A number of recent blogs have highlighted the ICC Banking Commission consultation regarding a potential revision of UCP 600.
As is known, the decision was made not to proceed with a revision but, instead, to focus on three key areas:
We fully support each of these initiatives and trust that our own training efforts positively complement the ICC approach. We have always been of the same opinion as expounded in the ICC recommendation, i.e., 50% of the problems apply to the presented documents. A great deal of these issues could actually be solved early on in the process when drafting the credit itself.
The issuance of a documentary credit is not always a simple formality or an act that can be completed in a standard or repetitive manner. It often requires attention to detail and, more importantly, to contain wording that is not ambiguous or subject to more than one interpretation.
An issuing bank has a responsibility to work with its clients to ensure that the issued documentary credit fully meets the needs of each applicant in terms of specifying the appropriate documentary requirements, that will enable the smooth importation of the goods, and provide a suitable level of assurance, as to the quality, standard and/or type of goods being purchased; whilst ensuring that the documentary credit is in accordance with the bank's internal policies and procedures and regulatory guidelines to which it must adhere.
All aspects relating to the need for a credit facility; the completion of a documentary credit application form by an applicant; the need for an issuing bank to determine the workability of an applicant's instructions; and for compliance with AML and sanctions regulations, etc. as well as the issuing bank's own internal policies and procedures; are covered in our training module "Sales Contract and Creation of LC Application".
When drafting or preparing a documentary credit for issuance, it should be noted that one format does not fit all circumstances. As a very simple example, the format of a documentary credit issued in favour of a beneficiary where the applicant and beneficiary have a long history of trading together, should be different in substance and content than that for a new relationship. Similarly, if a beneficiary were to draft a documentary credit for its customer to provide to its bank, the likelihood is that it would be minimal in its conditions and documentary requirements than if the customer had drafted it.
Poorly prepared documents can have a severe impact on a transaction, leading (at best) to delays in settlement. Global statistics differ, but it appears that the percentage of documents refused by banks on first presentation ranges between 65% and 80%.
Whilst a number of the more common discrepancies are due to timing issues (expiry, shipment and presentation period), quite a number of them derive from poorly prepared documents or presentations, including: conflicting data between documents; missing documents; unauthenticated alterations; missing endorsements; goods description not according to the documentary credit; port or place of loading, departure, receipt, taking in charge, or, port or place of discharge, destination or delivery are incorrect; insurance document dated later than the transport document; missing or incorrect shipped on board notations.
As a result of discrepancies in a presentation, additional costs can be incurred by way of discrepancy fees (of the nominated bank and/or issuing bank); fees for communications sent; loss of interest and increased administrative costs; all leading to a reduced profit margin on the transaction.