BAFT - Guide To Letters of Credit (Med Res)
BAFT - Guide To Letters of Credit (Med Res)
BAFT - Guide To Letters of Credit (Med Res)
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The global
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Certificate for
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This is a jointly produced
publication between the CONTENTS
BAFT (Bankers Association
for Financing and Trade) and
Trade Finance Global (TFG).
Documentary credits (Letters of Credit):
1 8
definition and purpose
THANKS TO
BAFT and TFG would like to extend
a special thank you to all authors,
editors, experts and contributors Why use a documentary credit:
for the production of this publication. 2 10
Risk mitigation and benefits
AUTHORS
Dave Meynell
3 Parties involved 12
Pradeep Taneja
EDITORS
Deepesh Patel 4 Types of credit 14
Scott Stevenson
EXPERTS
BAFT Commercial 5 Rules, practice, and law 18
Letters of Credit
Working Group
Ensuring credit-compliant
LAYOUT DESIGN 7 26
presentations of documents
Nigel Teoh
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AUTHORS
David Meynell
Founder
TradeLC Advisory
David is Senior Technical Advisor for the ICC Banking Commission and former
Chief Examiner for the LIBF Certificate in International Trade Finance (CITF®).
Pradeep Taneja
Founder
Chairman of ICC Bahrain
Trade Finance Forum
EDITORS
Deepesh Patel
Editorial Director
Trade Finance Global (TFG)
R
Scott Stevenson
Senior Vice President, Trade
BAFT
Prior to joining BAFT, Stevenson was a senior advisor for AF Capital Partners,
which provided expertise in emerging market structured and project
finance for development banking institutions. For two years, he consulted
development banks and export credit agencies following a 17-year career
at the International Finance Corporation (IFC) and World Bank Group in
various trade and investment project leadership roles.
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Everything you need to know about Letters of Credit
CONTRIBUTORS
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FOREWORD
Letters of Credit, the engine
behind international trade
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Everything you need to know about Letters of Credit
indication of the trust placed This guide is crafted to hope that this guide will help
in LCs by businesses seeking provide a comprehensive you navigate the international
to navigate the uncertainties understanding of LCs, from trade world.
of international markets. their historical origins to their
modern-day application. TFG and BAFT are thrilled to
The data points mentioned by It aims to demystify the launch this LC guide at the
the ICC’s Trade Register point technicalities of LCs, offering BAFT 2024 International Trade
to a broader trend of reliance insights into their operational and Payments Conference
on formalised trade finance framework, legal underpinnings, in Washington D.C. We want
mechanisms to secure and practical usage in trade to thank David Meynell and
transactions in a landscape finance. Pradeep Taneja for their help in
marked by fluctuating writing this guide, and the BAFT
economic policies and Whether you are a seasoned Letter of Credit Committee for
trade tensions. finance professional or new providing their expertise and
totrade finance, TFG and BAFT guidance during the process.
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1
Documentary credits (Letters of Credit):
definition and purpose
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Everything you need to know about Letters of Credit
ISSUANCE SETTLEMENT
Payment (6)
Discrepancies (if any)
LC Application LC Advised communicated and
Documents
(2) (5) resolved (2)
Payment (6)
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Risk mitigation
International trade transactions
often involve buyers and sellers
residing in countries with
different legal systems,
currencies, market practices,
customs, trade, and exchange
control regulations.
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3 Parties involved
Transferable – Process
LC
AD
VIC
E/C
ON
1st Beneficiary FIR Applicant
TR MA
AN TIO
SF N
ER
RE
QU
ES
T
Advising / LC APPLICATION
Confirming Bank
LC
ER ISS
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AN NC
TR E
2nd Beneficiary
Several distinct entities can In its application, the applicant The issuing bank irrevocably
be parties to a documentary details the documents required undertakes to pay the
credit. Some must be present, under the documentary credit beneficiary upon receipt of
while others are optional and along with applicable terms the necessary documents as
only added to meet certain and conditions. Even though determined by the terms and
goals or requirements for the the applicant initiates the conditions of the documentary
specific interaction. This request, it is not a party to credit.
chapter highlights the possible the documentary credit since
parties in documentary credits. a credit is a bank undertaking. The beneficiary
The beneficiary is the party in
The applicant The issuing bank whose favour the documentary
credit is issued. It is generally
The applicant is usually The issuing bank issues the the seller in an international
the buyer of the goods who documentary credit as per trade transaction.
requests (or applies to) the applicant’s request.
the issuing bank to issue
a documentary credit on
its behalf.
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Everything you need to know about Letters of Credit
The confirming bank The nominated bank The issuing bank authorises the
reimbursing bank to honour
a reimbursement claim from
A confirming bank can provide The issuing bank can the claiming bank.
an irrevocable undertaking - authorise another bank, called
in addition to that of the the nominated bank, to pay The reimbursement
issuing bank - to honour a presenter at sight, to accept authorisation is often subject
the documentary credit. a bill of exchange, or to to the ICC Uniform Rules for
incur a deferred payment Bank-to-Bank Reimbursements
This means that it agrees undertaking to pay at under Documentary Credits
to pay at sight, or to incur a maturity. (URR 725). If not so indicated
deferred payment undertaking,
in the credit, reimbursement
or to accept a bill of exchange Nomination by the issuing bank is subject to UCP 600 article 13
(depending on the availability only imposes obligations on (Bank-to-Bank Reimbursement
of the credit) on receipt of the nominated bank if it has Arrangements).
compliant documents as confirmed the documentary
stipulated in the documentary credit or expressly agreed
credit’s terms and conditions. and communicated to the The transferring bank
beneficiary that it will act on
its nomination.
The advising bank In some cases, the beneficiary
is an intermediary trader that
An advising bank receives the The reimbursing bank sources the goods from another
documentary credit from the supplier and may request its
issuing bank and advises the buyer to arrange a transferable
The reimbursing bank is
beneficiary on establishing its documentary credit. The issuing
another party - usually the
authenticity. bank would then nominate a
issuing bank’s correspondent
transferring bank to transfer
bank, with which the issuing
By advising the documentary the documentary credit.
bank maintains an account
credit, the advising bank verifies in the currency of the
that the documentary credit The beneficiary (“first
documentary credit.
is authentic and provides beneficiary”) will request the
assurance that the advice transferring bank to transfer the
The documentary credit will
accurately reflects the terms documentary credit in whole
stipulate the name of the
and conditions of the or in part to its own supplier
reimbursing bank on which
documentary credit as (i.e., “second beneficiary”).
the nominated bank or the
received. Unless the advising confirming bank (then known
bank has confirmed the For a transfer to occur, the
as “claiming bank”) should
documentary credit, it documentary credit must
make a reimbursement claim.
assumes no further liability explicitly state that it is
or responsibility. transferable.
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4 Types of credit
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Everything you need to know about Letters of Credit
a complying presentation, The first beneficiary can request If the documentary credit
by advancing or agreeing transfer to multiple second requires the presentation of
to advance funds to the beneficiaries, provided the an insurance document, the
beneficiary on or before documentary credit allows for amount or the percentage
the banking day on which partial shipments. However, of insurance can be increased
reimbursement is due to the second beneficiary cannot to provide cover as initially
the nominated bank. transfer the documentary credit required under the
to another subsequent documentary credit.
beneficiary.
Confirmed credits The first beneficiary has the
Under UCP 600, the transfer right to provide its invoice in
Confirmed credits are those must be effected on the existing substitution of the second
that also bear the confirming terms and conditions except beneficiary’s invoice and draw
bank’s irrevocable undertaking for the amount, the unit price for the difference in amount,
(in addition to that of the if given, the expiry date, and if any. However, if it fails
issuing bank) to honour or the latest date of shipment to provide its invoice, the
negotiate, without recourse, or period for presentation, transferring bank can forward
documents complying with the all of which can be reduced. documents received from the
terms and conditions of the Furthermore, the name of second beneficiary to the
credit. the first beneficiary can be issuing bank.
substituted with the applicant's.
Transferable credits
If the beneficiary (i.e., the “first
beneficiary”) of a documentary
credit is an intermediary trader
that procures the goods from
another source, they may
request the buyer to provide
a transferable credit, which
the first beneficiary can then
transfer to its supplier (i.e.,
the “second beneficiary”).
A transferable documentary
credit must expressly state that
it is transferable and provide
the name of the nominated
bank or the bank authorised
to transfer.
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Back-to-back credits
Back-to-back documentary
Back to Back – Process
credits serve the same purpose
as transferable credits.
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Everything you need to know about Letters of Credit
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Everything you need to know about Letters of Credit
copies of the underlying The content of the UCP 600 The UCP 600 does not indicate
contract, proforma invoice, comprises: which documents or under
or the like. Most documentary what circumstances parties
credit application forms Framework must present under
incorporate a choice of the a documentary credit.
main types of documents under Structure of and obligations These decisions are left to the
under documentary credits
the terms and conditions. For applicant and beneficiary to
example, they often include Pre-advice, nomination, determine. However, an issuing
invoices, transport documents, reimbursement, standard bank may insist on certain
insurance documents, packing for examination of documents being presented
lists, and weight lists. documents, discrepant from a local regulatory
documents, waiver and perspective or due to its
Applicants are strongly notice, originals, and Invoice internal policy.
encouraged to provide the
Transport documents
name of an entity required to
issue each document and its Insurance documents
ISBP 821
data content.
Extension, tolerance, partial The International Standard
drawing or shipment, Banking Practice for the
UCP 600 instalments, disclaimers,
Examination of Documents
and force majeure
under Documentary Credits
Over the years, the ICC Banking (ISBP 821) reflects the existing
Transferable credits and
Commission has become a assignment of proceeds practice. It has evolved into
leading global rule-making
body for the banking industry,
producing universally accepted
rules and guidelines for
international banking practice.
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Financial crime
By making available to their
clients an array of trade finance
products designed to facilitate
international trade, banks have
become accustomed to the
need for practical tools and
processes that manage and
mitigate operational and
documentary risk. Fraud and,
to varying degrees, sanction
regulations have also required
close monitoring with the
inherent creation of specific
practices, processes, and
technological aids.
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Everything you need to know about Letters of Credit
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Everything you need to know about Letters of Credit
Owing to a resurgence in
using sanctions clauses in
documentary credits, the ICC
addressed this issue again and
released an addendum to the
guidance paper in May 2020.
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Ensuring credit-compliant
7 presentations of documents
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Everything you need to know about Letters of Credit
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Handling document
8 discrepancies
In documentary credit
operations, advising document
discrepancies is the most
contentious issue a bank
will face with its clients or
another bank. It is, therefore,
imperative that the respective
discrepancies are of such detail
that the presenter is in no doubt
about the reason for the refusal.
A beneficiary should always
seek clarification if a bank
is unclear in its rejection of
presented documents.
Whether or not a bank refuses Clarity is the key. A bank that Pre-requisites
documents is based on the provides a refusal notice stating
content of the documents “Invoice not as per LC” tells the A covering schedule
themselves and their beneficiary or the applicant accompanying the documents
conformity to the documentary nothing. Is the goods should include the presenter's
credit and UCP. Ultimately, any description wrong? Is a required reference number and contact
discrepancy should stand certification missing? Is there details in case of any problems.
one test: “Would you feel some other specific issue?
comfortable justifying that A refusal notice must be of It should also include
discrepancy before a judge in sufficient detail and clarity for information on how and where
a court of law?” Remember, at the presenter of the documents to make payment, reference
the end of the day, a court will to understand it without to payment of charges, and
make the final judgement if having a copy of the actual details of where and how to
the parties cannot amicably documentary credit in front send the settlement advice.
resolve a dispute. of them.
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Everything you need to know about Letters of Credit
The UCP 600 does not expect Approaching the applicant for
banks to need the full five a waiver can give rise to five
banking days to examine different results:
documents, although certain
circumstances may exist when 1 The applicant agrees to
this is the case. Competition waive, and the issuing
between banks for business bank accepts the waiver.
typically ensures that most Issuing bank honours.
presentations are reviewed
within 48 hours, if not on the 2 The applicant agrees to
day of receipt. waive, but the issuing bank
does not agree to accept
the waiver. The issuing
Obligations of a bank bank issues a refusal
notice indicating it is
A nominated bank that has returning the documents or
agreed to act on its nomination, seeking further instructions
a confirming bank, or an issuing for their disposal or
bank must determine whether handling.
the documents are compliant.
Each bank must decide whether 3 The applicant does not
or not to issue a refusal notice agree to waive, and the
based on its examination of the issuing bank issues a
documents. However, it does refusal notice indicating it
not always follow that a bank is returning the documents
that identifies a discrepancy or seeking further
will refuse the documents. instructions for their
disposal or handling.
The bank may not consider
a discrepancy to warrant a 4 The applicant has not
UCP 600 allows banks a refusal. One example of a minor provided its waiver of
maximum of five banking days difference would be if the discrepancies within the
following the presentation day documentary credit required time allowed by the UCP
to determine if a presentation six document copies, but a 600 (which can be no later
is complying. It is important presenter only provided five. than the close of the 5th
to note that, in most In this case, the bank may opt banking day following the
circumstances, documents will to make the additional copy day of presentation unless
be examined by the nominated itself rather than refuse the the credit says otherwise),
or confirming bank and the documents. so the issuing bank refuses
issuing bank. Each bank has a the documents.
maximum of five banking days In respect of an issuing bank, it
to examine the documents. must decide whether or not to
approach the applicant for
a waiver of discrepancies.
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Issues for
a beneficiary
to consider
Through this process, there
are several issues for the Options in the event of In respect of point 3, the use of
terms such as “on a collection
beneficiary to consider. discrepancies basis” and “in trust”, are
For example, can it be sure that
acceptable between the
the documents are discrepant? If there are discrepancies, three beneficiary and the nominated
Has the bank missed a options exist: bank, BUT SHOULD NOT be used
condition in the documentary
in any communications to the
credit? Has data been inserted
1 Correct the discrepancies issuing bank, as they imply
on a document but not seen?
by either amending the that the rules for documentary
documents or by collections are to be applied
Beneficiaries must be aware
replacement, rather than the rules for
of the content of the UCP 600,
documentary credits.
particularly articles 3, 14,
2 Request that the
and 17-32, together with the
nominated bank or Remember that the respective
practices outlined in the
confirming bank sends parties could avoid or resolve
ISBP. The ISBP is a publication
a message to the issuing many discrepancies through
which, by title, refers to the
bank seeking approval careful attention to detail in
examination of documents
to honour or negotiate the documentary credit or
by banks and how they should
despite the discrepancies amendment application.
apply the articles of UCP 600
that they have found whilst Handled correctly, preparing
to given documents.
holding the documents and examining documents is
with them or valuable to the beneficiary,
Using reverse logic, if a
the applicant, and the industry.
beneficiary understands
3 Request that the
how a bank will examine its
nominated or confirming
documents, it should be able to
bank forward the
prepare them to that standard
documents to the issuing
and avoid many problems.
bank for settlement.
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Everything you need to know about Letters of Credit
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9 Dispute resolution
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Everything you need to know about Letters of Credit
An arbitration or mediation
ICC DOCDEX service is far more likely to
occur in disputes between a
The purpose of DOCDEX is to buyer and seller relating to a
provide parties with a specific contract of sale than a dispute
dispute resolution procedure concerning the status of
that leads to an independent, documents under a
impartial, and prompt expert documentary credit and the
decision in settling disputes. UCP.
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The UCP 600, while being This is all too apparent when
invaluable in a paper world, looking at evolving technology
is not to be intended to be and digital trade finance, with
applied to transactions the advent of the Internet of
involving electronic documents. Things (IoT), Distributed Ledger
Over time, traditional trade Technology (DLT), Smart
instruments will inevitably move Contracts, Artificial Intelligence
towards a mixed ecosystem (AI), Machine Learning, and
of paper and digital and, Optical Character Recognition
ultimately, to electronic (OCR).
records alone.
The ICC will continually monitor
With this in mind, the ICC the content of the eUCP to
published the eUCP Version 1.0 ensure applicability, with these
in 2002 to address the rules providing many benefits
presentation of electronic in advancing documentary
records under documentary credits in a digital environment
credits. They issued an update and ensuring the continued
in 2007 known as Version 1.1. To relevance of this valuable
bring the rules in line with the instrument in mitigating trade
changes in terminology in UCP risk. They have also produced
600, the ICC published Version several guides regarding the
2.0 in 2019. Version 2.0 provides eUCP, including guidance for
a complete update of the rules buyers and sellers in handling
to ensure ongoing “e- documentary credits subject
compliance”. to the rules.
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Everything you need to know about Letters of Credit
It is essential to consider
the implications of the eUCP
when issuing a documentary
credit that will provide for
the presentation of electronic
records solely or in combination
with traditional paper
documents. Not doing so
could negate many benefits.
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About BAFT
BAFT, the leading global financial services association for
international transaction banking, helps bridge solutions
across financial institutions, service providers and the
regulatory community that promote sound financial practices
enabling innovation, efficiency, and commercial growth.
BAFT engages on a wide range of topics affecting transaction
banking, including trade finance, payments, and compliance.
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About the BAFT
Letter of Credit Committee
The BAFT Letters of Credit working group is composed of
members of the BAFT Commercial Letters of Credit Committee.
The Committee focuses on issues and responds to questions that
directly impact the processing environment related to commercial
letters of credit. The committee provides comments on various ICC
rules, practices, and queries related to commercial letters of credit
operations.
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