeding 7 or 5 banking days depending on the rules applied in the specific case). but at the end it is up to the issuing bank to decide about it. The beneficiary has the right to present corrected documents within the expiry date and within the period for presentation after notification of refusal by the issuing bank. Seller can lodge a claim only using sales contract as a base for the claim. In other cases the risk falls on the beneficiary.W.I. the applicant wants unreasonable reduction in price or the applicant just cannot pay (the issuing bank will usually refuse the documents based on discrepancies if the applicant has gone bankrupt). The discrepancies because of which documents are refused must be stated by the issuing bank and it is not possible to add other reasons for refusal afterwards.
the beneficiary wishes to receive the proceeds of authority from the issuing bank to negotiate the draft. However. the following courses of action are available: • The documents may be corrected if possible. shipping company or whoever is concerned is able to correct the discrepancies before the expiry of the letter of credit and within the period of time allowed for presentation of the documents. it being understood the beneficiary's bank will have recourse to the beneficiary if the discrepancies are unacceptable to the issuing bank. Under the indemnity the beneficiary agrees to indemnify the negotiating bank for payment of principal. despite the discrepancies. documents may be sent to the issuing bank on an "approval" basis.Guidelines for dishonouring the documents When documents are presented by the beneficiary and are found not to be in accordance with the terms of the letter of credit. the documents to be delivered to the buyer only against the buyer's authority to pay or accept. this option is only applicable if the discrepancies are such that the beneficiary. If the discrepancies are considered minor. • • If the discrepancies cannot be corrected. the drawing immediately. the beneficiary's bank may be prepared to negotiate the draft "under reserve". in the case of a sight draft. interest and any other loss resulting from the refusal of the issuing bank to honour the drawing due to non-conformity of the documents. then an indemnity may be the expedient method. • As a last resort. 63 . the beneficiary's bank may request If.
Usually only if there are severe disputes for big amounts are going into courts. this gives possibility for fraud and presenting forged documents. In the UCP it is not said which country’s law is applicable and it is usually the law of the country where the credit is available i. the parties involved may choose to go for arbitration.e. Stopping the payment under 64 . each case is subject to the national law of the country in question and judicial decision are very different among the different countries. as an objective third party. The courts will in majority of cases base its decision on international rules and on the ICC opinions. SOLVING DISPUTES AND FRAUDS IN DOCUMENTARY BUSINESS Courts decisions. The problem with expert decision is that the decision is binding only in case of agreement to respect the decision between both parties. where the documents are presented. Centre for Expertise that is providing such service. Problem with some cases is that lawyers and judges in charge do not have satisfactory knowledge on documentary credits and their decisions can provoke confusion among the banks and people dealing with documentary credits. Fraud and forgery Since we mentioned earlier that banks deal with documents and not with the goods presented in those documents. Instead of going into court. to settle the dispute. The parties disputing about a documentary credit can have a documentary credit expert. The nominated bank has the right to refuse to pay if it detects fraud and forgery. arbitration and expert decisions Relatively very small number of documentary credits is disputed and even less of disputes under them are settled through the court. There is one body under the ICC. The trials take a long time and can be very expensive. In practice fraud is very rare. ICC International Court of Arbitration in Paris is among most important and it is often used for arbitration.9. The courts can call technical experts to expose their opinions as to the credit disputed. The advantage of arbitration comparing to an ordinary court is that both parties can appoint experts on the issue to make a decision together with the arbitrator. Another advantage is that arbitration decisions are not published. and banks avoid having them. Because the fraud and forgery is not covered by the UCP rules. There are several international institutions that can do arbitration.
There is another situation where the buyer and the seller try together to deceive the bank involved where buyer approves the documents containing specific discrepancy directly to the seller. A beneficiary in this case should contact his own bank that will determine the authenticity of such a credit. cement or similar. 65 . The typical situation of a fraud in documentary business is when beneficiary/fraudulent seller offers supply of big quantities in order to obtain a big amount of money. He offers goods usually at a significantly lower price and the goods is often bulk goods such as sugar. The best way to prevent fraud is to “know your customer”. The aim is to cause the interested buyer to ask for the issuance of the letter of credit which can be confirmed by a recognized bank. After this nominated bank can pay the amount of credit to the seller and then the buyer does not approve the documents after all. There are also cases where a beneficiary receives a documentary credit that turns out to be forged and not genuine. The ICC has established a special unit in London. because it was not issued by the issuing bank stated in the credit. To collect that amount the fraudulent seller presents forged documents and disappears. but the beneficiary has disappeared or gone bankrupt in the meantime.fraud and forgery can be done if fraud and forgery are documented and if existed before the credit is honoured. the ICC International Maritime Bureau (IMB) which deals with investigations of this type of crime.
this term requires the buyer to clear the goods for export and pay loading costs in addition to freight and insurance. CIF: "Cost. prepays the freight and supplies the buyer with a "clean" negotiable "on board" ocean bill of lading. Unlike FOB. The seller loads the goods on board at the port of shipment at his expense.10. ICC Official Rules for the Interpretation of Trade Terms ICC Publication No. The seller supplies the buyer with a "clean" negotiable "on board" bill of lading. The seller delivers the goods alongside the vessel at the loading Berth named by the buyer. Insurance of the goods is the buyer's responsibility. "on board" ocean bill of lading. FAS: "Free Alongside Ship".33 Explanations of four of the most common terms are: CFR: "Cost and Freight" to the named port of destination. At this point the seller's obligations are fulfilled. 2000 Edition 66 . This means the buyer bears all costs and risks of loss or damage to the goods from that moment. The seller loads the goods on board the carrying vessel at his expense. The buyer is responsible for payment of freight and insurance. FOB: "Free On Board" to the named port of shipment. Insurance and Freight" to the named port of destination. 560. 33 Incoterms 2000. The seller delivers the goods on board the carrying vessel and bears all costs and risks until goods pass over the ship's rail. prepays the freight and cost of marine insurance and supplies the buyer with a negotiable marine insurance policy and a "clean" negotiable. A BRIEF EXPLANATION OF TRADE TERMS Trade terms are defined in great detail in a publication of the International Chamber of Commerce entitled Incoterms.
The bank which opens a letter of credit on behalf of the applicant and forwards it to the advising bank for delivery to the beneficiary.The buyer or the party who requests the letter of credit to be issued.Usually the beneficiary's bank which. the following is a brief description of the parties most commonly involved in letters of credit: Accepting Bank .The seller or the party to whom the letter of credit is addressed. agrees to purchase the draft (pay the beneficiary). Negotiating Bank . thereby incurring a legal obligation to pay the amount of the draft at maturity. Beneficiary . joins that bank in undertaking to honour drawings made by the beneficiary.The bank named in the letter of credit where drafts are to be paid. Drawee Bank . PARTIES INVOLVED IN A DOCUMENTARY CREDIT TRANSACTION In order to help the reader understand the steps taken in a letter of credit transaction.A branch or correspondent bank at or near the domicile of the beneficiary. Discounting Bank .The bank named in a letter of credit on whom term drafts are drawn and who indicates acceptance of the draft by dating and signing across its face. to which the issuing bank either sends the letter of credit. Issuing Bank .The bank named in the letter of credit on which drafts are to be drawn. Nominated bank . Advising Bank . The advising bank advises the beneficiary of the letter of credit without engagement.A bank usually in the country of the beneficiary which. It is not necessarily the issuing bank. at the request of the issuing bank.11.The beneficiary of the letter of credit who will draw the draft in accordance with the terms of the letter of credit. provided the terms and conditions of the letter of credit have been complied with. Confirming Bank . or a notification that a letter of credit has been issued.A bank authorized by the issuing bank to honour the documents on its behalf Applicant . Paying Bank .A bank which discounts a draft for the beneficiary after it has been accepted by an accepting bank. but often a branch of the issuing bank or its 67 . after satisfying itself that the documents conform with the letter of credit. with instructions to notify the beneficiary. Drawer .
there is no recourse to the drawers.The bank authorized by the issuing bank to reimburse the drawee bank or other banks submitting claims under the letter of credit. Reimbursing Bank .correspondent. Once drafts have been paid or accepted by the paying/drawee bank. Forwarding Agent – The person or a company arranging transport on behalf of the seller 68 .
ICC Guide to Documentary Credit Operations for the UCP 500. 6.iccwbo. Charles del Busto. Publication No. www.com – S. Reinhard Langerich. 600 (the UCP 600) 5. 515.F.International Chamber of Commerce (ICC) – The world business organization 7. First Edition 2000.W. Publication No. International Standard Banking Practice (ISBP). 2000 Edition 8. ICC Publication No.org .T. www.swift. ICC (International Chamber of Commerce in Paris) rules of the Uniform Customs and Practice for Documentary Credits. Incoterms 2000. 1994 Edition 4. 560. ICC Official Rules for the Interpretation of Trade Terms ICC Publication No. Documentary Credits in practice.LITERATURE AND SOURCES: 1. 500 (the UCP 500) 2. 2003 Edition (supplement of the UCP 500 for the examination of documents under documentary credits) 69 .I. ICC (International Chamber of Commerce in Paris) rules of the Uniform Customs and Practice for Documentary Credits. (Society for Worldwide Interbank Financial Telecommunication) 3. ICC Publication No. 645.
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