Pre-issuance considerations and requirements
This chapter provides details of the benefits and risks that are faced by an applicant and beneficiary when deciding upon a documentary credit as the means of settlement, the need for a credit facility to be in place with the bank that is to issue the documentary credit, and the completion and delivery to that bank of a documentary credit application form. By the end of this chapter, you should be able to: ◆◆ describe the benefits obtained and the risks incurred by an applicant and a beneficiary when a documentary credit is the proposed method of settlement; ◆◆ understand the basic components of a credit facility that should be in place for the issuance of a documentary credit and the need for know your customer (KYC) and customer due diligence (CDD) policy and procedures to be in place; ◆◆ identify the key fields of a documentary credit application form and the considerations to be made in its completion; and ◆◆ recognise the different modes of delivery for that application form to a bank that will be requested to issue the documentary credit.
6.1 A documentary credit as the chosen method of settlement
As covered in Chapter 5, one of the key decisions to be made when a seller and buyer negotiate a sale contract is the selection of the terms of payment. When a documentary credit is chosen, both the buyer (who will be
known as the ‘applicant’) and seller (who will be known as the ‘beneficiary’)receive an independent undertaking in the exchange of goods, services or performance for payment.
The comfort provided to both an applicant and a beneficiary by the independent undertaking of a bank is one of the main reasons why a documentary credit is often the preferred method of payment in international trade.
6.1.1 Benefits for an applicant
As the applicant of a documentary credit, the buyer receives an undertaking from an issuing bank that no payment will be made unless the beneficiary has:
◆◆ presented the documents as stipulated in the documentary credit; and
◆◆ complied with all of its terms and conditions.
An applicant’s mandate to the issuing bank is on this basis.
6.1.2 Benefits for a beneficiary
As the beneficiary of a documentary credit, the seller receives an irrevocable undertaking from an issuing bank (and the separate undertaking from a confirming bank, in the case of a confirmed documentary credit – see
Chapter 10) that it will receive payment provided that the:
◆◆ documents are presented as stipulated in the documentary credit; and
◆◆ all of the terms and conditions of the documentary credit are complied with.
An undertaking of an issuing bank, or confirming bank, is addressed directly to the beneficiary and is legally binding. When an issuing bank or confirming bank effects settlement to a beneficiary, it does so on a
‘without recourse’ basis, which means that settlement is final and there can be no claim upon the beneficiary for any refund or repayment.
6.1.3 The autonomy of the documentary credit
Documentary credits are used in international trade because payment is made on the basis of the presentation of complying documents. An issuing bank, confirming bank, if any, or nominated bank acting on its nomination
is required to effect settlement only if all of the terms of the documentary credit are met. There is no responsibility to assess whether or not the terms of the sale contract have been met. This is what we mean by the ‘autonomy’ of the documentary credit.
This autonomy has been upheld in the courts of many countries. Any party seeking to obtain an injunction preventing a bank from honouring its obligations under a documentary credit will usually find it very difficult to
do so. This can even be true when there has been fraud and the granting of an injunction is appropriate. Issues relating to fraud and injunctions are covered in Chapter 25.
The autonomy of a documentary credit is evidenced in UCP 600, articles 2,4, 5, 7 and 8.
The definition of ‘credit’ in UCP 600, article 2, is as follows.
UCP 600, sub-article 4(a), states as follows.
UCP 600, article 5, states as follows.
UCP 600, sub-article 7(a), reads in part:
Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.
a. A credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included
in the credit. Consequently, the undertaking of a bank to honour, to negotiate or to fulfil any other obligation under the credit is not subject to claims or defences by the applicant resulting from its relationships
with the issuing bank or the beneficiary.
A beneficiary can in no case avail itself of the contractual relationships existing between banks or between the applicant and the issuing bank.
Banks deal with documents and not with goods, services or performance to which the documents may relate.
a. Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour if the credit is available by:
UCP 600, sub-article 8(a), reads in part:
a. Provided that the stipulated documents are presented to the confirming bank or to any other nominated bank and that they constitute a complying presentation, the confirming bank must:
It is the responsibility of the applicant and beneficiary to reflect the applicable terms and conditions of the sale contract that are to be complied with and / or evidenced within one or more stipulated documents by means of their incorporation into the completed documentary credit application form, or to ensure that they are added to the terms and conditions of an issued documentary credit by way of a subsequent amendment. Amendments are covered in Chapters 8 and 11.
6.1.4 The roles, responsibilities and risks involved in using documentary credits
It is important to recognise that although a documentary credit can provide comfort to both an applicant and beneficiary, the respective interests and risks they face in both the documentary credit and the underlying
transaction remain different. Their interests differ in two key ways:
◆◆ Cash flow – a beneficiary usually wants to receive payment as soon as possible, while an applicant will normally want to delay payment until the latest possible time.
◆◆ Documents – an applicant will want to ensure that the documents received are as stipulated in the documentary credit. This is certainly the case if the applicant has sold the imported goods and ultimate payment
depends on correct documentation. A beneficiary will want to make sure that the stipulated documents can be presented as soon as possible after the shipment of the goods or completion of the transaction. A
beneficiary will be concerned about the possibility of payment being delayed because of potential discrepancies in these documents.
These different interests are reflected in the different risks to which the two parties are exposed.
18.104.22.168 The risks faced by an applicant
Non-delivery of goods – goods may not be delivered because of fraud by the beneficiary. In such circumstances, the applicant may still remain liable to reimburse the issuing bank when a complying presentation is
◆◆ Short-shipment, or shipment of inferior goods – goods may be short-shipped (that is, a lesser quantity shipped than ordered) or the goods may be of inferior quality, despite the presentation of documents
that comply with the terms and conditions of the documentary credit.
In this event, an applicant may suffer a loss on the eventual sale of the goods. The same risk also applies if the goods are received late and an applicant is unable to sell at the price originally anticipated. To minimise losses being sustained for these reasons, it is important that an applicant makes every attempt to establish the integrity and trading record of the proposed beneficiary before entering into a documentary credit transaction. In this respect, some comfort may be gained by obtaining a bank or credit agency status report on the beneficiary. It may also be appropriate to require an independent pre-shipment inspection of the goods, with the outcome evidenced on one of the documents to be called for in the documentary credit.
◆◆ Goods received by the applicant prior to documents being received by the issuing bank – if an applicant is required to take delivery of the goods by the use of a shipping guarantee, rather than by using the usual transport document, this will normally require it to authorise payment under the documentary credit notwithstanding
any discrepancy in the documents when they are received. Shipping guarantees are covered in Chapter 20.
◆◆ Loss or damage to goods in transit – if goods are lost or damaged in transit, the owner of the goods at the time of such occurrence will look to its insurers for financial compensation. Both parties should ensure that
they fully understand which party is responsible for arranging insurance when agreeing the terms of the sale contract, for example via the use of an Incoterm, which should be reflected in the type and content of
the documents called for under the documentary credit. The applicant should be satisfied that the level of cover to be arranged provides an appropriate level of protection.
◆◆ Foreign exchange risk – if the currency of the documentary credit is not the applicant’s operating currency, there may be a difference in exchange rates between the time when the documentary credit is
issued (or the time of the underlying agreement) and the time at which settlement is made. If the movement is unfavourable to the applicant, it may have to pay more than the anticipated price, reducing its profit
margin or incurring a loss. An applicant can protect against this risk by entering into a forward foreign exchange contract (‘forward’) or by buying an option. A forward has the effect of fixing the future exchange rate (which could be at a higher rate than the market rate at the time of settlement).
◆◆ Failure of the issuing bank – in the event of a failure of the issuing bank, an applicant may be required to pay the beneficiary directly. This may result in the applicant effectively paying twice – that is, if it had already deposited funds with the issuing bank to meet its liability under the documentary credit, as part of the conditions of the credit facility.
◆◆ Fraud in the presented documents – an applicant also faces the risk that payment will be obtained for non-existent or worthless merchandise against the presentation of one or more documents that are subsequently found to be fraudulently issued or signed.
22.214.171.124 The risks faced by a beneficiary
A beneficiary faces the following risks.
◆◆ Failure to comply with the terms and conditions of the documentary credit – a documentary credit is a substantial safeguard of payment for a beneficiary. The main risk for a beneficiary is that the nominated bank or issuing bank will refuse payment because the documents do not comply with the terms and conditions of the
documentary credit. A beneficiary can minimise this risk by reading the documentary credit carefully as soon as it is received. The beneficiary should then immediately request an amendment if any of the conditions
appear to vary from those of the sale contract, or if the beneficiary would find it difficult to satisfy any of those conditions.
◆◆ Failure of, or delays in payment from, the issuing bank – in the case of an irrevocable, but unconfirmed, documentary credit, a beneficiary bears the risk of failure of the issuing bank, together with the country
risk relating to the country in which that bank is located. This can pose a potential problem when the country concerned lacks adequate foreign exchange reserves. If an issuing bank becomes insolvent, its
undertaking is placed in jeopardy and the beneficiary may need to rely on payment for the goods being received directly from the applicant.
In the case of country risk, payment may be prevented or delayed by incidents such as balance of payments difficulties affecting the country of the issuing bank or by government restrictions on the transfer of funds outside the country. A beneficiary can mitigate these risks by obtaining a confirmation of the documentary credit from a bank located in its own country. Confirmation of a documentary credit is covered in Chapter 10.
◆◆ Documentary credit issued by an entity other than a bank – all of these risks to a beneficiary, as outlined above, may increase if the issuer of the documentary credit is not a bank. If a beneficiary has any
doubts as to the status of the issuer of a documentary credit, or if it is clearly issued by a non-banking institution, the beneficiary should exercise caution before shipping the goods and placing reliance on the documentary credit as its guarantee of payment. The ICC Banking Commission issued an Opinion on this subject on 30 October 2002 (ICC, 2002).
◆◆ Fraud – there is the risk that the documentary credit itself may be fraudulently issued. This might induce a beneficiary to ship goods or perform a service against an apparent bank undertaking to pay that does
not in fact exist. In this event, the beneficiary will have no enforceable claim against the named bank because either that bank did not issue the documentary credit or the bank does not exist.
◆◆ Foreign exchange risk – if the currency of the documentary credit is not the beneficiary’s operating currency, there may be a difference in exchange rates between the time when the documentary credit is issued (or the time of the underlying agreement) and the time at which settlement is made. If the movement is unfavourable to the beneficiary, it may receive less than the anticipated price, reducing its profit margin or incurring a loss. A beneficiary can protect against this risk by entering into a forward foreign exchange contract or by buying an option. A forward has the effect of fixing the future exchange rate (which could be at a lower rate than the market rate at the time of settlement).
126.96.36.199 General risks
There are also some general risks that affect all parties to a documentary credit. The simple solution for an applicant to avoid becoming involved in a fraudulent transaction or falling foul of legislative and regulatory
requirements is simply to ‘know your customer’ – that is, the seller (beneficiary). The old maxim ‘If goods are being offered for sale at a price that sounds too good to be true, then it probably is too good to be true’ is
a good yardstick that, if followed, may save a good deal of embarrassment and financial loss that could prove disastrous to a company.
Wide-ranging legislation is aimed at the prevention of money laundering,transferring the proceeds of drug trafficking and the funding of terrorist activity. Legislation varies in content and application from country to
country, but as the global community seeks to control and eradicate such activities there is an increasing responsibility on banks to understand better who their customers are and the true nature of their customers’
businesses. Banks that fail to undertake the required levels of due diligence run the risk of incurring severe penalties imposed by their local regulatory or legislative bodies (see section 6.2.2 and, for more detail, Chapter 25).
Other general risks include the following.
◆◆ Sovereign and regulatory risks – these are the risks that performance of the documentary credit may be prevented by government action outside the control of the parties. This may occur, for instance, if a government imposes foreign payment restrictions or import / export prohibitions after a documentary credit has been issued, but before it has been fully performed. This risk may also be referred to as ‘country risk’.
◆◆ Legal risks – while sovereign and regulatory risks may disrupt the documentary credit by means of events outside the framework of the documentary credit operation itself, legal risks concern the possibility
that performance of a documentary credit may be disturbed by legal action relating directly to the parties and to their rights and obligations under the documentary credit.
6.2 The prerequisites for the issuance of a documentary credit
6.2.1 The need for a credit facility
When a documentary credit has been chosen as the means of settlement,establishing the credit is not a straightforward task whereby the buyer (applicant) can simply go along to its bank and request its issuance. As we have seen, a documentary credit constitutes a definite and independent undertaking of an issuing bank to honour a complying presentation made by, or on behalf of, the beneficiary (seller).
If an issuing bank is to be expected to make settlement to a beneficiary, on a without recourse basis, it needs to be certain that the applicant will reimburse it. The credit facility agreement or documentation serves to
establish the terms and conditions under which the bank will agree to issue undertakings on behalf of the applicant. For example, if the bank is willing to treat the purchased goods as adequate security for issuing a
documentary credit, it will seek to control access to those goods by having the transport document indicate that the goods are consigned to, or to order of, the bank.
However, it may require the applicant to deposit with it a certain percentage of the value of each documentary credit issued, or even a deposit for the full amount, as a form of security. It may also seek other forms of security
that have a monetary value and can be used in the event of default by the applicant. The terms and conditions will be agreed between the bank and the applicant, and such terms and conditions will vary between different
In simple terms, a credit facility can be described as an arrangement with a bank that enables a person or company to be given credit or to borrow money when it is needed, for example for the establishment of documentary credits, bank guarantees or other products that require an undertaking to be given by a bank, to a seller or supplier, in respect of the purchase or provision of goods, services or performance.
Most credit facilities covering trade finance products will refer to the rules under which a bank is willing to issue a bank undertaking. For documentary credits, this will be UCP 600, a set of internationally accepted rules that
were discussed in Chapter 2 and which will be referred to throughout this study text. For a standby letter of credit, either UCP 600 or ISP98 will be the chosen rules. A bank may either leave the choice to the applicant or
identify a preference within the facility documentation. Standby letters of credit are covered in Chapter 21.
Note that UCP 600, sub-article 4(a), includes the following provision:
a. A beneficiary can in no case avail itself of the contractual relationships existing between banks or between the applicant and the issuing bank.
One effect of this sub-article is that a beneficiary cannot argue that it has knowledge of an existing credit facility that has been granted by the issuing bank to the applicant, and as a consequence the bank is bound to issue a
documentary credit in its favour that would fall within the parameters of that facility. An issuing bank is at liberty to accept or reject any instructions from its customer, even if a credit facility is in place and there is sufficient
availability for a new transaction.
ISP98, rule 1.07, expresses a similar intent to UCP 600, sub-article 4(a).
An issuer’s obligations toward the beneficiary are not affected by the issuer’s rights and obligations toward the applicant under any applicable agreement, practice, or law.
188.8.131.52 The main components of a credit facility agreement or document
As mentioned in section 6.2.1, a credit facility serves to inform a bank’s client of the terms and conditions under which it will be willing to issue one or more bank undertakings – that is, the maximum amount that
may be outstanding at any one time, the maximum period for which an undertaking may be issued (in terms of expiry date and / or usance period for any settlement to be made) and the expectations of the bank as to how
it will be reimbursed by the applicant for any honour that is made under any undertaking it issues.
Other components or sections of a credit facility agreement or document include:
◆◆ representations and warranties – that is, requirements that the client should inform the bank of any change in status of the company or matters that could impact the fulfilment of its obligations under the facility document;
◆◆ the responsibilities of the bank – that is, to act with reasonable care according to instructions that it will receive, except to the extent that the bank may advise that it is unable or unwilling to issue a transaction
in the manner requested;
◆◆ limitations on liability – such as that the bank will issue a transaction only subject to rules such as UCP for documentary credits or standby letters of credit, or ISP for standby letters of credit, and that it will also
abide by any laws, customs or regulations to which it is subject;
◆◆ reference to the basis under which the credit facility is being granted – that is, with the goods as partial or full security, or partial or full collateral being deposited with the bank;
◆◆ general indemnification and disclaimer clauses that will protect not only the issuing bank, but also any bank that the issuing bank chooses to act as an advising bank or confirming bank;
◆◆ a discrepancy waiver – that is, a clause to the effect that the bank is under no obligation to accept any waiver of discrepancies that may be offered by the applicant either in response to a request of the bank or as a result of information provided by the beneficiary directly to the applicant;
◆◆ the period of validity – that is, the time for which the credit facility will operate prior to renewal being required;
◆◆ fees and expenses – that is, the charges that will be levied by the bank and an agreement that the customer will pay them, which will include not only the usual transaction fees, but also legal fees and local regulatory
fees that may be incurred; and
◆◆ the applicable law to which the credit facility will be subject.
The general indemnification and disclaimer clauses will usually follow the format of UCP 600 articles and sub-articles 4(a), 5, 16(b), and 34–37, and be suitably adapted where a standby letter of credit is a form of undertaking that is to be requested.
UCP 600, sub-article 4(a), reads in part as follows.
a. A credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit. Consequently, the undertaking of a bank to honour, to negotiate or to fulfil any other obligation under the credit is not subject to claims or defences by the applicant resulting from its relationships with the issuing bank or the beneficiary.
UCP 600, article 5, provides the following.
Banks deal with documents and not with goods, services or performance to which the documents may relate.
The following appears as UCP 600, sub-article 16(b). b. When an issuing bank determines that a presentation does not comply, it may in its sole judgement approach the applicant for a waiver of the discrepancies. This does not, however, extend the period mentioned in sub-article 14(b).
UCP 600, article 34, comprises a ‘Disclaimer on Effectiveness of Documents’.
A bank assumes no liability or responsibility for the form, sufficiency,accuracy, genuineness, falsification or legal effect of any document, or for the general or particular conditions stipulated in a document or superimposed thereon; nor does it assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods, services or other performance represented by any document, or for the good faith or acts or omissions, solvency, performance or standing of the consignor, the carrier, the forwarder, the consignee or the insurer of the goods or any other person.
UCP 600, article 35, comprises a ‘Disclaimer on Transmission and Translation’.
A bank assumes no liability or responsibility for the consequences arising out of delay, loss in transit, mutilation or other errors arising in the transmission of any messages or delivery of letters or documents, when
such messages, letters or documents are transmitted or sent according to the requirements stated in the credit, or when the bank may have taken the initiative in the choice of the delivery service in the absence of such
instructions in the credit.
If a nominated bank determines that a presentation is complying and forwards the documents to the issuing bank or confirming bank, whether or not the nominated bank has honoured or negotiated, an issuing bank or
confirming bank must honour or negotiate, or reimburse that nominated bank, even when the documents have been lost in transit between the nominated bank and the issuing bank or confirming bank, or between the
confirming bank and the issuing bank.
A bank assumes no liability or responsibility for errors in translation or interpretation of technical terms and may transmit credit terms without translating them.
UCP 600, article 36, provides for circumstances of ‘Force Majeure’.
A bank assumes no liability or responsibility for the consequences arising out of the interruption of its business by Acts of God, riots, civil commotions, insurrections, wars, acts of terrorism, or by any strikes or lockouts or any other causes beyond its control.
A bank will not, upon resumption of its business, honour or negotiate under a credit that expired during such interruption of its business.
UCP 600, article 37, comprises a ‘Disclaimer for Acts of an Instructed Party’.
a. A bank utilizing the services of another bank for the purpose of giving effect to the instructions of the applicant does so for the account and at the risk of the applicant.
b. An issuing bank or advising bank assumes no liability or responsibility should the instructions it transmits to another bank not be carried out, even if it has taken the initiative in the choice of that other bank.
c. A bank instructing another bank to perform services is liable for any commissions, fees, costs or expenses (“charges”) incurred by that bank in connection with its instructions.
If a credit states that charges are for the account of the beneficiary and charges cannot be collected or deducted from proceeds, the issuing bank remains liable for payment of charges.
A credit or amendment should not stipulate that the advising to a beneficiary is conditional upon the receipt by the advising bank or second advising bank of its charges.
d. The applicant shall be bound by and liable to indemnify a bank against all obligations and responsibilities imposed by foreign laws and usages.
6.2.2 Completion of know your customer (KYC) and customer due diligence (CDD) formalities
Today, the principles of ‘know your customer’ (KYC) and ‘customer due diligence’ (CDD) are firmly established in the day-to-day activities of banks when opening new accounts and / or credit facilities (KYC) and engaging in
the ongoing monitoring of a customer’s business profile (CDD).
A bank’s KYC procedures should include a process whereby it is able to obtain sufficient evidence of a prospective client’s identity. This is achieved by means of identification – that is, obtaining information from the client as to the ownership and corporate structure, up to the ultimate beneficial owner – and verification – that is, the checking of this data against an independent source or by other means. In addition, banks will seek
information such as the background and geography of the company, the range of its business activities, the source of the goods, the frequency of its transactions, the product and service needs – that is, whether documentary credits are to be issued or received – and the source and nature of funds that the company will receive and / or the wealth of the owners.
A bank’s CDD measures require the ongoing review of a client’s business profile. Completion of the KYC process is not a single one-time event.
Each bank should have processes in place that will identify any change in the business activities of a company, for example a company originally imported household electrical equipment and has now started importing
pipe and engineering materials. Any changes in a company profile should be reported to the relationship manager for the client so that follow-up action may be taken as necessary. For example, this could mean a new
review of the client’s business activities so that the bank is satisfied as to the purpose for which the new commodity will be used.
The required due diligence should, as a minimum, be undertaken in relation to the customer who is the instructing party for a transaction. Any further,or enhanced, due diligence will be subject to the internal policy of each bank. For the issuance of a documentary credit, the instructing party will be the applicant, and for the advising or confirmation of a documentary credit,it will be the issuing bank.
In addition to KYC and CDD formalities, a bank should also assess transactions from a potential money laundering, terrorist financing and sanctions perspective. These issues are covered in Chapter 25.
6.3 Applying for the issuance of a documentary credit
It is a buyer’s responsibility to request the issuance of a documentary credit. The time when it should be opened should be detailed in the sale contract. If no date is indicated, a documentary credit should be issued
so as to be in the hands of the beneficiary prior to the earliest date of any specified shipment date.
Beneficiaries often use documentary credits opened in their favour as the basis for obtaining bank finance. This finance may be necessary to enable them to procure raw materials or to ship the goods. As a result, a
beneficiary is under no obligation to do anything until the documentary credit is issued.
You should not be concerned with the legal remedies that an applicant and beneficiary may have against each other, but simply with the fact that an applicant has a responsibility to arrange for the documentary credit to be
issued in good time to enable shipment to be made.
6.3.1 The type, nature, terms and conditions of a documentary credit
An applicant and beneficiary should jointly agree the type, nature, and terms and conditions of a documentary credit. Most problems with the execution of documentary credits occur because the parties have not
completely agreed these points. In many cases, it may have been assumed that they have reached agreement, but it will subsequently be found that their interpretations of that agreement are different.
This is recognised in ISBP 745, ‘Preliminary Considerations’, paragraphs iii and iv.iii. The terms and conditions of a credit and any amendment thereto are independent of the underlying sale or other contract even if the credit or
amendment expressly refers to that sale or other contract. When agreeing the terms of the sale or other contract, the parties thereto should be aware of the ensuing implications for the completion of the credit or
iv. Many of the problems that arise at the document examination stage could be avoided or resolved by the respective parties through careful attention to detail in the credit or amendment application and issuance
of the credit or any amendment thereto. The applicant and beneficiary should carefully consider the documents required for presentation, by whom they are to be issued, their data content and the time frame in
which they are to be presented
6.3.2 General conditions when completing a documentary credit application form
Having agreed the establishment of a credit facility with a bank or that there is sufficient availability within a previously agreed credit facility, the main responsibility of an applicant is to complete the bank’s documentary
credit application form.
The main purpose of a documentary credit is to pay for an applicant’s purchase, not to police or administer the underlying sale contract or proforma invoice. Therefore, when completing the application form, an
◆◆ provide its bank with clear and precise instructions, avoiding any form of ambiguity in describing the terms and conditions that are to be complied with by the beneficiary;
◆◆ maintain an awareness of the documents that are necessary for the import of the concerned goods, or those that are to evidence delivery of the services or performance that is to be provided by the beneficiary;
◆◆ provide details of the type, issuer (if applicable) and data content of the documents that are to be presented, which will include within one or more of those documents any reference to specifications or quality
requirements that are to be met and evidenced;
◆◆ (where there is a requirement that the goods are to be subject to a form of inspection) clearly indicate the type of document and, where appropriate, the name or type of company that should issue it (for example the presentation of an inspection certificate issued by an inspection or quality assurance company, with or without stating the name of that company), along with the standard or quality that is to apply to the goods; and
◆◆ ensure that all terms and conditions, and the documents called for, are in accordance with the sale contract or proforma invoice agreed with the beneficiary.
It is often the case that, apart from describing the goods and indicating the value of those goods, the only other information provided in a sale contract or proforma invoice will be the desire of the beneficiary to receive
a documentary credit that is payable on a sight basis or at a future date.
This leaves the buyer to complete the application form in a manner that it will deem appropriate and it often leads to subsequent amendments being required as a result of the inability of the beneficiary to comply with one or more conditions.
As part of the sale contract negotiation, an applicant and beneficiary should agree, at least, upon the answers to the following questions relating to the issuance of a documentary credit.
◆◆ Is settlement due on a sight or usance basis? Is it to be available by sight payment, deferred payment, acceptance or negotiation?
◆◆ What is the currency and amount? Is there any tolerance that is to be applied?
◆◆ What is the validity (or expiry) date?
◆◆ What is the last date for shipment, and what is the period for presentation of documents?
◆◆ What is the routing of the goods to be?
◆◆ Are partial shipments or drawings to be allowed or prohibited, and is transhipment to be allowed or prohibited?
◆◆ How are the goods, services or performance to be described? If there is a quantity of goods, is it subject to a tolerance? Is there a unit price or prices that are applicable?
◆◆ What is the transport document (for goods) and which Incoterm is applicable?
◆◆ What are the other required documents?
◆◆ Are there any special terms and conditions? If so, what are the documents to be presented to evidence compliance with such terms and conditions?
◆◆ Who will pay the respective bank charges under the credit?
◆◆ Is it to be confirmed or not?
Each bank will maintain its own style of application form, whether in paper form or available online, but the individual fields will usually follow the structure of a SWIFT MT700 message to make the review and issuance
process easier to manage.
The standard terms and conditions applied by a bank in its application form or format, including indemnification clauses, usually seek to evidence the applicant’s acknowledgement at least that:
◆◆ the documentary credit will be issued subject to UCP 600;
◆◆ any necessary insurance will be arranged by the buyer, depending on the Incoterm (for example FOB);
◆◆ any necessary government regulations have been / will be complied with;
◆◆ the applicant will reimburse the issuing bank for any payments made under the credit;
◆◆ the applicant recognises that the bank has no liability or responsibility for the form, sufficiency, accuracy, genuineness, or falsification of documents, as detailed in UCP 600, article 34; and
◆◆ the applicant agrees to pay all charges and costs designated for its account and those not paid by the beneficiary.
6.3.3 Delivery of the completed documentary credit application form to the issuing bank
The application form, when completed and either approved online or signed by the applicant, acts as a request to its bank (which will become known as the ‘issuing bank’) to issue an irrevocable documentary credit in favour of a named beneficiary. The application will be submitted to the bank in either electronic or hard copy.
The application form itself and / or other documents signed by the applicant, as part of the credit facility documentation, will provide not only details of the documentary credit that is being requested to be issued, but also an agreement for the bank to debit the applicant’s account for any payment made (or an undertaking that the applicant will remit funds as requested by the bank). The general indemnification clauses will also mirror some of the clauses that appear in the credit facility agreement.
At this point, it should be remembered that an applicant is not a party to the documentary credit. Once the documentary credit has been issued, any attempt to change its terms and conditions will be subject to at least
the agreement of the issuing bank and the beneficiary. It is therefore imperative that an applicant ensures that the terms and conditions of the documentary credit that is to be issued are complete and precise, and
accurately reflect its understanding of the sale contract agreed with the proposed beneficiary.
Pre-issuance considerations and requirements
1. Of what is an ongoing review of a client’s business profile’ a definition?
A. Know your customer (KYC) principles
B. Customer due diligence (CDD) principles
C. Anti-money laundering (AMI) principles
D. Anti-terrorist-financing (ATF) principles
The correct answer is B. COD is recognized as the process for the ongoing review of a customer’s business profile.
2. Which of the following are potential risks faced by an applicant?
i. Loss or damage to goods in transit
ii. Foreign exchange risk
iii. Failure of the issuing bank
iv. Fraud in the presented documents
A. i, ii and iii
B. ii, iii and iv
C. I, ii, iii and iv
D. I, iii and iv
The correct answer ¡s C. All of them are risks that an applicant can face.
3. Which of the following is not a component usually seen ¡n a credit facility agreement or document?
A. Security requirements for the establishment of the facility
B. Representations and warranties
C. Types of document that can be called for
D. Fees and expenses
The correct answer is C. A credit facility agreement or document will not specify the documents that are expected to be called for other, than indicating whether the bank may wish to be shown as the consignee or order party, in order to control the goods on arrival.
4. When an applicant requests the presentation of a document such as an inspection or analysis certificate, what type of conditions should be expressed ¡n the application form?
A. Name or type of issuer
B. The data content
C. The standard or quality to which the goods are to be inspected or analyzed
D. All of the above
The correct answer is D. All three conditions should be covered in an application form, not only for an inspection or analysis type of document but any document.
5. Which of the following is a way of describing what is meant by the ‘autonomy’ of the documentary credit?
A. A documentary credit ¡s separate from the sale contract on which it is based.
B. A documentary credit ¡s supplemented by the sale contract on which it is based.
C. A documentary credit is supported by the sale contract on which it is based.
D. A documentary credit is superseded by the sale contract on which it is based.
The correct answer is A. This is essentially the wording that appears in UCP 600, sub-article «a).
Pre-issuance considerations and requirements
Source: Page 61-79