2nd Lecture. Letter of

Credit (L/C)1. L/C Operation (1)General Theory of L/C

(2)Basic Factors of L/C(3)Parties Concerned with L/C Transaction(4)Variety of L/C

2. Reading L/C (1)Variety of L/C Related SWIFT Messages(2)Composition of MT 700(L/C Establishment)

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1. L/C Operation (1) General Theory of L/C

2nd Lecture. Letter of

Credit

•Meaning of L/C

-Settlement method used in order to devise fluent international business transaction by hardening credibility of both importer and exporter through mediation of banks with publicity

-‘Letter of commitment of conditional payment’: According to importer’s instruction, issuing bank opens L/C. Exporter submits documents stated on L/C and the documents are exchanged with export money, and at last, importer can claim imported goods.

Exporter Importer

Bank

Bigger, Safer, and more Fluent Transaction

Submit Document Open L/C

Payment settlement

• Utility of L/C

-Can manufacture and gather goods regardless of credibility of importer -Can receive all the money at his bank as soon as he submits transport documents after shipment -Can benefit from trading finance before shipment, based on L/C -Exporter can safely start manufacturing by receiving irrevocable L/C

-Can import regardless of his own credibility -Can pay after confirming that the goods are actually shipped through documents -Has same effect as import fund financing and can commit credit transaction-Can claim goods on the date he wishes to

Exporter

- Can pass the risk and costs to importer - Obtain security rights on goods on-board

-Payment will definitely be settled by issuing bank once the document it buys from exporter matches conditions of L/C -Negotiating bank can ask money directly from exporter once the documents go bankrupt

Importer

Issuing Bank

Negotiating Bank

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•L/C 특성

Principle of Independence

Once L/C is opened, L/C is totally independent from sales contract and other contracts it is based upon .

•If L/C is opened, sales contract becomes totally unrelated with L/C and does not have any binding power - If there is inconsistency between sales contract and L/C, process through L/C - Even when sales contract is canceled, L/C transaction is still valid

•L/C is independent from issuing contract between importer and issuing bank - Applicant cannot plea against issuing contract for the payment by L/C - Neither can Beneficiary

Principle of Abstraction

Everyone concerned with L/C proceeds transaction with abstract documents, not the real goods

•All concerned people transact according to documents, not the real goods, services or other financial liabilities related to the documents .

•Concept to protect negotiating bank that purchases transport documents related to L/C because banks do not have information and experience in real good transaction

Independence from Sales Contract

Independence from L/CIssuing Contract

•Limits of L/C

Disadvantage for Importer

Importer 이 L/C 거래의 추상성을 악용하여 서류상의 사소한 오류를 트집잡아 지급을 거절하거나 가격할인을 요구하는 한계점 존재

Disadvantage for Exporter

•Even when the submitted documents match the conditions of L/C, if they were written out upon ‘forgery or fraud’, issuing bank exceptionally stop redemption of L/C according to ‘judgment of court’ ※ Injunction: Ruled out when importer directly gives proof to court that proves that the contract document is forgery or fraud.•May it be in discord with independent abstraction of L/C and immunity clause of bank however, it is approved in international precedents •This whole rule conflicts with the biggest characteristic of L/C, the independent abstraction, and can shrivel L/C transaction so they are approved very restrictively

※Fraud Rule

Exporter 이 L/C 거래의 추상성을 악용하여 대금 지급 요구 시 Importer 은 L/C 대금을 지급을 해야 하므로 Importer 이 요구하는 상품을 반드시 수입할 수 있다는 보장이 되지 않음 .

Transaction by Documents

Basic Concept of Trading Activation

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•Basic Factors

•Composition of L/C

Bank’s undertaking to reimburse

Documents required

Indication whetherRevocable or Irrevocable

Expiration DateHow and Where to use L/C

Time of Document Presentation

Matters Related to L/C itself Related to Bill of Exchange

Related to Shipment

Related to Product Details

Related to Documents

Other Specially Mentioned Matters

(2)Basic Factors of L/C

•Parties Concerned to L/C

Exporter who benefits from L/C transaction .Called ‘Consigner’ for consigning goods Called ‘Drawer’ for being publisher of bill of exchange

Bank that issues L/C

Where L/C can be used, designated by issuing bank

Confirmation: A definite undertaking of the confirming Bank, in addition to that of the issuing Bank, to honour or negotiate a complying presentation

Accepts bill of exchange when the L/C is acceptance L/C and pays money on maturity date

Takes care of inter-bank settlement if reimbursement L/C is used

Applicant(Buyer,

Importer, Consignee)

Generally importer. Often called Consigneebecause he consigns goods

Negotiating Bank

(Negotiating Bank)

L/C Issuing Bank(Issui

ng Bank)

Nominated Bank

Advising BankGives notification of L/C

Confirming Bank Bank added by request from issuing bank that double-confirms the documents

Purchases transport document and pays money for it

Paying Bank In charge of payment in deferred L/C transaction

Accepting Bank

Reimbursing Bank

Beneficiary(Seller, Exporter,

Consignor, Drawer)

(3)Parties Concerned to L/C

•Duty of Concerned Parties in L/C Transaction

Importer and Exporter

Importer -Duty of L/C Publication -Duty of Payment

Exporter -Duty of Delivering Doods, -Duty to Follow L/C Conditions

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Issuing Bank and Applicant

Issuing Bank-Duty to Follow Instruction-Duty to Open L/C-Duty to examine Documents

Applicant -Duty to Reimburse -Duty to Pay Commission to Reimburseing Bank and Take Risks -Duty to Follow Foreign Custom and Legislation

Issuing Bank and Beneficiary

Issuing Bank -Duty to Make Payment Beneficiary -Duty to present Documents and Bills of Exchange Matching to Conditions of L/C

•Positions of Each Party Involved in L/C Transaction

○Position of Advising Bank

Advising Bank

Relationship with Issuing Bank

Relationship with Beneficiary

Relationship with Applicant

Relationship with Negotiating Bank

Entrusted by Issuing Bank : Duty of delivering L/C safely and correctly

L/C - Has to be very careful about sincerity of L/C

No duties or legal binding

Do not have any duties unless it confirms L/C

Advising Bank does not have to pay, undertake nor purchase unless it is confirming bank.

○Positions of Paying, Accepting, and Negotiating Banks

Paying, Accepting, Negotiating Banks

Relationship with Issuing Bank

Relationship with Beneficiary

Nominated Bank approved by issuing bank has ‘rights’ to undertake, purchase, or pay for the L/C but it is ‘rights’ not ‘duty’ If a bank undertook, purchased, or paid for the documents matching L/C conditions, the bank can ask for C.O.D. to issuing bank

Paying, Accepting, Negotiating banks can ask money directly to beneficiary

(4) Variety of L/C

L/C

Classified by Presented Documents

•Documentary L/C•Non-Documentary L/C -Clean L/C: used in transaction of labor or service, not merchandises, Does not include transport document -Standby L/C: used in guaranty of banks such as contract payment guarantee. Does not include transport document

Classified by Publication Method

•Telex L/C•SWIFT L/C•Mail L/C※SWIFT: Society for Worldwide Interbank Financial Telecommunication

Classified by Settlement Period

•Sight L/C•Usance L/C - Shipper’s Usance L/C - Banker’s Usance L/C(Domestic Usance L/C)•Mixed Payment L/C•Installment Payment L/C•Red-clause L/C

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SWIFT : Society for Worldwide Interbank Financial Telecommunication which is a sytstem that has been organized in order to rapidly, and precisely settle with international payment through exchange bank. It is a NPO with members of major banks of Europe and North America and has been established in May 1973. The headquarter is located in Brussels.

2. Reading L/C

(1) Variety of L/C Related SWIFT Messages

Message Type Message Type Name Usage (Purpose)

700 / 701 Issue of Documentary Credit Used in L/C publication

705Pre-Advice of a Documentary Credit

Notifying Beneficiary about preliminary information before opening L/C

707Amendment to a Documentary Credit

Amendment of L/C conditions

710 / 711Advice of a Third Bank’s Documentary Credit

Used when Advising Bank notifies the third Advising Bank about L/C

720 / 721 Transfer of a Documentary Credit Used in case of L/C negotiation

730 Acknowledgement Advising Bank notifies Issuing bank about receiving L/C

732Advice of Discharge Issuing bank or Negotiating Bank notifies each other about

receiving defected documents

734Advice of Refusal Used when issuing bank notifies Negotiating Bank about

defects of documents

740Authorisation to Reimburse Used when issuing bank asks reimbursement bank for

reimbursing authorization

742Reimbursement Claim Used When negotiating bank asks reimbursement bank for

money

747Amendment to an Authorisation to Reimburse

Used when issuing bank changes reimbursement bank

750 Advice of Discrepancy Negotiating bank notifies discrepancy to issuing bank

752Authorisation to Pay, Accept or Negotiate

Accepting negotiation of MT 750

754Advice of Payment /Acceptance/negotiation

Negotiating bank notifies purchase of healthy documents to issuing bank

756Advice of Reimbursement or Payment

Used when issuing bank notifies negotiating bank about settlement

797Free Format Message Free format message, used in other not-standardized

matters.

(2)MT 700(L/C 개설 ) 의 구성Status Tag Field Name Content / Options

M 27 Sequence of Total 1n / 1n

M 40A Form of Documentary Credit 24x

M 20 Documentary Credit Number 16x

O 23 Reference to Pre-Advice 16x

O 31C Date of Issue 6n

M 40E Applicable Rules 30x[/35x]

M 31D Date and Place of Expiry 6n29x

O 51a Applicant Bank A or D

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Status Tag Field Name Content / Options

M 50 Applicant 4*35x

M 59 Beneficiary [/34x], 4*35x

M 32B Currency Code, Amount 3a15number

O 39A Percentage Credit Amount Tolerance 2n / 2n

M 41a Available With .... By .... A or D

O 42C Drafts at ..... 3*35x

O 42a Drawee A or D

O 42M Mixed Payment Details 4*35x

O 42P Deferred Payment Details 4*35x

Example1. ::700 Issue of Documentary Credit :27 Sequence of Total:1/2 :40A Form of Documentary Credit: IRREVOCABLE :20 Documentary Credit Number: OD3100706032608 :31C Date of Issue:070703 :40E Applicable Rules: UCP LATEST VERSION :31D Date and Place of Expiry:080808 AT HOCHIMINH CITY :50 Applicant: ABC Co. :59 Beneficiary: XYZ Co. :32B Currency Code and Amount:USD100000,00 :41D Available With ... By ...:ADVISING BANK BY MIXED PYMT :42M Mixed Payment Details: PLS SEE 46B :44C Latest Date of Shipment:080305 :45A Description of Goods and/or Services: COMMODITY: +TREATED WATER PUMP STATION PIPE WORKS : USD 50,000.00 +ERECTION : USD 50,000.00 TOTAL AMOUNT: USD100,000.00 CIF HOCHIMINH CITY DESCRIPTION GOODS, SPECIFICATION,PRICES AND OTHER DETAILS AS PER CONTRACT NO.A/97/ICB/3 PACKAGE IV DATED 15/04/99 :47A Additional Conditions: +REIMBURSEMENT UNDER THIS L/C (IF ANY) IS SUBJECT TO THE ADB'S ''COMMITMENT LETTER (C/L) TO REIMBURSE''ISSUED BY THE ASIAN DEVELOPMENT BANK. +ONE COPY SET OF DOCUMENTS REQUIRED FOR OPENING BANK'S FILE +ACCEPTANCE OF ANY DISCREPANCY(IES) IN ANY PRESENTATION OF DOCUMENTS BY US DOES NOT IMPLY OR CONSTITUTE ANY AMENDMENT(S) TO THIS L/C FOR THE PURPOSE OF ANY FUTURE DRAWING(S). ----- The Rest is Omitted -------

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Example2.::700 Issue of Documentary Credit :27 Sequence of Total:1/1 :40A Form of Documentary Credit: IRREVOCABLE :20 Documentary Credit Number:ILCC500381 :31C Date of Issue:070702 :40E Applicable Rules: UCP LATEST VERSION :31D Date and Place of Expiry:070725KOREA :50 Applicant: ABC CO. CALGARY, ALBERTA :59 Beneficiary: XYZ CO. SEOUL, KOREA :32B Currency Code and Amount:USD10000.00 :41D Available With ... By ...:CIBC BY ACCEPTANCE :42C Drafts at ...:45 DAYS FROM BILL OF LADING :42D Drawee: CIBC TRADE FINANCE CENTRE CALGARY, ALBERTA :43P Partial Shipments: ALLOWED :43T Transshipment: ALLOWED :44A Place of Taking in Charge /Dispatch from../ Place of Receipt :SEOUL, KOREA :44B Place of Final Destination/ For Transportation to/ Place of Delivery: EDMONTON, ALBERTA :44C Latest Date of Shipment:070715 :45A Description of Goods and/or Services: CARBON STEEL FLANGES :46A Documents Required: INSURANCE POLICY/CERTIFICATE ALL ORIGINALS ISSUED MUST BE PRESENTED – COVERING ALL RISKS - PAYABLE IN NEGOTIABLE FORM FOR 110 PERCENT OF INVOICE VALUE COMMERCIAL INVOICE IN TRIPLICATE CANADA CUSTOMS INVOICE IN TRIPLICATE BENEFICIARY SIGNED STATEMENT THAT ONE SET OF NEGOTIABLE DOCUMENTS HAVE BEEN AIRMAILED TO THE APPLICANT WITHIN 10 DAYS AFTER SHIPMENT. FULL SET OF CLEAN MULTIMODAL (COMBINED) TRANSPORT BILL(S) OF LADING TO SHIPPERS ORDER BLANK ENDORSED MARKED NOTIFY WFFFITTINGS AND FREIGHT PRE-PAID ------- The Rest is Omitted -------

::707 DOCUMENTARY CREDIT AMENDMENT :20 Sender's Reference:M06H7112NU00064 :21 Receiver's Reference: NONREF :31C Date of Issue:011212 :30 Date of Amendment:011231 :26E Number of Amendment:01 :59 Beneficiary (Before this Amendment): SHANGHAI JIN HANG INTERNATIONAL TRADING CO., :32B Increase of Documentary Credit Amount:USD5738,10 :34B New Credit Amount After Amendment:USD59648,20 :44C Latest Date of Shipment:020122 :72 Sender to Receiver Information: ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED. ----- The Rest is Omitted ------

Example3.

::740 Authorization to Reimburse :20 Documentary Credit Number:M0609906EU00057 :31D Date and Place of Expiry:990721IN U.S.A. :32B Credit Amount:USD100000.00 :41A Available With ... By ...:KOEXUS6S BY NEGOTIATION :42C Drafts at ...:2 YEARS FROM B/L DATE :42A Drawee:SEAFUS66 :71A Reimbursing Bank's Charges:CLM :72 Sender to Receiver Information: + THIS IS SUBJECT TO ICC URR525. KOREA EXCHANGE BANK, SEATTLE BANKER'S USANCE

Example4.