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Copyright © International Chamber of Commerce (ICC). All rights reserved.
( Source of the document: ICC Digital Library )
Sometimes, of course, the nominated bank will act as the lender in an assignment transaction, and, sometimes, rather than make an advance to the seller, the lender will issue a credit to the supplier. Under this back-to-back credit transaction, the lender does not advance the proceeds of the credit to the seller but undertakes to pay the supplier directly if the supplier presents the key documents necessary to satisfy the conditions of the original credit. This is done by issuing a second letter of credit, called the “back-to-back” credit. By requiring all of the documents that are necessary to satisfy the documentary conditions of the original credit (sometimes called the “master” or “original” credit), the nominated bank is able to assure itself, before it makes any payments under the back-to-back credit, that it will have the documents necessary to comply with the prime credit’s documentary conditions. The closest the nominated bank can get is to require the supplier to present all the documents other than the seller’s invoice. The supplier will present its own invoice in order to satisfy the back-to-back credit. Once the back-to-back credit has been honoured by the nominated bank (which is the issuer of the back-to-back credit), the documents become the property of the seller. By substituting its own invoice for that of the supplier, the seller can complete the documents required to satisfy the original credit. [Page84:]
Sometimes the documents under the two credits do not match, and the seller may need to substitute other documents or supplement the documents presented by the supplier (e.g. the shipping terms are “ex works” in the seller’s contract with the supplier but “carriage and insurance paid” in the seller’s contract with the buyer, which means that the seller is arranging transportation and insurance). The more differences the nominated bank allows in these two credit transactions, the more the bank must rely on the seller to perform actions that generate the additional documents necessary to satisfy the prime credit and the less they fit the back-to-back model transaction. The nominated bank must pay the second credit regardless of the seller’s ability to perform these actions, and the nominated bank may insist on additional collateral from the beneficiary of the master credit in order to secure the bank’s reimbursement claim.
Sometimes the credit will authorize the nominated bank to prepay the beneficiary in order for the beneficiary to have sufficient funds to assemble the goods or commodities that are to be shipped to the buyer. These authorizations are unusual. They permit the nominated bank to advance some of the letter of credit proceeds to the beneficiary before the beneficiary ships and before it presents the invoice, transport document, insurance and other certificates required for payment. In the past, when banks issued letters of credit in paper format, these unusual clauses appeared in red or green ink to call attention to them. Bankers sometimes still call them “red clause” or “green clause” credits. [Page86:]