Bank to bank reimbursements and reimbursement from aid agencies
22.1 The relationship between an issuing bank and a reimbursing bank
Although only one bank (an issuing bank) is necessary to facilitate reimbursement under a documentary credit, in many cases an issuing bank will nominate another bank to reimburse a nominated bank that has honoured or negotiated a presentation made under its documentary credit. Such a bank is known as a ‘reimbursing bank’.
Although the UCP were developed to standardise the operation of documentary credits, the practice of inter-bank currency reimbursement was typically carried out in line with local market practice. As the volume of
international trade increased, this became a significant cause of additional risk for reimbursing banks in documentary credits. The ICC developed a set of rules for bank-to-bank reimbursements to help banks to manage this risk. The current version is the ICC Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits (URR 725).
This chapter looks at arrangements that involve a reimbursing bank or aid agency providing reimbursement to a nominated bank.
By the end of this chapter, you should be able to:
◆◆ describe the role of a reimbursing bank; and
◆◆ understand the process that applies when an aid agency is responsible for providing reimbursement.
UCP 600, article 13, covers some very basic arrangements for bank-to bank reimbursements. URR 725 provides additional clarification and more detailed rules to be followed in such circumstances.
UCP 600, sub-article 13(a), requires a documentary credit to state whether URR 725 is to apply to it. URR 725 requires the reimbursement authorisation issued by the issuing bank and sent to the reimbursing bank to make it clear that URR 725 is to apply to it. If the documentary credit and reimbursement authorisation is silent in this respect and a bank-to-bank reimbursement is to occur, then the contents of UCP 600, sub-articles 13(b) and (c), will apply.
a. If a credit states that reimbursement is to be obtained by a nominated bank (“claiming bank”) claiming on another party (“reimbursing bank”), the credit must state if the reimbursement is subject to the ICC rules for
bank-to-bank reimbursements in effect on the date of issuance of the credit.
b. If a credit does not state that reimbursement is subject to the ICC rules for bank-to-bank reimbursements, the following apply:
i. An issuing bank must provide a reimbursing bank with a reimbursement authorization that conforms with the availability stated in the credit. The reimbursement authorization should not be subject to an expiry date.
ii. A claiming bank shall not be required to supply a reimbursing bank with a certificate of compliance with the terms and conditions of the credit.
iii. An issuing bank will be responsible for any loss of interest, together with any expenses incurred, if reimbursement is not provided on first demand by a reimbursing bank in accordance with the terms and conditions of the credit.
iv. A reimbursing bank’s charges are for the account of the issuing bank. However, if the charges are for the account of the beneficiary, it is the responsibility of an issuing bank to so indicate in the credit and in the reimbursement authorization. If a reimbursing bank’s charges are for the account of the beneficiary, they shall be
deducted from the amount due to a claiming bank when reimbursement is made. If no reimbursement is made, the reimbursing bank’s charges remain the obligation of the issuing bank.
c. An issuing bank is not relieved of any of its obligations to provide reimbursement if reimbursement is not made by a reimbursing bank on first demand.
Reimbursing banks act upon the instruction and authority of the issuing bank, and any difficulties that a claiming bank has in respect of nonpayment, late payment or interest charges are to be referred to the issuing
bank and not the reimbursing bank.
22.1.1 The risks to the reimbursing bank
A reimbursing bank is entitled to be reimbursed by the issuing bank when it has honoured a claim of a claiming bank as specified in the issuing bank’s reimbursement authorisation. However, it has no obligation to reimburse a claiming bank unless it has issued a reimbursement undertaking.
It should be noted that a reimbursing bank is neither concerned with nor bound by the terms and conditions of the underlying documentary credit, and therefore is not concerned with whether or not a complying presentation has been made to a claiming bank (nominated bank).
The main risk to the reimbursing bank is that, once it has paid the claiming bank’s claim, it may not be able to obtain reimbursement from the issuing bank (for the same reasons as a confirming bank may not be able to
obtain reimbursement from an issuing bank). However, in most cases, a reimbursing bank will not honour a claim unless sufficient funds are available on the account of the issuing bank or other arrangements are in
place where there may be a shortfall.
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