1. Transferable Credits
    Sometimes a seller will seek to use the letter of credit it received from the buyer to pay the seller’s supplier. If the credit is transferable, as in this illustration, the seller/beneficiary asks the bank designated as the “transferring bank” to “transfer” a portion of the credit to the supplier. There are four steps to this moderately complex transaction.
    1. Step One: The Need for a Transferable Credit
      First, the credit must state that it is transferable. If the credit does not state that it is transferable, the parties may not transfer it (see UCP 600 art. 38).
    2. Step Two: The Request to Transfer
      Second, if the credit is a transferable credit, the seller/beneficiary must ask the transferring bank to transfer part of it to the supplier. For the transfer to work, that bank must agree. A seller/beneficiary exporting metals might obtain ore from a mine but might not want the mine to know who the ultimate buyer is. The seller uses the buyer’s letter of credit in this transaction to pay the mine by asking the transferring bank to advise the mine to draw on the issuing bank and submit shipping documents and the mine’s draft and invoice to the transferring bank. The transferring bank will notify the seller/beneficiary when documents have been presented by the supplier.
    3. Step Three: Substituting Documents
      Upon being notified that the supplier’s documents have been presented, the seller/beneficiary substitutes its draft and invoice for those of the mine. These substitutions allow the beneficiary to mark up the price and prevent the buyer from learning the identity of the seller/beneficiary’s supplier and are not in any way a fraudulent practice. By authorizing the issuer to issue a transferable credit, the buyer knows that such substitution will occur.
    4. Step Four: Reimbursement from the Issuer
      With the substitute documents, the transferring bank can now obtain payment from the issuer. Upon receipt of payment, the transferring bank will disburse the amount drawn under the transfer to the mine and will credit the balance to the seller/beneficiary. That balance is the seller/beneficiary’s profit in the international sale.

  1. Transferring the Right to Draw
    Note that this arrangement allows the transferee to draw. In letter of credit transactions generally, only the beneficiary named in the credit may draw. The transferable credit alters this general principle. If the beneficiary of the credit fails to present substitute drafts and invoices, the supplier’s documents will be passed along to the issuer for payment.
    Often, the original credit is not transferable, and the parties must resort to other devices to generate credit to pay suppliers. For a discussion of the assignment of proceeds, red and green clause credits and the back-to-back credit arrangement, see chapter XVI.

  1. Duty of the Transferring Bank
    The bank designated as the transferring bank is not obliged to transfer the credit, but most transferring banks will do so, provided that the documentary arrangements are compatible with sound banking practices. If the seller/beneficiary desires to make multiple transfers, say, to multiple suppliers, it will be permitted to do so as long as the credit does not prohibit partial shipments, but the transfers may not be transferable.