Although there is no obligation for an issuing bank to advise a documentary credit through the intermediary of an advising bank, such action facilitates the beneficiary being informed that the documentary credit is apparently authentic, and for documents to be presented to a bank that is local to the beneficiary. This act will usually also allow for the documentary credit to be available for honour or negotiation with that bank or one or more other nominated banks.
An advising bank has no obligation to review a documentary credit or amendment to determine that its terms and conditions appear to be workable. A policy or decision to review all or some of the terms and conditions of a documentary credit is for each advising bank to make. For example, some banks will review all of the terms and conditions of the documentary credit; others will review up to 8-10 key pieces of data; whilst the remainder will not review the text at all, on the basis that it is giving no undertaking to the beneficiary to honour or negotiate.
The mere act of advising a documentary credit to the beneficiary signifies that the advising bank has satisfied itself as to its apparent authenticity and that the advice it has sent accurately reflects the terms and conditions of the documentary credit that has been received. In other words, silence will mean that the documentary credit is apparently authentic and the details of the documentary credit attached to the covering advice (usually in the form of a photocopy of the SWIFT MT700 or other medium of issuance) reflects what was received by the advising bank.
It should be noted that even though a bank may advise a documentary credit, it has no obligation to examine documents (assuming that it is also a nominated bank), and when it does, there is no obligation for it to honour or negotiate a complying presentation.
Confirmation is normally requested by a beneficiary at the time of agreeing the sale of goods, or agreeing to provide services or performance, and is usually a pre-condition inserted in the proforma invoice or sale contract.
A beneficiary will usually request confirmation when it has concerns with (a) the risk of the issuing bank (e.g., the ability of the bank to honour its undertaking), (b) country risk (e.g., the payment risk of the country where the issuing bank is domiciled), and/or (c) documentary risk (e.g., they require another bank to take the risk of non-payment due to the issuing bank determining that documents do not comply).
Some beneficiaries also have a company policy that every documentary credit, or documentary credits from certain countries or regions, must be confirmed. Depending on the location of the beneficiary's customer, this may or may not be a sound policy given the range of fees charged by banks for adding confirmation and that the underlying issuing bank, country and/or documentary risk may not be as significant in every documentary credit.
In order for a bank to consider a request or authorisation from an issuing bank to add confirmation, there must be a credit facility established for that issuing bank with the confirming bank. As a minimum, this facility will determine the maximum period for which confirmation may be added (e.g., up to 6 months); the maximum amount that may be outstanding at any one time; and the maximum payment terms that may be applied (e.g., 180 days after sight).
This subject is covered in far greater detail within our training module ‘documentary credits in practice' which can be purchased at https://www.tradefinance.training/shop/