In documentary credit operations, the advising of discrepancies in documents is probably the most contentious issue that a bank will face with its clients or another bank.
Global statistics differ but it is estimated that the percentage of documents refused on first presentation ranges between 60-75%, although there are many regional/national differences. This does not necessarily mean that a beneficiary will not receive payment; but it does mean that, at the very least, there will be a delay in receiving settlement or financing and an increase in bank fees.
One perplexing issue is that the introduction of UCP 600 in 2007 did not, and still has not, improved the discrepancy rate. Why have discrepancy rates on first presentation not decreased under UCP 600? This is absolutely critical to understanding how to take the ICC rules forward.
What are the problems?
Complexity of documentary requirements:
Documentary credits often have very detailed and specific documentary requirements that can be challenging for beneficiaries to fully comply with. Even minor errors or omissions can lead to discrepancies. A simple documentary credit format must be applied.
Lack of education/training:
Many beneficiaries and those who prepare document may not be fully aware of or trained on the intricacies of UCP 600 and proper document preparation; this knowledge gap contributes to ongoing discrepancies.
Inconsistent document examination practices:
Despite UCP 600 and ISBP guidelines, there can still be variations in how different banks examine documents, leading to discrepancies being found by some banks but not others.
Tight timeframes:
The short timeframes for document preparation and presentation after shipment can lead to rushed work and errors.
Overly strict interpretation:
Some banks may take an excessively strict approach to document examination, finding discrepancies for very minor issues.
Lack of standardisation:
While UCP 600 provides rules, there is still a lack of full standardisation in document formats and requirements across different trades and regions.
Commercial pressures:
In some cases, discrepancies may be used as leverage for renegotiation of terms, incentivising strict document examination.
How can these problems be addressed?
Banks and financial institutions have a duty to educate their clients. When a client has been faced with discrepancies, provision of an explanation of where the presentation has gone amiss can only prove beneficial for future presentations.
However, most banks merely advise discrepancies as if they were inescapable and a fact of life; this is not so. The manner in which a bank expresses a discrepancy, and explains it clearly to a beneficiary, can demonstrate an operational excellence that will set them apart from their peers.
Whether or not a bank refuses documents is based upon the content of the documents themselves, and their conformity to the terms and conditions of the credit, UCP and international standard banking practice. At the end of the day, the decision to accept or reject is often down to an individual document examiner in assessing compliance or otherwise, based on their individual knowledge, experience and judgement.
However, any discrepancy should stand one particular test - would you feel comfortable in justifying that discrepancy before a judge in a court of law? Remember, in a worst-case scenario, it would be a court that would be asked to provide judgement if a dispute were not amicably resolved.
Solutions
There are a number of simple tasks that can reduce discrepancy rates:
Ultimately, if a presentation is refused due to discrepancies, there are three options available to secure payment under the credit. In order of suggested preference:
1) Correct the discrepancies, at least as far as is possible.
2) Request the nominated bank contact the issuing bank for its agreement that the documents may be honoured or negotiated despite the noted discrepancies. The documents will be held with the nominated bank until the issuing bank responds indicating that the applicant has provided an acceptable waiver of the discrepancies.
3) Request that the nominated bank forward the documents to the issuing bank for settlement. The documents are sent to the issuing bank as a presentation under the credit and honoured following the applicant issuing an acceptable waiver of the discrepancies.