1. Methodology
    This chapter explains the methodology for advising the beneficiary of the documentary credit that the credit has, in fact, been issued. There is a risk that dishonest buyers will issue fraudulent letters of credit. The banking industry has taken steps, primarily through its SWIFT cooperative, to limit this risk. The SWIFT network has reduced the risk of forged letters of credit virtually altogether. This chapter discusses various features of the advising process that merit examination. It also introduces the correspondent bank, which plays a significant role in addition to its role as the advisor of the credit.

  1. Assuring the Seller
    When a seller and a buyer agree that payment shall be by documentary credit, the seller wants assurances that the credit has been issued. Before the advent of modern telecommunications, banks maintained signature books for their foreign correspondents. When they received what purported to be a letter of credit from a foreign correspondent, they compared the signature on the letter with their signature records. If the signatures matched, they then felt confident in advising the beneficiary/seller that the credit had been issued and that the seller could rely on it. “Advising” refers to sending the credit to the seller, who would then know the terms of the credit—its expiry, amount and the documentary conditions for payment.

  1. The Role of SWIFT
    The advent of modern technology has greatly enhanced the transmission of credits. Today, using the SWIFT network, an issuer in the buyer/applicant’s country can send the credit electronically to its correspondent in the seller/beneficiary’s country (for a discussion of SWIFT, see chapter III, section 2). By virtue of its message authentication features, a SWIFT communication does not introduce transmission errors. Moreover, the SWIFT system’s use of digital signatures makes a SWIFT communication a reliable means of verifying the identity of the sender.

  1. Reliance on SWIFT
    In order to exchange messages over SWIFT, any two banks must first set one another up by exchanging correspondent agreements and SWIFT digital signature keys, which are called “authenticator keys”. Then, when a bank in the seller’s locale receives a SWIFT transmission indicating that the foreign correspondent bank has issued a credit, the receiving bank will use the key to authenticate the digital signature and can trust the communication with no further inquiry. Furthermore, because the SWIFT communication includes full details of the letter of credit requirements, the advising bank will then be in a position to create an original credit and forward it to the named seller/beneficiary with its cover letter “advising” that the credit has been issued. That advice gives the seller reliable information: (a) that the credit has been issued; and (b) that the advice correctly communicates the terms and conditions as received by the advising bank. UCP 600 article 9(b) imposes on the advisor the duty of satisfying itself as to the apparent authenticity of the credit and accurately advising its terms. The SWIFT network makes it easy for the advisor to satisfy this duty.

  1. The Advisor’s Second Role
    Most advisors play another, rather critical and often unnoticed function. They may review the terms and conditions of the credit and, on occasion, refuse to advise a credit that they find incompatible with sound banking practices or local law. Some countries forbid banks from issuing or even advising credits that offend boycott or anti-boycott laws or that may be used to avoid currency or export restrictions or launder money. Also, some credits are issued with non-documentary terms, which is a particularly harmful practice. UCP 600 article 14(h) provides that issuers must disregard non-documentary conditions. Many advisors will refuse to advise credits that offend local laws or sound banking practices. If a bank elects not to advise a credit, it must notify the issuer of its decision (see UCP 600 art. 9(e)).

  1. Other Roles of the Advisor
    As we will see in later chapters, the advisor often plays multiple roles. First of all, it advises and sometimes confirms the credit (chapter IX discusses confirmations). It may also be nominated by the issuer to honour or negotiate the seller/beneficiary’s drafts and/or documents (chapter IX discusses the nominated bank’s functions). Honour includes paying or accepting drafts or incurring a deferred payment obligation and in the latter two cases paying the beneficiary when the acceptance or deferred obligation comes due.