Article

by Wang Shanlun

The newly approved ICC Banking Commission Opinion TA 700rev (see "Queries and responses"), together with other ICC Opinions concerning the troublesome issue of banking charges (R 380, R 441, R 656, etc.) will be warmly welcomed by L/C practitioners.

Situation A

This conclusion to Situation A described in this Opinion, which states that if an issuing bank wishes to deduct a discrepancy fee, then details of its intent to do so and the amount thereof should be stated in the credit, offers a strong defence to the beneficiary against unreasonable deductions.

A similar position was expressed in an earlier Opinion, R 656, which concludes: "If the issuing bank wishes to make a deduction from the proceeds in respect of its fees, then the credit should clearly indicate the amount or percentage of charges that will be deducted. It will then be for the beneficiary to decide whether it will perform under the credit with such a charge for its account."

Situation B

In Opinion TA 700rev's Situation B, the Commission said that the issuing bank is not justified in deducting payment or a reimbursement commission from the beneficiary's proceeds. Even if a fee is to be levied, it should be charged to the applicant. The credit stated: "all charges outside Country X for account of the beneficiary", Country X being the country of the issuing bank.

However, it seems that the Banking Commission simply repeated what had been stated in Opinion R 380, and avoided the question of whether the "telex/SWIFT" and "reimbursement comm." charges deducted were charges within the issuing bank's country. This is an important issue for beneficiaries, since there are questions with regard to credits that state "all banking charges outside the issuing bank (or the country of issuing bank) are for account of beneficiary." Specifically, beneficiaries would like to know what kind of charges are within the issuing bank's country and which are from outside - for example, questions may arise concerning opening charges, payment fees, SWIFT fees and amendment fees. If they do not know, beneficiaries will likely be compelled to pay certain dubious banking charges.

Situation C

Generally speaking, as stated in the conclusion of TA 700rev's Situation C, it's true that charges incurred in respect of actions taken by the issuing bank at the request of the presenter are for the account of the requesting party, i.e., the presenter. However, as per ISBP 681 paragraph 47, in all cases the drawee bank must advise the maturity date to the presenter. Thus, in the case cited in the Opinion, the message sent to the presenter to confirm the due date of the draft or deferred payment under taking was something that could be contemplated at the time of issuance. Consequent ly, these charges that were incurred within the issuing bank's obligation should be for the account of the issuing bank. This writer deems it unreasonable to charge the telex/ SWIFT fee to the beneficiary.

Situation D

This writer used to believe that before deducting a discrepancy fee, the issuing bank must send a valid notice of refusal first, and that failure to do so may trigger the application of UCP 600 sub-article 16 (f).

Sub-article 16 (f) says: "If an issuing bank or a confirming bank fails to act in accordance with the provisions of this article, it shall be precluded from claiming that the documents do not constitute a complying presentation." Deducting a discrepancy fee implies that the documents do not constitute a com plying presentation in the opinion of the issuing bank. In my view, without sending a valid notice of refusal before making a deduction, the issuing bank has failed to act in accordance with the pro vision of sub-article 16 (f) and should thereby be precluded from claiming that the documents do not comply.

In its conclusion to Situation D, in allowing the deduction of a discrepancy fee, the Banking Commission tries to seek a balance between UCP rules and business efficiency by stating that "the issuing bank is not required to send a notice of refusal to the presenter if it elects to con tact the applicant for a waiver and to receive a waiver acceptable to it", and that, in these circumstances, sub-article 16 (f) does not apply.

If the issuing bank deducts a discrepancy fee first in the event the observed discrepancy(ies) is/are controversial or groundless, the costs to contest this action may even be higher than the deducted discrepancy fee. This, in turn, may encourage arbitrary deductions.

The charges

For many years, there have been only four or five ICC opinions concerning the issue of banking charges. This may be because all banking charges will ultimately be borne by the traders (either the applicant or the beneficiary, with most of them for the account of the beneficiary), and because banks, which have vested interests, usually shy away from this sensitive topic.

Nonetheless, there is a worrying trend whereby more and more items and with higher rates of banking charges are being deducted by banks in the course of L/C transactions. Some of these charges include: opening charges, amendment fees, advising fees, negotiation fees, confirmation fees, transferring fees, reimbursing fees, payment commissions, telex/SWIFT commissions, courier charges, document checking fees, handling charges, discrepancy fees, commission in lieu of exchange and so on.

The list is being updated frequently. Here are several newly invented charges:

Example 1

"A HKD150.00 or equivalent will be deducted from the proceeds for each presentation of documents under this documentary credit which are of value less than USD10,000.00 or equivalent."

Example 2

"It is a condition of this credit that for each drawing or presentation under this credit containing more than three sets of transport documents, we will view each set of additional transport documents as a separate presentation. A charge of USD50.00 or equivalent will be deducted from proceeds for each additional set of documents presented. This charge is, in any case, for account of beneficiary."

Example 3

"A fee of USD132.00 or equivalent per month or part thereof safekeeping charges, on each discrepant document, pending acceptance/instructions for more than two months after receipt, will be deducted from the proceeds or will be claimed from the negotiating bank if re imbursement is already claimed by them."

Meanwhile, the rates for these charges are escalating as well. For example, several years ago the average discrepancy fee was around USD25 for each set of discrepant documents; now it can amount to USD 150 or even higher.

Who bears the charges?

UCP 600 sub-article 37 (c) provides a general rule concerning which party bears the charges among banks by stating it's for the instructing party (issuing bank) to bear the charges incurred by the instructed party. The issuing bank will frequently pass these costs on to the applicant.

The applicant (buyer) and the beneficiary (seller) can re-allocate these costs in their commercial agreement, and such an arrangement could be evidenced in the SWFIT MT700 field 71B. But both the applicant and the beneficiary have to pay attention to the rule for using 71B. In the absence of information in this field, all charges, except negotiation and transfer charges, are to be borne by the applicant.

Despite these general rules, usually the applicant and issuing bank will take advantage of their superiority to shift these costs to the account of the beneficiary.

Bad banking practices

Banks dealing in the credit business do not often meet resistance from beneficiaries when they increase charges. Following are some more questionable charges that were imposed without being resisted.

Example 4

"Commission in lieu of exchange at 1/4 percent (minimum HKD350.00 or equivalent) will be deducted from the proceeds." Comment: this writer cannot understand what kind of commission this represents. Can a bank charge a certain amount of money only because it loses an opportunity to earn profits from foreign exchange? Can a bank levy a heavy charge without offering any extra service? Can a bank create something out of nothing?

Example 5

"DC expired commission calculated at 0.25 percent per 6 months (minimum HKD500 or currency equivalent) are for the account of beneficiary." Comment: banks always set minimum charging criteria for small credit amounts; however, they never seem to set maximum charging criteria for large credit amounts, which seems unfair.

Example 6

"A discrepancy fee of USD75.00 plus 15 pct applicable VAT will be deducted from the proceeds if documents are presented with discrepancy(ies), and acceptance of such documents presented with discrepancy( ies) does not in any way alter the terms and conditions of this credit."

Example 7

"A discrepancy fee of USD100 plus government levies as applicable [at present the government levies a service tax at 10.30 percent] will be deducted from the bill proceeds for each presentation of discrepant documents under this documentary credit, notwithstanding any instructions to the contrary, this charge shall be for the account of the beneficiary." Comment: some greedy banks want their charges to be net income!

Example 8

"In case of delay in shipment, 1 percent of invoice value per day will be deducted from proceeds by xx bank."

Example 9

"The opening bank has the right to deduct the claim amount from the payment under negotiation mentioned above directly with the applicant's applications." Comment: the effectiveness of such a penalty clause has been accepted in DOCDEX Decision No. 212, which under mines the independence of a documentary credit.

Example 10

"XXX Bank holds special instructions for disposal of documents and reimbursement under this L/C." Comment: in order to make money in addition to advising fees, some advising banks incorporate this kind of clause into their advising covering letter, or even insert it into the credit. An advising bank is not entitled to alter the terms and conditions of a credit. Another phenomenon worth mentioning is some banks' tendency to make deductions without detailing the items they're charging for or the rate they're charging. If the beneficiary wants to know the details of what has been deducted, he may have to pay additional communication fees (probably for at least two additional SWIFT telexes).

Increasing business costs

As noted, most banking charges are for the account of the beneficiary. A seller showed this writer a bill as follows:

USD.339.­ADV

USD.100.­AMND.CHRGS

USD.200.­COURI/SWIFT

USD.450.­ PAY

USD.271.­NEG

USD.200.­DISCR. CHRGS

USD.250.­OPENING BANK CHRGS.

The invoice value was USD135408.50, and the deduction amounted to USD1810, or 1.34% of the invoice value, which represented most of the seller's profit.

By taking advantage of the beneficiary's trust and using their superior tech ni cal knowledge, banks making these arbitrary deductions are under mining the documentary credit, and are turning it into an impediment rather than an instrument to facilitate trade. Little wonder that more and more exporters feel angry and are losing confidence in L/Cs.

Suggestions

Although charging for service is a matter of individual policy for banks - and although not all banks follow these bad practices - to preserve the advantages of the documentary credit, something should be done to discourage these practices and to achieve a win-win situation for banks and traders. As a first step, I believe that ICC, in consultation with its national committees, should issue an official paper on the issue of banking charges, one that urges banks to exercise self-discipline for the good of the industry and the world trading community.

Wang Shanlun is an Associate Professor lecturing at Jiangxi University of Finance and Economics, in China. His e-mail is wangshanlun@gmail.com