Donald Smith is Chairman of the Banking Committee of the United States Council for International Business and represents the US banking community in ICC's Commission on Banking Technique and Practice, where he co-chaired the ICC Working Group charged with documenting International Standard Banking Practices. He was also a member of the Consulting Group working on the revision of the UCP 500. Presently, Mr Smith is Vice President for Client Services at Norman Technologies, a Charlotte, North Carolina-based IT consulting firm in the US.

DCI As Co-Chair of the task force that drafted the original ISBP, have you been satisfied by the way it was received worldwide?

Smith I was thrilled. The reception the original ISBP received in some parts of the world, particularly Asia, Africa and the Asian subcontinent, was just overwhelming. I did several seminars explaining the ISBP, and it literally received standing ovations, as participants expressed their thanks to the ICC Banking Commission for taking this step, because bankers were facing pressure from applicants to reject documents as discrepant where the bankers thought this was inappropriate, but there was no source they could point to explaining what the UCP actually meant. Likewise, bankers were receiving pressure from beneficiaries to pay documents that were clearly discrepant, and the bankers needed a resource to explain the UCP in practice.

DCI It's clear there was a gap in the market between the rather general term "International Standard Banking Practice" and the concrete examples of how it was to be applied. Is there a lesson we can take from this?

Smith I think there is a significant lesson. The language in UCP 500 was not as clearly understood as we had hoped when we revised UCP 400 to UCP 500. Some of the changes, although explained in articles in global publications such as DCInsight, were not thoroughly understood, nor were the explanations always embraced by the letter of credit community.

The ISBP approach was to explain how the practices articulated in the UCP are actually applied by letter of credit professionals around the world. This was a big step forward.

DCI At the time the first ISBP was approved, there was the hope that it would serve to significantly reduce the number of discrepancies on first presentation. Do you believe it has accomplished that objective?

Smith Absolutely, yes. Unfortunately, I know there are some banks that have said: "Our letters of credit are subject to the UCP and not subject to the ISBP, and we choose not to follow the explanations the ISBP has laid out." I think primarily this was true of banks that view discrepancy fees as a profit centre as opposed to banks who view a letter of credit as a method of payment. In my opinion, it threatens the viability of the letter of credit as a reliable payment instrument in international trade and reflects badly on those individual banks and their management decisions.

DCI Along those lines, there has been some criticism of the ISBP saying it added still another document to the UCP, the Banking Commission Opinions, etc. that would make the task more complicated for a document checker who had to refer to a number of different documents.

Smith I wish the language in the UCP had proved to be easily understandable and translatable so it would not have been necessary to create the ISBP in the first place. However, the Banking Commission's experience, based on the large number of queries it received, made it clear that UCP 500 was not, in fact, consistently understood, nor were all of the practices articulated in the UCP consistently applied. Therefore, the wisdom of the Banking Commission in creating the task force that resulted in the approval of the ISBP was well founded.

I do understand people's concerns, and yet the experience I personally have had, as related to me by bankers around the world, is that if they read the UCP and the ISBP, then they do not need to go anywhere else.

Bankers are using the ISBP as part of their training of new letter of credit professionals both in the issuance and in the document examination stages, because they report the language in the ISBP was much more clearly understood than the language in the UCP. That was one of the things we really focused on, language and word choice, trying to make sure that it worked, not only in English but also other languages. "Giving value", for example, ended up not being as easily translatable as the Drafting Group thought when moving from the 400 to the 500.

DCI In that connection, the Introduction to the updated ISBP for UCP 600 says in part: "There have been comments that although the ISBP publication 645 was approved by the Banking Commission, it had no clear relationship for its application with UCP 500." Is there still confusion about the role of the ISBP vis-à-vis the UCP?

Smith The ISBP explains how the rules articulated in the UCP are actually applied by professional letter of credit practitioners, not just by bankers, but also importers and exporters, carriers, forwarders and insurers. In addition, the introduction to the UCP 600 says that the ISBP has evolved into a necessary companion to the UCP for determining compliance of documents with the terms of letters of credit.

The UCP 600 received the unanimous approval of the Banking Commission, as did the ISBP. The ISBP does not amend UCP. It explains how the practices articulated are to be applied by documentary practitioners.

DCI Another statement in the updated ISBP Introduction says: "The incorporation of this publication into the terms of a documentary credit should be discouraged, as UCP 600 incorporates international standard banking practice, which includes the practices described in this presentation." Have you heard of situations where practitioners have tried to incorporate the ISBP in their credits?

Smith Yes, I have. Immediately following the adoption of the original ISBP, some bankers proudly showed me their new letters of credit that incorporated ISBP 645. It was nice in the sense that they appreciated the publication and were incorporating it, but I explained to them this was inappropriate and that the publication itself said this should not be done. I tell people around the world "You should not dishonour documents based on the ISBP. If these documents are going to be dishonoured, you should explain why in terms of the articles of UCP 500 (now UCP 600). If it is necessary to explain to the other party why an article is being applied in a certain manner, it is appropriate to explain this by referring them to the relevant paragraphs in the ISBP."

DCI The updated ISBP has only 185 paragraphs, while the original ISBP had 200. The UCP 600 Drafting Group decided to incorporate some of the original ISBP into the UCP. Is this a good idea and would you have liked to have seen more of the original ISBP incorporated in the new rules?

Smith I think the UCP Drafting Group did a marvelous job. I have no qualms whatsoever about the decisions they made. We will find out as UCP 600 is implemented, and the ISBP 681 becomes an effective companion for credits issued subject to the UCP 600, whether or not the Drafting Group feels at a later date as though they should have included more or less. I am not in a position to say, because letter of credit practitioners have not yet had the opportunity to experience UCP 600 credits and ISBP 681.

DCI The Drafting Group took some ISBP language and some language from its Decision on original documents and put it in the new UCP. Do you approve of that choice?

Smith It is difficult to condense the ICC Decision on originals into a very short article. I like what was done by the Drafting Group. I do not know how I would have done it differently. And I also understand the need to have the ICC Decision on originals as an appendix to the updated ISBP, because it gives more examples and explains the subject more fully. It is difficult to draw the line between what becomes an explanation and what becomes a rule. I have looked at that specific UCP 600 article and spent a great deal of time on it as we went through the revision of the rules. I approve of the way it was handled.

DCI What about the provision saying that the address of the beneficiary need not be the same as that stated in the credit, but must be within the same country? That has been shifted from the ISBP into the UCP. Is that such a fundamental issue that it belongs in the rules?

Smith It is there because people misunderstood UCP 500 sub-article 37(a) concerning the commercial invoice and the name of the beneficiary and applicant. The word "address" does not appear in UCP 500. This was such a significant creator of mythical discrepancies that it became necessary to move that point into the actual rules. And beneficiaries around the world are thrilled by that, as I found out during our seminars on the new UCP.

DCI There were some controversies about this in the Banking Commission.

Smith Yes, there were significant discussions about it in the Commission, but I have paid letters of credit my entire banking career in favour of a major US corporation whose head office happens to be in New York City but that has manufacturing plants throughout the United States. That corporation's policy was for all letters of credit to go through their New York head office, while the individual purchase orders were manufactured and shipped directly from their plants around the United States. Because of my bank's knowledge that the beneficiary in New York was the same company as the beneficiary named in the invoices and other documents, having the same name but a different address, we paid those documents without problems. If an issuing bank came back to us and said the address of the beneficiary on the invoice or packing list was different from the address of the beneficiary in the letter of credit, we explained to them that article 37 only says that commercial invoices "must appear on their face to be issued by the Beneficiary named in the Credit", and in this case we have knowledge that that beneficiary is the same party with different addresses on the invoice and on the packing list. We told them that we made the payment and the payment stands.

It is unfortunate that it became necessary to put this point into the rules, but it was such a significant generator of alleged discrepancies that it had to be emphasized.

DCI Finally, should practitioners be content to continue using the original ISBP or would you advise them to change to the updated version?

Smith I believe every letter of credit practitioner should have both the original ISBP 645 and the conformed ISBP 681 for a couple of reasons. One is that we will continue to see UCP 500 letters of credit for some time. Not every country can convince its bankers and its companies to move from one international set of rules to another international on a chosen implementation date. Some nations require an act of their legislative bodies to move from UCP 500 to UCP 600. So, I believe ISBP 645 will continue to be a necessary companion.

Another point is that many letters of credit are issued for lengthy periods of time, so it is well to keep ISBP 645 on hand.

Likewise, because there are major changes from 500 to 600, I am advising all parties - banks, applicants, beneficiaries, carriers, forwarders, insurers - to have a copy of the revised ISBP 681. I think it is a critical document in any letter of credit user's reference library.