Temat: Understanding and Using Letters of Credit - Alibaba.com

Understanding and Using Letters of Credit

Author: Safe Trading Admin

Letters of credit accomplish their purpose by substituting the credit of the bank for that of the customer, for the purpose of facilitating trade. There are basically two types: commercial and standby. The commercial letter of credit is the primary payment mechanism for a transaction, whereas the standby letter of credit is a secondary payment mechanism.

Commercial Letter of Credit

Commercial letters of credit have been used for centuries to facilitate payment in international trade. Their use will continue to increase as the global economy evolves.
Letters of credit used in international transactions are governed by the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits. The general provisions and definitions of the International Chamber of Commerce are binding on all parties. Domestic collections in the United States are governed by the Uniform Commercial Code.
A commercial letter of credit is a contractual agreement between a bank, known as the issuing bank, on behalf of one of its customers, authorizing another bank, known as the advising or confirming bank, to make payment to the beneficiary. The issuing bank, on the request of its customer, opens the letter of credit. The issuing bank makes a commitment to honor drawings made under the credit. The beneficiary is normally the provider of goods and/or services. Essentially, the issuing bank replaces the bank's customer as the payee.

Elements of a Letter of Credit
• A payment undertaking given by a bank (issuing bank)
• On behalf of a buyer (applicant)
• To pay a seller (beneficiary) for a given amount of money
• On presentation of specified documents representing the supply of goods
• Within specified time limits
• Documents must conform to terms and conditions set out in the letter of credit
• Documents to be presented at a specified place

Beneficiary

The beneficiary is entitled to payment as long as he can provide the documentary evidence required by the letter of credit. The letter of credit is a distinct and separate transaction from the contract on which it is based. All parties deal in documents and not in goods. The issuing bank is not liable for performance of the underlying contract between the customer and beneficiary. The issuing bank's obligation to the buyer, is to examine all documents to insure that they meet all the terms and conditions of the credit. Upon requesting demand for payment the beneficiary warrants that all conditions of the agreement have been complied with. If the beneficiary (seller) conforms to the letter of credit, the seller must be paid by the bank.

Issuing Bank

The issuing bank's liability to pay and to be reimbursed from its customer becomes absolute upon the completion of the terms and conditions of the letter of credit. Under the provisions of the Uniform Customs and Practice for Documentary Credits, the bank is given a reasonable amount of time after receipt of the documents to honor the draft.
The issuing banks' role is to provide a guarantee to the seller that if compliant documents are presented, the bank will pay the seller the amount due and to examine the documents, and only pay if these documents comply with the terms and conditions set out in the letter of credit.
Typically the documents requested will include a commercial invoice, a transport document such as a bill of lading or airway bill and an insurance document; but there are many others. Letters of credit deal in documents, not goods.

Advising Bank

An advising bank, usually a foreign correspondent bank of the issuing bank will advise the beneficiary. Generally, the beneficiary would want to use a local bank to insure that the letter of credit is valid. In addition, the advising bank would be responsible for sending the documents to the issuing bank. The advising bank has no other obligation under the letter of credit. If the issuing bank does not pay the beneficiary, the advising bank is not obligated to pay.

Confirming Bank

The correspondent bank may confirm the letter of credit for the beneficiary. At the request of the issuing bank, the correspondent obligates itself to insure payment under the letter of credit. The confirming bank would not confirm the credit until it evaluated the country and bank where the letter of credit originates. The confirming bank is usually the advising bank.
Letter of Credit Characteristics

Negotiability

Letters of credit are usually negotiable. The issuing bank is obligated to pay not only the beneficiary, but also any bank nominated by the beneficiary. Negotiable instruments are passed freely from one party to another almost in the same way as money. To be negotiable, the letter of credit must include an unconditional promise to pay, on demand or at a definite time. The nominated bank becomes a holder in due course. As a holder in due course, the holder takes the letter of credit for value, in good faith, without notice of any claims against it. A holder in due course is treated favorably under the UCC.
The transaction is considered a straight negotiation if the issuing bank's payment obligation extends only to the beneficiary of the credit. If a letter of credit is a straight negotiation it is referenced on its face by "we engage with you" or "available with ourselves". Under these conditions the promise does not pass to a purchaser of the draft as a holder in due course.

Revocability

Letters of credit may be either revocable or irrevocable. A revocable letter of credit may be revoked or modified for any reason, at any time by the issuing bank without notification. A revocable letter of credit cannot be confirmed. If a correspondent bank is engaged in a transaction that involves a revocable letter of credit, it serves as the advising bank.
Once the documents have been presented and meet the terms and conditions in the letter of credit, and the draft is honored, the letter of credit cannot be revoked. The revocable letter of credit is not a commonly used instrument. It is generally used to provide guidelines for shipment. If a letter of credit is revocable it would be referenced on its face.
The irrevocable letter of credit may not be revoked or amended without the agreement of the issuing bank, the confirming bank, and the beneficiary. An irrevocable letter of credit from the issuing bank insures the beneficiary that if the required documents are presented and the terms and conditions are complied with, payment will be made. If a letter of credit is irrevocable it is referenced on its face.

Transfer and Assignment

The beneficiary has the right to transfer or assign the right to draw, under a credit only when the credit states that it is transferable or assignable. Credits governed by the Uniform Commercial Code (Domestic) maybe transferred an unlimited number of times. Under the Uniform Customs Practice for Documentary Credits (International) the credit may be transferred only once. However, even if the credit specifies that it is nontransferable or nonassignable, the beneficiary may transfer their rights prior to performance of conditions of the credit.

Sight and Time Drafts

All letters of credit require the beneficiary to present a draft and specified documents in order to receive payment. A draft is a written order by which the party creating it, orders another party to pay money to a third party. A draft is also called a bill of exchange.
There are two types of drafts: sight and time. A sight draft is payable as soon as it is presented for payment. The bank is allowed a reasonable time to review the documents before making payment.
A time draft is not payable until the lapse of a particular time period stated on the draft. The bank is required to accept the draft as soon as the documents comply with credit terms. The issuing bank has a reasonable time to examine those documents. The issuing bank is obligated to accept drafts and pay them at maturity.

Standby Letter of Credit

The standby letter of credit serves a different function than the commercial letter of credit. The commercial letter of credit is the primary payment mechanism for a transaction. The standby letter of credit serves as a secondary payment mechanism. A bank will issue a standby letter of credit on behalf of a customer to provide assurances of his ability to perform under the terms of a contract between the beneficiary. The parties involved with the transaction do not expect that the letter of credit will ever be drawn upon.
The standby letter of credit assures the beneficiary of the performance of the customer's obligation. The beneficiary is able to draw under the credit by presenting a draft, copies of invoices, with evidence that the customer has not performed its obligation. The bank is obligated to make payment if the documents presented comply with the terms of the letter of credit.
Standby letters of credit are issued by banks to stand behind monetary obligations, to insure the refund of advance payment, to support performance and bid obligations, and to insure the completion of a sales contract. The credit has an expiration date.
The standby letter of credit is often used to guarantee performance or to strengthen the credit worthiness of a customer. In the above example, the letter of credit is issued by the bank and held by the supplier. The customer is provided open account terms. If payments are made in accordance with the suppliers' terms, the letter of credit would not be drawn on. The seller pursues the customer for payment directly. If the customer is unable to pay, the seller presents a draft and copies of invoices to the bank for payment.
The domestic standby letter of credit is governed by the Uniform Commercial Code. Under these provisions, the bank is given until the close of the third banking day after receipt of the documents to honor the draft.

Procedures for Using the Tool

The following procedures include a flow of events that follow the decision to use a Commercial Letter of Credit. Procedures required to execute a Standby Letter of Credit are less rigorous. The standby credit is a domestic transaction. It does not require a correspondent bank (advising or confirming). The documentation requirements are also less tedious.

Step-by-step process:
• Buyer and seller agree to conduct business. The seller wants a letter of credit to guarantee payment.
• Buyer applies to his bank for a letter of credit in favor of the seller.
• Buyer's bank approves the credit risk of the buyer, issues and forwards the credit to its correspondent bank (advising or confirming). The correspondent bank is usually located in the same geographical location as the seller (beneficiary).
• Advising bank will authenticate the credit and forward the original credit to the seller (beneficiary).
• Seller (beneficiary) ships the goods, then verifies and develops the documentary requirements to support the letter of credit. Documentary requirements may vary greatly depending on the perceived risk involved in dealing with a particular company.
• Seller presents the required documents to the advising or confirming bank to be processed for payment.
• Advising or confirming bank examines the documents for compliance with the terms and conditions of the letter of credit.
• If the documents are correct, the advising or confirming bank will claim the funds by:
o Debiting the account of the issuing bank.
o Waiting until the issuing bank remits, after receiving the documents.
o Reimburse on another bank as required in the credit.
• Advising or confirming bank will forward the documents to the issuing bank.
• Issuing bank will examine the documents for compliance. If they are in order, the issuing bank will debit the buyer's account.
• Issuing bank then forwards the documents to the buyer.

Standard Forms of Documentation

When making payment for product on behalf of its customer, the issuing bank must verify that all documents and drafts conform precisely to the terms and conditions of the letter of credit. Although the credit can require an array of documents, the most common documents that must accompany the draft include:

Commercial Invoice

The billing for the goods and services. It includes a description of merchandise, price, FOB origin, and name and address of buyer and seller. The buyer and seller information must correspond exactly to the description in the letter of credit. Unless the letter of credit specifically states otherwise, a generic description of the merchandise is usually acceptable in the other accompanying documents.

Bill of Lading

A document evidencing the receipt of goods for shipment and issued by a freight carrier engaged in the business of forwarding or transporting goods. The documents evidence control of goods. They also serve as a receipt for the merchandise shipped and as evidence of the carrier's obligation to transport the goods to their proper destination.

Warranty of Title

A warranty given by a seller to a buyer of goods that states that the title being conveyed is good and that the transfer is rightful. This is a method of certifying clear title to product transfer. It is generally issued to the purchaser and issuing bank expressing an agreement to indemnify and hold both parties harmless.

Letter of Indemnity

Specifically indemnifies the purchaser against a certain stated circumstance. Indemnification is generally used to guaranty that shipping documents will be provided in good order when available.

Common Defects in Documentation

About half of all drawings presented contain discrepancies. A discrepancy is an irregularity in the documents that causes them to be in non-compliance to the letter of credit. Requirements set forth in the letter of credit cannot be waived or altered by the issuing bank without the express consent of the customer. The beneficiary should prepare and examine all documents carefully before presentation to the paying bank to avoid any delay in receipt of payment. Commonly found discrepancies between the letter of credit and supporting documents include:

• Letter of Credit has expired prior to presentation of draft.
• Bill of Lading evidences delivery prior to or after the date range stated in the credit.
• Stale dated documents.
• Changes included in the invoice not authorized in the credit.
• Inconsistent description of goods.
• Insurance document errors.
• Invoice amount not equal to draft amount.
• Ports of loading and destination not as specified in the credit.
• Description of merchandise is not as stated in credit.
• A document required by the credit is not presented.
• Documents are inconsistent as to general information such as volume, quality, etc.
• Names of documents not exact as described in the credit. Beneficiary information must be exact.
• Invoice or statement is not signed as stipulated in the letter of credit.

When a discrepancy is detected by the negotiating bank, a correction to the document may be allowed if it can be done quickly while remaining in the control of the bank. If time is not a factor, the exporter should request that the negotiating bank return the documents for corrections.
If there is not enough time to make corrections, the exporter should request that the negotiating bank send the documents to the issuing bank on an approval basis or notify the issuing bank by wire, outline the discrepancies, and request authority to pay. Payment cannot be made until all parties have agreed to jointly waive the discrepancy.

Tips for Exporters
• Communicate with your customers in detail before they apply for letters of credit.
• Consider whether a confirmed letter of credit is needed.
• Ask for a copy of the application to be fax to you, so you can check for terms or conditions that may cause you problems in compliance.
• Upon first advice of the letter of credit, check that all its terms and conditions can be complied with within the prescribed time limits.
• Many presentations of documents run into problems with time-limits. You must be aware of at least three time constraints - the expiration date of the credit, the latest shipping date and the maximum time allowed between dispatch and presentation.
• If the letter of credit calls for documents supplied by third parties, make reasonable allowance for the time this may take to complete.
• After dispatch of the goods, check all the documents both against the terms of the credit and against each other for internal consistency.

Summary

The use of the letters of credit as a tool to reduce risk has grown substantially over the past decade. Letters of credit accomplish their purpose by substituting the credit of the bank for that of the customer, for the purpose of facilitating trade.
The credit professional should be familiar with two types of letters of credit: commercial and standby. Commercial letters of credit are used primarily to facilitate foreign trade. The commercial letter of credit is the primary payment mechanism for a transaction.
The standby letter of credit serves a different function. The standby letter of credit serves as a secondary payment mechanism. The bank will issue the credit on behalf of a customer to provide assurances of his ability to perform under the terms of a contract.
Upon receipt of the letter of credit, the credit professional should review all items carefully to insure that what is expected of the seller is fully understood and that he can comply with all the terms and conditions. When compliance is in question, the buyer should be requested to amend the credit.

Source: http://crfonline.org

http://resources.alibaba.com/article/283811/Understand...



Controlling The Letter of Credit Transaction

Author: Safe Trading Admin

Exporters expecting to be paid under a letter of credit (referred to in this article as "LC" or "Credit") may be sadly disappointed. Although an LC is considered one of the most secure means of obtaining prompt payment for sale of goods, clients who are exporting should be made to understand that they can never totally control the payment process. Documents which are required to be presented under an LC are frequently prepared by other people, and may not meet the strict compliance standards required by the banking community for payment. Sometimes banks which have not properly ensured they will be adequately reimbursed by their customer (the buyer), have very narrowly applied LC principles to deny payment. They have been regularly upheld by courts on grounds that the seller has not strictly complied with the terms of the LC.
There are steps, however, that a prudent exporter can take to maximize his control of the LC process, thereby greatly increasing the likelihood of being paid under the LC. This article will first look at the scope of the problem, then discuss a ways of maintaining control of the LC process, as well as the legal and economic consequences of losing control.

CONTROLLING THE PROCESS

Choosing the Issuing Bank
An attorney should encourage clients to try to control the payment process from the outset. This means that when negotiating with the buyer, the seller should try to get the buyer to use a bank of the seller's choice to issue the LC. The seller should find out from its own bank, preferably a bank with a substantial international presence, what corresponding bank it uses in the country of the buyer. If the buyer can have the LC issued by that correspondent bank, the process can proceed more expeditiously.
At the very least, the seller should insist that the buyer use a bank that is well-known and highly regarded by the banking community. The seller's own bank can provide information on the financial status and reputation of the foreign bank. Since a major purpose served by an LC is that the issuing bank assumes the risk of the buyer's insolvency, if the bank itself is financially weak, the LC may not serve its purpose.

Confirming the Letter of Credit

If the seller does not have confidence in the bank of the buyer's choice, or if there is any question about the political stability of the foreign country where the issuing bank is located, then the LC should be confirmed by a U.S. bank. When a U.S. bank confirms an LC issued by a foreign bank, it takes upon itself the payment obligation. Thus, if a U.S. bank confirmed an LC, and subsequently, for political or economic reasons, the foreign bank could not reimburse the U.S. bank, the U.S. bank is nonetheless on the hook to pay the beneficiary under the LC.
There is a charge for confirmation, which becomes more expensive in proportion to how big a risk the U.S. bank believes it is taking in confirming the LC. There are some situations where the risk may appear so high that a U.S. bank will not agree to confirm at all. If the bank refuses to confirm because of political instability, advise the client to try to have the LC issued outside the politically unstable area, in a country such as Switzerland. The question of who pays the U.S. bank's confirmation charges is negotiable, but if not negotiated in advance, the bank will generally charge the beneficiary for this service.

Keeping Documents Simple

The seller should negotiate with the buyer prior to the issuance of the LC exactly what documents must be presented to the bank for payment under the LC. The most important thing from the seller's point of view is to have as few documents as possible, to have as simple a description as possible, and to be sure that all documents called for by the LC can in fact be produced. Cases have occurred where one of the documents is a certificate supposed to be issued by the foreign government, which was simply never produced. Another problem can by created if the LC requires a document to be signed by someone under the control of the buyer. The document may not be signed by the right person, or may not be signed at all.
Almost all LC's require production of a commercial invoice and a transport bill of lading. With respect to the commercial invoice, the LC will typically state the description of the goods which must be found in the invoice. If the goods are not described in exactly the same way, the seller may not be paid. In one case where payment was denied, the LC required for the commercial invoice to describe the goods as "100% Acrylic Yarn". When the invoices were presented to the bank, they described the goods as "Imported Acrylic Yarn." Even though the packing list attached to the invoice described the goods as 100% Acrylic Yarn, the court upheld the bank's refusal to pay under the LC because the documents did not strictly comply with the requirements of the LC.
In many cases, even if the documents do not comply exactly, the buyer will agree to waive any discrepancies in the documents, and, if the bank agrees, the payment will occur. In the Acrylic Yarn case above, however, the buyer had gone into bankruptcy, and the trustee in bankruptcy would not agree to waive discrepancies. In another case, buyer and seller sought to amend the LC to correct a discrepancy. The bank, however, having never checked the financial status of its customer, the buyer, prior to issuing the LC, and having learned in the meantime that its customer might not be able to reimburse the bank if it paid the LC, refused to amend the LC. The court held that the issuer bank had no duty to amend a letter of credit upon the request of a customer and a beneficiary.
These cases teach three important lessons. First, documents must be accurate. Second, if there is a mistake or a problem with the documents which the LC requires to be presented, the seller/beneficiary should not ship goods until the LC has been amended. The UCP 500 makes clear that no amendment can take place unless the issuing bank, the confirming bank, if any, and the seller, agree to it. UCP 500, Article 9(d). Unless the seller has written confirmation from the bank that the amendment to the LC has been issued, and the confirming bank has accepted the amendment, he bears the risk that the LC will not be paid.
Third, a prudent seller will not let the buyer take possession of the goods until he has been paid under the LC. The reason should be obvious. If there are discrepancies in the documents preventing payment of the LC, a buyer in possession of the goods has much less incentive to waive discrepancies so the seller can be paid. If the seller is not paid by the bank, the buyer still has a contractual obligation to pay for goods, but the difficulty of collection can make the price drop substantially, even assuming the buyer is solvent and can pay something. Particularly when the goods have been shipped to a foreign country, the attempt to collect payment can be quite costly. The buyer, knowing this, will undoubtedly attempt to negotiate a lower price, if he pays at all.
To keep goods out of the buyer's possession, the seller should be sure to have the marine bill of lading consigned to order of the bank. Since the marine bill of lading is a title document, a consignment to order of the bank gives the bank title to the goods until they have been paid for by the buyer. Assuming proper payment, the bank transfers title to the buyer, who can then take the bill of lading and go pick up the goods. If payment is not made, the bank has an obligation to hold the documents for the seller, or return them to the seller if instructed to do so by the seller. The buyer should not be able to get the goods without the title document.
A buyer may ask the seller to have the bill of lading made out to order and blank endorsed, and to send one or more sets to the buyer within a few days of shipping the goods. This is like writing a blank check. It enables the buyer to pick up the goods, and thereby provides him with a disincentive to waive any discrepancies in documents the seller presents to the bank. Given the high failure rate of initial presentations of documents under an LC, a seller needs to know he will have the buyer's cooperation in correcting discrepancies or in waiving them. The buyer's cooperation will be more forthcoming if he cannot get possession of the goods until any problems with discrepancies have been resolved.

Meeting the deadlines

Every LC has three important dates: the date by which goods must be shipped, the date by which documents must be presented, and the expiry date for the LC. A seller should make sure that each of these dates can be met, and should allow a large margin for error. After the LC has been issued, if the seller learns that the date for shipping goods cannot be met, he should not ship any goods until he obtains an amendment to the LC permitting later shipment.
If an LC which calls for transport documents does not contain a date by which documents must be presented, does this mean the seller can wait until the expiry date to present his documents? Not if he wants to be paid. Article 43 of the UCP 500 provides that if no time period after shipment is given in the Credit for presentation of documents, banks will not accept documents presented to them later than 21 days after shipment. An exporter unfamiliar with the 21 day rule of the UCP 500 could easily miss this deadline.

The exporter should make sure that the expiry date of the LC permits sufficient time to permit correction, if possible, of any mistakes in the documents. Under the UCP 500, once the documents are presented, the bank has a maximum of seven days to let the beneficiary know if there are any discrepancies. If discrepancies can be corrected, they must be corrected and the documents resubmitted before the expiry date of the LC. Thus the exporter should make sure that the expiry date allows enough time for errors to be rectified.

CONCLUSION

Clients should understand that in working with LC's, it is most important to get good advice from the outset, to learn the rules of the game, and to proceed with great care. Once mistakes have been made, too often they are irreparable and costly.

Source: http://cfg-lawfirm.com

http://resources.alibaba.com/article/283828/Controllin...


Letter of Credit - Checklist and Guide for Exporters (Part 1)

Author: Safe Trading Admin

Key Checks on the Day the Letter of Credit is Received
Before going any further…
• Check that the letter of credit states that it is subject to the 1993 revision of the Uniform Customs and Practice for Documentary Credits (UCP) of the International Chamber of Commerce, usually mentioning ICC Publication No. 500 (or perhaps “current revision”). Check the authenticity of the credit. Forgeries are comparatively rare, but dangerous. Credits are normally sent through an advising/confirming bank in the UK. Any departure from this routine should be viewed with suspicion, for example, if it comes to you direct from overseas. If it comes from a UK address asking you to send documents abroad and you do not recognise the UK bank, check its authenticity with your own bank. UCP 500 commits an advising bank to take reasonable care as to apparent authenticity of a credit (see UCP 500 Article 7) Nonetheless, if you receive an unexpected credit from a buyer unknown to you, even under cover of a seemingly genuine advice from a UK bank, check with the bank that everything is in order - particularly if it calls for goods direct to the buyer with only a PO Box number! Having assured yourself on these points, proceed with the key checks, bearing in mind, as mentioned above, that over half of credit documents are rejected on first presentation to the paying / accepting banks. The main reason for this is that matters which could have been put right, given time, were not put right because the credit had not been checked early enough. Making these key checks on the day the credit arrives, consulting other departments accordingly and carrying out the more detailed checks immediately afterwards, will enable difficulties to be spotted in better time to take action.
• Check that the type of credit gives you the level of payment security you sought. It may not be confirmed by a bank in the UK and may even be revocable i.e subject to cancellation without your knowledge. Credits issued under UCP 500 are irrevocable unless otherwise stated.
• Check that you will be paid at the time you planned. The credit may specify payment some time after documents and/or drafts have been accepted by the paying bank. Additional delays and other problems may arise if payment/acceptance is to take place abroad.
• Check that your company name and full title and those of the buyer are both correct.
Check that you can produce the goods, ship them, assemble the documents required and deliver them to the bank, all by the expiry date and within the transport document time limit. The bank has no discretion under UCP 500 and is not in a position to pay after expiry dates, nor if the documents are not completely in order. If the credit has been sent electronically to a UK bank - “teletransmitted” - check that it provides details of the credit that you can act upon and that is not just a pre-advice. Unless is says otherwise, and provided it refers to UCP 500, it can be taken as the operative credit, can be safely acted upon and overrides any later mailed advice, since unless a pre-advice says otherwise, the issuing bank is bound to follow up the pre-advice by issuing the credit.
• Check that only those bank charges you agreed to pay are stated to be for your account. Be areful over bank reimbursing charges with a credit not expressed in sterling. If something is wrong, requiring an alteration or extension, complete the detailed checks below to see if there is anything else, then contact the advising bank immediately - it may e an error/omission on their part. If that is not the case, contact the buyer without further delay and then ensure that any necessary amendments are received in time. If an import licence must be extended, this can take some time. If the licence cannot be extended and a new one has to be obtained the delay may well go beyond the expiry date of the credit. At an early stage, it will be in your best interests to send a copy of the credit to your forwarder or whoever will obtain the transport documents. Similarly with your insurers if insurance is to be covered by you. Telephone instructions alone may easily result in mis-spellings and consequent rejection by the bank, or even a wrong type of transport or insurance document may be provided.

Source: http://sitpro.org.uk

http://resources.alibaba.com/article/289481/Letter_of_...


Letter of Credit - Checklist and Guide for Exporters (Part 2)

Author: Safe Trading Admin

Detailed Checks Immediately on Receipt of the Credit
When checking your credit under the headings below, remember that UCP 600 will apply fully unless you have agreed different terms, which are reflected in the credit. One or more of the following checkpoints may thus be overridden by conditions stipulated in your particular credit. If you are still unclear as to what the wording of the credit implies check what UCP 600 has to say on the point and with the UK bank.
Note: It is recommended that the details of the credit be recorded at this point so that a progress check can be updated right through to presentation of the final documents to the bank for payment. The Documentary Letter of Credit Exporters Validation Form available from Chancellor Formecon Ltd provides a convenient way for doing this.
Does the type of credit give you the security of payment you want?
• Irrevocable but carrying only the undertaking of your customer's bank in their country
• Irrevocable and confirmed, carrying the extra and separate undertaking of a second bank, usually in the UK
Is it payable when you want it?
• At sight, when correct documents are presented to the paying bank
• At a later date, such as 90 days after the date of the transport document
Is it payable where you want it?
• In the UK with little or no delay after reasonable time for checking by the paying bank; or
• Abroad, with possible lengthy delays and some risk
o If you were not expecting payment to be made abroad but are prepared to consider it, be sure you understand your position, i.e. that you are responsible for postal delays in presenting documents overseas within the time limits set by the credit. It also gives less time for replacing non-compliant documents with compliant ones
Note: Under UCP 600, whether a credit is available by sight payment, deferred payment, acceptance or negotiation, a credit can be available with any bank.
Is the value of the credit correct?
• Does it allow for:
Any extra agreed costs such as freight or inspection fees
o Planned variation: "about" or "approximately" in a credit permits up to a ±10% variation in the amount stated of the credit, quantity or the unit price (see Article 30(a) of UCP 600)
o Unplanned variations: UCP 600 Article 30(b) allows a tolerance of ±5% provided a stipulate number of packing units or individual items is not stated in and the total amount of the drawings does not exceed the credit
Are the terms of delivery the same as you quoted (e.g. FOB, CIF, CIP) and do they match the price properly?
• You will need to specify if you want the delivery terms to form part of the credit terms
o For example, if you quoted “£10,000 FOB Southampton –Incoterms 2000” and the credit states “£10,000 CIF Hong Kong –Incoterms 2000” you will naturally not be able to recover the freight and insurance
• The paying bank will refuse your documents if you exceed the credit amount or alter any unit price quoted in the credit
• Inconsistent delivery terms are discrepancies and the L/C will be rejected
Company names, addresses and other details
• All details should be correctly spelt and consistently reproduced on all the documents
• Following UCP 600 Article 14(j), addresses need not be the same as stated in the credit, but must be within the same country as the respective addresses mentioned -except when the Applicant's contact details appear as part of the consignee or notify party details on a transport document
Are partial shipments expressly prohibited?
• If not, they are allowed (UCP 600 Article 31(a))
Can you meet the expiry date and also present documents within the transport document time limit?
• You will need to allow for:
o Production and packing
o Inspection, if required, and obtaining any inspection certificate or clean report of findings
o Obtaining other certificates (e.g. certificate of origin)
o Chamber of Commerce and/or consular work
o Shipment against availability of transport
o Assembling and checking documents
o Presenting documents to the bank
 The presentation of documents must be completed within 21 days of the date of shipment evidenced by the transport document, unless the credit curtails or extends the period - a credit will more frequently curtail the period
 The expiry date stipulated in the credit must be adhered to - it is not overridden by the 21-day rule
 It might be in your interest to ask for an extension on the 21 days - provided it falls within the validity of the contract
Has the export or import licence been obtained with adequate validity?
Are the goods described consistently?
• Descriptions in the L/C should be brief and correspond with the invoice (UCP 600 Article 18(c))
• Details in other documents do not need to be identical to, but should not conflict, with that stated in the invoice and credit (UCP 600 Article 14(d) and (e))
Does the credit restrict the way in which documents are prepared?
• Documents, howsoever prepared, are deemed to be originals provided they are properly authenticated (Article 17 of UCP 600 gives details)
Can you provide the transport document called for?
• "On deck": a clause stating goods may be loaded on deck is acceptable, but it must not state that goods are or will be loaded on deck (UCP 600 Article 26(a))
• "Claused" transport documents: Article 27 of UCP 600 states that banks will only accept clean transport documents (i.e. bearing no clause or notation expressly declaring a defective condition of the goods or packaging)
• The places of acceptance and delivery and, if a bill of lading is called for, the ports of loading and discharge should be checked - the UCP 600 transport articles (Articles 19-24) are precise on this point
• Transport documents may be issued by any party, including freight forwarders, other than a carrier, owner, master or charterer (see UCP 600 Article 14(l))
o Check that the requirements for the mode of transport are satisfied
• Short form or blank back transport documents are acceptable
• "Intended vessels" and "intended ports of loading" are acceptable in certain circumstances (see UCP 600 Articles 20 and 21 sections (a)(ii) and (iii))
• "Received for carriage" or "received for shipment" documents are not acceptable under UCP 600
o For Road, Rail and Inland Waterway the transport document can indicate the date of receipt for shipment, dispatch or carriage (UCP 600 Article 24)
o For Courier and Post, a courier receipt may indicate a date of pickup, and a post receipt or certificate of posting can indicate a date of receipt for transport (UCP 600 Article 25)
• Transhipment: the prohibition of transhipment is inappropriate
o Under UCP 600 Articles 19-24 (the transport articles), transport documents may indicate goods may or will be transhipped provided the entire carriage is covered by one and the same document, even if the credit prohibits transhipment
Insurance
• Can you obtain insurance cover for the risks specified? If "all risks" is stipulated, banks will accept any "all risks" notation or clauses on insurance documents (UCP 600 Article 28(h)) - remember that "all risk" does not mean all risk
o Does your quotation cover the cost of insuring the risks specified?
o Can you provide the right type of insurance document, for example if the credit calls for a policy rather than a certificate? Cover notes are not acceptable
• If you are not asked to arrange marine insurance, for example on Incoterms CFR or CPT sales, have you considered obtaining "seller's interest" or other suitable cover for your own account, if available, outside the terms of the credit?
Can you supply all other documents in the way called for?
• Remember that some documents, such as inspection certificates or consular documents, may take some time to arrange
Interpretation of common business language
• For example, words such as "promptly" and "immediately" are disregarded under UCP (refer to Article 3 of UCP 600 for further information)
What if the credit is wrong or ambiguous on any of the above points?
• Prompt decision and action is necessary on:
o Whether you can change your plans or paperwork to meet the requirement
o Whether to ask the customer to amend the credit and who pays for the amendment
o Whether to let things stand and risk non-payment
o If in doubt, always consult your own bank and/or the paying bank for advice and make a record of the time, date and outcome of the contact
 Remember that only the Applicant can authorise amendments, i.e. alterations or extensions, through his bank

Source: http://sitpro.org.uk

http://resources.alibaba.com/article/289597/Letter_of_...


Letter of Credit - Checklist and Guide for Exporters (Part 3)

Author: Safe Trading Admin

When Compiling Documents for Presentation to the Bank
Ensure that:
• Documents presented in the credit are presented as separate documents
o For example, if a packing list and weight list are required and you have a combined packing and weight list, two original copies of this document will need to be presented
• You have the correct number of originals and/or copies of each; they carry the information called for; the title of each is correct and it is issued by the party specified in the credit
• They do not conflict
o For example, the shipping marks, quantities/weights, transport details, references, and in general terms the descriptions, must tally so that they clearly relate on their face to the same shipment
• The description of goods is correct
o They may be described in general terms (not conflicting with the credit) in all documents except the invoice, where the exact contract description should be reproduced
o Contract details should preferably not be repeated in full in transport documents and some carriers will refuse to enter more than the minimum necessary information. This may cause a discrepancy if the information conflicts with that in the credit or other documents
• Documents are authenticated where necessary - import regulations in some countries still make it essential to sign manually and possibly witness documents and any alterations or additions to them
• Any restrictions in the credit are catered for, for example if short form bills of lading are prohibited
Check each document to ensure that it is in order
Transport Document
• Type of transport document, e.g. sea, air, road, rail, inland waterway, multimodal, courier or postal despatches
• The document should:
o Indicate the name of the carrier and be signed by the carrier, master (for sea shipments) or named agent
o Indicate the goods have been dispatched, taken in charge or shipped on board (as appropriate) at the place stated in the credit
o Indicate the place of dispatch, taken in charge, ports of loading and discharge, and/or the final destination (as appropriate) stated in the credit
• Date of issuance - deemed to be the date of dispatch, taking in charge or shipment, unless otherwise indicated
• Consignor - can be different from beneficiary
• Consignee - can differ from buyer
• Endorsed as may be stipulated in the credit
Insurance Document
• Correct type, e.g. a certificate or policy, and number of documents as stipulated in the credit
• Correct amount stated for insured coverage -the amount must be at least 110% of the CIF or CIP value of the goods (UCP 600 Article 28(f)(ii))
• Same currency as the credit
• Risk covered in the credit
• Date of insurance document no later than date of shipment -unless cover takes effect from date of shipment (UCP 600 Article 28(e))
• Endorsed, if necessary, exactly as required by the credit
Invoice
• Must not contain merchandise not called for in the credit, even if they are stated to be free of charge
o Invoices listing no-charge goods or samples not included in the credit will be refused
• Invoice heading containing your company's name
• Made out in name of Applicant, expressed and spelt exactly as in the credit.
• Same currency as the credit
• Description of goods, including import licence or pro-forma details, price, terms of delivery, and any no-charge goods or samples, worded and spelt exactly as set out in the credit
• Clauses or statements word for word identically spelt and the use of any foreign language specified
• Value not more than the credit permits and the same as any bill of exchange -under certain conditions you may be able to underdraw by up to 5% (see below)
• Quantity: a ± 5% tolerance is sometimes permitted. Alternatively, the credit may permit a specific variation, e.g. an 'about' amount is equivalent to a ± 10% tolerance (see Article 30(a) and (b) of UCP 600)
• Produced, signed and authenticated as necessary in a way allowed for by UCP and in the credit (UCP 600 Article 17)
Other Documents
• Correct issuer
• Correct wording or content -avoid unnecessary wording which might confuse the bank checker
• Clearly relate to the goods invoiced
• Tele-transmissions to the Applicant and/or insurer correctly set out, addressed and dated
• Certificates to cover any other credit requirement only where a specific certificate is called for (note UCP 600 Article 14(h))
• Signed, authenticated or endorsed as necessary
• Do not enclose any documents not required by the credit
Bills of Exchange, if any
• Date
• Signature identifies signatory
• Endorsement
• Clause
• Letters of Credit reference number
• Term - sight or usance dates
• Amount and currency
• Words and figures tally
• Drawn on correct party
• Correct document e.g. "sole" or "1st and 2nd of exchange"
Covering note/letter to Nominated bank
• List the documents, preferably in the same order as they appear in the credit
o Give the name, address, telephone, email and fax details of the correct contact in your office and back-up contact in case of absence
o Indicate how to pay - cheque or direct to bank account (in which case show bank, branch, sort code, account name and account number)
o If you have a forward currency contract for a letter of credit payable in foreign currency, provide contract details
Present documents to the bank without delay and within the expiry date and transport document time limit
• All documents must be completed and delivered to the bank by close of business on the expiry date and within the presentation of transport documentation time limit, whichever is earlier; or, if the bank is normally closed on that day, on the next business day
o Obtain a time/dated receipt where appropriate
• Check the transport document presentation time limit very carefully: presentation must be completed within 21 days of the date of shipment, unless the credit specifies a different period -this may well be earlier than the expiry date of the credit itself or any specified "last date for presentation/negotiation" (Article 14 of UCP 600)
• The import licence expiry date is equally important and it may not be possible to extend this
• If any discrepancies are found and they can be put right, the corrected documents must still be presented to the bank by the original expiry date and within the time permitted from date of shipment evidenced by the transport document
• Check and send any specified documents to the Applicant if required to do so under the terms of the credit, enclosing a copy of your documents schedule as sent with your credit documents when making presentation to the bank for payment
Source: http://sitpro.org.uk
http://resources.alibaba.com/article/289598/Letter_of_...

Letter of Credit - Checklist and Guide for Exporters (Part 4)

Author: Safe Trading Admin

If There Are Discrepancies

Unless you can correct discrepancies in time you will lose your right to payment under the credit and all the cost and effort to obtain security will have been wasted.
What are the options?
• Correct the documents within the original expiry date and within the period allowed after the shipment evidenced by the transport document
• The Issuing bank may approach the Applicant for a waiver of the discrepancy (UCP 600 Article 16(b)) -not normally done at the request of the exporter
• Ask the paying bank to contact the Issuing bank for authority to honour/negotiate the documents despite the discrepancies
• An indemnity, either your own undertaking or one issued by or joined-in by your bank, may be acceptable
o In such a case you are paid promptly but are still at risk and if the Issuing bank decides not to pay, the money must be repaid to the paying bank with interest
o Indemnities are often casually issued and financial directors are frequently unaware that a massive contingent liability is building up. (If an indemnity is decided upon, try to arrange a validity of six months maximum)
• The bank may offer to pay under reserve -this has the same practical effect as payment under an indemnity though without the paperwork, but there is normally no time limit applicable
o Money received has to be paid back with interest if the Issuing bank rejects the discrepant document
• Documents can be sent on an "approval basis" (also called "in trust" or "on collection") to the Issuing bank under the protection of the credit
o Can seriously hinder cash flow and an unscrupulous buyer may try to take advantage by offering a reduced price for a quick settlement against documents "as presented"
o With documents "on collection" the Remitting bank (paying bank) should be requested to instruct the issuing bank that release of the documents to the buyer is to be only against payment being authorised in accordance with the credit terms
If the transport document involved is a full set of negotiable bills of lading, these measures normally retain your control over the goods as the buyer cannot take delivery without the documents, which are still in your control. However, in other circumstances, the buyer can obtain the goods without the presentation of documents. Nevertheless, the buyer is in effect being asked whether, after all, they still want the goods and is prepared to accept the discrepancies in the documents. They are quite free to refuse.

Source: http://sitpro.org.uk

http://resources.alibaba.com/article/289599/Letter_of_...