Confirming a documentary credit

Confirming a documentary credit

Learning objectives
This chapter describes the process performed by a bank from the time of receipt of a
documentary credit, which includes an authorisation or request for confirmation
to be added, through to its sending of the advice to a second advising bank or
to the beneficiary by means of SWIFT or telex, or mail (letter) form.
By the end of this chapter, you should be able to understand:

◆◆ the process of determining whether a documentary credit is acceptable
in terms of its content and its meeting of bank policy and regulatory requirements
, and whether the transaction falls within the availability and terms of a
credit facility granted to the issuing bank, such that a bank will add its
confirmation;

◆◆ the risks associated with adding confirmation to a documentary credit; and

◆◆ that there is a need to ensure, among all other terms and conditions,
that the form of availability and location of the place of expiry is
linked not only to the settlement and reimbursement instructions
that will be provided to the confirming bank, but also to the form
and scope of the confirmation that is being authorized or requested.

10.1 Pre-confirmation considerations

Before they even assess the content of a documentary credit, bank staff should be aware of and have consideration for, various aspects of documentary credit practice, for example of the risks that a bank faces
when adding confirmation to a documentary credit, and due consideration of the terms and conditions of the documentary credit and the content of UCP 600, article 8.

UCP 600, article 2, defines ‘confirmation’ as follows.
Confirmation means a definite undertaking of the confirming bank, in
addition to that of the issuing bank, to honour or negotiate a complying
presentation.

The concept of confirmation should be understood in the context that whereas the issuance of a documentary credit, by an issuing bank, removes the payment risk of the applicant, the adding of confirmation removes the
payment risk of the issuing bank.

If a proposed beneficiary is not comfortable with receiving an irrevocable undertaking from a particular issuing bank, it may require the applicant to instruct its bank to authorize or request a bank to add its confirmation to
the documentary credit. This is most likely to occur when the issuing bank is located in a country that the proposed beneficiary believes represents a risk to receipt of settlement. It may also occur when the proposed
beneficiary has an internal policy that dictates that documentary credits are to be confirmed when they are issued from certain countries or regions of the world. Confirmation will often be added by a bank that is the proposed beneficiary’s own, or preferred, banker.

UCP 600, article 2, defines ‘confirming bank’ as follows.

Confirming bank means the bank that adds its confirmation to a credit
upon the issuing bank’s authorization or request.

In most cases, the advising bank will be the bank that is authorized or requested to add its confirmation.
An authorization to add confirmation will be given via a specific clause in the documentary credit such as ‘You are authorized to add your confirmation at the specific request of the beneficiary’. This type of clause will often indicate that the charges for the confirmation are to be collected from the beneficiary, usually in advance. In a SWIFT MT700 message, Field 49 would state ‘May add’.

A request to add confirmation will be made via a specific clause in the documentary credit, such as ‘Please add your confirmation’ or, in Field 49 of a SWIFT MT700 message, the insertion of the word ‘Confirm’.
It should be noted that honour or negotiation by a confirming bank is not conditional upon the confirming bank first being reimbursed by the issuing bank, or the issuing bank providing an indication that it has accepted the
documents. A confirming bank honours or negotiates in the expectation of being reimbursed by the issuing bank.

10.1.1 The risks applicable to a confirming bank

The risks faced by a bank that is willing to confirm a documentary credit can be broadly summarised as follows.

◆◆ Issuing bank risk – the issuing bank may be unable to reimburse the bank for any payment or reimbursement that it is required to make in respect of a presentation that complies with the terms and conditions of the documentary credit, or in respect of a presentation where the applicant had previously issued a waiver of discrepancies, and that waiver was acceptable to the issuing bank and the confirming bank.

◆◆ Financial crime – the transaction may be used to facilitate criminal activity, such as money laundering, fraud against the bank and/or other entities, terrorist financing, etc.

◆◆ Errors in conveying the requirements of the issuing bank – in most cases, the bank requested to add its confirmation will take a copy of the incoming documentary credit and send this to the beneficiary, with covering advice indicating the terms and conditions that apply to the confirmation. The bank must ensure that the copy it sends is a true reflection of the documentary credit it received; otherwise, compliance by the beneficiary to the terms and conditions as advised to it, rather than the terms and conditions of the documentary credit issued by the issuing bank, may leave the confirming bank in a situation in which it is required to honor or negotiate a complying presentation, but its right to reimbursement from the issuing bank is placed in jeopardy.

When a confirming bank advises a documentary credit via a second advising bank, it may use the SWIFT MT710 message type. In this case, the bank is required to copy across the text from the MT700 to the MT710 message.
Any errors in rekeying will be the responsibility of the confirming bank. However, it should be noted that a number of banks’ back-office systems populate the fields of the MT710 to match those of the MT700 to avoid the risks involved in rekeying data.

UCP 600, article 35, a ‘Disclaimer on Transmission and Translation’ provides 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.
[ … ]

However, such ‘errors’ refer to a SWIFT or telex advice of a documentary credit or amendment being mutilated between the sending and receiving of the message, and do not include any errors made by a confirming bank
in rekeying the data the issuing bank has provided.

◆◆ Errors in document examination or a failure to follow the requirements of UCP 600, article 16, when refusing documents

– a confirming bank may make an error in determining the status of the documents, by considering the documents to be compliant when there is a clear and undeniable discrepancy. In these circumstances, a
confirming bank may find that the issuing bank will immediately issue a refusal notice and return the documents, or that the issuing bank will not accept a waiver that is given to it by the applicant.

Similarly, if a confirming bank determines that the documents are discrepant, but it issues a refusal notice that is not in conformity with the requirements of UCP 600, article 16, it may find itself precluded from claiming that the documents are discrepant. As a result, it will be required to honour or negotiate what will be discrepant documents, and once again will find itself in the hands of the issuing bank and the applicant as to whether it may be reimbursed for the settlement made to another nominated bank or beneficiary.

The topic of refusal notices and preclusion is discussed further in Chapter 18.

10.1.2 The application of UCP 600, article 8

UCP 600, sub-article 8(a), recognizes that a documentary credit may be available with another nominated bank or more than one nominated bank – that is, that a documentary credit may be available with any bank.

It should be noted here that while a confirming bank need not be a nominated bank, it is advisable that it is. If a bank is authorised or requested to add its confirmation to a documentary credit that is not available with it, it should fully understand the scope of the confirmation that is being authorized or requested. If a confirming bank is not a nominated bank, it is likely that it is being asked to undertake to pay in the event of non-payment of
a complying presentation by the issuing bank, and not to undertake to Pre-confirmation considerations
honor or negotiate against the presentation of complying documents to it. The wording of the confirmation advice must clearly reflect the form of undertaking that the bank is giving.

When a confirming bank is a nominated bank under a documentary credit that is available with any bank, UCP 600, sub-articles 8(a)(i)(b)–(e), require that it honor or negotiate if another nominated bank does not act on its
nomination or, having acted on its nomination, does not effect the settlement on the due date.

The possible effect of these sub-articles can be modified by the confirmation advice clearly indicating that the undertaking of the confirming bank is applicable only in the context of a complying presentation being made to
it, at its designated office, within the expiry date of the documentary credit (see section 10.4).
A bank is irrevocably bound to honour or negotiate as of the time at which it issues its advice of confirmation. Any subsequent attempt to amend or cancel the terms and conditions of the confirmation will be subject to the
consent of the beneficiary.

UCP 600, sub-article 8(c), is similar in content to UCP 600, sub-article 7(c), which was discussed previously in Chapter 7. Primarily, a confirming bank provides an undertaking to a beneficiary to honor or negotiate a
complying presentation (subject to the comments made earlier in this section).

C. A confirming bank undertakes to reimburse another nominated bank
that has honoured or negotiated a complying presentation and forwarded the documents to the confirming bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not another nominated bank prepaid or purchased before maturity. A confirming bank’s undertaking to reimburse another nominated bank is independent of the
confirming bank’s undertaking to the beneficiary.

Sub-article 8(c) also reflects the obligation of a confirming bank when another nominated bank has acted on its nomination and honored or negotiated, and is expecting to be reimbursed according to the terms and
conditions of the documentary credit. This undertaking to reimburse and the independent undertaking that is given to a beneficiary is reflected in the sub-article.

Any honor or negotiation of a complying presentation, or reimbursement of a claim made by another nominated bank, is made without recourse.

Last, but not least, a bank authorized or requested to add its confirmation is under no obligation to do so. If it decides not to add its confirmation,

it is not required to offer any reason(s); the only requirement is to inform the issuing bank without delay. The bank may still choose to advise the documentary credit to the beneficiary without confirmation.
There are a number of reasons why a bank may not be prepared to add its confirmation. Some of the more common ones are that:
◆◆ the limit available under its own guidelines for issuing bank risk may already have been reached;
◆◆ a similar limit in respect of the country risk of the country in which the issuing bank is located may have been reached; and / or
◆◆ the terms and conditions of the documentary credit may not be acceptable to the bank.

10.2 Pre-confirmation requirements
10.2.1 Receipt of the documentary credit

As mentioned earlier, in most cases the bank that is requested to add its confirmation will also be the advising bank – that is, the bank that receives the documentary credit from the issuing bank.

As indicated in Chapter 9, a documentary credit is generally issued by use of a SWIFT MT7 type message – that is, an MT700 or MT799. This will enable a confirming (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 that will appear on the telex, or the examination of the signature(s) against specimens held on file.

When a proposed confirming bank is not the advising bank, it will need to be able to determine the authentication of the authorization or request to add confirmation. It should also request that the issuing bank provide it with a copy of the documentary credit and any amendment(s) that may have been issued. In these circumstances, the advice of confirmation (if agreed to by the bank requested to add its confirmation) will normally be routed to the beneficiary through the advising or second advising bank.

10.2.2 Reviewing the documentary credit against an agreed credit facility

One of the first items to be considered will be whether there is an authorization or request for confirmation to be added. If the answer is ‘yes’, there is a need to review the main criteria against a credit facility that has been granted in the name of the issuing bank.

Just as an applicant will establish a credit facility with its bank for the issuance of documentary credits, so will an issuing bank with a number of its correspondent banks in order that confirmation may be added as and when required by the beneficiary and/or the applicant. Details such as the expiry date, amount, payment terms and goods description will be reviewed for compliance with the terms and conditions of the credit facility and the availability thereunder.

10.2.3 Reviewing the 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 quotes 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. It is true to say that some banks when authorized or requested to add
confirmation will insist on the documentary credit being available by payment, acceptance or deferred payment (and not by negotiation), and require that the issuing bank provides a reimbursement instruction that
allows the confirming bank to debit the account of the issuing bank or to claim reimbursement from a named reimbursing bank. This is purely a matter of bank policy and not a requirement of UCP 600, in particular, UCP
600, article 8.

10.3 Reviewing the content of the documentary credit

A bank that is considering adding its confirmation should review the entire text of the documentary credit to determine that it appears to be in a workable form. If there is any ambiguity with, or clarification needed to,
any of its terms and conditions, the issuing bank should be contacted in the first instance.
When adding confirmation to a documentary credit, terms, and conditions such as those relating to the place of expiry (which should be the location of the confirming bank), the bank with which the credit is available (which should be the confirming bank or should otherwise allow honor or negotiation with any bank) and the manner in which the bank will be reimbursed are paramount.

The terms and conditions of the documentary credit may have a bearing on the scope of the confirmation that will be added. For example, a documentary credit that expires 270 days after the date of issuance will prove problematic if the credit facility is established for a maximum period of 180 days. The choice for the confirming bank is to decline the transaction or to add confirmation for 180 days and perhaps review every 30 days to see whether a further period may be covered, and so on up to the stated expiry date. Similarly, a documentary credit may provide for payment terms whereby the confirming bank is willing to add confirmation for only, say, 90 percent of the amount of the documentary credit.

In either case, the advice of confirmation must clearly reflect the scope of the confirmation and the issuing bank should be similarly informed. It will then be for the beneficiary to determine whether it can operate within the
parameters set by the confirming bank. If not, the beneficiary may need to find a bank that will be willing to add confirmation based on the original documentary credit terms. Any new confirming bank would be indicated by
way of an amendment to the documentary credit.

10.4 Preparing the confirmation advice

As already mentioned, the words used in advice to convey the scope of the confirmation are critical. Such wording will establish the basis under which the confirming bank will be expected to honour, negotiate or
reimburse. Any ambiguity can have serious consequences for a bank.

A number of banks make the mistake of simply stating ‘We confirm the credit’. Such wording can have implications for a confirming bank, especially when there are one or more other nominated banks with which
the documentary credit is available.

As discussed earlier, UCP 600, sub-articles 8(a)(i)(b)–(e), require a confirming bank to honour or negotiate when another nominated bank fails to act on its nomination to honor or negotiate or, having acted on that nomination, fails to effect settlement on the due date. In either event, a confirming bank that has stated ‘We confirm the credit’ will be obligated to honor or negotiate where a complying presentation was previously made.
Consider, however, a confirming bank using the following wording.

We hereby add our confirmation to this credit and undertake that we shall [honor or negotiate] all drafts and/or documents that are presented to us, at our address mentioned above, on or before the expiry date mentioned in the credit, provided that they fully comply with the terms and conditions of the credit.
In this case, the undertaking of the confirming bank is limited to a presentation being made to it and to no other bank. In these circumstances, UCP 600, sub-articles 8(a)(i)(b)–(e), will be modified.
When a bank is authorized to add confirmation to a documentary credit, the documentary credit will normally be advised on an unconfirmed basis, with a clause in the advice of the advising bank stating the following (or words of similar effect):

◆◆ where charges are for the account of the applicant or may be collected from the proceeds of any presentation, ‘We are authorized to add our confirmation to this credit, at your request. Upon our receipt of your written request, the matter will receive our further consideration’; or

◆◆ where charges are to be collected from the beneficiary in advance, ‘We are authorized to add our confirmation to this credit, at your request and upon our receipt of your payment for the confirmation
fee. Upon our receipt of your request and payment for [currency] XXXX, the matter will receive our further consideration’.

In both cases, the bank leaves open its option to add confirmation until the preconditions have been met.
10.5 Transmitting the confirmation advice
In most cases, a confirming bank will advise the details of a documentary credit in letter form. This letter will either be sent to the beneficiary by mail or courier, or the beneficiary will collect it from the offices of the bank.
Some banks now provide electronic delivery of the advice of the documentary credit to their clients through their front-end system.

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.
The beneficiary should also review the wording of the confirmation to ensure that the undertaking of the confirming bank is as was expected and in line with its requirements.
When the documentary credit is being advised to the beneficiary through another bank – a second advising bank – the confirming bank may send its advice of confirmation and the documentary credit by mail, courier or
SWIFT MT710 message.

Whether the advice is sent to another bank or the beneficiary, the required manner of sending may be indicated in the documentary credit.

Questions

1. ‘A bank receives a documentary credit in which it is requested to add its confirmation. When reviewing its terms and conditions, the bank is not in agreement with one or more conditions. It decides not to add its
confirmation and informs the issuing bank the next day. The bank is not required to advise the documentary credit on an unconfirmed basis.’ Is this statement true or false?

A. True
B. False

2. According to UCP 600, article 8, a confirming bank is irrevocably bound to honor or negotiate from when?

A. When the beneficiary receives the documentary credit
B. When the beneficiary presents complying documents under the credit
C. When it issues its advice of confirmation
D. When it determines that the transaction falls within the credit facility of the issuing bank

3. ‘An authorization of the issuing bank, for a bank to add its confirmation, is indicated in Field 49 of a SWIFT MT700 message by the word “Confirm”.’Is this statement true or false?

A. True
B. False

4. ‘The beneficiary presents documents to the confirming bank, which are found to be compliant. The documentary credit is available by sight payment. The confirming bank is authorized to claim reimbursement
from a named reimbursing bank value three banking days after sending its claim to that bank. The confirming bank claims reimbursement value 20 May 20XX (Monday). Because of the time-zone differences between it and the reimbursing bank, the confirming bank will not receive confirmation that funds have been credited to its account until the morning of 21 May. The confirming bank should effect payment to the beneficiary on 21 May, when confirmation of receipt of funds is received.’ Is this statement true or false?

A. True
B. False

5. Which of the following criteria will a bank not usually review when determining whether a documentary credit falls within the structure of a credit facility granted to the issuing bank?

A. The expiry date
B. The payment terms
C. The presentation period
D. The amount

Source: Guide to Documentary Credits-Gary Collyer Page-137-147