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UNIVERSITY OF THE PUNJAB

Hailey College of Banking and Finance

Submitted to:
Mr. Riaz Ahmed Mian

Submitted by:
Wassaf Ali M15BBA008
Agha Muzahir Ali M15BBA010
Talha Rehman M15BBA018

BBA Hons. (B&F) 5th Semester (2015-2019)

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Sr.No. Contents Page No.

1 Documentary Credit ( Introduction) 4
2 History of Documentary Credit 5
3 Why use the Letter of Credit 7
4 Types of Letter of Credit 7
5 Parties Involved in a letter of Credit 10
Transaction
6 Characteristics of Letter of Credit 11
7 Advantages for Buyer and Seller 11
8 Tips for Exporters and Importers 12
9 Mechanism of Letter of Credit 13
10 UCP( General principles of UCP) 15
11 Documents most frequently used in letters 16
of credit transactions
12 Transport Documents 16
13 Insurance Documents 16
14 Financial Documents 17
15 Commercial Documents 17
16 Official Documents 17
17 Draft 20
18 Commercial Invoice 21
19 Incoterms 21
20 Specimen of Commercial Invoice 23
21 Packing List and Weight List 29
22 Documents usually required under a letter 32
of credit
23 Checklist 32
24 Bill of Lading 32
25 Specimen Bill of Lading 37
26 Bill of Exchange 39
27 Certificate of Origin 41
28 Specimen Certificate of Origin 44
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29 Inspection Certificate 48
30 Steps in an Export Letter of Credit 53
transaction
31 Specimen Draft/ Bill of Exchange 54
32 What to do if Documents are Dishonored? 54
33 What is Weboc system? 55
34 Risks covered by LC insurance 55
35 Risks associated with international 58
payment methods
36 Risk Assessment 60
37 Assessment of LC limit 61
38 Specimen of letter of Credit 63
39 Communication Through SWIFT. 65
What is SWIFT?
40 Who should pay bank charges in a letter 67
of credit transaction?
41 What are the main LC fees that Exporters 68

have to pay?
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Documentary Credit
International trade procedure in which the credit worthiness of an importer is substituted
by the guaranty of a bank for a specific transaction. Under documentary credit
arrangement (also called letter of credit arrangement) a bank (usually in the importer's
country) undertakes to pay for a shipment, provided the exporter submits the required
documents (such as a clean bill of lading, certificate of insurance, certificate of origin)
within a specified period. In the US this arrangement is called 'commercial letter of
credit.'

 Letters of credit (LCs)

These are among the most secure instruments available to international traders. An LC is
a commitment by a bank on behalf of the buyer that payment will be made to the
beneficiary (exporter) provided that the terms and conditions have been met, as verified
through the presentation of all required documents. The buyer pays its bank to render this
service. An LC is useful when reliable credit information about a foreign buyer is
difficult to obtain, but you are satisfied with the creditworthiness of your buyer’s foreign
bank. This method also protects the buyer, since no payment obligation arises until the
documents proving that the goods have been shipped or delivered as promised are
presented. However, since LCs have many opportunities for discrepancies, they should be
prepared by well-trained documenters or the function may need to be outsourced.
Discrepant documents, literally not having an “I-dotted and T-crossed,” can negate
payment.

If the Letter of Credit is issued in course of international trade

– The Letter of Credit should comply with FEMA regulations,
– And are also subject to provisions of Uniform Customs and Practices for
Documentary Credit (UCPDC) framed by International Chamber of Commerce (ICC)
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History:

 Understanding the nature of letters of credit as an international financial device and the
reason why they have become widely used by merchants all over the world requires us to
find out its historical origins.
 Some scholars believe that the origins of letters of credit go back to ancient Egypt and
Babylon, which had an adequate system of banking. A clay promissory note of Babylon
dating from 3000 B.C., is exhibited in the University Museum of Philadelphia, USA,
which provided for repayment of an amount and the interest on a specific date.

Another discovery is an evidence of an obligation made in 248 B.C. in Egypt “for
the repayment, in wheat, or upon default double its value, of a loan of money from one
Zenon, which ends with ‘and the right of execution shall rest with Zenon and the person
bearing the note on behalf of Zenon". It is also verified that banks of ancient Greece
prepared letters of credit “on correspondents with the view to obviating the actual
transport of specie in payment of accounts”.

 With the collapse of the Roman Empire the role of the banks as well as the great extent of
commerce between trading nations diminished. It was not until the 12th and early 13th
century that banks in Genoa, Venice, Florence and other European cities were re-
established. At this time merchants had to face two major problems:

(a) Travelling with gold was very dangerous; and
(b) commerce generated currency that was not sufficient to satisfy the needs of traders.

 The earliest devices with which merchants tried to solve these problems were with the
bills of exchange and letters of credit. In their early history these payment instruments
operated in a very similar way, and letters of credit were used to supplement the bills of
exchange. There are scholars who believe that their development in Europe was inspired
by the discoveries made by Marco Polo in the 13th century who reported the use of
currency and other negotiable documents in China, concluding that such a measure was
one of the reasons for “the ways and means by which the Great Chan can have and
indeed does have more treasures than all the kings in the world”.

 In any case, it was impossible to conduct commerce via caravan without some sorts of
documentary letters. To explain their early operation Professor Dolan gives the following
example:

 “… a Florentine merchant who bought wool from an Amsterdam merchant could issue a
bill of exchange to the Dutch merchant’s agent in Florence directing a third party (the
drawee) to pay the sum due for the wool. The agent, having taken the bill in payment for
the wool, could travel across Europe or by sea to a commercial center, where he would
meet the drawee and ask the drawee for payment. The drawee would pay the draft either

(1) in gold (though such payment would be rare);
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(2) by “clearing”, that is, by setting the draft off against sums due from the Dutch
merchant on other drafts; or
(3) by accepting the draft and returning it to the agent.

In the third case, the holder had a readily marketable instrument, which he could use to
trade or which he could take with him to other commercial centers. He could do so
armed with the knowledge that such “currency”, while valuable to merchants, was of
little value to the brigands who stalked the highways and the pirates who sailed the seas.
It did not take long for some enterprising merchant, whose paper was suspect, and,
therefore, subject to heavy discount or to outright rejection in the trade, to strengthen his
bills by obtaining the drawee’s announcement that he, the drawee, would pay or accept
the bills. The announcement was a letter of credit.”
 De Roover also refers to letters of credit used by the Medici Bank in Bruges and in Italy
between 1385 and 1401. The various provisions of the letters are strikingly similar to
those of the modern letters of credit. They stated for example that

(a) payments are to be made as requested by a named beneficiary
(b) the payments could not exceed a specific sum
(c) the payor shall obtain receipts from the beneficiary
(d) the payment shall be charged to the account of the issuer with the payor; or
(e) upon receipt of a written notice from the payor that the amount has been paid, the
issuer shall credit the payor’s account accordingly.

By the 17th century letters of credits were common financial instruments both in the
European continent and in England. At this time, they functioned more like a traveler’s
cheque.

 By the 19th century British banks had a virtual monopoly on the issuance of letters of
credits. This was due to the fact that in world trade the Pound Sterling was the most
accepted currency and the bankers of London gained a pre-eminent position in the field
of international finance.

 In the United States letters of credit emerged from the “competition of factorage houses
for business, which led to the issuance of promises to accept drafts against shipments”.
The growing number of manufacturers and their relationships with foreign traders, the
specialization of banking activities and the technological development such as the more
frequent use of telegraph for communicating the terms of the contracts facilitated the
increasing use of letters of credit.

 On the other hand, letters of credit were not used exclusively by merchants. The outbreak
of World War I broke the well-established and trusted trading links that had existed
between the merchants worldwide. In order to keep on trading, merchants were forced to
create new links with firms often unknown or not trusted. These circumstances were
favorable for the extensive use of letters of credit which invited a trustworthy paymaster,
a bank, into the merchants’ relationship. By the 1950s letters of credit had earned a
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predominant position in domestic commerce of the United States and were also widely
used in international transactions.

 Since World War II the use of letters of credit in world trade remains steadfast. Although
from time to time the emergence of alternative means of trade finance overshadows the
use of the letter of credit, it has “proven to be a flexible instrument, which can be readily
attempted to the needs of changing conditions in international trade”. In a world of
shrinking distances and increasing trade there will be a continuing need for such a highly
reliable and flexible means of payment and financing.

Why use a letter of credit?

Letters of credit are most commonly used when a buyer in one country purchases goods from a

seller in another country. The seller may ask the buyer to provide a letter of credit to guarantee
payment for the goods.

The main advantage of using a letter of credit is that it can give security to both the seller and the
buyer.

Types of letter of credit

 Irrevocable LC: This LC cannot be cancelled or modified without consent of the

beneficiary (Seller). This LC reflects absolute liability of the Bank (issuer) to the other
party.

 Revocable LC: This LC type can be cancelled or modified by the Bank (issuer) at the
customer's instructions without prior agreement of the beneficiary (Seller). The Bank will
not have any liabilities to the beneficiary after revocation of the LC.

Stand-by LC: This LC is closer to the bank guarantee and gives more flexible
collaboration opportunity to Seller and Buyer. The Bank will honor the LC when the
Buyer fails to fulfill payment liabilities to Seller. Standby letter of credit is the one which
is opened for non-performance of some activity it is very much similar in nature to a bank
guarantee. The main objective of issuing such a credit is to secure bank loans.Unlike a
traditional letter of credit where the beneficiary obtains payment against documents
evidencing performance, the standby letter of credit allow a beneficiary to obtains
payment from a bank even when the applicant for the credit has failed to perform as per
the terms. Standby LC is payable only in case where an event had occurred but
performance for the event has not happened.
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An example of this could be a construction of a bridge. An agreement would be in place

between the applicant and the beneficiary that in case after construction of the bridge, if
the payment is not made for the
services rendered, a claim would be made under the Standby LC.
• A standby letter of credit is subject to "Uniform Customs and Practice for
Documentary Credit" (UCP), International Chamber of Commerce
Publication No 500, 1993 Revision, or "International Standby Practices"
(ISP), International Chamber of Commerce Publication No 590, 1998.

 Confirmed LC: In addition to the Bank guarantee of the LC issuer, this LC type is
confirmed by the Seller's bank or any other bank. Irrespective to the payment by the Bank
issuing the LC (issuer), the Bank confirming the LC is liable for performance of
obligations.

 Unconfirmed LC. Only the Bank issuing the LC will be liable for payment of this LC.

 Transferable LC. This LC enables the Seller to assign part of the letter of credit to other
party(ies). This LC is especially beneficial in those cases when the Seller is not a sole
manufacturer of the goods and purchases some parts from other parties, as it eliminates
the necessity of opening several LC's for other parties.

 Back-to-Back LC. This LC type considers issuing the second LC on the basis of the first
letter of credit. LC is opened in favor of intermediary as per the Buyer's instructions and
on the basis of this LC and instructions of the intermediary a new LC is opened in favor
of Seller of the goods.

 Payment at Sight LC. According to this LC, payment is made to the seller immediately
(maximum within 7 days) after the required documents have been submitted.

 Deferred Payment LC. According to this LC the payment to the seller is not made when
the documents are submitted, but instead at a later period defined in the letter of credit. In
most cases the payment in favor of Seller under this LC is made upon receipt of goods by
the Buyer.

 Red Clause LC. The seller can request an advance for an agreed amount of the LC
before shipment of goods and submittal of required documents. This red clause is so
termed because it is usually printed in red on the document to draw attention to "advance
payment" term of the credit.

 Revolving Letter of Credit:

Single L/C that covers multiple-shipments over a long period. Instead of arranging a new
L/C for each separate shipment, – the buyer establishes a L/C that revolves either in
value (a fixed amount is available which is replenished when exhausted) or in time (an
amount is
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available in fixed installments over a period such as week, month, or This type of LC is
used when the buyer needs shipments of the same commodity at specified intervals e.g.
monthly. It may revolve automatically or subject to certain conditions.

Example 1: Supply of coal to the iron industry is an ongoing material and therefore as
and when the goods are delivered, documents are submitted and payment is made.
For the next supply of coal, there is no new LC that is issued, rather the existing one is
"Reinstated" (bring back into use again) to the original amount. Assume that the supplier
and the buyer agrees that 200MT of coal would be delivered on a monthly basis for 12
months. The value of the LC for 200MT of coal is Rs 12 lakhs . Every month 200MT of
coal will be shipped and documents for Rs 12 lakhs would be submitted for payment.
Once it get's paid in the first month, the LC amount is automatically reinstated to Rs 12
lakhs for the next month's payment.

Revolving L/Cs can be either cumulative or non-cumulative.

Under a cumulative resolving L/C, the exporter is allowed to carry over any amounts
not drawn in previous periods. For example, if a revolving L/C is issued for US$100,000
monthly, cumulative, and the exporter draws only USD80,000 in one
month, the unutilized amount (i.e. USD20,000) may be carried over to next month. That
means the sum of US $120,000 becomes available the next month.

Whereas under a non-cumulative revolving L/C, any amount not drawn during
a given period may not be available for drawing in next period. As in the above
example, the unutilized amount of USD20,000 can not be carried over and
added to the amount of next shipments, that means the exporter can draw
only US$100,000 in each succeeding month.
Clean Letters of Credit:
Below two different definitions of clean letters of credit are given.

A letter of credit payable upon presentation of the draft, without any supporting

document being required.(www.businessdictionary.com)

L/C that does not require any document other than a written demand for payment by its

beneficiary. In effect, a draft.(www.intracen.org)

Clean letters of credit are issued only by the request of the highest credit standing

companies. It is suitable for variety commercial situations where no movement of goods

is expected. Historically these types of credits have been used in traveler's letters of
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credit. Today direct pay standby letter of credit can be given as an example of clean

letters of credit.

There are also some other form of letters of credits which deserve special attention. We

will discuss them by one by more in detail however; you can find short description of

each of them below.

PARTIES INVOLVED IN A
LETTER OF CREDIT TRANSACTION

 In order to help the reader, understand the steps taken in a letter of credit transaction, the
following
 is a brief description of the parties most commonly involved in letters of credit.

 Accepting Bank The bank named in a letter of credit on whom term drafts are drawn and
 who indicates acceptance of the draft by dating and signing across its face,
 thereby incurring a legal obligation to pay the amount of the draft at
 maturity.

 Advising Bank A branch or correspondent bank at or near the domicile of the beneficiary
to which the issuing bank either sends the letter of credit, or a notification that a letter of
credit has been issued, with instructions to notify the beneficiary. The advising bank
advises the beneficiary of the letter of credit without engagement.

 Applicant: The buyer or the party who requests the letter of credit to be issued.

 Beneficiary: The seller or the party to whom the letter of credit is addressed.
 Confirming Bank: A bank usually in the country of the beneficiary which, at the request
of the
 issuing bank, joins that bank in undertaking to honor drawings made by
 the beneficiary, provided the terms and conditions of the letter of credit
have been complied with. A beneficiary can in no case avail itself of the contractual relationships
existing between banks or between the applicant and the issuing bank.

 Discounting Bank: A bank which discounts a draft for the beneficiary after it has been
accepted
by an accepting bank.

 Drawee Bank: The bank named in the letter of credit on whom drafts are to be drawn.

 Drawer: The beneficiary of the letter of credit who will draw the draft in accordance
 with the terms of the letter of credit.
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 Issuing Bank: The bank which opens a letter of credit on behalf of the applicant and
forwards it to the advising bank for delivery to the beneficiary. An issuing bank should
discourage any attempt by the applicant to include, as an integral part of the
credit, copies of the underlying contract, proforma invoice and the like.

Characteristics of a Letter of Credit

Applicability
Recommended for use in new or less-established trade relationships when you are satisfied with
the creditworthiness of the buyer’s bank.
Risk
Risk is evenly spread between seller and buyer provided all terms and conditions are adhered to.
Pros
• Payment after shipment
• A variety of payment, financing and risk mitigation options
Cons
• Process is complex and labor intensive
• Relatively expensive in terms of transaction costs

 Advantages:
 Letter of credit advantages for the seller
 The seller has the obligation of buyer's banks to pay for the shipped goods;
 Reducing the production risk, if the buyer cancels or changes his order
 The opportunity to get financing in the period between the shipment of the goods and
receipt of payment (especially, in case of deferred payment).
 The seller is able to calculate the payment date for the goods.
 The buyer will not be able to refuse to pay due to a complaint about the goods
 Letter of credit advantages for the buyer
 The bank will pay the seller for the goods, on condition that the latter presents to the bank
the determined documents in line with the terms of the letter of credit;
 The buyer can control the time period for shipping of the goods;
 By a letter of credit, the buyer demonstrates his solvency;
 In the case of issuing a letter of credit providing for delayed payment, the seller grants a
credit to the buyer.
 Providing a letter of credit allows the buyer to avoid or reduce pre-payment.

 Tips for Exporters

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• Consult with your bank before the importer applies for an LC.
• Consider whether a confirmed LC is needed.
• Negotiate with the importer and agree upon detailed terms to be incorporated
into the LC.
• Determine if all LC terms can be compiled within the prescribed time limits.
• Ensure that all the documents are consistent with the terms and conditions of
the LC.
• Beware of many discrepancy opportunities that may cause nonpayment or delayed
payment.

 To the Exporter/Seller
 Letters of credit open doors to international trade by providing a secure mechanism for
payment upon
 fulfilment of contractual obligations.
 A bank is substituted for the buyer as the source of payment for goods or services
exported.
 The issuing bank undertakes to make payment, provided all the terms and conditions
stipulated in the
 letter of credit is complied with.
 Financing opportunities, such as pre-shipment finance secured by a letter of credit and/or
discounting of
 accepted drafts drawn under letters of credit, are available in many countries.
 Bank expertise is made available to help complete trade transactions successfully.
 Payment for the goods shipped can be remitted to your own bank or a bank of your
choice.

To the Importer/Buyer
 Payment will only be made to the seller when the terms and conditions of the letter of
credit are complied
 with.
 The importer can control the shipping dates for the goods being purchased.
 Cash resources are not tied up.

Mechanism of Letter of Credit:

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Step 1.
• The seller and the buyer enters into a sales contract where buyer agrees to purchase goods from
the seller. This agreement may be a purchase order, an accepted pro-forma invoice, a formal
contract, as to how and when goods are to be shipped and insured, and how and when payment is
to be affected. In this case they agree that letter of credit will be used as the mechanism of
payment.

Step 2.
• The buyer applies to his bank for a letter of credit in favor of the seller (beneficiary), signing
the
bank’s letter of credit application/agreement form specifying the terms and condition under
which
the Letter of Credit shall be issued.
Step 3.
• After approving the application, the issuing bank issues the actual letter of credit instrument
and
sends it to the beneficiary (the seller), thus undertaking the definite obligation of effecting
payment
to the beneficiary upon presentation of documents, strictly complying with the terms and
condition
of the credit.
Note: There are 3 separate contracts in a letter of credit transaction:
a) The contract of sale
b) The L/C application/agreement
c) The L/C itself.
Step 4.
• As soon as the seller receives Letter of Credit (issuing bank’s assurance of payment), the seller
ships
the goods to the buyer provided the terms of credit meets the terms of underlying sales contract.
Step 5 & 6.
• The seller prepares the documents called for in the letter of credit and presents them to the
Issuing
bank. The issuing bank examines the documents whether they strictly comply with the terms of
letter of credit. If the documents meet the requirement the issuing bank pays the beneficiary
(seller) in the manner stipulated under the credit.
Step 7 & 8.
• The issuing bank sends the documents to the buyer (applicant) and obtains payment in
accordance
with the terms of the applicant’s letter of credit agreement (usually by debit to the applicant’s
account)
Step 9
• On receiving the documents from bank, the applicant (buyer) is in a position to pick up the
merchandise from the carrier, completing the letter of credit cycle.
How standby l/c works:
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Step 1.
• Two parties enter into a contract that calls for one party to arrange a letter of credit in favor
of the
other. With a standby letter of credit, the agreement is that the L/C will not be drawn unless
the
applicant defaults on the contract. Standby letters of credit can be used as bid
bonds, performance bonds, advance payment guarantees, and for many other purposes.
Step 2.
• The first party applies to his bank for a letter of credit, signing the bank’s letter of credit
application/agreement form, and indicating what documents the beneficiary will be required to
present in order to be paid.
Step 3.
• After approving the application, the issuing bank issues the actual letter of credit instrument
and
sends it to the beneficiary (the seller), thus undertaking the definite obligation of effecting
payment to the beneficiary upon presentation of documents, strictly complying with the terms
and condition of the credit .

Note: There are 3 separate contracts in a letter of credit transaction:

a) The contract of sale
b) The L/C application/agreement
c) The L/C itself.
Step 4.
• Having received the issuing bank’s assurance that the applicant will perform (or the L/C can be
drawn), the beneficiary performs his end of the contract.
Step 5
• In the event the beneficiary feels the applicant has defaulted, he prepares the documents
called for
in the letter of credit and presents them to the issuing bank.

Step 6
• The issuing bank examines the documents. If it determines that the documents comply with
the
letter of credit, the issuing bank pays the beneficiary. Note that there is no inquiry into the
truth of
the documents and permission to pay is not sought from the applicant, who is likely to not want
the bank to pay and to insist he is not in default on the contract
Step 7 & 8
• The issuing bank obtains reimbursement for the payment from the applicant and forwards the
documents to the applicant
Step 9
• If the applicant feels the drawing was not justified, he can seek to get the funds returned
under the
terms of the contract.
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Uniform Customs and Practice for Documentary Credits (UCP)

 The Uniform Customs and Practice for Documentary Credits is an internationally agreed
upon set of rules for
 all parties involved in all types of letter of credit transactions. The rules, which were
adopted by the
 International Chamber of Commerce in Vienna in 1933, have been revised several times
and are used by banks
 in practically all countries.
 The Uniform Customs and Practice for Documentary Credits, currently applicable, is a
set of rules which, when
 not in contravention of local laws, are binding on the parties who have adopted them. The
authority of
 UCP lies in its universal acceptance which is acknowledged by a statement on the letter
of credit itself.
 All Scotiabank Documentary Letters of Credit are issued subject to UCP.
 Copies of the Uniform Customs and Practice for Documentary Credits are available upon
request from your
 nearest Scotiabank office.

General Principles of UCP

• Letters of credit are separate transactions from the sales or other contracts on
which they may be based,
 and banks are in no way involved with or bound by such contracts, even if reference to
them is included
 in the letter of credit.
• In letters of credit transactions, all parties deal with documents and not with the
underlying contracts to which the documents may relate.
• Before payment or acceptance of drafts is affected, banks bear the responsibility
for examining the documents to ensure that they appear on their face to be in
accordance with the terms and conditions of the letter of credit.
• Banks bear no responsibility for: the form or genuineness of documents; for the
goods described in the documents; or the performance of the seller of the goods.
 There is no limit to the number and variety of documents which letters of credit may
stipulate. The following is a list of documents most commonly seen in a letter of credit
transaction. Each document is described in brief with a check-list for preparing the
document.
 As already stated, the beneficiary should, on first being advised of the letter of credit,
examine it carefully and be satisfied that all the documentary requirements can be
complied with. Unless the documentary requirements can be strictly complied with, the
beneficiary may not receive payment from the issuing bank.
 If there are any requirements that cannot be complied with, the beneficiary should
immediately request the applicant to arrange for an appropriate amendment to the letter
of credit.

Documents most frequently used in letters of credit transactions

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Transport Documents:

 Transport Paper Covering at Least Two Different Modes of Transport (multimodal or

combined transport document)

 Negotiable FIATA Multimodal Transport Bill of Lading

 Bill of Lading

 Non-Negotiable Sea Waybill

 Charter Party Bill of Lading

 Air Transport Document

 Road Transport Document, Rail Transport Documents or Inland Waterway Transport

Documents

Insurance Documents:

 Insurance Policy

 Insurance Certificate

 Open Cover

Financial Documents:

 Bill of exchange (Draft)

Commercial Documents:

 Proforma Invoice, International Sale Contract

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 Commercial Invoice

 Packing List; Weight List

 Inspection Certificate

 Certificate of Analysis

 Pre-Export Verification of Conformity (PVoC) Certificate

 Fiata Documents which are not considered as a transport document: FCR, FCT, FWR,

SDT

 Shipment Advice

Official Documents:

 Certificate of Origin

 Health Certificate

 Consular Invoice, Legalized Invoice

 What is Multimodal Transport Bills of Lading? How can we use a

combined transport document in a letter of credit transaction?

 Multimodal transport bill of lading and combined bill of lading are transport documents

covering transport by more than one mode of transport.

Definition and Usage :

On this page we will try to explain you "Multimodal Transport Bills of Lading" and "Combined

Transport Bills of Lading". Both multimodal bill of lading and combined bill of lading are

transport documents covering transport by more than one mode of transport. (No idea what

mode of transport means, please follow this link for detailed explanation. Keep reading...)
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Types of Transport Document Covering at Least Two Different Modes of Transport :

Multimodal Transport Bills of Lading : Multimodal Transport Bills of Lading are mostly

printed on International Federation of Freight Forwarders Associations (FIATA) standard pre-

printed bill of lading forms. Multimodal transport document defined on UNCTAD / ICC Rules

for Multimodal Transport Documents (ICC publication 481) as follows, a multimodal transport

document (MT document) means a document evidencing a multimodal transport contract and

which can be replaced by electronic data interchange messages insofar as permitted by

applicable law and be,

(a) issued in a negotiable form or,

(b) issued in a non-negotiable form indicating a named consignee.

Important Note : Multimodal Transport Bills of Lading and Combined Transport Bills of

Lading has the same meaning and application under letter of credit rules.

Through Bill of Lading : Through Bill of lading is virtually identical to the Multimodal

Transport Bill of lading but with one major difference. The Multimodal Transport Bill of Lading

is issued by the Multimodal Transport Operator (MTO) (generally the sea carrier) who takes

responsibility of the goods (e.g. shortages, losses, damages) during the entire period of

transport, thus not only for the sea passage but also for the other transport modes as well. The

Through Bill of Lading is issued by the sea carrier but the carrier states on the contract of

carriage that he is only responsible of the goods for that part of the carriage he takes care of, such

as the sea passage only. (source : www.maritimeknowhow.com )

Multimodal / Combined Bill of Lading in Letters of Credit Transactions :

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Transport Document Covering at Least Two Different Modes of Transport covered under article

19 UCP 600.

a. A transport document covering at least two different modes of transport (multimodal or

combined transport document), however named, must appear to:

i. indicate the name of the carrier and be signed by:

- the carrier or a named agent for or on behalf of the carrier, or - the master or a named

agent for or on behalf of the master.

ii. indicate that the goods have been dispatched, taken in charge or shipped on board at the

place stated in the credit.

iii. indicate the place of dispatch, taking in charge or shipment and the place of final

destination stated in the credit,

iv. be the sole original transport document or, if issued in more than one original, be the full

set as indicated on the transport document.

v. contain terms and conditions of carriage or make reference to another source containing the

terms and conditions of carriage (short form or blank back transport document).

vi. contain no indication that it is subject to a charter party. (source : UCP 600)

Special Hints on Transport Document Covering at Least Two Different Modes of

Transport from ISBP 2007 :

 20

 In all places where the term “multimodal transport document” is used within this

document, it also includes the term combined transport document. A document need not

be titled “Multimodal transport document” or “Combined transport document” to be

acceptable under UCP 600 article 19, even if such expressions are used in the credit.

 If a credit requires presentation of a transport document covering transportation utilizing

at least two modes of transport ... the transport document must not indicate that shipment

or dispatch has been effected by only one mode of transport.

Draft
 A draft is a bill of exchange and a legally enforceable instrument which may be regarded
as the formal
 evidence of debt under a letter of credit. Drafts drawn at sight are payable by the drawee
on presentation.
 Term (usance) drafts, after acceptance by the drawee, are payable on their indicated due
date.
 Checklist
• Drafts must show the name of the issuing bank and the number and date of the
letter of credit under
 which they are drawn.
• Drafts must be drawn and signed by the beneficiary of the letter of credit.
• The terms of the draft must be expressed in accordance with the tenor shown in
the letter of credit;
 e.g., at sight or at a stated number of days after bill of lading/shipment date.
• The amount in words and figures must agree and be within the available balance
of the letter of credit
 and in the same currency as the letter of credit.
• The amount must agree with the total amount of the invoices unless the letter of
credit stipulates that
 drafts are to be drawn for a given percentage of the invoice amount.

Commercial Invoice
 The commercial invoice is an itemized account issued by the beneficiary and addressed
to the applicant, and
 must be supplied in the number of copies specified in the letter of credit.
 Checklist
• The invoice description of the goods must be identical to that stipulated in the
letter of credit.
 21

• Unit prices and shipping terms, ie., CIF, FOB, etc., must be as stipulated in the
letter of credit. Extensions
and totals should be checked for arithmetical correctness.

Incoterms:
EXW (‘Ex Works’)
The seller makes the goods available to be collected at their premises and the buyer is
responsible for all other risks, transportation costs, taxes and duties from that point onwards.
This term is commonly used when quoting a price.
Example Goods are being picked up by the buyer from the seller’s premises in Birmingham. The
term used in the contract is ‘EXW Birmingham’.

FCA (‘Free Carrier’)

The seller gives the goods, cleared for export, to the buyer’s carrier at a specified place. The
buyer is then responsible for getting transported to the specified place of final delivery. This term
is commonly used for containers travelling by more than one mode of transport.

CPT (‘Carriage Paid To’)

The seller pays to transport the goods to the specified destination. Responsibility for the goods
transfers to the buyer when the seller passes them to the first carrier.

CIP (‘Carriage and Insurance Paid’)

The seller pays for insurance as well as transport to the specified destination. Responsibility for
the goods transfers to the buyer when the seller passes them to the first carrier.

CIP (‘Carriage and Insurance Paid’) is commonly used for goods being transported by
container by more than one mode of transport. If transporting only by sea, CIF is often used (see
below).

DAT (‘Delivered at Terminal’)

The seller pays for transport to a specified terminal at the agreed destination. The buyer is
responsible for the cost of importing the goods. The buyer takes responsibility once the goods are
unloaded at the terminal.

DAP (‘Delivered at Place’)

The seller pays for transport to the specified destination, but the buyer pays the cost of importing
the goods. The seller takes responsibility for the goods until they’re ready to be unloaded by the
buyer.
 22

DDP/DTP (‘Delivered Duty Paid’)

The seller is responsible for delivering the goods to the named destination in the buyer’s country,
including all costs involved.

FAS (‘Free Alongside Ship’)

The seller puts the goods alongside the ship at the specified port they’re going to be shipped
from. The seller must get the goods ready for export, but the buyer is responsible for the cost and
risk involved in loading them.
This term is commonly used for heavy-lift or bulk cargo (e.g. generators, boats), but not for
goods transported in containers by more than one mode of transport (FCA is usually used for
this).

FOB (‘Free on Board’)

The seller must get the goods ready for export and load them onto the specified ship. The buyer
and seller share the costs and risks when the goods are on board. This term is not used for goods
transported in containers by more than one mode of transport (FCA is usually used for this).

CFR (‘Cost and Freight’)

The seller must pay the costs of bringing the goods to the specified port. The buyer is responsible
for risks when the goods are loaded onto the ship.

CIF (‘Cost, Insurance and Freight’)

The seller must pay the costs of bringing the goods to the specified port. They also pay for
insurance. The buyer is responsible for risks when the goods are loaded onto the ship.

COMMERCIAL INVOICE SHOULD BE COMPLETED FOR DELIVERY OF

COMMERCIAL GOODS (FOR SALE)
PRINT COMMERCIAL INVOICE ON CONSIGNORS LETTERHEAD SHOWING
LEGAL ADDRESS
ORIGINAL COMMERCIAL INVOICE SHOULD BE SUBMITTED (NOT A
COPY)
 23

ALL GREY FIELDS MUST BE COMPLETED

COMMERCIAL INVOICE
Invoice No Insert Invoice number
Date Insert date of Invoice

Invoice Address (no private individuals): Delivery terms (Incoterms)

Put legal address and name of CNEE company in Put delivery terms (Incoterms) as per trade
accordance with registration docs of CNEE contract

Ship to (no private individuals): Delivered under:

Put delivery address of CNEE (where the Goods should
be delivered to after Clearance as per airwaybill)
Contact person:
First name and family name of contact person of CNEE
Put number and date of trade contract
Payment terms
Put terms of payment as per trade contract
(check that cnee is able to keep indicated
terms!)

Phone:
Phone number of contact person of CNEE for clearance
and delivery

Unit Total
No Country of Net
Description HS Code Qty (pieces) price, price,
item origin weight/kg
USD USD

1. PUT FULL PUT Indicate net Put HS code Indicate Insert Insert
DETAILED COUNTRY weight per of each item quantity per retail Total
DESCRIPTION OF ORIGIN each each value. retail
OF THE line/position line/position Attach value
proof of
 24

GOODS: NAME OF value:

MANUFACT e.g. 1)
URER pricelist
PURPOSE OF or 2)
USE; proof of
paymen
t or 3)
MATERIAL; export
declarat
ion copy
TRADE MARK; etc

model/part
number/serial
number/article/
technical
parameters/
chemical
composition

2.
Total
Total, USD goods
value

Insurance cost, USD: Put Insurance amount as per Insurance certificate

if Goods are insured;

Freight cost, USD: Put transportation cost amount (for Incoterms

DDU, CPT, CIP, CIF);

Total for payment, USD: Put total amount: total price, insurance amount (if
Goods insured), transportation cost
(transportation cost for DDU, CPT, CIP, CIF)
 25

Gross Weight, kg (total) : Put total gross weight of the shipment (should
match weight on airwaybill)

Signed by: Authorized representative of CNOR must put his

signature here and a stamp of CNOR's company
(if availalble)

Certified Commercial Invoice and Legalized Commercial Invoice

A certified commercial invoice is a commercial document, which is issued by the beneficiary of
the letter of credit and certified by the chamber of commerce. Legalized invoice, in addition to
chamber of commerce certification,contains a signature and stamp of an embassy.

Which countries require certified commercial invoice and legalized commercial invoices?

Generally Arab States located in the Middle East, such as Jordan, Yemen, Saudi Arabia, Egypt

etc., demand certified and legalized invoices during the import customs clearance operations.

Normally exporters should be getting the invoices certified and legalized.

What is the function of a certified commercial invoice or legalized invoice?

Certified and legalized invoices inherited from the 1970s and 1980s, where most underdeveloped

countries had been implementing high custom duties on imported goods in order to protect their

domestic manufacturers.

Later on almost all of these countries, which had been employing import substitution strategy,

shifted their directions towards open economic policies with significantly reduced custom tariffs.

By doing that the need for the certified or legalized invoices have been reduced considerably.

But these kind of documents generates revenue for the embassies and chambers of commerce.

As a result even today some countries still demand certified invoices or legalized invoices.
 26

Egypt Car Import Example

An importer has to pay 135% import tariff duty when importing a standard family car to Egypt.
(Please see picture on the left for details)

In order to pay less custom duties, importer companies who located in with high custom duties
countries, demand commercial invoice which shows only a portion of the actual sales amount.

In order to prevent such actions that cause custom tax losses, governments demand certified or
legalized invoices from the importers.
 27

What sort of information a certified invoice or legalized invoice should contain?

A certified or legalized invoice should contain all details that a standard commercial invoice

normally indicates, but in addition to this information a certified invoice should also contain the

signature and stamp from the respected chamber of commerce. If you get the certified invoice

signed and stamped by a respected embassy, then you will be having a legalized invoice.

Standard commercial Invoice

 Name and address of consignor ( seller, supplier company, exporter company)

 Name and address of the consignee ( buyer, importer company)

 Description of goods, quantity , net weights, gross weights,

 Shipping marks and numbers,

 Origin of goods

 Trade terms ( FOB Hamburg Port, Germany Incoterms 2010, CIF Los Angeles Port, USA

Incoterms 2010 etc.)

 Unit price, total amount, discounts or rebates,

 Freight cost and insurance cost if available (in case of CFR, CPT, CIF or CIP shipments)

 Name of the vessel, voyage number and date of shipment.

 If shipment is insured by the buyer shipper must note this fact on the invoice.

 The invoice should also contain a statement that the products being shipped are of ( xyz

country ) origin and that they are manufactured in the ( xyz country ).
 28

 If the products contain any foreign components then- besides the full name and address of

domestic manufacturer the full names and addresses or all the manufactures involved

must be given.

Certified commercial Invoice

 Certified commercial invoice usually bears the signature and stamp of the local chamber

of commerce. In some cases, letter of credit may indicate that the certificate of origin

must be certified by a special chamber of commerce such as one of the Arab Chambers of

Commerce resident in the exporting country.

Legalized commercial Invoice

 Generally three copies of the standard commercial invoice will be required during the

import clearence of the goods. In most cases, one original copy of the commercial invoice

needs to be legalized according to letter of credit conditions.

 Exporters have to make sure that the content of the standard invoice is correct and

complete as indicated above. ( Please keep in mind that invoice content for legalization

may change from one country to another. Double check the invoice content with the

respected embassy before submission)

 A responsible member of the exporting company should sign a statement that the invoice

is true and correct and contains the correct origin of the goods. (if required)

 The invoice must be legalized with a signature and stamp by the Consular Section at the

Embassy
 29

Packing List and Weight List:

What is packing list? What is weight list?

Packing list, is an international trade document, used to identify details of the shipment in terms

of packaging. Packing list normally should not disclose any financial information regarding the

shipment such as total amount of the cargo, unit price of the items or payments terms.

Content of the Packing List

Although there is no standard format exist for packing lists a packing list that will be used in an
international trade transaction should cover below points;

 Name of the Exporter, address and contact details. : "consignor"

 Name of the Importer, address and contact details : "consignee"

 Title of the document, packing list number, packing list date : "Packing List Date :

26.June.2012", "Packing List No : PL 26062012"

 Definition of goods : "Crushing and Screening Machine" etc...

 Delivery term : "FAS ANTWERP PORT, Incoterms 2010", "FOB PORT OF

SINGAPORE, Incoterms 2000" etc...

 Quantity : "10Mtons of "Titanium Dioxide Rutile"

 The type of package (such as pallet, box, crate, drum, carton, etc.)

 Total number of packages (such as pallets/boxes/crates/drums, etc.)

 The contents of each package

 The package markings, if any, as well as shipper's and buyer's reference numbers

 Reference to the associated commercial invoice such as the invoice number and date

 A purchase order number or similar reference to correspondence between the supplier

and importer
 30

 An indication of the carrier (sealine, airline, shipping line or road hauler)

 Reference to the transport document, bill of lading or air waybill number

 Reference to the vessel name, container number, truck plate number or air waybill

number according to mode of transport

 Signature and stamp (not required under letter of credit rules but it is asked by most of

the custom authorities and government institutions.)

Using a Packing List as a Weight List :

By adding details of the weight you can use a packing list as a weight list or weight certificate

without any problem. Which details should be added to the packing list to use it as a weight list

or weight certificate?

 Net Weight of the shipment

 Gross Weight of the shipment

 Weight of the each package (such as pallets/boxes/crates/drums, etc.)

Packing List or Weight List for Letters of Credit Transactions :

 Documents may be titled as called for in the credit, bear a similar title, or be untitled. For

example, a credit requirement for a “Packing List” may also be satisfied by a document

containing packing details whether titled “Packing Note”, “Packing and Weight List”,

etc., or an untitled document. The content of a document must appear to fulfil the

function of the required document.

 31

 Documents listed in a credit should be presented as separate documents. If a credit

requires a packing list and a weight list, such requirement will be satisfied by

presentation of two separate documents, or by presentation of two original copies of a

combined packing and weight list, provided such document states both packing and

weight details.

DOCUMENTS USUALLY REQUIRED

UNDER A LETTER OF CREDIT

 Checklist
• Consular invoices must be visaed (officially stamped) and signed by a consular
officer of the importing
 country and be supplied in the official form and number of copies as stipulated in the
letter of credit.
• All headings of the forms must be completed.
• The value of goods required must agree with that shown on the commercial
invoice.

 Bill of Lading
 8 Common Types of Bills of Lading by Transportation Mode
 Are you shipping your goods by sea, air, truck, or rail? The terms and types of bills of
lading differ with the mode of transportation.

Ocean Transportation
When goods are transported by ship, an ocean bill of lading is issued. Ocean freight to or
from the U.S. is regulated by the Federal Maritime Commission (FMC). Common types
of ocean bills of lading or releases are:

Non-Negotiable Sea Waybill

a. A non-negotiable sea waybill, however named, must appear to:
i. indicate the name of the carrier and be signed by:
- the carrier or a named agent for or on behalf of the carrier, or
- the master or a named agent for or on behalf of the master.
 32

Any signature by the carrier, master or agent must be identified as that of the carrier, master or
agent.
Any signature by an agent must indicate whether the agent has signed for or on behalf of the
carrier or for
or on behalf of the master.
ii. Indicate that the goods have been shipped on board a named vessel at the port of loading
stated in the
credit by:
- pre-printed wording, or
- an on board notation indicating the date on which the goods have been shipped on board.
The date of issuance of the non-negotiable sea waybill will be deemed to be the date of shipment
unless the
non-negotiable sea waybill contains an on board notation indicating the date of shipment, in
which case the
date stated in the on board notation will be deemed to be the date of shipment.
If the non-negotiable sea waybill contains the indication "intended vessel" or similar
qualification in relation
to the name of the vessel, an on board notation indicating the date of shipment and the name of
the actual
vessel is required.
iii. indicate shipment from the port of loading to the port of discharge stated in the credit.
If the non-negotiable sea waybill does not indicate the port of loading stated in the credit as the
port of
loading, or if it contains the indication "intended" or similar qualification in relation to the port
of loading, an
on board notation indicating the port of loading as stated in the credit, the date of shipment and
the name
of the vessel is required. This provision applies even when loading on board or shipment on a
named vessel
is indicated by pre-printed wording on the non-negotiable sea waybill.
iv. be the sole original non-negotiable sea waybill or, if issued in more than one original, be the
full set as
indicated on the non-negotiable sea waybill.
v. contains terms and conditions of carriage or make reference to another source containing the
terms and
conditions of carriage (short form or blank back non-negotiable sea waybill). Contents of terms
and
conditions of carriage will not be examined.
vi. contain no indication that it is subject to a charter party.
b. For the purpose of this article, transhipment means unloading from one vessel and reloading to
another
vessel during the carriage from the port of loading to the port of discharge stated in the credit.
c.
i. A non-negotiable sea waybill may indicate that the goods will or may be transhipped provided
that the
entire carriage is covered by one and the same non-negotiable sea waybill.
 33

ii. A non-negotiable sea waybill indicating that transhipment will or may take place is
acceptable, even if the
credit prohibits transhipment, if the goods have been shipped in a container, trailer or LASH
barge as
evidenced by the non-negotiable sea waybill.
d. Clauses in a non-negotiable sea waybill stating that the carrier reserves the right to tranship
will be
disregarded.

 A straight bill of lading: This is a non-negotiable form of the B/L which is addressed /
consigned directly to the buyer, with the buyer’s customs broker listed as a “Notify
Party.” In this case, the carrier will issue a set of three original Bills of Lading, one of
which must be endorsed by the consignee and presented in order to obtain the cargo at
destination. Typically, the straight bill of lading is issued if buyer still owes payment for
all or part of the goods.

 An “order” bill of lading: This is a negotiable form which is addressed “to order” or “to
order of [a party]” instead of being consigned to the buyer. The carrier will hand over the
shipment to whoever presents this bill of lading, as long as it is endorsed on the back. The
holder of the order bill of lading is assumed to be the owner of the goods being shipped.
The order bill of lading is commonly used when the purchase of goods is covered by a
letter of credit or if the goods are expected to be traded on a mercantile exchange while
the shipment is still in transit.

 The electronic “telex” release: An electronic “telex” release eliminates the need for an
original bill of lading to be presented at the destination for the release of the goods.
Instead, the shipper endorses an original bill of lading and submits it to the carrier’s agent
at the origin. The origin agent then notifies the agent at the destination in a simple
message that the goods may be released without the hard copy bill of lading present. In
the past, this notification was done by telex (hence the name), but today electronic
releases are done by email or via integrated system notes in carrier booking systems. This
is often used when a buyer still owes for all or part of the goods, but then pays before
cargo arrives.

 An express bill of lading: With this type of bill of lading, the carrier agrees to only
release the goods to the named consignee or notify party. It is a non-negotiable document,
and no original bills of lading are issued at all. The express bill of lading is frequently
used if the importer paid for the goods before shipping or has credit with the supplier. It
expedites the release of the goods upon arrival and saves on time and mail courier fees by
eliminating the need for a physical bill of lading to be presented.
 34

 Air Transportation
 Air waybills, or AWB, are issued when goods are transported by air. They are non-
negotiable, so once cargo arrives at the destination airport it is immediately handed over
to the consignee or their customs broker for customs clearance and final delivery. Air
waybills therefore serve only as:
 A contract of carriage
 A cargo receipt, i.e. the carrier has received the shipment
 Delivery instructions, if special handling is necessary
 However, if goods are shipped under a letter of credit or the shipper is using his bank to
collect payment for goods prior to release to the consignee, the air waybill may be
consigned to a bank. In such cases, the consignee must pay the bank, who in turn
provides a bank release to the airline to authorizing the carrier to release the goods. This
process typically takes several days during which the goods will sit at the airline
warehouse and possibly incur storage charges.

Air Transport Document

a. An air transport document, however named, must appear to:
i. indicate the name of the carrier and be signed by:
- the carrier, or
- a named agent for or on behalf of the carrier.
Any signature by the carrier or agent must be identified as that of the carrier or agent.
Any signature by an agent must indicate that the agent has signed for or on behalf of the carrier.
ii.indicate that the goods have been accepted for carriage.
iii. indicate the date of issuance. This date will be deemed to be the date of shipment unless the
air
transport document contains a specific notation of the actual date of shipment, in which case the
date stated
in the notation will be deemed to be the date of shipment.
Any other information appearing on the air transport document relative to the flight number and
date will
not be considered in determining the date of shipment.
iv. indicate the airport of departure and the airport of destination stated in the credit.
v. be the original for consignor or shipper, even if the credit stipulates a full set of originals.
vi. contain terms and conditions of carriage or make reference to another source containing the
terms and
conditions of carriage. Contents of terms and conditions of carriage will not be examined.
b. For the purpose of this article, transhipment means unloading from one aircraft and reloading
to another
aircraft during the carriage from the airport of departure to the airport of destination stated in the
credit.
c.
i. An air transport document may indicate that the goods will or may be transhipped, provided
that the
entire carriage is covered by one and the same air transport document.
 35

ii. An air transport document indicating that transhipment will or may take place is acceptable,
even if the
credit prohibits transhipment.

 Land Transportation Waybill

 A “Waybill” is widely used in North America for overland shipments. This is a short
form contract of carriage that usually refers only vaguely to terms and conditions in the
carrier’s tariff. Be sure to request them – you will want to know the limits of liability
under which your shipment moves. Just like an Air Waybill, a Waybill is never consigned
“to order” and is never negotiable. However, the shipment can be sent under “Collect on
Delivery” terms with an additional carrier’s handling fee to protect the interests of both
the buyer and the seller.

 Uniform Bill of Lading

This type of bill of lading is issued for overland shipments and is subject to “uniform” terms and
conditions with widely adopted transportation tariffs and/or contract carriage agreements. The
uniform bill of lading (aka uniform waybill), may be consigned “to order,” thereby becoming a
negotiable bill of lading – just like an ocean B/L. A uniform bill of lading is a long version of the
“Waybill,” and it includes the entirety of the terms and conditions, whereas the waybill only
nominally refers to the terms of conditions.
 36

Specimen Bill of Lading

Shipper : UROOJ ENTERPRISES Inv. # SE/487/2013

50- MODEL TOWN, Dtd : May, 18, 2013
LAHORE. Form “E” # 0 1 3 8 5 8 8
Allied Bank Limited
Dtd : May, 20, 2013
Consignee : TO THE ORDER OF
Minahil Fashion Ltd
Yorkshire Street
Ashton-Under-Lyne Lancs
United Kingdom
Notify Party : MINAHIL FASHIONS LTD.,
YORKSHIRE STREET,
ASHTON UNDER LYNE, LANCS.
UNITED KINGDOM.
Destination : Leicester Ware House Delivery – UNITED KINGDOM.

Shipping Mark. DESCRIPTION

 37

Size/Weight/QTY
Description
2313 CARTONS, CONTAINING 56083 N. Weight
Carton # PIECES OF ;
Kgs.
1 To 900 KNITTED DYIED & WHITE
HOSIERY GARMENTS.
G. Weight
Kgs.

Sea Freight Pre-Paid

UK Haulage Pre-paid
Destination THC Prepaid

 Hand Tag
The hand tag is typically used when a truck driver shows up at a shipping dock or door
for cargo pickup and fills in a form by hand – hence its name. This is a short form
contract, with only a brief note of certain terms and conditions. Despite its casual nature,
it is still covered by the carrier’s liability limit and refers to the carrier’s underlying tariff.
Because of its convenience, the hand tag is frequently used in the air freight and local
carriage business by courier services and other electronically dispatched trucks that are
hired to pick up cargo from shippers who did not prepare a uniform waybill for the driver
to sign as a cargo receipt.

 Insurance Policy or Certificate

 a. An insurance document, such as an insurance policy, an insurance certificate or a
declaration under an open cover, must appear to be issued and signed by an insurance
company, an underwriter or their agents or their proxies.
 Any signature by an agent or proxy must indicate whether the agent or proxy has signed
for or on behalf of the insurance company or underwriter.

 b. When the insurance document indicates that it has been issued in more than one
original, all originals must be presented.

 c. Cover notes will not be accepted.

 d. An insurance policy is acceptable in lieu of an insurance certificate or a declaration
under an open cover.

 e. The date of the insurance document must be no later than the date of shipment, unless
it appears from the insurance document that the cover is effective from a date not later
than the date of shipment.
 38

 i.The insurance document must indicate the amount of insurance coverage and be in the
same currency as the credit.

 ii. A requirement in the credit for insurance coverage to be for a percentage of the value
of the goods, of the invoice value or similar is deemed to be the minimum amount of
coverage required.
 If there is no indication in the credit of the insurance coverage required, the amount of
insurance coverage must be at least 110% of the CIF or CIP value of the goods.
 When the CIF or CIP value cannot be determined from the documents, the amount of
insurance coverage must be calculated on the basis of the amount for which honour or
negotiation is requested or the gross value of the goods as shown on the invoice,
whichever is greater.

 iii. The insurance document must indicate that risks are covered at least between the
place of taking in charge or shipment and the place of discharge or final destination as
stated in the credit.
 g. A credit should state the type of insurance required and, if any, the additional risks to
be covered. An insurance document will be accepted without regard to any risks that are
not covered if the credit uses imprecise terms such as "usual risks" or "customary risks".
 h. When a credit requires insurance against "all risks" and an insurance document is
presented containing
 any "all risks" notation or clause, whether or not bearing the heading "all risks", the
insurance document will
 be accepted without regard to any risks stated to be excluded.
 i. An insurance document may contain reference to any exclusion clause.
 j. An insurance document may indicate that the cover is subject to a franchise or excess
(deductible).

Definition and Usage of Bill of Exchange / Draft :

Bill of exchange is one of the most hard-to-understand concept in trade finance terms. I guess,

you will get my point if I will be starting to explain bill of exchange with its formal definition.

According to UK's Bill of Exchange Act (1882) bill of exchange defined as an unconditional

order in writing, addressed by one person to another, signed by the person giving it, requiring the
 39

person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum

certain in money to or to the order of a specified person, or to bearer".

Little bit complicated. Yes it is. But do not worry. I will be explaining bill of exchange and its

usage in detail with illustrations on the next page.

Important Note 1 : Two major legal traditions, common law and civil law, govern bill of

exchange slightly different as a financial instrument in international trade transactions.

 Bills of Exchange Act (1882) : Bills of Exchange Act (1882) is valid for United

Kingdom, Ireland, commonwealth nations such as Australia, India, New Zealand etc..

 Geneva Conventions (1930) : Geneva Conventions (1930) is valid for Germany, France,

Austria, Belgium, Saudi Arabia, Denmark, Finland, South Korea, Greece, Taiwan,

Thailand, Oman, Syria, Iceland, Poland, Italy, Czech Republic, Liechtenstein, Slovakia,

Luxembourg, Hungary, Malta, Albania, Netherlands, Bulgaria, Norway, Romania,

Portugal, Croatia, Spain, Bosnia-Herzegovina, Sweden, Macedonia, Switzerland,

Slovenia, Turkey, Serbia, Indonesia, Lebanon, Japan, Jordan etc...

Bill of Exchange / Draft in Letters of Credit Transactions :

 40

UCP 600 - Article 6 states that "A credit must not be issued available by a draft drawn on the

applicant." (source : UCP 600)

Special Hints on Bill of Exchange / Draft from ISBP 2007 :

 Drafts, transport documents and insurance documents must be dated even if a credit does

not expressly so require.

 Shipping documents have the following meaning under international standard banking

practice; “shipping documents” – all documents (not only transport documents), except

drafts, required by the credit.

 Even if not stated in the credit, drafts, certificates and declarations by their nature require

a signature.

 The draft must be endorsed, if necessary.

 The draft must be drawn on the party stated in the credit.

 The draft must be drawn by the beneficiary.

 A credit may be issued requiring a draft drawn on the applicant as one of the required

documents, but must not be issued available by drafts drawn on the applicant.

Certificate of Origin
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What is A Certificate of Origin? How can we use a certificate of origin in a letter of credit

transaction?

Certificate of Origin is a document used in international trade transactions certifies that goods

in a particular export shipment are originated in a particular country either by wholly obtained

principle or substantial transformation principle.

What is the function of a certificate of origin in export / import transactions?

Certificates of origins are requested mostly by the custom administrations for the following

reasons:

 Determining whether or not the goods being imported are eligible for any preferential

custom tariff agreements

 Determining what duty will be assessed on the goods

 Determining whether or not goods come from a country against which the importing

country has trade restrictions

What are the types of certificates of origin?

Certificates of origin can be classified under two main groups:

Ordinary Certificates of Origin: An Ordinary Certificate of Origin is a document that can be

used to satisfy importing country’s custom authorities that the products exported are originated

in a specific country. Ordinary certificates of origin do not grant any preferential tariff treatment

during the importation of goods.

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Issuing bodies of ordinary certificates of origin: Ordinary certificates of origin can be issued

and certified by chambers of commerce, chambers of industry and chambers of commerce and

industry. In some occasions exporting companies can also prepare ordinary certificates of origin

by themselves in a separate document form or adding a statement on this effect on to the

commercial invoices. Ordinary certificates of origin do not need any endorsement or legalization

from the custom authorities.

Preferential Certificates of Origin: Preferential Certificates of Origin likely to grant reduced or

zero rates of custom duty when export goods are entering into importer’s country as a

Preferential Certificate of Origin (PCO) proves that the product originates from a Free Trade

Agreement Partner Country under stipulated Rules of Origin (ROO) and hence, qualifies the

product for tariff concessions provided under the specific FTA.

Issuing bodies of preferential certificates of origin: Preferential certificates of origin must be

issued and authorized by custom offices in the exporting country.

Some Examples of Preferential Certificates of Origin:

 Certificate of Origin GSP Form A

 North American Free Trade Agreement (NAFTA) Certificate of Origin

 EUR1 Form Movement Certificate

 ATR Movement Certificate

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44
45
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Certificates of Origin in Letters of Credit Transactions:

 Letter of credit rules do not cover certificate of origin under specific articles unlike

transport and insurance documents as a result certificates of origin will be treated like any

other ordinary document under letter of credit rules. This having been said, we need to

emphasize that the issuing banks have to indicate on their letters of credits the specific

requirements regarding the certificates of origin.

 If no specific requirement exists in the letter of credit for the certificates of origin than the

presentation of a certificate of origin will be satisfied by the presentation of a signed

document that appears to relate to the invoiced goods and certifies their origin.

 When a credit requires the presentation of a preferential certificates of origin such as a

Certificate of Origin GSP Form A or EUR1 Form Movement Certificate, only a

document in that specific form should be presented by the beneficiary.

 A certificate of origin should be issued by the entity stated in the credit such as Chamber

of Commerce, Chamber of Industry, Customs Authorities etc..

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Inspection Certificate in Letters of Credit Transactions

Definition and Usage :

I have explained couple of times so far on this website that letter of credit transaction follows the

documents not the actual goods or services in circulation. Which means that banks reach

payment or non-payment decision under a letter of credit only by controling the documents

presented by the beneficiary. Banks have no connection with the actual goods or the services.

Above explanation left importers into a serious source of fraud risk such as non-delivery, goods

received with inferior quality etc... Pre-shipment inspection, also called preshipment inspection

or PSI, is a part of supply chain management and an important and reliable quality control

method for checking goods' quality while clients buy from the suppliers. Place of inspection can

be set either in the country of origin (at the time of loading) or in the country of destination (at

the time of unloading or at the warehouses where the imported goods are received).

Types of Inspection Certificates :

The certificates delivered by inspection companies are basically of two different types:

Clean Report of Findings (CRF) : This is a document required by the importing (sometimes,

exporting) country, as some developing countries have a large part or all of their imports

(exports) inspected prior to shipment in the country of origin, as to quantity, quality and price

(Pre-Shipment Inspection - PSI). These PSI schemes, entrusted to international inspection

agencies, have been established by the authorities for custom, fiscal or foreign exchange control

purposes and are compulsory.

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Commercial Certificate of Inspection : Stating the quantity and quality ( any

measurable quality parameter requested by the principals). These Certificates are issued by an

inspection agency acting as a neutral third party assessing the actual condition of a traded cargo

between a seller and a buyer. A commercial certificate of inspection is necessary to build up a

long-term relation between buyers and sellers. Bad quality of goods traded can lead to loss of

market share in the long run.

Benefits of Inspection Certificates :

Main objective of the inspection certificate is to satisfy the importer or the government body that

the goods are in conformity with the indicated specifications on the sales contract or proforma

invoice.

1. Inspections are important tools to reduce trade risks and avoid fraud.

2. Shipment of low quality goods prevented.

3. Shipment of low quality goods prevented.

4. Non-delivery fraud with fake bill of lading or any other transport document prevented.

Another risk of fraud is that the cargo is changed after inspection: the cargo inspected did

not go into the ship. This can be prevented by adding a numerical link on the inspection
 49

certificate to the transport document. For example inspection certificate that must indicate

the container number can prevent such a fraudulent action.

How to demand an effective inspection certificate in a letter of credit

transaction?

1. Add at least one original copy of an inspection certificate to field 46-A Documents

Required as one of the necessary documents under the letter of credit.

2. Make sure that inspection certificate is issued by one of the well known inspection

companies around the world. The most well known inspection companies are : SGS,

Bivac/Bureau Veritas, Cotecna, Intertek.

3. Clearly indicate on the letter of credit text that inspection certificate is complying with

the specifications indicated on the sales contract or proforma invoice.

4. Make sure that values indicated on the inspection certificate does not conflict with the

values indicated on the letter of credit or other documents.

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5. Do not forget to add a numeretical link on the inspection certificate to the transport

document.

Means of Conveyance and Mode of Transport

Understanding means of conveyance and mode of transport in international logistics.
Modes of Transport is a term used to distinguish substantially different ways to perform

transport. The most frequently used modes of transport in international trade are, air

transportation, land transportation, rail transportation and sea transportation.

Means of Conveyance is a term describing something that serves as a means of transportation,

such as container, truck, aircraft

On this page I will try to explain you the meaning of modes of transport and means of

conveyance. We face with these expressions in ISBP 2007 under part TRANSPORT

DOCUMENT COVERING AT LEAST TWO DIFFERENT MODES OF TRANSPORT .

We see Modes of Transport term on various occasions within above given part in ISBP 2007.

Even just on the title of the paragraph. Whereas we find Means of Conveyance later on the same

part under the article which explains transshipment and partial shipment. Let me quote you

related ISBP 2007 paragraph I have been referring right below,

"In a multimodal transport, transhipment will occur, i.e., unloading from one means of

conveyance and reloading to another means of conveyance (whether or not in different

modes of transport) during the carriage from the place of dispatch, taking in charge or shipment

to the place of final destination stated in the credit."

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According to ISBP 2007 transhipment can only be occurred only if,

• happened during the carriage from the place of dispatch, taking in charge or shipment to the

place of final destination stated in the credit.

• cargo is unloading from one means of conveyance and reloading to another means of

conveyance (whether or not in different modes of transport).

Modes of Transport is a term used to distinguish substantially different ways to perform

transport. The most frequently used modes of transport in international trade are,

 air transportation

 land transportation

 rail transportation

 sea transportation

 multimodal transportation

Means of Conveyance is a term describing something that serves as a means of transportation,

such as container, truck, aircraft etc

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STEPS IN AN EXPORT LETTER OF CREDIT TRANSACTION

 Shipment of Goods
 Upon receiving the letter of credit, the beneficiary should examine it carefully and be
satisfied that all the terms
 and conditions can be complied with. If this is not possible, the beneficiary should
request the applicant to
 arrange an amendment to the letter of credit. Once completely satisfied, the beneficiary
will then be in a
 position to assemble and ship the goods.

 Presentation of Documents by Beneficiary

 The beneficiary prepares an invoice in the number of copies required, with the
description of goods shown
 exactly as stipulated in the letter of credit. The beneficiary obtains the bill of lading
and/or other transport
 documents from the carrier and prepares and/or obtains all other documents required by
the letter of credit.
 These are attached to the draft, drawn on the bank indicated and at the term stipulated in
the letter of credit,
 and are presented to the advising/confirming/negotiating bank.

 Sending Documents to the Issuing Bank

 The advising/confirming/negotiating bank checks the documents presented by the seller
against the letter of
 credit. If the documents meet the requirements of the letter of credit, that bank will send
them to the issuing
 bank, claiming reimbursement and paying the seller.

 Delivering Documents to the Applicant

 The issuing bank will also check the documents for compliance and then deliver them to
the applicant either against payment or as an undertaking to pay on maturity of the
drawing under the letter of credit.

 PAYMENT PROCEDURE
 Payment
 On presentation of the documents called for under the letter of credit, provided they are in
compliance with its terms, the advising/negotiating bank, in the case of an unconfirmed
letter of credit, may pay/negotiate the draft.

 In the case of a confirmed letter of credit, the confirming bank is obliged to honor the
drawing without
 recourse to the beneficiary.
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 Reimbursement
 The advising/confirming/negotiating bank will claim reimbursement from the issuing
bank.

 Settlement
 On receipt of conforming documents, the issuing bank will also be responsible for
checking documents and will charge the applicant’s account under the terms of the letter
of credit application and agreement forms, effecting reimbursement to the negotiating
bank.

Draft/ Bill of Exchange

Bill of Exchange- 1st
Draft No.:
Dated: For Amount of: USD 50,000.00
On Demand / At 90 days sight (Specific date as per LC term) of this first Bill of Exchange
(Seconded date and tenor remain same being unpaid). Pay to the order of ICICI Bank Ltd. /
Name of Importer (As per the LC status) the sum of US Dollar 50,00.00. Drawn under: Invoice

No. ______________________________________ LC

No.:______________________________ LC Issued By__________________________

WHAT TO DO IF DOCUMENTS ARE

DISHONOURED

 When documents are presented by the beneficiary and are found not to be in accordance
with the terms of
 the letter of credit, the following courses of action are available:

• The documents may be corrected if possible. However, this option is only

applicable if the discrepancies
 are such that the beneficiary, shipping company or whoever is concerned is able to
correct the
 discrepancies before the expiry of the letter of credit and within the period of time
allowed for
 presentation of the documents.

• If the discrepancies cannot be corrected, the beneficiary’s bank may request

authority from the issuing
 bank to negotiate the draft, despite the discrepancies.
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• If, in the case of a sight draft, the beneficiary wishes to receive the proceeds of the
drawing immediately,
 then an indemnity may be the expedient method. Under the indemnity the beneficiary
agrees to
 indemnify the negotiating bank for payment of principal, interest and any other loss
resulting from the
 refusal of the issuing bank to honor the drawing due to non-conformity of the documents.
If the
 discrepancies are considered minor; the beneficiary’s bank may be prepared to negotiate
the draft “under
 reserve”; it being understood the beneficiary’s bank will have recourse to the beneficiary
if the
 discrepancies are unacceptable to the issuing bank.

• As a last resort, documents may be sent to the issuing bank on an “approval”

basis; the documents to be
 delivered to the buyer only against the buyer’s authority to pay or accept.

What is Weboc system?

WEBOC stands for Web Based One Customs developed by PRAL (Pakistan Revenue
Automation Ltd)., for FBR and its divisions like Customs. It is a web based system for filing
Goods Declarations (GD) for import and export cargo., which can be used by both Importers,
Exporters and their Customs Clearing Agent

What risks are covered by L/C insurance?

Export L/C insurance protects confirming/discounting banks against nonpayment of

documentary letters of credit issued by banks in other countries. Most policies are used to cover
confirmation of sight L/Cs and/or discounting of drafts drawn on usance L/Cs. Letter of credit
refinancing can also be insured.

As long as the issuing banks and country risks can be underwritten, policies may be structured
for one or multiple letters of credit, single or repetitive transactions, some or all L/Cs issued by
an individual foreign bank, some or all issuing banks in an individual country, or all of a
financial institution’s export L/C business.

While coverage can be written on issuing banks or countries where an insured financial
institution has never had L/C exposures before, most banks use letter of credit insurance to cover
markets in which they’re already doing business but where growing exposures would otherwise
exceed their internal capacity limitations.
 55

Letter of credit insurance enables banks to leverage their capacity for foreign L/C exposures so
they don’t have to refer business to other financial institutions, risk losing customers, or miss
opportunities to provide their own L/C confirmation and discounting services.

How much does L/C insurance cost?

Premium rates for letter of credit insurance are based on issuing bank and country risks, the
tenor(s) of the covered letter(s) of credit, and the insured bank’s prior experience—if any—with
the issuing bank and country.

Letter of credit insurance premiums are very competitive, often significantly less than the cost of
international credit insurance for open-account foreign receivables.

Some underwriters set their premium rates based on issuing bank and country risks, while others
assess premiums as a percentage of the insured bank’s confirmation fees or
discounting/financing spreads.

In all cases the cost of L/C insurance can be passed to exporters or their foreign customers.

L/C insurance for exporters

Exporters who manage their own letter of credit risks, without confirmation or discounting by a
commercial bank, often purchase L/C insurance for their own protection. Some exporters insure
all their letters of credit. Others use L/C insurance only in cases where their banks are unable to
offer confirmation or discounting services.

L/C insurance for exporters is underwritten by most of the same insurers that offer international
credit insurance on unsecured foreign receivables. Letters of credit can be insured separately or
alongside open-account receivables in a master policy covering an exporter’s various terms of
sale.

Insuring standby letters of credit

Working capital financing can be difficult to obtain in developing countries, so foreign suppliers
sometimes arrange cash deposits from their US customers or a trade finance loan from a US
bank. Delivery of the goods and repayment of the loan are typically secured with a standby L/C
issued by the supplier’s local bank.

International credit insurance is available to protect against non-honoring of standby letters of

credit, as long as the L/Cs are clearly linked to cross-border trade transactions.

Underwriting standby letters of credit involves not only analysis of issuing bank and country
risks but also review of purchase contracts and other documents evidencing the underlying
export-import trade.
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Policy terms generally range from 180 days to one year, but can go out as far as five years for
long-term contracts.

Each international trade transaction carries a risk, lower or higher.

Some trade relationships might have been established for a long period of time between
importers and exporters, whom are located in safe countries with sound financial backgrounds.

In such a scenario, we can talk about two professional partners, working for a win-win situation,
both of them understanding its roles and responsibilities in order to complete the transaction in a
good manner.

Concluding these kinds of transactions financially would not be a difficult task.

Now, I want you to think just an opposite scenario. Potential trade is about to initiate between an
importer and exporter, whom has no enough knowledge about the counter party. Even more, at
least one party is located in a politically unstable country.

What do you think. Which payment method should be chosen to satisfy both parties under such
extreme conditions?

Do you think that you can find a risk-free payment method that you can rely on regardless of the
surrounding conditions?

Above, I have tried to illustrate two different conditions effecting the payment selection
decisions in international trade.

On this post, I will try to explain the risks associated with international payment methods in
general.

Specifically, I will emphasize the risks in letters of credit for different parties’ perspectives.
 57

What sort of risks are associated with international payment methods?

Political Risks:
Political risks in international trade, in simple terms, can be defined as the factors that are
happened outside of importer's or exporter's control, preventing full or part of the payment of the
goods reaching to the exporter or else preventing the delivery of the goods to the importer.
Most common political risks are:

 War, civil war, civil commotion, coups, other acts of politically-motivated violence,
including terrorism
 Foreign exchange controls
 Restrictions on the foreign currency transfers

Fraud Risks:

As export and import transactions occur between companies located in different countries, the
fraud risk in international trade is comparatively higher than the domestic trade.

Additionally, fraudulent transactions in international trade possess more destructive risks to the
exporters and importers, because of the fact that the volume of international trade transactions is
generally bigger than domestic sales and also it is very hard to compensate losses resulted from
fraudulent transactions. Fraudulent companies disappear very quickly, before you can reach them
legally.
Fraud Examples:
 Chinese supplier ships sands instead of polyurethane under cash in advance payment
terms.
 English supplier gets paid via forged documents under a letter of credit payment, even
without making the shipment.
 Exporter and importer scam issuing bank under letter of credit payment with a fictitious
shipment.

What are the Risks in Letters of Credit?

In order to describe the risk in letters of credit accurately, it is imperative to clarify the specific
risks that the letter of credit parties is exposed to.

On below image you can find the specific risks that each letter of credit party has to bear.
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Applicant's Risks in Letters of Credit: Applicant is the importer in a commercial letter of

credit transaction. Applicant's risks in a letter of credit transaction can be classified under
shipment risks, issuing bank's failure risk and fraud risks.
Risks Related to Shipments: Short shipments, shipments of under quality goods and late
shipments risks fall in this category.

Failure of the Issuing Bank:

Failure of the issuing bank may result a double payment risk to the applicant. In case the issuing
bank failed to pay the L/C amount, applicant may have to pay the credit amount to the
beneficiary outside of the letter of credit, even if the applicant already paid the credit amount to
the issuing bank.

Fraud Risks:
Applicants are exposed to fraud risks, that are commonly originated from the acts of the
beneficiaries. This scenario becomes reality if the beneficiary gets his money from the
confirming or issuing bank against forged documents. Applicants can receive funds under letters
of credit via forged documents by shipping under quality goods or even worse shipping nothing
at all. Beneficiary and applicant may act together to scam issuing banks under letter of credit
transactions.

Beneficiary's Risks in Letters of Credit:

Beneficiary means the party in whose favor a credit is opened. Beneficiary's risks in a letter of
credit transaction can be classified under discrepant documents risks, fraud risks, non-payment
risks (due to sanctions, political risks etc.)

Discrepant Documents Risks: If the banks figure it out that the documents are discrepant, then
beneficiaries can only reach the payment upon applicant's acceptance of the documents.

Non-Payment Risks (Due to Sanctions, Political Risks etc.): Beneficiaries make sure that they
comply with the international regulations including UN, EU and US embargoes.

Issuing Banks's Risks in Letters of Credit:

Issuing bank is the entity, which gives the main conditional payment guarantee to the
beneficiary. As a result, issuing bank is more vulnerable to the risks in letters of credit
transactions than any other parties involved.

Insolvency Risk of the Applicant:

Issuing bank may not be able to recover the credit amount that has already paid to the
beneficiary, if applicant becomes insolvent after issuance of the letter of credit.
 59

Political Risks:
Issuing bank may not be able to honor its payment obligation due to various political risks. Most
recent examples are sanction clauses inserted into letters of credit.

Confirming Bank's Risks in Letters of Credit:

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

Non-reimbursement Risks:
A confirming bank is irrevocably bound to honor or negotiate as of the time it adds its
confirmation to the credit. A confirming bank's main risk is the non-reimbursement risk, which
means that the confirming bank could not get the credit amount from the issuing bank, although
it has already paid it to the beneficiary.

Country Risk:
This includes risk elements like the political and economical stability of a country and exchange
controls etc. Country Risk is however more pertinent for exporters rather than importer..

Foreign exchange Risk:

A depreciation in the local currency vis-a-vis the transaction currency may lead importer to pay
more for the consignment than originally envisaged.

Risk assessment:
On the part of opening bank risk associated with Import LCs can be classified into :

The financial standing of the Importer:

he should be in a position to arrange for funds required at the time of retirement of bills
under LC. This involves an appraisal of the creditworthiness of the importer as a
borrower.

Acceptability and saleability of the goods:

This is a generic risk associated with all modes of international trade, and may affect the
importer’s ability to pay for his consignment.

The status of the Exporter ( or beneficiary of the LC)

This is the risk inherent in a situation that an errant exporter may ship substandard goods.

Assessment of Exposure under LC:

In a letter of credit, the commitment of the LC opening bank to the beneficiary is absolute and
not dependent on the payment by the applicant/customer. The opening bank always runs the risk
 60

that the applicant may not honors his commitment to pay and take delivery of his documents.
This may entail a loss for the bank.

Such crystallization of the liability under the LC, at the hands of the issuing bank, is commonly

known as ‘Devolvement’, which signifies an irregular situation created by the failure of the

applicant to honor his commitment. Under this situation, the non-fund-based facility gets
converted into a fund-based credit facility.

A critical appraisal of a letter of credit facility, therefore, involves a study of both the customer

and the proposal submitted by him, in the same line of credit appraisal for fund-based credit
facilities.

Quantitative Assessment of LC Facility:

(1) To Purchase Capital Goods:

When an LC is opened to purchase a particular machinery, equipment or any other capital item,

the assessment becomes relatively easier. The LC is to be opened for the price of the capital item

to be purchased net of advance payment if already made by the buyer. This information is

generally provided by the applicant which can be verified from the proforma Invoice or various
other documents.

(2) Assessment of LC Limit to Purchase Raw Materials, Consumables:

While assessing the limits for opening letter of credit, a credit officer should consider the

following important points:

(i) The limit should be adequate to facilitate the procurement of sufficient quantity of materials
to support uninterrupted operation of the customer

(ii) A proper analysis of the cash flow pattern of the customer should be made to ensure that
sufficient funds will be available to meet the liability when payment under the credit falls due
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(iii) It is to be ensured by the bank that the materials purchased under the LCs are not offered as
security for other fund-based working capital limits granted by the bank

An illustration of quantitative assessment of LC limit is given below: It is assumed that:

A specimen of letter of credit is reproduced on the

next page:
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Communication through SWIFT:

Important Note : According to the current letters of credit rules, UCP 600, a letter of credit will
be deemed to be operative letter of credit if it is transmitted via an authenticated electronic
platform such as SWIFT.

What does SWIFT mean in trade finance?

SWIFT is the short form of "Society for Worldwide Interbank Financial Telecommunication".

Swift defines its role in international financial transactions on its website as follows. “Our role is

two-fold. We provide the proprietary communications platform, products and services that allow

our customers to connect and exchange financial information securely and reliably. We also act

as the catalyst that brings the financial community together to work collaboratively to shape

market practice, define standards and consider solutions to issues of mutual interest.”

In simple terms swift has two main roles in international financial transactions, firstly SWIFT

provide a secure communications platform by which financial institutions can communicate each

other reliably and fastly and secondly SWIFT establishes standard message formats which can be

used on secure SWIFT platforms. Today banks use SWIFT platform to communicate each other

when sending a wire transfer, issuing a letter of credit, advising a discrepancy message etc. Each

of these message formats have a different code, which is called swift message types. For

example a bank must use MT700 Issue of a Documentary Credit when issuing a letter of credit

and MT 734 advice of a refusal when giving its refusal message. (MT means Message Type)
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The communication in respect of documentary credit among the banks take place through
SWIFT (Society for Worldwide Inter-Bank Financial Telecommunication) network.

SWIFT provides secure network to banks and financial institution to transfer financial
transactions worldwide through a 'financial message'.

– SWIFT messages consist of five blocks of data including three headers, message content, and a
trailer.

– SWIFT messages are present and categorized in specific MT (Message Type) numbers. MT
are crucial to identifying content.
Example: MT304

The first digit (3) represents the category.

A category denotes messages that relate to particular financial instruments or services such as
Precious Metals (6), Treasury (3), or Travelers Cheques (8).

The category denoted by 3 is Treasury Markets.

The second digit (0) represents a group of related parts in a transaction life cycle. The group
indicated by 0 is a Financial Institution Transfer.

The third digit (4) is the type that denotes the specific message. There are several hundred
message types across the categories. The type represented by 4 is a notification.

Why letters of credit are expensive comparing to other payment methods?

Who pays letters of credit fees? Letters of credit have certain advantages as an international
payment method. If you have enough knowledge and expertise on letters of credit field then
you can use them wisely to get paid where no other payment method works. No matter how
many advantages letters of credit have they have one big disadvantage. They are expensive.

Banks play a key role in letters of credit transactions. This is the main reason why letters of

credit are so expensive comparing to other payment methods. Issuing banks open letters of

credit for the account of applicants and in favor of the beneficiaries. Issuing banks have to bear

certain amount of risks when they open letters of credit. They also let the applicants benefited

from their credit worthiness. As a commercial institution issuing banks provide these services

only for one reason. To earn more money, to make more profit. Similarly confirming

banks collect fees from the letter of credit parties for the same reason. When confirming a letter
 66

of credit confirming banks may have to bear substantial amount of non-payment risk. As a

result confirmation fees can sometimes climb to high values. As we have learnt that in a typical

letter of credit transaction there are other banks may exist in addition to issuing bank and

confirming bank such as advising bank, nominated bank, reimbursing bank. Every additional

bank means additional fees and additional cost for either applicants or beneficiaries.

Who should pay bank charges in a letter of credit transaction?

We can answer this question by either looking at the rules or by looking at the real life situations

because what rules say is not what is really happening on practice.

 UCP 600's article related to charges of letters of credit is article 37 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."

 In real life situations applicant pay only issuing bank's charges and remaining bank

charges will be paid by the beneficiary unless beneficiary is very strong against applicant.

We need to look at field "71B: Charges" in a letter of credit text issued by swift format

to understand how bank charges will be paid by letter of credit parties.

How to deal with high banking commissions under letters of credit as an exporter?
High banking commissions are one of the biggest problems in international trade finance
that exporters have to face who would like to use letter of credit payment option in their
business transactions.
 67

Dealing with high banking commissions and charges under a letter of credit transaction

No matter how many advantages letters of credit have they have one big disadvantage. They are

expensive. As a result you should understand your costs before finalizing a letter of credit deal.

Letter of credit is a secure payment method in foreign trade. But this comfort of security comes

with a price. Letters of credit are one of the most expensive international payment

methods available on the market. As a result exporters find themselves in a dilemma when

negotiating the terms of the business conditions. Question is simple but not easy to answer; either

choosing an expensive but relatively secure payment method or choosing a risky but less

expensive payment method.

What are the main letter of credit fees that exporters have to pay?

It is realy hard to answer this question. Because what rules say is different than what the daily

practice dictates.

 According to Rules : Issuing bank must pay all bank commissions as per UCP 600

which is the latest ICC rules of documentary credits.

 Real Life Situation : Applicants pay the letter of credit issuance charges and all

remaining l/c costs will be collected from the beneficiaries.

Bank commissions that exporters normally have to pay can be grouped under these

headings :

 Courier Fee / Postage Fee

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 Advising Fee

 Discrepancy Fee

 Handling Fee / Negotiation Fee

 Amendment Commission

 Confirmation Fee

 Reimbursing Bank Charges

 Real life example :

 I would like to share a real life bank commissions example below. These bank fees were

collected from a British exporter under a letter of credit transaction. As you can see they

had to pay 487GBP to banks as letter of credit fees. Total transaction amount was only

1890GBP. Letter of credit fees are 25% of all transaction amount and this is

unacceptable.

Figure 1 : Real life example of bank commissions under a letter of credit transactions.

How to deal with high banking commissions under letters of credit as an exporter?
Suggestions to eliminate high bank commissions under letters of credit transactions for

exporter :
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• Suggestion 1 : Do not use letters of credit to low value transactions. As a general rule of

thumb transaction amounts below 10.000USD to 15.000USD can be considered as a low value

businesses. Try to use alternative payment methods instead of letters of credit on these occasions.

• Suggestion 2 : Try to convince your customer so that the letter of credit fees will be paid

by the applicant. Remember letter of credit rules are on your side.

• Suggestion 3 : The worst case scenario may be that you can not find an alternative

payment option and your customer does not want to pay letter of credit charges except for the l/c

issuance costs. If this is the situation than try to learn approximate bank commissions and make

sure that you have included at least some of them on your price offer.

What is advising fee?

By advising the credit to the beneficiary an advising bank certifies 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.

The act of informing the details of a credit or an amendment to the beneficiary is known as

advising under documentary credit transactions. A credit and any amendment may be advised to

a beneficiary through an advising bank. 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.

Charges that the advising bank demands in exchange for its advising services is defined as an

advising fee. On this article I would like to write about the advising fees.

Why banks apply advising fees?

Letter of credit is a payment method which is used mainly in international trade. As a result of

this international character, letter of credit parties in particular issuing banks and beneficiaries
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most probably be located in different countries. For this reason issuing banks have to use another

banks' services to dispatch the credits to the beneficiaries.

An advising bank should be located in the same country as beneficiry. Advising banks receive

documentary credits from the issuing banks and send them to the beneficiaries. According to

documentary the letter of credit rules their role is simple and their responsibilities are very

limited. By advising the credit to the beneficiary an advising bank certifies 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. Advising fees are

originated from these services that advising banks perform in letters of credit transactions.

Who should pay advising fees?

According to the letter of credit rules issuing banks have to pay advising fees but in practice

most of the time advising fees are beeing paid by the beneficiaries.

LC Advising Commission Samples :

o Bank of China Singapore : USD40,00

o Citibank UAE : AED150,00

o Deutsche Bank Germany : Minimum EUR150,00 - Maximum EUR400,00

o What is confirmaton fee?

o
o Confirmation fee can be defined as charges collected by the confirming banks against

the risks they will be having to posses by confirming the letters of credit. As I have
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explained below confirming banks undertake two main risk factors with

the confirmation

o Confirmation Fee
o Confirmation of a letter of credit is defined as an undertaking from a bank in addition to

the undertaking provided to the beneficiary by the issuing bank. Beneficiary would like to

eliminate the default risk of the issuing bank as well as political risk by having the letter

of credit confirmed to a bank which is located within the same country.

o Confirming banks could only honour or negotiate a complying presentation. As a

result beneficiaries have to present complying documents in order to obtain funds under

letters of credit from either the issuing bank or the confirming bank. For this reason

complying presentation is the key for the payment for both confirmed letters of credit and

unconfirmed letters of credit.

o Confirming banks take the default risk of the issuing bank as well as non-payment risk of

the letter of credit originated from the political risk of the issuing bank’s country over

themselves from the moment they have added their confirmation to the letters of credit.

Even if a confirming bank could not receive any reimbursement from the issuing bank he

has to make payment to the beneficiary against a complying presentation under the letter

of credit which he has confirmed.

o You might be wondering why a confirming bank would take such risks and confirm a

letter of credit. The correct answer is very simple and straight forward; to make more

profit.
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o Examples of Confirmation Fees:

o Confirmation Fee Format 1: Exporters First Help Bank of New York confirms this credit

and hereby undertakes to honor all drafts and documents presented in strict compliance

with the credit terms. Our confirmation charges USD3.120,48.

o Confirmation Fee Format 2: We shall charge our confirmation commission of 4,000000

PCT p.a., min. EUR200.00 p.q.

o p.a. : per annum (12 months or 360 days)

o p.q. : per quarter (3 months)

o Who should pay confirmation fees?

o According to letter of credit rules all fees and charges related to credits should be paid by

the applicants. But we have learned long ago that this perfect world indication is not valid

under real life situations. In most cases applicants pay only letter of credit issuance

charges and let the banks collect all the remaining fees from the beneficiaries. As a result

confirmation fees will be paid by the beneficiaries in most cases.

o What is discrepancy fee?

o Discrepancy fee can be seen as a condition in a letter of credit stipulating that a fee will

be deducted from payments made under the credit if issuing bank finds any discrepancies

in the documents presented. Discrepancy fees vary from one letter of credit to another in

terms of wording or clause indicating that these fees will be charged and the amount of

the applied fees.

o Examples of Discrepancy Fees:

o Discrepancy Fee Format 1: Any set of documents containing discrepancies and

presented to us under this documentary credit, will be charged with a fee of USD.50.00
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plus telex charge (if any) at final payment. This charge is for account of beneficiary and

will be deducted from any proceeds to be paid.

o Discrepancy Fee Format 2: Discrepancy fee for USD 75.- (or equivalent in l/c currency)

plus all relative swift/tlx charges will be deducted from documents value for each

presentation of discrepant documents under this credit, notwithstanding any instructions

to the contrary.

o Discrepancy Fee Format 3: If documents are presented with discrepancies and accepted

by applicant a fee at the rate of USD 225.

o History of the Discrepancy Fees

o “As I recall, it all began sometime in the mid-1980s, when banks in US began charging a

discrepancy fee - usually about US$25. Over the last decade, this practice spread

through the documentary credit world so much that now practically most banks,

including some large international banks, engage in this practice. A senior trade finance

department manager says: "Now more than 60% of the credits impose discrepancy fees

and these credits come from all over the world." writes Abdul Latiff Abdul Rahim in his

article which was published in year 1997 at DCInsight. We have reached 2014 and now

almost every letter of credit issued with very little exception contains a discrepancy fee.

o
o Discrepancy fees applied to vast majority of the letters of credit because banks can

increase their letter of credit commissions significantly with these kinds of charges.

o
o “Nonetheless, there is a worrying trend whereby more and more items and with higher

rates of banking charges are being deducted by banks in the course of L/C transactions.

Some of these charges include: opening charges, amendment fees, advising fees,
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negotiation fees, confirmation fees, transferring fees, reimbursing fees, payment

commissions, telex/SWIFT commissions, courier charges, document checking fees,

handling charges, discrepancy fees, and commission in lieu of exchange and so on.”

Wang Shanlun states in his article published in 2010 at DCInsight.

o
o Unless exporters and importers object these high banking charges in letter of credit

transactions, we should expect to see the trend keep going which results higher and

higher L/C fees that will be imposing by the banks.

o Who should pay discrepancy fees?

o Discrepancy fees are collected from the beneficiaries.