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During a January 2024 phone conference among bankers, a scenario was discussed involving issuance of a standby letter of credit requiring the following wording be used in the beneficiary’s demand certification:
“WE HEREBY DEMAND THE PAYMENT IN THE AMOUNT OF PURSUANT TO THAT CERTAIN LOAN AGREEMENT DATED AS OF , 2023 BY AND BETWEEN [APPLICANT NAME] AND [BENEFICIARY NAME], AS AMENDED FROM TIME TO TIME. PLEASE WIRE DRAW PROCEEDS PER THE FOLLOWING INSTRUCTIONS: NAME: [BENEFICIARY NAME] ACCOUNT NUMBER: 1234567 BANK: BEST BANK ABA NO.: XXXXXXX REFERENCE: SBLC NO. [YYY]”
The issuing bank received a timely demand that complied with the standby. However, on the beneficiary’s cover letter, the payment instruction request to remit payment to their account with a different bank than what is stated on the certification.
For discussion purposes, the following questions were asked: 1) Would you honor the payment, and if so, which account would you pay? 2) You contacted the beneficiary for clarification and the beneficiary stated that the bank on the cover letter is their new bank. Would you remit payment now to the new bank? 3) You formally notified the beneficiary of some discrepancy on their presentation. The beneficiary responded and requested you to get waiver from the applicant. Would you do it, and if so, would you honor if the applicant consents to the waiver?
Standing in the shoes of the decision-maker at this issuing bank, no one on the discussion call was willing to remit payment upon receiving such demand by acting on the cover letter ’s instructions. Opinions expressed were decisively split among those who viewed the presentation as discrepant and those who did not. Some commenters contended the issuer is obliged to honor – there is no discrepancy – but needed a means of determining which account to pay. Other commenters said it was a discrepancy and applicant waiver or an amending of the LC would be needed.
Of course, the group discussed why the standby was issued with this type of requirement. Some commenters advised against putting such account instructions in the LC, but another said the instructions are likely there in as a safeguard against fraud and often inserted on the recommendation of lawyers for this reason. Others concurred that the instructions are used to deal with the problem of beneficiary authentication.
In further discussion, some specialists said that this dilemma does not involve the applicant, but is a matter between the issuer and beneficiary. Many banks do not check the beneficiary name at all, but rely solely on the account number. Choosing to share his comments with DCW and expand on them, Francisco Rodriguez, CDCS, GLS noted: “Perhaps banks leaning on ISP98 Rule 1.08 (Limits to Responsibilities) would point out that ‘An issuer is not responsible for: a) performance or breach of any underlying transaction; b) accuracy, genuineness, or effect of any document presented under the standby; c) action or omission of others even if the other person is chosen by the issuer or nominated person; or d) observance of law or practice other than that chosen in the standby or applicable at the place of issuance.’”
One commenter asked if the beneficiary could assign funds to themselves. Rodriguez thought not. “An assignment of proceeds requires payment of fees and it is typically issued to a third party”, he said to DCW. “For many business reasons, a third party could be a subsidiary but in this case, the beneficiary’s name did not change; only their account number and the name of their new bank.”
Another specialist asked: Could there be an annex to the LC, specifying that the beneficiary could notify the issuer if their information changed? Others responded that this would essentially defeat the purpose of having such instructions in the LC in the first place. As for approaching the beneficiary for clarification of their account instructions, this places undue burden on the issuer to wait for a response. “Likewise, the beneficiary can’t wait for their funds, so their response is expected to be rather quick”, said Rodriguez.
Although the case study did not indicate whether the standby was issued subject to ISP98, Rodriguez points out to DCW readers ISP98 Rule 1.03 (Interpretative Principles) which states: “These Rules shall be interpreted as mercantile usage with regard for: a) integrity of standbys as reliable and efficient undertakings to pay; b) practice and terminology of banks and businesses in day-to-day transactions; c) consistency within the worldwide system of banking operations and commerce; and d) worldwide uniformity in their interpretation and application.”
As issuer, one commenter said that they would pay on the certificate presented and the account instructions therein, not those contained on the cover letter. Asked by DCW what argument the beneficiary would have against the issuer, Rodriguez said: “The beneficiary would in fact seek proper redirection of the payment as their instructions were clearly stated on their cover letter which supersede the old banking information that they stated in the demand solely to comply with the LC terms and conditions. Besides, payment to the account, as per the demand, could be rejected for many reasons (account closed, bank merger, etc).”
Commenting further to DCW, Rodriguez added the following observations:
“While the LC’s terms and conditions might have been intended to add a layer of protection against fraudulent drawing by including the beneficiary’s banking information at the time of issuance, business needs change over time; and a new banking relationship of the beneficiary might have occurred, yielding fresh payment instructions. An issuing bank would be hard-pressed to deem the demand and built-in payment instructions as discrepant, especially since the required document is to be created verbatim, based on use of quotation marks in the LC. The matter to address is the payment instructions received by the issuer from the beneficiary as per the cover letter, leaving the applicant out of the picture. The burden of due diligence is on the issuing bank and a clear communication with the beneficiary to ascertain their banking information is a must in order to mitigate the risk of effecting an incorrect payment. Answering the three questions asked, I would conclude that the payment can be honored (question 1), but being guided by question 2. Question 3 is not relevant since the demand document complies with the credit requirements in my opinion.”