Advising a documentary credit

Advising a documentary credit

Learning objectives

This chapter describes the process from the time of receipt of a documentary credit by a bank designated as the advising bank or second advising bank to the time it is advised to a beneficiary.

By the end of this chapter, you should be able to:
◆◆ describe the role of an advising bank;
◆◆ outline the responsibilities of an advising bank when advising a documentary credit to a beneficiary; and
◆◆ describe the role and responsibilities of a second advising bank if it is to be the bank that advises a documentary credit to a beneficiary.

9.1 Considerations prior to advising a documentary credit

The choice of advising bank may have been made either by the beneficiary indicating in the sale contract the name of its own banker as its preferred advising bank, or by the issuing bank, in the absence of such bank being
indicated in the documentary credit application form.

For banks that maintain a global or regional presence, the advising bank may be a branch of the issuing bank. This enables the same bank to be on both ends of the transaction from a processing and revenue viewpoint.
Otherwise, to be an advising bank, a bank must be in a correspondent banking relationship with the issuing bank. This should ensure that the documentary credit is routed in an apparently authentic form for advising
to the beneficiary.

A documentary credit might indicate that an advising bank is to advise the beneficiary of its issuance through the intermediary of another bank. This bank is known as the ‘second advising bank’.

A second advising bank is often the beneficiary’s banker and, as mentioned previously, is likely to have been indicated in the sale contract as the bank through which the documentary credit is to be advised. However, because no correspondent banking relationship existed between the issuing bank and that bank, or because of an internal policy at the issuing bank to route documentary credits through another preferred correspondent bank in that country or to use a branch of the issuing bank, the chosen advising bank was not that indicated by the beneficiary.

The advising bank will be directed to advise the documentary credit to the beneficiary via the second advising bank.

9.1.1 The application of UCP 600, article 9

UCP 600, article 9, contains some minimal rules, when advising a documentary credit, which relate to an advising bank and a second advising bank.

UCP 600, sub-article 9(a), provides as follows.
a. A credit and any amendment may be advised to a beneficiary through
an advising bank. An advising bank that is not a confirming bank advises
the credit and any amendment without any undertaking to honour or
negotiate.

It should be noted, however, that UCP 600, sub-article 9(e), does not require an advising bank or second advising bank to advise a documentary credit.

e. If a bank is requested to advise a credit or amendment but elects not
to do so, it must so inform, without delay, the bank from which the credit,
amendment or advice has been received.

There is, however, no requirement for the bank to indicate its reason(s) for not advising the documentary credit.
UCP 600, sub-article 9(b), provides as follows.

b. By advising the credit or amendment, the advising bank signifies
that it has satisfied itself as to the apparent authenticity of the credit
or amendment and that the advice accurately reflects the terms and
conditions of the credit or amendment received.

Similarly, UCP 600, sub-article 9(c), makes the following statement.

c. … By advising the credit or amendment, the second advising bank
signifies that it has satisfied itself as to the apparent authenticity of the
advice it has received and that the advice accurately reflects the terms
and conditions of the credit or amendment received.

Although the main requirement for an advising bank or second advising bank is to determine the apparent authenticity of the documentary credit (advising bank) or the advising bank’s advice of a documentary
credit (second advising bank), UCP 600, sub-article 9(f), provides for the advising of a documentary credit where authentication has not been possible.

f. If a bank is requested to advise a credit or amendment but cannot
satisfy itself as to the apparent authenticity of the credit, the amendment
or the advice, it must so inform, without delay, the bank from which the
instructions appear to have been received. If the advising bank or second
advising bank elects nonetheless to advise the credit or amendment, it
must inform the beneficiary or second advising bank that it has not been
able to satisfy itself as to the apparent authenticity of the credit, the
amendment or the advice.

Because of the significant use of the SWIFT MT700 message type for the issuance of a documentary credit, the occurrence of non-authentication is confined to a very small percentage of transactions that are sent by
telex or in letter form. However, in today’s regulatory environment, a bank would be expected not to advise a documentary credit until its apparent authenticity could be determined.

The rules in UCP 600, article 9, are mirrored by the content of ISP98, rule 2.05.

a. Unless an advice states otherwise, it signifies that:
i. the advisor has checked the apparent authenticity of the advised
message in accordance with standard letter of credit practice; and
ii. the advice accurately reflects what has been received.
b. A person who is requested to advise a standby and decides not to
do so should notify the requesting party.

Should an advising bank or second advising bank agree to advise a documentary credit, the issuing bank is ultimately liable, as instructing party, for any uncollected charges of the advising or second advising bank
(UCP 600, sub-article 37(c)). Reimbursement from the applicant for these will form part of the separate agreement between the issuing bank and the applicant.

Similarly, the applicant indemnifies each bank for all obligations and responsibilities imposed by foreign laws and usages – that is, the laws and usages of the country of the other banks – if these are different from those
of the country of the issuing bank (UCP 600, sub-article 37(d)).

9.1.2 The risks applicable to an advising bank

An advising or second advising bank undertakes no obligation to honour or negotiate and therefore incurs no credit risk by advising a documentary credit. The sole obligation of the advising bank and second advising bank,
if accepting the issuing bank’s instructions, is to satisfy itself as to the apparent authenticity of the documentary credit (advising bank) or the advice (second advising bank) and to advise the documentary credit to the
beneficiary.

An advising or second advising bank is also to ensure that it advises the credit substantially in the form in which it was received. For example, the bank is to ensure that the details received, by way of content of the documentary credit and the number of pages of that documentary credit, are forwarded to the beneficiary.
Information that is considered strictly bank-to-bank information need not form part of the advice to the beneficiary unless it may be appropriate to another nominated bank, in the event that the documentary credit is
available with any bank.

Information that is considered strictly bank-to-bank information need not
form part of the advice to the beneficiary unless it may be appropriate
to another nominated bank, in the event that the documentary credit is
available with any bank.

9.2 Requirements prior to advising a documentary credit 
9.2.1 Receipt of the documentary credit

As mentioned in Chapter 7, a documentary credit is generally issued by use of a SWIFT MT7 type message, such as an MT700 or MT799. This will enable an advising bank to determine the apparent authentication of the
message in accordance with UCP 600, sub-article 9(b).

b. By advising the credit or amendment, the advising bank signifies
that it has satisfied itself as to the apparent authenticity of the credit
or amendment and that the advice accurately reflects the terms and
conditions of the credit or amendment received.

For documentary credits sent by telex or in letter form, authentication will be achieved, respectively, by means of the agreement of the testing algorithm, which will appear on the telex, or the examination of the signature(s) against specimens held on file.

A second advising bank will receive the documentary credit from the advising bank by means of a SWIFT MT710 message or telex, or in letter form. The second advising bank is required to determine the apparent authenticity of the advice that has been issued by the advising bank.

9.2.2 Reviewing the documentary credit against an agreed credit facility

One of the first items to be reviewed will be whether there is a request or authorisation for confirmation to be added. If the answer is ‘yes’, this will change the form of advice and the process that needs to be followed.
Issues relating to the adding of confirmation are covered in Chapter 10.

Even if the documentary credit does not indicate a request or authorisation for confirmation to be added, there may still be a need to review the main criteria against a credit facility in the name of the issuing bank.
If a documentary credit is to be advised to the beneficiary, without confirmation, but it is available with the advising bank and / or second advising bank by deferred payment or acceptance, the bank is being asked
to incur a liability against the issuing bank, should it agree to act on the nomination of the issuing bank and incur a deferred payment undertaking or accept a draft drawn on it. Prior to advising such a documentary credit, the bank should check to ensure that the terms and conditions fall within the parameters of the facility, so that if the beneficiary were to ask the bank to act on its nomination, there would be a reasonable chance that it
will agree.

For example, if the advising or second advising bank were to observe that the terms and conditions were outside the agreed parameters or that there was little chance of the bank acting on its nomination, it should inform the
issuing bank prior to advising the documentary credit. This is a prudent course of action so that the beneficiary is not misled in any way that the bank may be willing or able to act should a complying presentation be
made.

9.2.3 Reviewing a documentary credit against bank policy and regulatory requirements

The terms and conditions of a documentary credit, including any names of entities or countries appearing thereon, should be checked against any regulatory requirements, such as sanction regulations that are applicable to the bank.

Bank policy should also be adhered to in relation to the type and nature of the transaction, including the goods and how they may be described in the documentary credit. For example, if a documentary credit were to quote
a goods description of ‘Equipment’, the bank should be seeking a more detailed description to understand exactly what type of equipment is to be shipped.

9.3 Reviewing the content of a documentary credit

There is no requirement in UCP 600 for an advising bank or second advising bank to review the text of a documentary credit to ensure that its terms and conditions appear to be in a workable form. It should be noted that even if a bank were to complete such a review and come to the conclusion that the documentary credit appears to be in a workable form, it would be only the beneficiary who could definitively make that decision.
In this context, some advising and second advising banks will examine every detail and contact the issuing bank should there be a conflict of data or a need for clarification of a term or condition. Other banks will review one or more of a select number of criteria, such as expiry date and place, latest shipment date, goods description, form of availability, Incoterm in relation to freight and insurance requirements,correct transport document called for, reimbursement conditions commensurate with the form of availability, etc. Others will not review the text at all, on the basis that the advice of the documentary credit conveys no undertaking on the part of the advising bank or second advising bank. Ultimately, the choice is left to each bank, and the process that is undertaken can often be a factor in a beneficiary choosing a preferred advising or second advising bank.

The following are some of the matters that an advising or second advising bank will consider when reviewing a documentary credit.

9.3.1 Types of settlement

A bank that examines all, or some, of the terms and conditions of a documentary credit will look at the form of availability to see what will be expected of it if it agrees to act on a nomination to honour or negotiate
(noting that, in most cases, an advising bank will also be the named nominated bank or a nominated bank, by virtue of the documentary credit stating that it is available with ‘any bank’).

In this respect, see Chapter 7, section 7.3.2, which provides an outline of the four different forms of settlement and the types of reimbursement instruction that a nominated bank should expect to see.

9.3.2 The place and date of expiry

The place of expiry should be that of the advising bank or second advising bank (or its country), if the advising or second advising bank is to consider offering the beneficiary an indication in its advice of the documentary credit
that it may be willing to honour or negotiate a complying presentation.

9.3.3 Transferable credits

If a documentary credit is stated to be transferable and the advising or second advising bank is the nominated bank, or the documentary credit is available with any bank and the advising bank or second advising bank
is nominated to be the transferring bank, and if the advising or second advising bank is willing to consider a request for transfer submitted by the beneficiary, it should attach to its advice of the documentary credit its
standard transfer request form.
Transferable credits are covered in more detail in Chapter 19.

9.4 Was the issuance of the documentary credit subject to an earlier pre-advice?

It is highly unlikely that a pre-advice will have been issued where a documentary credit is issued using the SWIFT MT700 or MT799 message type, or by telex. Pre-advices are discussed in Chapter 7, section 7.6.
A pre-advice will commonly occur when the full terms and conditions of a documentary credit are issued in letter form. In this event, the documentary credit should clearly refer to issuance of the pre-advice and its date. The
advice of the advising or second advising bank to the beneficiary should make reference to the pre-advice message.

9.5 Preparing a documentary credit for advising to the beneficiary

An advising bank or second advising bank will usually maintain a standard form of advice that it uses to advise a documentary credit to a beneficiary.These will vary from bank to bank.

Some banks will provide an advice that merely indicates that a credit has been issued, will attach a copy of it and will indicate the charges that are due from the beneficiary, if any.

Other banks will take a more proactive role by indicating the conditions under which they may be willing to honour or negotiate. They may advertise their willingness to finance where a draft is accepted or where a deferred payment undertaking is incurred, or to negotiate where a documentary credit is available by negotiation.

Some banks will also provide beneficiaries with a short guide of how to review the terms and conditions of the documentary credit, or one indicating the main points for consideration when the documents are being prepared
for subsequent presentation to the bank.

It should be noted that in its advice of the documentary credit an advising or second advising bank is not required to translate any of its text or interpret any technical terms (UCP 600, article 35).

An advising or second advising bank may incorporate its own standard wording in relation to certain matters, such as sanction clauses, the imposition of discrepancy fees, delivery instructions for the documents,
etc.

If a non-bank financial institution has issued the documentary credit, the advising or second advising bank should inform the beneficiary of this fact in its advice.

9.6 Transmitting a documentary credit to the beneficiary

In most cases, the advising bank or second advising bank will advise the details of the documentary credit in letter form. This letter will either be sent to the beneficiary by mail or by courier, or the beneficiary will collect
it from the offices of the bank. The latter is often the option chosen when an advising bank wishes to collect its fees in advance – that is, where the documentary credit is available with any bank and the beneficiary is a noncustomer of the advising or second advising bank.

Some banks now provide electronic delivery of the advice of the documentary credit to their clients through their front-end systems.In relation to the actual transmission of the documentary credit or an advice thereof, UCP 600, article 35, states as follows.

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.[ … ]

A beneficiary should review the documentary credit upon its receipt to determine if its terms and conditions are acceptable. If not, the beneficiary should contact the applicant and request an amendment. It is advisable
that only when the documentary credit is in an acceptable form should the beneficiary commence the manufacture, production or shipment of the goods, or provide the required service or performance.

Questions

1. When an advising or second advising bank issues its advice of a documentary credit, it signifies that it has found the documentary credit or its advice to be which of the following?

A. Genuine B. Authentic
C. Apparently genuine
D. Apparently authentic

2. ‘An advising bank receives a documentary credit by way of a telex instruction. The bank is unable to agree the testing algorithm that has been used. The bank must obtain a corrected authentication before it advises the documentary credit to the beneficiary.’ Under UCP 600, is this statement true or false?

A. True
B. False

3. ‘A second advising bank is required to determine the apparent authenticity of the documentary credit issued by the issuing bank.’ Is this statement true or false?

A. True
B. False

4. ‘An advising bank or second advising bank is not required to examine a documentary credit to determine whether it is in a workable form.’ Is this statement true or false?

A. True
B. False

5. ‘Because a documentary credit that is to be advised to a beneficiary conveys no engagement or responsibility of an advising or second advising bank, its contents need not be examined against bank policy.’
Is this statement true or false?

A. True
B. False

Source: Guide to Documentary Credits-Gary Collyer Page-127-136