Documentary Credit Insight

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THE TRADE FINANCE QUARTERLY OF THE INTERNATIONAL CHAMBER OF COMMERCE

Vol 19 No 3 July September 2013

Bogus documents and L/Csput banks at riskby P. Mukundan

Under sub-article 14 (a) and article

34 of UCP 600, banks are not

obliged to go beyond the

documents as they appear on their

face nor can they be held

responsible for the falsification of

the documents presented. If that is

the case, does it matter to banks if

the documents presented relate to

a non-existent cargo?

There are two aspects to this issue. On

the one hand are the obligations that

banks enter into between each other

under the UCP. UCP 600 correctly reflects

the position with the articles above.

Notwithstanding this, there are very real

risks that banks assume vis--vis their

counterparties and regulators if

inadvertently they finance customers

who regularly present spurious

shipments to them.

Compliance with the UCP is only one

side of the risk coin. It is easy for bankers,

through blind adherence to the UCP and

the exclusion of all else, to ignore the flip

side risks of fraud and money laundering.

A few current cases highlight this.

Middle East banks

The secondary market in L/Cs in the

Middle East is a well-established business

through which banks seek to fully exploit

their correspondent banking

relationships or increase the volume of

their trade finance transactions. This

sometimes helps those banks that do not

have direct access to a wide range of

trade finance customers.

A Middle East bank active in this trade

was approached by a bank in North Africato buy a set of documents, valued at

tens of millions of US dollars, on a 90-day

deferred payment basis, which appeared

to involve a government buyer in that

country. It was only when the bank

investigated the transaction through the

International Maritime Bureau (IMB) that

it discovered the shipment had not taken

place as described on the documents and

rejected the offer.

This information was passed on to the

originating bank in North Africa. Withinweeks, a number of other banks were

offered the same set of documents.

Secondary banks offered these

transactions are inherently remote from

the customer with little knowledge of the

customers business and the true context

under which the transaction was offered

to the banks. They are vulnerable.

The easy approach is to take the view

that the secondary bank is not concerned

with whether the goods exist or not, but

simply takes a credit risk on the North

African bank. However, there is the

practical risk in the event of a fraud that

local courts in the North African country

may take a different view concerning thecontractual obligations under the UCP.

This may not be what the UCP intends,

but hard-pressed nations have tried to

resist paying out tens of millions of

dollars if they have not received value in

return. It is this reality which may impose

upon the prudent Middle East bank a

need to make checks to ensure that the

shipment was performed. Buyer beware!

An Asian case

A bank in Asia received a substantial L/C(Master L/C) for the shipment of finished

garments. In turn, as permitted under the

L/C, it split the L/C into many different

back-to-back sub-L/Cs favouring

> continued on page 22

InsideDCInsightBogus documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Ban k in g C om m is s ion n ew s . . . . . . . . . . . . . . . . . . . . . . . . . . . 2The Insight interview (Andr Casterman). . . . . . . . . . . . . . . 3Queri es and responses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5ISBP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Expert commentary (Sarah Younger) .. . . . . . . . . . . . . . . . 11Special report: Islamic banking . . . . . . . . . . . . . . . . . . . . . . 13Guarantees and standbys . . . . . . . . . . . . . . . . . . . . . . . . . . . 15The UCP in court . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6Insurance documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Multilateral development banks . . . . . . . . . . . . . . . . . . . . . 19DOCDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

In brief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24


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Volume 19 No 32

Editors note

Its been an intense period for the ICCBanking Commission (see followingarticle), with the passage of the newURBPO rules, the revised ISBP, theexpansion of the Commission intoregional commissions and new initiatives

on compliance. As usual, at DCInsightwetry to expand on the news by runningfeatures that put some meat on thebones of the news.

In this issue, we run along interview with AndrCasterman, whoco-chaired the committeedrafting the URBPO rules.Andr is quite candidabout what it will costbanks to be

technologically ready touse the BPO between10,000 and 27,000 tobegin with. But, he adds,

those costs can be offset by theadditional fees that the banks can chargecorporates as they do now on the letter ofcredit transactions. In other words,expensive in the short run but well worthit in the long run. Andr also makes a boldprediction when he claims that, by theend of the decade, I would expect BPOuse to be as widespread as that of L/Cs.

Well see. Commentators have beenforecasting the increasing electronicreplacement of L/Cs for some years now,and it hasnt happened yet which is notto say it wont.

On the related question of electronicpresentation of L/Cs, Sarah Younger, in ourExpert commentary, says that its just amatter of time. In the not-too-distantfuture, reality will overcomeconservatism, she contends.

We also run two critiques of the new

ISBP revision. In one, David Meynell, whilehailing the revision, expresses someregrets it was not more ambitious incovering more aspects of handlingdocumentary credits. Kim Sindberg, whocalls the revision an invaluable tool,refutes critics who say that anotherrevision was unnecessary. It was, he says,in light of documents and practices thatUCP 600 as well as the related industries have created.

We like this mix of stories. Hope youwill too.

Ron KatzEditor

Banking Commission news

Money laundering, regionalexpansion and tradefinance awards

During the last several months, ICCs

Banking Commission has branched

out with new initiatives on anti-

money laundering (AML), has

engaged in regional expansion and

has received international

recognition for its trade services

activities.

A newly formed group, the ICC Banking

Commission Compliance Group, has been

set up to respond to the increasing numberof issues the industry faces in meeting the

regulatory requirements around compliance

for financial institutions. Composed of a

small group of experts, the group will

interact with, and draft guidance, policy

submissions and responses to regulators on

all topics related to compliance issues

affecting the trade finance industry. Some of

the issues to be covered:

sanctions regulations and consequences

of not understanding the requirements;

customer due diligence requirements; know your customer and correspondent

banking requirements;

AML in respect of trade;

terrorist finance and weapons

proliferation;

financial crime, including tax evasion and

other offences relating to trade products

and services; and

narcotics and people trafficking.

The main bodies with which the

Commission will interact include the

Financial Action Task Force (FATF)

headquartered in the OECD; the Wolfsberg

Group, an association of eleven global

banks, which aims to develop financial

services industry standards in KYC, AML

and counter-terrorist finance, as well as

other finance industry groups. This broad

remit reflects the seriousness with which

the Commission views the growing

problems associated with compliance.

A second Commission initiative is aimed

at de-centralizing some of the

Commissions activities by improving the

global reach for ICC banking products andservices. To accomplish this, the first step

was to set up a regional banking

commission in the Middle East and North

Africa (MENA) region, with the objective to

engage policy makers and business on a

dialogue relating to regional trade finance

issues.

MENAs program is a full one. In Dubai in

May, it organized a regional briefing on the

new Bank Payment Obligation (URBPO)

rules and reported the results of the new

ICC Global Survey on Trade Finance. In

September 2013, again in Dubai, it will

organize a public relations trade event in

parallel with SIBOS, an event that brings

together 7,000 experts from financial

institutions, multinational corporations andtechnology partners. And in November

2013, it will hold a trade facilitation

consultation by invitation only to

discuss trade finance challenges.

This regional initiative, if successful,

could be followed by the establishment of

regional banking commissions in other

parts of the world as well.

In June, following on the successful

launch of the URBPO rules and the approval

of the revised ISBP, the Commission

received a welcome accolade in the form ofan award as the best non-bank services

provider from the prestigious publication

Trade and Forfaiting Review. The final results

took a 75% weighting of the votes cast with

the remaining 25% weighting being

applied by the editor and based feedback

from the marketplace, engagement from

the institutions nominated, observations of

deal flow and general activity and reports

on nominations gathered over the last 12

months. The award for the best trade bank

in the world was won by J.P. Morgan; the

award for the most innovative trade bank

was garnered by Standard Chartered.

Commenting on the Banking

Commission award, Commission Chair Tan

Kah Chye said: This recognition marks the

shifts taking place in the Banking

Commission as we strive to keep pace with

the changes taking place in world markets.

The Commission has scheduled its

autumn meeting in Vienna from 21-25

October. Among the matters to be

discussed will be implementation of the

BPO rules and the new rules for theDOCDEX dispute resolution process.

For further information about the meeting, contactWhitney Jolivet [email protected]
mailto:[email protected]:[email protected]


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July September 2013 3

The Insight interview: Andr Casterman

The future of the Bank PaymentObligation (BPO)

Andr Casterman is Head of

Corporate and Supply Chain

Markets at SWIFT and is Co-Chair

of the BPO Project that developed

the recently adopted ICC/URBPO

rules and related SWIFT messaging

standards.

DCI: Some commentators have called the

BPO the most revolutionary development in

trade finance for some decades. But the

question still arises: apart from the largest

banks, how aware are most banks of theBPO, and what it can mean to

their business?

Casterman:There is a growing

awareness in the market. More and more

banks now understand what we are

doing, in terms of ICC and SWIFT helping

them to accelerate the inter-bank trade-

related processes. We see more banks all

over the world joining the SWIFT trade

matching application called the Trade

Services Utility (TSU) to adopt the BPO

and to operate BPO transactions on

behalf of their corporate clients. We try to

help banks structure their

commercial efforts.

On the corporate side, there is still

much more to achieve to raise awareness.

This awareness can be achieved, not by

focusing on the BPO as a payment

instrument, but rather by advertising the

value-added services that banks can offer

on top of the BPO, such as payment

assurance, pre-shipment finance and

post-shipment finance.

DCI:The BPO was conceived in part as an

electronic solution to the increasing move

to open account. Is this change to open

account common to all regions or are there

still some where the letter of credit still

dominates trade finance transactions?

Casterman: Asia is a region where letters

of credit remain a key instrument for the

majority of the trade transactions. It is

hard to quantify how much the L/C is

securing trade in Asia, but what we can

see from SWIFTs traffic statistics is that 70per cent of the letters of credit have a leg

in Asia. 80 per cent of those are intra-

Asian letters of credit.

DCI:People have been forecasting the end

of paper-based trade finance for some time

now. When ICC developed the eUCP rules,

for example, there was talk of electronic

trade finance becoming dominant within a

decade, but that has not happened. Why is

the BPO any different from what has not

happened with the eUCP?

Casterman:The L/C is here to stay. No

one really wants to eliminate or replace it.

It will remain the preferred instrument for

parties to secure a trade transaction

when the level of trust is low or zero. But

as soon as trading parties have more

confidence in their relationship, they willask their banking partners to be more

flexible and efficient when offering risk

mitigation and financing.

And this is where the BPO starts to

make sense, when risk financing is

required but efficiency becomes critical

for the exporter to be more competitive

or for the importer to pay suppliers faster,

for example.

The BPO does not aim to replace letter

of credit transactions, and the real

challenge for banks is to attracttransactions that have moved away from

the L/C to open account and that are

secured with a partial advance payment,

a payment guarantee or credit insurance.

These are the transactions the banks can

win back with the BPO.

With the BPO, they will be able to do

more than with the payment guarantee,

and if they attract transactions from the

credit insurance world, they will be

winning the competition against the

insurance sector.

DCI:In that regard, as of June 2013, how

many banks have indicated that they are

prepared to use the BPO?

Casterman: At this time, 50 banking

groups have confirmed to the corporate

market that they are adopting the BPO.

But on the technical platform, we have

more than 80 banking groups connected

to the platform in order to operate BPO

transactions. That number is

continuously increasing.

DCI:So, you are satisfied with the pace of

growth of the BPO adoption?

Casterman: Im very satisfied on the bank

side given the progress made by various

banks. The next challenge we face is on

the corporate side, to attract more

corporates to adopt the BPO. This is

happening thanks to a dozen of banks at

this time.

DCI:Lets look at some of the impediments

banks face before deciding to use the BPO.

The first is cost and specifically the cost of

technology to implement the BPO. One DCI

writer said and I quote Some market

participants question whether its worthspending a large amount of money on this,

particularly when a bank may not find a

trading partner who can provide a similar

electronic set up. Is this a valid point and

whats the typical technology cost for a

bank to offer the BPO?

Casterman:The minimum technology

investment for the bank to operate a low

volume of BPO transactions is between

10,000 and 27,000 euros. This includes

being connected to the SWIFT platform,

which is a bank-to-bank messaging andmatching tool to operate BPO

transactions.

That is the cost to the bank. Once the

volume materializes, banks need to

increase their internal automation, and

there they have to talk to their vendors to

take advantage of the BPO functionality

that their trade finance lenders are

supporting. That is an additional cost.

Those costs can be offset by the

additional fees that the banks can charge

corporates as they do now on the letter

of credit transactions.

DCI:Is it fair to say that only very large

banks are likely to take on these costs

willingly?

Casterman: I would expect BPO use to be as widespread

as that of L/Cs


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Volume 19 No 34

Casterman: Fifteen of the top 20 trade

banks are connected to the Trade

Services Utility. But we also have many

smaller banks from various countries

such as China, Argentina, Chile, Korea,

Morocco, Jordan, Belgium, etc., that are

seeing the benefits of the BPO and want

to market it to their clients. The

innovation is not only relevant to largebanks and large clients. And the bank

may offer those services over a paper

channel to their clients or using their

internet portal. Corporate-to-bank flows

do not need to be on SWIFT, only the

bank-to-bank flows.

DCI:There is another impediment to BPO

adoption, and that is the conflicting

legalization and compliance requirements

in different countries. Since compliance and

sanctions requirements have increased and

countries may have these conflicting

standards, isnt this a hindrance for banks

in those countries wanting to offer the BPO?

Casterman: Compliance requirements

are growing, and they are as valid for L/Cs

as for BPOs. Whatever the underlying

instrument, these requirements are valid

across the board. They may hold back

banks from entering geographic areas or

may encourage banks to pull out of some

areas. That would, as a whole, limit their

trade payments and trade business in

those areas, including the BPO. However,the BPO makes it easier to adhere to

sanctions screening because the data

must be more structured.

DCI:Now that ICC and SWIFT have now

teamed up to produce rules for the BPO, is

this likely to help make standards more

uniform internationally?

Casterman: Yes, definitely. That is

something that banks expect from any

new initiative: that all of the innovations

be based on common standards. Thebanks do not want to operate with

multiple formats. With clients, of course,

it is the commercial aspect that counts.

They will accept any kind of format.

But on the bank-to-bank segment,

there is really a need for uniform

standards. These standards are not only

the messaging standards that SWIFT

developed over 40 years, but also the

legal standards that ICC has been

developing for 80 years.

The two sets of standards have to go

well together, and that is why the BPO is

so special. For the first time, the ICC/

URBPO rules mandate the use of

common messaging standards between

banks and a centralized matching

application, the TMA, which is SWIFT-

issued today. but which could be in

another system in the future.

That is how banks can easily focus

their efforts on the corporate-to-bank

commercial proposition, which includes

corporate-to-bank contracts, corporate-

to-bank commercial pricing and

commercial offerings that rely on highlystandardized bank-to-bank standards.

DCI:On the question of supply chain finance

and the BPO, can you explain how that

works for some of the banks that may not

be familiar with it?

Casterman:The topic of supply chain

finance is an important innovation that has

arisen in the last several years. As defined

by banks a few years ago, the use of

electronic flows has been basically linked to

automated financing. The bank receives

electronic data of approved payables from

a large buyer and with those approved

payables it will manage the risks of future

receivables and will automatically offer

discounting to suppliers.

The bank makes a margin out of this

intermediation between larger buyers

and their suppliers. That is quite

interesting for suppliers looking for early

payment at a discounted rate defined on

the basis of the buyers credit standing,

which is usually better than the suppliers.

So, essentially we are talking about asituation where we have a large buyer

and smaller suppliers. This is a very

interesting development because it

shows that financing can be automated.

The limitations of that scheme are that

it has been developed by large banks in

support of large buyers and in a very

proprietary way, where there are no

standards. The bank works on its own,

not with local banks that already have the

suppliers as customers. The buyers bank

takes on board all those suppliers, which

leads to more know-your-customer, on-

board processes.

These are issues not usually advertised

by banks. But thanks to the work ICC and

SWIFT have done, were enabling the

buyers bank to work with local banks and

to avoid having to take on board all of

those suppliers by working with the local

banks that have already done so on their

Web banking systems.

We are enabling the market to move

from a single non-standardized bank set-

up to a standardized two-bank set-up.

That will remove the know-your-

customer issues for the buyers bank, and

it will increase the rolefor local bankssupporting those suppliers. It will also

enable the banking industry as a whole

to extend what is now called approved

payables finance to the very early stage

of the transaction, which can be called

purchase order finance or

pre-shipment financing.

That is what we aim to do, and we

have found that the large banks are

looking for this kind of collaboration with

local banks.

DCI:What do you say to banks that may

fear that using the BPO will cannibalize the

revenues they currently earn from their

traditional paper-based lc business?

Casterman:We tell them that the BPO

will definitely cannibalize some of their

letter of credit revenues, but that is

basically good for banks. First, they will

keep those transactions in their shop

rather than losing them to competitors

that offer alternative risk mitigation

services.

They will be able to charge the risk fee,which is the most important value-added

banks can offer the corporate: to take on

the risk of these future payments, with

conditions, of course.

They will be able to remove costs not

adding value such as courier costs,

manual processing costs, etc. resulting

from paper-based processes. With these

costs removed, the margins will increase,

but also their competitiveness will

improve because they wont have to

charge those costs to their clients.

In short, they will be able to retain the

trade transactions in their trade business

whilst continuing to offer their main

value-added service, which is risk

mitigation, and possibly financing.

Whereas if they continue only with letters

of credit and do not have the tools such

as the BPO to offer with their service, they

might lose the L/C business and lose their

role in those transactions as well.

DCI:Looking ahead, lets say to 2020, would

you think that in that time frame, there

would be a generalized acceptance of the

BPO, by both smaller banks and those with

the resources now to adopt it? How

widespread would you expect BPO use by

The URBPO rules: definition of a BPOBank Payment Ob ligation or BPO meansan irrevocable and independentundertaking of an Obligor Bank to pay orincur a deferred payment obligation and payat maturity a specified amount to aRecipient Bank following Submission of allData Sets required by an EstablishedBaseline resulting in a Data Match or anacceptance of a Data Mismatch pursuant tosub-article 10 (c).


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the end of this decade?

Casterman: Looking to the 2020

milestone, I would expect BPO use to be

as widespread as that of L/Cs, because as

corporates discover the BPO, they will be

asking their banks to develop payment

assurance and financing services. And we

know that banks can act very quickly

when the corporate demand is there.

Hopefully, by 2020 the BPO will

support more trade transactions than the

letter of credit because the L/C has

virtually disappeared in some regions,

and banks want to win back transactions

that moved to partial advance payments

or payment guarantees which are not

welcomed by importers or to credit

insurance, which is not good for banks.

Andr Castermans e-mail [email protected]

Queries and responses

Opinions: Lisbon Banking Commission meetingUCP 600 sub-articles 6 (d)(ii), 6 (a) and 7 (a)

When a credit stipulated that

documents were to be sent in two

lots, must both lots be received at

the place for presentation, in this

case the counters of the issuing

bank, on or before the expiry date

or the latest date for presentation?

Query [TA 785rev]

We kindly request your official opinion for the

following query related to a documentary credit

issued subject to UCP 600.

Under a documentary credit that was available

with the issuing bank and expiring at its counters,

documents were to be sent to it in two lots the

first lot by special courier service and the second

by registered airmail. The issuing bank receivedthe first lot, containing one original of all the

required documents, within the presentation

period stipulated in the documentary credit.

However, the second lot, containing the

remaining documents, i.e., both originals and

copies, was received after the documentary credit

expired. In such a case, is the issuing bank obliged

to honour the presentation based upon the

content of the first mailing?

Is ICC Opinion R 415, regarding documents

sent in two consecutive lots, which was decided

under a UCP 500 credit, still valid for documentary

credits subject to UCP 600?

Analysis

UCP 600 sub-article 6 (d) (ii) includes: The place

of the bank with which the credit is available is

the place for presentation.

UCP 600 sub-article 6 (e) states: Except as

provided in sub-article 29 (a), a presentation by or

on behalf of the beneficiary must be made on or

before the expiry date.

UCP 600 sub-article 7 (a) states: Provided that

the stipulated documents are presented to the

nominated bank or to the issuing bank and thatthey constitute a complying presentation, the

issuing bank must honour .

The credit was available with the issuing bank

and expired at its counters. Under these

circumstances, the issuing bank must receive all

the stipulated documents called for under the

credit, in the required number of originals and

copies and within the stated expiry date and

presentation period, for it to determine whether

the presentation is compliant. The issuing bank

received only one original of all the stipulated

documents in the first lot and, therefore, it wasnot in a position to determine compliance with

the terms and conditions of the credit until the

second lot had been received.

When a credit stipulates documents are to be

sent in two lots, both lots must be received at the

place for presentation, in this case the counters of

the issuing bank, on or before the expiry date or

the latest date for presentation.

When a credit is available with an issuing

bank, such bank should not incorporate a mailing

condition that requires the documents to be sent

in two mails. If a credit is available with an issuingbank, it is the responsibility of the beneficiary to

ensure that the documents are received by that

issuing bank within the credit validity and the

applicable presentation period.

Conclusion

The issuing bank is not obliged to honour if

the second lot is not received within t he expiry

date of the credit. The presenter was required

to ensure that the issuing bank would receive

both lots within the expiry date and applicable

presentation period. ICC Opinion R 415 is still valid under UCP

600. However, it does not apply in this

case since the credit is available with the

issuing bank.

UCP 600 sub-article 14 (a)

If a credit required shipment to be

effected from any Chinese Port,

and where the shipment has been

effected from Hong Kong, would

that comply with the requirement

of the credit?

Query [TA 770rev2]

If a credit required shipment to be effected from

any Chinese Port, and where the shipment has

been effected from Hong Kong, would that

comply with the requirement of the credit?

Analysis and conclusion

When a credit indicates that shipment is to be

effected from Any Chinese Port (or to Any

Chinese Port), it is recognized that in the context

of examination of documents on their face, inaccordance with UCP 600 sub-article 14 (a), this

would include Hong Kong being shown as the

port of loading (or port of discharge).

However, applicants and beneficiaries should

be aware that differing customs, systems and

regimes operate in Hong Kong and at ports on the

Chinese mainland. Therefore, a credit should

specifically indicate where shipment is only to be

effected from or to a port on the Chinese

mainland. This comment is particularly relevant to

applicants based on the mainland that may

require, or at the very least expect, delivery tooccur at a port on the mainland as opposed to

Hong Kong. Otherwise, banks will be required to

honour or negotiate documents that indicate

shipment from or to Hong Kong, even though the

expectation under the contract and the credit may

have been for the use of a port of loading (or

discharge) on the mainland.

UCP 600 sub-articles 14 (a),16 (c) and 16 (d)

If the documents were received by

the issuing bank after the expirydate of the credit, did this relieve

it from acting in accordance with

the requirements of UCP 600 sub-

article 14 (a), and sub-articles

16 (c) and (d), as the presentation

was made timely at the confirming

banks counters?

Query [TA 782]

An issuing bank (IB) in Country L opened a credit,

subject to UCP 600, available by payment at sight

at the counters of a confirming bank (CB) inCountry U. Validity was 31/12/2011 in Country U.

The CB added its confirmation and advised the

credit through an advising bank (AB) in Country B.

The beneficiary presented documents to the AB,
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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Volume 19 No 36

which found a non-disputable discrepancy (charter

party bill of lading presented, which was not

allowed). As shipment to Country L was urgent,

the beneficiary instructed the AB to present the

documents urgently in trust on approval basis to

the CB and, so further, to the IB. The AB, acting as

presenting bank, complied with these instructions

and forwarded the documents under the L/C with

following instructions to the CB: We herewithauthorize you to send documents on approval basis

due to the stated discrepancy without verification.

The documents arrived with the CB in Country U

before the expiry date. The CB refused the

presentation in due time according to sub-article

16 (d) for the reason of Charter party B/L

presented and forwarded the documents to the IB

on 3 January 2012 on approval basis,referring to

the credit.The IB received the documents from the

CB on 10 January 2012, but after reminders were

sent by the AB, the IB refused only on 24 January

2012 to the CB.

When the AB drew the attention of the CB andthe IB to the non-compliance of article 16 by the

IB, the CB replied that the documents had been

forwarded in trust, on an approval basis. The IB

also stated that the L/C expired prior to receipt of

the documents by IB, i.e., 10 January 2012, and

that such documents are outside the scope of UCP

600 and no rejection notice as per article 16

is required.

The AB disagreed with this, stating that its

presentation was timely received by the CB,

where the credit was available and that LC

expired could not be a valid discrepancy. The AB,therefore, claims payment from the IB based on

the argument that the IB did not timely reject the

presentation according to sub-article 16 (d) and,

as a consequence, has to pay according to sub-

article 16 (f).

Despite continuing disagreement, the

documents were returned by the CB to the AB.

Query:

1) Did the fact that the presentation by the CB to

the IB took place after the expiry date of the credit

discharge the IB from acting according to sub-article 16 (d)?

2) If not, has the AB the right to claim payment

from the IB?

Analysis

The credit was available by payment at the

counters of the confirming bank against

presentation to it of the documents stipulated

therein. Due to an indisputable discrepancy, the

confirming bank, at the request of the presenting

bank, sent the documents to the issuing bank for

approval. It is to be noted that a presentation was

made to the confirming bank within the expiry

date and thus bound the issuing bank to examine

the documents.

When the issuing bank received the referenced

documents, it was required to determine whether

they complied, according to the requirements of

UCP 600 sub-article 14 (a). Having determined

that the documents were discrepant, and

deciding to refuse them, it was required to send a

notice of refusal in accordance with sub-articles

16 (c) and (d).

The issuing bank refused the presentation only

14 calendar days after receipt. The reason given

was that the credit had expired prior to its receiptof the documents, that the presentation was

outside the scope of UCP 600, and that no notice of

refusal according to UCP 600 article 16 is required.

The notice of refusal sent by the issuing bank

fails in two respects. First, the reason for refusal

L/C expired is not correct for the reasons stated

above, and second, it had not been sent by the

close of the fifth banking day following the day of

presentation to the issuing bank.

Conclusion

Query 1The fact that the documents were received by

the issuing bank after the expiry date of the

credit does not relieve it from acting in

accordance with the requirements of UCP 600

sub-article 14 (a), and sub-articles 16 (c) and

(d), as the presentation was made timely at

the confirming banks counters.

Query 2

The issuing bank is required to honour the

presentation.

UCP 600 sub-article 22 (a) (i)Is a CPBL issued and signed by a

carrier or a named agent for a

named carrier discrepant because

such parties are not named in UCP

sub-article 22 (a) (i)? If so, why

cannot a carrier or its agent be an

issuer and signatory of a bill of

lading subject to a charter party

contract?

Query [TA 775rev]

Charter party bill of lading issued and signed by

carrier or an agent for the carrier

We seek the opinion of the ICC Banking

Commission on the above subject.

UCP 600 sub-article 22 (a) (i) states that a

charter party bill of lading (CPBL) must appear to

be signed by any of the following parties:

a) the master;

b) the owner;

c) the charterer; or

d) a named agent for any of the above

Not included in the list of signatories is a

carrier or a named agent for a carrier. While such

CPBLs (issued and signed by a carrier and/or

issued and signed by a named agent for a named

carrier) were seldom seen in the past, recently

they have been spotted with

increasing frequency.

The immediate and obvious response to such a

CPBL is one of discrepancy, as the signatory is

not any one of the parties listed in sub-article

22 (a) (i). However, those opposing the

discrepancy argue that:

UCPs mere silence in this matter is not enough

justification for dishonour.

UCP does not specifically prohibit such a CPBL. Articles 19, 20 and 21 give the impression that

the carrier and/or its agents B/L is somehow

superior to the CPBL since, unless otherwise

expressed, a CPBL is not good tender.

Based on conventional L/C practices and the

UCP, banks are to examine only the face of

documents and not go beyond, beneath, over or

further than the documents data content. Would

this not necessarily mean that banks need not

(and most really do not) have intimate

knowledge of vessel chartering and related

arrangements and structures?

In short, we would like to clarify:Is a CPBL issued and signed by a carrier or a

named agent for a named carrier discrepant

because such parties are not named in the above-

quoted sub-article?

If so, we would like to know why a carrier or its

agent cannot be an issuer and signatory of a bill

of lading that is subject to a charter

party contract.

Analysis

When a credit simply allows for or requires the

presentation of a charter party bill of lading

(CPBL), a CPBL issued and signed by a carrier or

its agent is discrepant under UCP 600 sub-article

22 (a) (i).

The reason for excluding such CPBLs from this

sub-article was to avoid document examiners

having to determine which one, of a possible

number of different entities ranging from the

owner to charterers and sub-charterers, might be

the contractual carrier under the contract of

carriage as evidenced by or contained in the

CPBL. The reasoning underlying the current terms

of the sub-article is consistent with the principlethat document examiners must examine a

presentation to determine, on the basis of the

documents alone, whether or not the documents

(in this case a CPBL) appear on their face to

constitute a complying presentation, without

examining the terms of the contract of carriage

for that CPBL.

However, when a credit expressly allows for or

requires the presentation of a CPBL issued and

signed by the carrier or its agent, then the CPBL

referenced in the query would not be discrepant;

the express terms of the credit will prevail overthe default position set out in UCP 600 sub-article

22 (a) (i). In this situation, a document examiner

need only determine whether the CPBL presented

appears on its face to be issued and signed by or

on behalf of an entity described as the carrier.


7/24


Conclusion

Question 1

UCP 600 sub-article 22 (a) (i) does not permit a

CPBL to be signed by a carrier or its agent.

Question 2

A CPBL signed by a carrier or its agent is

discrepant unless the credit expressly requires

such a CPBL, for the reasons stated inthe Analysis.

ISBP 681 paragraph 23

Was the confirmation invalid if a

shipping mark contained symbols

or wording that was not in English

as opposed to symbols or

lettering shown in Spanish? When

the confirming bank refused

documents on the basis that the

documents did not comply with

a condition attached to itsconfirmation, was it entitled to

claim reimbursement if it did not

waive the condition and take up

the documents, or if it did not act

in its role as nominated bank?

Query [TA 776rev]

We would like to seek an official opinion of the

ICC Banking Commission on the following

questions related to shipping marks appearing in

the documents presented under a documentary

credit issued subject to UCP 600.

The documentary credit was issued by Bank I

in a Central American country and confirmed by

Bank C in Country T.

Relevant information of confirmation advice

and L/C:

1. The confirmation advice stated: Our

confirmation will be null and void if any

wording, except description of goods indicated

on the L/C appearing on any presented

document, is not in English.

2. The L/C was issued in English except for the

applicants name and address and thedescription of goods that were in Spanish.

There was no special requirement regarding

the language in which the documents were to

be issued.

3. The L/C stated: Upon receipt of original

shipping documents in full compliance with

the terms and conditions, you are authorized

to claim reimbursement from Bank R (the

reimbursing bank, i.e., the confirming banks

head office in New York).

Documents presentation:

1. Documents were presented to the confirming

bank through us.

2. The confirming bank refused payment as

follows: Shipping marks bearing wording not in English. (The L/C was silent with regard

to shipping marks, which appeared in the

documents in Spanish.)

3. We rejected this refusal as follows:

Shipping mark is not any wording. It is just a

symbol used to identify the goods during

import and export, so that it will be easily

recognizable. Since the documents presented

constitute a complying presentation, please

effect payment immediately.

4. The confirming bank refused again as follows:

The discrepancy is valid. Pls refer to

paragraph 23 of ISBP, a nominated bank(including the confirming bank) may, in its

conformation advice, restrict the number of

acceptable language[s] as a condition of its

engagement and confirmation in the L/C.

In our opinion, as stated in our rejection of the

refusal, a shipping mark is just a symbol used for

identification purposes only; it does not constitute

any wording of documents, and therefore the point

is not related to paragraph 23 of ISBP.

Much to our regret we were not able to

convince the confirming bank. It insisted on

sending the documents to the issuing bank forapproval to obtain its authorization to claim

reimbursement from the reimbursing bank.

However, it could not determine any discrepancy

subject to the L/C terms. Nevertheless, the issuing

bank authorized the confirming bank to claim

reimbursement, and payment has been received.

We would like to seek your opinion on the

following two questions:

1. Is the discrepancy raised by the confirming

bank valid with respect to the shipping mark?

2. Is the confirming bank in a position to claim

reimbursement from the reimbursing bank ifthe confirming bank determines that the

presentation does not comply with its own

requirements, but does comply with the

L/C terms?

Analysis

The confirming bank qualified its confirmation

undertaking by stating: Our confirmation will be

null and void if any wording, except description of

goods indicated on the L/C, appearing on any

presented document is not in English. In the

context of this query, the confirmation is only to

be considered invalid if the shipping markcontained wording that was not in English as

opposed to symbols or lettering shown

in Spanish.

Even though the shipping mark is not in

English, there is no requirement in the credit for

documents to show shipping marks. There is also

no restriction concerning the language in which

documents are to be issued. Therefore,

documents showing shipping marks in Spanish

do not constitute a discrepancy under the credit.

In view of the condition that the confirming

bank applied to its confirmation in respect of an

acceptable language, it had no obligation to

honour or negotiate. Although it had no such

obligation, and the documents were otherwise

compliant with the terms and conditions of the

credit, the bank could have agreed to act in its

role as nominated bank by forwarding the

documents to the issuing bank and claiming

reimbursement, and effecting settlement to the

beneficiary upon receipt of funds or to make

settlement to the beneficiary on a with

recourse basis.

The issuing bank still had an obligation to

honour a presentation that complied with theterms and conditions of its credit.

Conclusion

The discrepancy is not valid under the terms of

the credit, and the issuing bank would be

required to honour the presentation. The use

of any Spanish language in the wording of the

shipping mark would cause the confirmation

of the confirming bank to cease in respect of

that drawing.

Given that the confirming bank

refused documents on the basis that thedocuments did not comply with a condition

attached to its confirmation, it was not

entitled to claim reimbursement unless it

subsequently waived that condition and

agreed to take up the documents, or was

willing to act in its role as nominated bank, as

outlined in the Analysis.

Overturned UCP 600 Opinions

DCInsightreaders should note that the agreed text of ISBP publication 745 contains two practices that differ from previously

agreed positions that have been published as ICC Opinions. These are Opinions R 751 (TA 735rev) and R 766 (TA 709rev). These

Opinions appear in the ICC booklet ICC Banking Commission Opinions 2009-2011, publication No. 732.Opinion R 751 is superseded by the practices described in paragraphs D1 (c) and E1 (a) of the new ISBP 745. For R 766, this

Opinion is superseded by the practice described in paragraph K10 (c). These two Opinions are to be considered withdrawn with

immediate effect.


8/24

Volume 19 No 38

ISBP

Two experts consider the revised ISBP

The new ISBP: keeping up with the times

by David Meynell

Change is inevitable ... changeis constant.

Benjamin Disraeli, 1867

My first contact with standard banking

practice was way back in April 1997 at the

ICC Banking Commission meeting inShanghai. Representatives of ICCs US

National Committee showed me a

publication entitled Standard Banking

Practices for the Examination of

Documents (SBPED), which covered

standard banking practices jointly agreed

by the US Council on International

Banking and the Mexican Bankers

Association. It was immediately obvious

that this could be expanded into a global

agreement under the auspices of ICC.

As we all know, this was completed in2003 with the publication of ISBP 645,

and the subsequent updated ISBP 681,

which provided alignment with UCP 600

in 2007. The 2007 revision left much of

ISBP unchanged, although certain

alterations had to be made. UCP 600

required a few years of practice before

any significant adaptation of ISBP could

be implemented. Fortunately, many of

the required changes have been

enshrined in ICC formal Opinions issued

since 2007.

Operational impact

It is important to note that ISBP reflects a

consensus of standard banking practice

around the world in connection with the

examination of documents under

documentary credits. Ideally, many of

these practices would have already

incorporated in the daily activity of trade

finance departments in banks. However,

experience proves that this is not always

the case. Therefore, its expected that

most banks will need to carry out anoperational review in order to ensure

they are aligned with the new ISBP.

Change is not made without

inconvenience, as Samuel Johnson

observed in 1755.

One particular problem Ive

encountered over the years since ISBP

was first introduced has been that too

many practitioners regard ISBP as a

bank-only publication to assist bankers

in checking documents. No doubt this is

partially correct, but it s often forgotten

that the ISBP is also an invaluable guide

for exporters in their preparation and

submission of documents. By

understanding how documents underdocumentary credits are handled by

banks, exporters have the opportunity to

enhance compliance with the terms and

conditions of credits and thereby to

reduce discrepancy rates. Education in

the wider world, outside of the banking

environment, is essential to assure further

success with the ISBP.

With regard to ISBPs content, Ive

always considered it to be an essential

publication. However, my personal view

is that an even greater benefit could have

been realized if the remit of ISBP had

been widened. At the outset of the latest

ISBP revision, it was mooted that, in

addition to including additional

documents seen in most documentary

credits, it could also be advantageous to

create an additional section or sections to

cover various aspects of handling

documentary credits. Unfortunately,

insufficient feedback was received from

ICC national committees, and in March

2012 the plans for such an extension

were dropped. Perhaps this is one forthe future!

So what do we have in the latest

revision? The core features have been

retained, if not strengthened, and further

components have been added. Its not

the intention of this brief overview to

provide a detailed synopsis of all the

provisions of ISBP. Such an approach

would require a full one-day workshop,

which can, of course, be provided. For the

purposes of this article, I will concentrate

on a few key features of ISBP 745.

Usage of virgules (/) and commas

Ideally, certain grammatical usage,

including the use of virgules (/) and

commas would be fairly constant

globally, but this not the case. ISBP 745

provides clear guidance in stating that

usage of either a virgule or a comma

means that any combination of the

stated options, either singular or plural, is

acceptable.

Certificates, certifications,

declarations and statements

When certificates, certifications,

declarations and statements are requiredby a credit, they are to be signed.

Whether or not they need to be dated

depends on the type of document

requested, its required wording and the

wording that appears in it.

Copies of transport documents

covered by UCP 600 articles 19-25

Articles 19-25 only refer to original

documents, not copies. Accordingly, a

copy is only to be examined under UCP

600 sub-article 14 (f). Data need not be

identical but must not conflict. Copies of

transport documents are not subject to

the default presentation period of 21

calendar days.

Correction and alteration

Its very important that corrections to

documents be handled in a consistent

way. ISBP clarifies the process for

beneficiary and non-beneficiary

documents, and additional interpretation

is provided concerning documents that

have been legalized, visaed or certified.Further, ISBP 745 explains that any

correction of data in a document issued

by the beneficiary (with the exception of

drafts), or any correction of data in a copy

document, need not be authenticated.

Dates

The question of dates is contained in a

fairly detailed section and provides

concise information as to how dating

requirements for each type of document

are to be observed.

Documents for which the UCP 600

transport articles do not apply

In accordance with standard banking

practice, documents for which the UCP


9/24


600 do not apply include documents

commonly used in relation to the

transportation of goods, such as but not

limited to, delivery notes, delivery orders,

cargo receipts, forwarders certificates of

receipt,forwarders certificates of

shipment, forwarders certificates of

transport, forwarders cargo receipts and

mates receipts. The implication is that acondition in a credit that presentation is

to occur within a certain number of days

after the date of shipment will be

disregarded for such documents, and

that the default presentation period of 21

calendar days stated in UCP 600 sub-

article 14 (c) does not apply to them.

Expressions not defined in

UCP 600

As practitioners know, a number of

common expressions used in credits are

not expressly defined in UCP 600, i.e.,

shipping documents, stale documents

acceptable, third party documents

acceptable, third party documents not

acceptable, exporting country,

shipping company and documents

acceptable as presented. ISBP 745 states

that these expressions should not be

used. Nonetheless, in the unfortunate

event they are, a meaning for each has

been provided in ISBP 745.

LanguageThis is a very important section, and all

parties to a documentary credit are

advised to pay close attention to the

content. In essence, when the language

of the documents is stipulated in the

credit, data are to be in that language.

When the credit is silent with regard to

language, documents may be issued in

any language. If the credit allows two or

more acceptable languages, the

confirming/nominated bank may restrict

the number of acceptable languages as a

condition of its engagement in the credit.

If it does not so restrict, then it is required

to examine the data in all of the

acceptable languages appearing in the

documents.

Mathematical calculationsWhen the presented documents indicate

mathematical calculations, banks only

need to determine that the stated total in

respect of criteria such as amount,

quantity, weight or number of packages,

does not conflict with the credit or any

other stipulated document.

Originals and copies

Experience has proved that this is never

an easy subject in our technological age,

but its one that cannot be avoided. I

believe that this section of ISBP 745 will

be necessary guidance to the

identification of what is considered to be

an original or a copy.

Signatures

This section emphasizes that signatures

need not be handwritten and can be in a

variety of methods as defined in UCP 600.

It also notes that statements on a

document such as This document has

been electronically authenticated or

This document has been produced byelectronic means and requires no

signature or words of similar effect do

not, in themselves, represent an

electronic method of authentication in

accordance with the signature

requirements of UCP 600 article 3. An

important new addition is that a

statement on a document indicating that

authentication may be verified or

obtained through a specific reference to

a website (URL) constitutes a form of

electronic method of authentication in

accordance with the signature

requirements of UCP 600 article 3.

However, banks will not access such

websites to verify or obtain

authentication.

Conclusion

Of course, the ISBP is worthless if it is not

supported and promoted by those in the

trade finance world. To paraphrase

Benjamin Franklin at the signing of the

Declaration of Independence in 1776, we

must all work together or, most assuredly,

we shall all hang separately.

I can only endorse the hope of Kim

Sindberg in the following article that ISBP

745 will be universally accepted as acomprehensive tool providing added

value to practitioners involved in

documentary credits.

David Meynellis the owner of TradeLC Advisory(www.davidmeynell.com), an independent tradeadvisory and consultancy service. His email address [email protected]

ISBP 745 a significant milestone

by Kim Sindberg

At the ICC Banking Commission meeting

in Lisbon on 17 April, the new ISBP was

approved on a vote of 87-1. Only one

country, Singapore, voted no. In this

article, I will argue that ISBP 745 is a

significant milestone that will be helpful

to those working with documentarycredits on a daily basis be they

document examiners in a bank, export

officers in a production company or

persons working in an accounting

department.

Need for a new ISBP

The first version of the ISBP, ICC

publication 645, dates back to 2002. The

following version, ISBP 681, was an

updated version intended to align it with

UCP 600. The current revision, ISBP 745, is

the first version that provides a

comprehensive overview of international

standard banking practice for

documentary credits issued subject to

UCP 600.

Implementation of the new UCP gave

birth to new practices but not in one

stroke. For that reason it was correct to

merely update the ISBP in 2007 to bring it

in line with UCP 600, mainly in respect of

terminology. Likewise, it was a correct

decision some six years later to present a

new version of the ISBP in light of

documents and practices that UCP 600

as well as the related industries

have created.

Implementation date

One of the issues that caused controversy

is the absence of an implementation date

for ISBP 745, there is only a publication

date. Following its approval in Lisbon,

David Meynell


10/24

Volume 19 No 310

Gary Collyer stated that it was in force as

of 2007, i.e., when UCP 600 came into

effect. This, of course, is a provocative

statement: how can a publication be in

force seven years before its published?

A more nuanced way to look at this is

the following: in order to understand the

ISBP, one must look at the difference

between rules (UCP 600) and practices(international standard banking practice).

UCP 600 article 2 includes the

following definition of what constitutes a

complying presentation under a

documentary credit: Complying

presentation means a presentation that

is in accordance with the terms and

conditions of the credit, the applicable

provisions of these rules and

international standard banking practice.

This definition provides a hierarchy of

tests concerning how to determine if a

presentation is compliant:

1) First, the wording of the

documentary credit. This means that any

condition in a documentary credit that

excludes or modifies the UCP 600

will prevail.

2) Second, the UCP 600.

Ideally, rules (in this case, UCP 600) are

static. They are the foundation for any

documentary credit issued subject

to them.

3) Third, international standard

banking practice. The latter is the trickypart. It is a catch-all phrase that includes

the preponderance of practices that

currently apply to a documentary credit.

These come from various sources ICC

Opinions, DOCDEX Decisions, court cases

AND the ISBP.

Practices, contrary to rules, are not

static. They move with the relevant

industry. Technology, processes, etc.,

change over time, and these changes

mean that practices change.

Some changes appear slowly; othersseem to come out of the blue. An

example of the latter is the signing of

transport documents by a branch of the

carrier. The original ISBP drafters did not

see this in the market when ISBP 645 was

drafted, but it was there when ISBP 745

was created1. This changed practice is

now documented in ISBP 745.

But when would a new practice be

applicable to a documentary credit

issued subject to UCP 600? One cannot

really say. Therefore, it makes no sense at

all talking about an in force or

implementation date for the ISBP. The

fact is that the world changes and that

changes the practice in different

industries, which has an influence on

international standard banking practice.

An example can be found in the ICC

Opinions. In some cases, these have

changed. There are instances in which

new Opinions have overruled old ones. Is

this because the old Opinion was wrong?

No, generally it was because a practice

had changed.The same principle applies to ISBP 745,

which is a selected collection of

international standard banking practices

as they exist right now. Most of the text is

the same as it was before, but much has

been expanded, elaborated upon and

clarified, and, in a few cases, has changed

because practice has changed2.

Old and new practices

ISBP 745 is more than twice the length of

ISBP 681, so there are a number of new

practices documented, and old

practices have been elaborated upon to

describe them in a clearer way. Here are

some examples:

The dating of certificates

ISBP 681 paragraph 14 included the

following statement: Although it is

expected that a required certificate or

declaration in a separate document be

dated, its compliance will depend on the

type of certification or declaration that

has been requested, its required wordingand the wording that appears within it.

The somewhat vague wording made it

hard to apply. Therefore, ISBP 745 has

restated it as follows: Whether a

certificate, certification, declaration or

statement needs to be dated will depend

on the type of certificate, certification,

declaration or statement that has been

requested, its required wording and the

wording that appears within the

document .

Indeed, ISBP 745 goes one step further

and offers two examples: one in which

the dating of a certificate is required, and

one where it is not, thereby making the

text easier to comprehend and apply.

Expressions not defined in UCP 600

The section of ISBP defining some of the

terms used in documentary credits, but

not defined in the UCP 600, has been

expanded to include third-party

documents not acceptable, shipping

company and documents acceptable as

presented. The other definitions in past

versions of the ISBP have been

elaborated upon.

The invoice and the nature, classification or

category of the goodsOne of the recurring challenges

document checkers face concerns the

description of the goods in the invoice.

The UCP 600 rule is that the goods

description in the invoice must

correspond with that appearing in the

documentary credit3. ISBP 745 offers

more assistance than its predecessor in

applying the rule by stating that the

goods description in the invoice is not to

refer to a different nature, classification

or category of the goods than what isreflected in the documentary credit. It

includes two examples to illustrate

this point.

Instalment drawings or shipments

Also new to ISBP 745 is an elaboration of

language concerning the interpretation

of drawing or shipment by instalments

within given periods4. It has now been

made clear (again with examples) that

given periods are a sequence of dates

or timelines with a start and end date for

each instalment. A series of latest dates

are not given periods5.

Indication of name and address of delivery agent

at port of discharge

Sindberg: Implementation of the new UCP gave birth tonew practices

ISBP 745: the goods description

in the invoice (excepted)

C3 The description of the goods,

services or performance shown on the

invoice is to correspond with the

descriptions shown in the credit. Thereis no requirement for a mirror image.

For example, details of the goods may

best be stated in a number of areas

within the invoice which, when read

together, represent a description of the

goods corresponding to that in

the credit.


11/24


New to the ISBP is a paragraph stating

that when a documentary credit requires

a bill of lading to indicate the name,

address and contact details of a delivery

agent, at or for the port of discharge, the

address need not be one that is located

at the port of discharge or within the

same country as that of the port

of discharge.These are just a few of the valuable

additions to ISBP 745.

Conclusion

ISBP 745 is a comprehensive work.

Documentary credit from experts the

world over have invested thousands of

hours in its creation. No doubt it is not

perfect. There may be points on which

reasonable people may disagree; after all,

this is a compromise fashioned by

representatives from many different

countries, so it would be strange if

everyone were to agree to everything.

My hope is that despite somedisagreements, ISBP 745 will be

universally accepted as a comprehensive

tool that brings undisputable value to the

people working on a daily basis with

documentary credits.

Kim Sindbergis Trade Finance Consultant at SindbergConsult. His e-mail address is [email protected]

1. In fact, two ICC Opinions were given on the subject at the samemeeting: TA 748 and TA 750rev were both approved at the ICCBanking Commission meeting October 2011.

2. This is elaborated on in the blog-post The Second Unfair Yes-Votehttp://www.lcviews.com/index.php?blog_id=67.

3. UCP 600 sub-article 18 (c).

4. UCP 600 article 32.5. For more information refer to my article regarding UCP 600article 32: The ambiguities in UCP article 32 published inDCInsight,Vol. 18 No.3, July-September 2012.

Expert commentary

Whats holding back electronicpresentation under L/Cs?by Sarah Younger

Online trading is the name of the global

game in the 21stcentury. It would appear

that making purchases in a virtual mall is

no less enjoyable than visiting the

nearest real mall and, in many cases, also

cheaper. Most products can be boughtvia websites, which enjoy massive

popularity. Of course, we are talking

about products that are often sent

directly to the purchasers from their

overseas production plants or from the

warehouses of local wholesalers

or retailers.

Technology has caused a revolution

that has resulted in increased efficiency

in the production process, the shortening

of lead times and a reduction in costs.

Accordingly, one could expect that, intandem with the changes now occurring

on the global scene, paper-based

documentation will be replaced by

electronic documentation at a lightning-

quick rate. It is obvious to everyone that

paper documentation increases costs,

slows down procedures (even when sent

by courier) and is susceptible to loss and

errors. In other words, it simply flies in the

face of the transition to the brave

new world.

Most surprisingly, even today, paper-

based documents accompany goods

from one place to another, which is

especially true for marine bills of lading

(B/L) and insurance certificates (as a result

of their special status), as well as other

documentation, such as air transport

documents (AWB) and certificates

of origin.

Air transport

At the same time, something has

changed, at least in the field of air

transport, with the announcement by the

IATA that it had set a target of 100%e-AWB usage by the end of 2014. The use

of e-AWBs currently stands at just 15% of

transactions. State authorities, air

transport companies, forwarders, airports

and customs authorities are all involved

in the preparations to meet the

100% target.

The question that arises from the IATA

initiative is whether, even when the

implementation of e-AWBs is fully

completed, banks will continue to

demand an AWB, when in reality there is

only an e-AWB. Will exporters demand

paperwork from the carriers or the

forwarders (in addition to the e-mail) in

order to present it to banks under the

documentary credit when they have

already made the transition to a

different era?

Legislation and other preparations

What has already been done to prepare

for online operations?

1. Since the 1990s, many countries, with

the United States leading the way, havepassed legislation relating to electronic

commerce. From our perspective, as

people who deal with documentation,

one of the most important laws is the

Digital Signature Law. This law (verified

and approved) has the objective of

ensuring the verification of the identity

of whoever sends an electronic

document, the verification of the

completeness of the document

(integrity) and the prevention of

repudiation (non-repudiation). This is

just as it would be upon presentation

of a paper document.

2. International organizations, such as the

UNCITRAL, created the Model Law on

Electronic Commerce (MLEC), which is

a model for the legislation enacted bycountries on the subject. In 1996, the

United Nations Economic Commission

for Europe (UNECE) published the

United Nations Electronic Trade

Younger: this is a change we will not be able to resist
mailto:[email protected]:[email protected]:[email protected]


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Document (UNeDocs), which proposed

an integrated concept of paper

documents and electronic documents

on an XML or EDIFACT basis.

3. In 2002, ICC distributed the eUCP,

which is the supplement to the UCP for

electronic presentation. The eUCP

provides helpful definitions of the

terms that have differentmeanings in the electronic

and paper worlds, such as

place for presentation and

sign. It also addresses key

issues of electronic

presentation such as the

format in which electronic

records are to be presented,

how original documents are

to be defined and what

happens when an

electronic record is corrupted by a virus

or other defect. In particular, it enables

the presentation of mixed documents

(paper and electronic), making it

possible to present paper-based

documentation and electronic

documents within the framework of

the same documentary credit.

4. In the 1990s, a number of business

entities, including banks, adopted a

format for electronic transmissions

the Electronic Data Interchange (EDI).

This method of communication has

already been implemented betweenthe parties to commercial transactions

and between those parties and their

banks. However, this has not become a

channel of communication used

between banks.

5. An additional option for presentation

electronic documents is via banks

portals. Various banks have developed

the ability to receive electronic

documentation from their customers

thru the portals.

Obstacles

So why are we not seeing electronic

documentary credits in our operations?

The reason lies in the fact that there are

still obstacles present in a number of

fields and they are not minor ones: legal

obstacles, the need for investment in

technological infrastructure,

bureaucracy and not a little

conservatism on the part of the parties

involved importers and exporters as

well as banks.

For the following reasons, there has

been an absence of a sufficient legal

response:

Recognition of the acceptability and the

validity of electronic documentsThe

criticalquestion is whether the courts

will accept an electronic document as

evidence. A concern arises that even if

a court in Country A were to recognize

an electronic document as acceptable,

the evidentiary weight attached to it

could be different from that in Country

B. The chances of a reasonable banker

or exporter having advanceknowledge of the law that

applies concerning the

recognition of an electronic

document as evidence in

every country to which they

export are extremely remote.

Verification of the

authenticity of an electronic

document (the original copy)

There are those who claim

that an electronic document

is created on the senders computer,

whereas a copy of the original

document is created on the recipients

computer. This subject is of

considerable importance, primarily

concerning the special status of the

marine bill of ladingas a negotiable

document that affords its holder the

right to possess the goods. In addition,

the ability to duplicate electronic

documents with considerable ease

requires us not to waive the paperwork

that is customary at present until a

solution is found for this issue. Thestatus of a maritime insurance

certificate is similar.

The retention of electronic documents

Standards do not exist in every country

regarding the need to retain electronic

documents. These standards l ink the

identity of the party to a transaction

required to retain them, the manner of

proving that the copy retained is true

to the original, as well as other issues.

The determination of the prevailing law

and the judicial authorities In theevent of a dispute concerning the

documents between commercial

parties based in different countries, it is

not obvious which legislative

framework will prevail and which

judicial body will have jurisdiction in a

case in which a document is sent

during the course of a transaction by

Party A in Country A and received by

Party B in Country B, after having

passed through a number of routing

switches (each in a different country,

none of which is in A or B) in a

communications network.

An orderly definition of criminal activities

The crime of impersonation, which is

not a new one, is already causing

considerable damage, with criminals

impersonating suppliers and

customers on the Internet. With

documents at stake, this issue is crucial

for electronic documents presented

under documentary credits.

Investment in the appropriate

technological infrastructureThe

obstacle from this perspective derivesfrom the need for a significant financial

investment by importers, exporters

which, in many cases, are small- and

medium-sized companies in

developing countries and the banks.

Bureaucracy bilateral agreements

between banks One of the

requirements that banks will have to

comply with is the signature on

bilateral agreements with each and

every one of the banks used by the

other parties in the documentary credit

transactions they handle. These

agreements are intended to include

sections that cover the responsibility of

the banks that send the transmission

for example, responsibility for verifying

the identity of the sender of the

original electronic document to the

bank (sometimes the presenter is not

the beneficiary of the credit, the banks

customer, but the forwarder or the

shipping company). These concern the

completeness of the transmission,

aspects relating to data security andother elements that involve various

technological issues.

Conclusion

Dr Alan Davidson, in his article Electronic

Records in Letters of Credit, wrote: The

history of mercantile law and practice

shows us that either by stealth or by trial

and error, the commercial parties make a

due assessment of the risk at all levels

and proceed onto their perceived

respective commercial advantages.The point is that the attachment by

some bankers to the continued use of

familiar methods is also shared by our

customers. Why should we jump when

we are not being pushed? Despite the

problems that still exist, and which one

cannot ignore, there can be no doubt but

that in the not-too-distant future, reality

will overcome conservatism, and this is a

change we will not be able to resist.

Sarah Youngeris the Head of International Tradeand Payments at Bank Leumi Le-Israel. She is also theChair of the ICC-Israeli Banking Committee. Her e -mail [email protected]

In the not-too-

distant future,

reality will

overcome

conservatism
mailto:[email protected]:[email protected]:[email protected]


13/24


Special report: Islamic banking

Shariah banking and trade financeby Michael Peiris

The following core concepts are

the basics of an Islamic trade

module that is being widely

discussed and reported to have

been put into practice by several

countries. In view of the apparent

successes achieved by various

banks in different parts of the

world, especially the countries

where Shariah law is in force,

there is a demand in other

countries to provide bankingfacilities that are in line with

Shariah banking.

Taking into consideration the large trade

volumes routed through banks by clients

practising the Islamic religion, a number

of banks from non-Muslim countries

including Sri Lanka have provided a

window for Shariah-compliant banking.

The number of banks offering this, as well

as the number of customers relying on

Shariah banking, is expected to increasein the years to come. In this context, it

would be useful to discuss Shariah

banking in order to understand future

banking needs, especially with regard to

trade finance.

Some of the relevant terms are as

follows:

1. Murabah sale of goods to another

party for a price that includes the cost

and a mutually agreed profit;

2. Musharakah partnership with profit &

loss sharing. All parties in this

agreement provide capital and share

profit in a mutually agreed ratio and

losses in the ratio of their capital

contribution;

3. Wakalah agency arrangement: One

party appoints another party to

perform certain tasks for the benefit of,

and at the risk of, the principal;

4. Zaman a payment or performance

guarantee issued in support of a third

party;

5. Istisna sale of goods with deferred

delivery: payment made either upfrontor in installments, for delivery of goods

at a future date according to

specifications and time frames agreed

between the parties concerned.

Import finance

Article 2 of UCP 600 says that an issuing

bank is permitted to establish letters ofcredit on its own behalf. This provision

allows banks to import goods consigned

to them and to have the absolute

ownership of the goods. For many years,

there has been a regulation in Sri Lanka

that goods could be consigned to the

order of a local bank for both export and

import transactions. This regulation,

although no longer a hard-and-fast rule,

has now become an accepted practice in

Sri Lanka. Almost all of Sri Lankan banks

continue to call for bills of lading drawnto their order with an underlying interest

to retain title to the goods in a trade

transaction. The provisions contained in

UCP 600 and the prevailing practice in

the market have created an ideal

situation for Murabah financing in

Sri Lanka.

Murabah financing

The concept behind Murabah financing

allows one party to sell goods to another

party with an agreed profit. It goes

without saying that one must first own

the goods to make a sale.

In a scenario in which goods are

consigned to the order of a bank, the

ownership of the consignment

automatically remains with the bank. In

another words, the bank retains the title

to the goods with an option to transfer

them in consideration of a sale price,

thereby transferring the ownership of the

goods to a prospective buyer.

With regard to letter of credit

transactions, the importer comes to anagreement (Wakalah) with the bank to

purchase goods from the bank that has

imported under its name as per the

requirement of the buyer. This agreement

is more or less similar to that of the letter

of credit application used by banks for

opening letters of credit. The Wakalah

(agreement) will permit the importer to

act as the agent of the bank to source the

merchandise and negotiate terms as

desired by him. This method will also

allow the buyer to remain competitive inthe market in terms of price, quality and

timely delivery of goods.

In this type of transaction, a bank also

might consider a total financing facility

without any other collateral, and, for its

trustworthy corporate and retail clients,

may only be content with title to the

goods. In financing this kind of

transaction, a bank may work out its

funding costs depending on the duration

of the facility and the volatility of

currency involved in the transaction, and

may include a percentage of profit aftertaking into account the cost and the risks

involved.

Musharakah financing

Musharakah financing is a concept that

supports an arrangement to share profit

and loss in a transaction. Under a

Musharakah arrangement, the parties

involved contribute capital, share profit in

a mutually agreed ratio and take losses in

the ratio of capital contributed. This

method of payment can be conveniently

applied to facilities based on collateral in

the form of either cash or assets (movable

or immovable).

In an L/C transaction where a certain

percentage of a cash margin is used as

collateral, the bank would expect a lesser

percentage of profit than that from an

L/C opened with no margin. In the event

the bank decides for any reason to

dispose of the goods due to non-

payment by the importer, in order to

reduce the loss incurred by the bank, the

importer can either forego its entire shareof the margin or a portion of it placed at

the time of opening the letter of credit.

When a bank decides to finance the

entire import transaction under

Peiris: A Shariah financing module could be adopted without deviating from existing practices


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Volume 19 No 314

Musharakah, it can go to the extent of

retiring the import bill through import

financing, adhering to its concept of

sharing profit and loss. Under normal

circumstances, a bank may consider

granting an import loan (trust receipt/

pledge loan) for an agreed percentage of

the value of the goods.

Application of customary importfinancing in the form of Musharakah

financing for the benefit of the sectors

that wish to avoid borrowing on interest

is possible and may even be encouraged

for the growth of the banking industry.

However, there appears to be a

misconception among practising bankers

that once the bank and the customer

sign an agreement (Istisna) using the

Musharakah financing concept, the

agreeing parties cannot deviate from the

original agreement. In reality,

the customer might face a

situation where he would find

it difficult to dispose of the

goods held in pledge due to a

price fluctuation in the

market. In such a situation,

selling the goods at the

agreed date might force both

the bank and the customer to

take a huge loss, since both

have agreed to share the

profit and the loss. To meet such

contingencies, the agreement couldmake a provision to extend the facility

further for a mutually agreed period.

D/A and D/P

Not only letters

Documentary Credit Insight

Documents

Transcript of Documentary Credit Insight