We, Edward Trading LLC, received an irrevocable letter of credit in our favour issued by a Chinese bank in China in the amount of USD 677,000.00 for the purchase of 200 metric tons of LME Grade "A" Copper Cathodes CIF China port to be shipped not later than 31 January 2009.

The L/C expired on 21 February 2009 with a draft to be drawn at sight on the issuing bank accompanied by the following documents:

1. signed commercial invoice in duplicate;

2. packing list in duplicate;

3. full set of clean on board ocean bills of lading consigned to and notify applicant with full address marked freight to collect;

4. shipping authorization issued and signed by the applicant authorizing shipment;

5. beneficiary's certificate certifying that one set of documents has been sent to the applicant by courier service immediately after shipment;

6. insurance policy in duplicate for 110% of CIF value covering all risks and war risk with claim payable, if any, at the destination in the currency of the draft.

We shipped the goods and submitted the documents to the negotiating bank that forwarded them to the issuing bank for payment. We were informed that the documents were refused by the issuing bank with the following discrepancies:

- shipping authorization not manually signed;

- insurance policy not stated "claim, if any, payable in the currency of the draft".

We immediately disputed the discrepancies, which were groundless. We also responded with the following:

- The L/C did not stipulate that the shipping authorization must be signed manually. The signature appears to be signed in a digital format.

- The insurance policy did indicate the claim, if any, to be payable in the currency of the policy, i.e., US dollars.

Our bank, the negotiating bank, sent a SWIFT message to argue that the discrepancies mentioned above were groundless. UCP 600 sub-articles 17 (b) and (c) state:

"b. A bank shall treat as an original any document bearing an apparently original signature, mark, stamp, or label of the issuer of the document, unless the document itself indicates that It is not an original.

c. Unless a document indicates otherwise, a bank will also accept a document as original if it:

i. appears to be written, typed, perforated or stamped by the document issuer's hand; or

ii. appears to be on the document issuer's original stationary; or

iii. states that it is original, unless the statement appears not to apply to the document presented."

After a series of negotiations with the applicant, we finally received payment from the issuing bank.

Because of the decline in the price of copper, the applicant may have played an important role in urging the issuing bank to find discrepancies and to reject the documents. Although UCP 600 article 17 does not clearly spell out the acceptability of a digital signature, it is clearly a "mark" on the original shipping authorization, which constitutes a "signed" original document.

This transaction raises doubts about the Chinese bank's adherence to international banking practice in the examination of documents and specifically whether its examination was influenced by the applicant. We contend that the issuing bank should examine the documents strictly as they appeared on their face to determine whether they were in compliance with the terms and conditions of L/C. (For a further discussion of dubious discrepancies being claimed by Chinese banks as a result of changes in market conditions, see the Chinese contribution in the special section "The financial crisis and L/Cs" in this issue of DCInsight.)

Simon Jian Chief Executive Officer and President
Edward Trading LLC

Republic of Belarus

Donald Smith in his article in DCInsight (October-December 2008, Vol.14, No. 4) noted that " ... different clients in different countries are now moving to L/C from cash in advance, while other clients in the same or other countries are continuing to move to open account from letters of credit."

The former trend is illustrated by recent administrative measures taken by the authorities in the Republic of Belarus. To a certain degree, these actions were dictated by the turmoil in international financial markets. To reduce the volume of "cash in advance" import settlements, in November 2008 the National Bank of the Republic of Belarus forbade all commercial payments in favour of non-residents from accounts in Belarussian banks if these payments were to be effected in international contracts providing for payment before complete fulfilment of non-residents' obligations toward local importers. Moreover, the authorities declared that the termination date of foreign exporters' obligations related to the shipment of goods should be determined, not in accordance with Incoterms 2000, but in conformity with the Belarussian President's decree as the "date of the placing of goods under Customs regulations provided by the Customs Code of the Republic of Belarus".

Some exceptions were allowed; importers can, in some instances, obtain special permission from the National Bank to effect advance payments. But more importantly, the National Bank's regulations will not apply to import contracts providing for settlement by means of documentary credits. This "positive" exemption of settlements under L/Cs was explained by the independence of the banking undertaking from the sale or other contract. (The provisions concerning the UCP are reproduced in the Belarussian Banking Code.)

However, even in L/C operations the terms of many documentary credits issued by Belarussian banks require presentation of the original transport document stamped by Customs in the importer's country. This condition creates difficulties. First, if this is the case the beneficiary can almost never make a presentation of the documents within the time limits stipulated in sub-article 14 (c) of UCP 600. Second, if the documents are discrepant, the option provided to banks by sub-article 16 (c) (iii) (c) of UCP 600 (and especially to the issuing bank) becomes impractical. In fact, the return of the documents to the presenter may result in applicant-beneficiary contacts and, if no positive solution is found, in the return of the goods. Moreover, one can never be sure whether the goods described in the transport documents stamped by Customs have not already been received by the buyer.

Clearly, the advantage given documentary credits by the Belarussian banking authorities is not motivated by businesslike considerations but by the authorities' urgent need to enforce foreign trade and monetary regulations. This is not the first time that public authorities have had recourse to documentary credits for control purposes. In these cases, some import features of L/Cs may disappear or be temporary ignored, but apparently the authorities believe that is too high a price to pay.

G. Kobakhidzé
Directeur, VTB Bank (France) SA, Paris

Russian Federation

The Central Bank of Russia has recently adopted a series of measures aimed at maintaining a certain stability in the Russian banking system and limiting the exposure of Russian commercial banks to the financial crisis. As one instance, in December 2008 the Central Bank recommended that during the first quarter of 2009 Russian financial institutions should maintain the amount of their assets in foreign currency at an average level similar to that of August-October 2008. Exceptionally, this amount may be increased if it is accompanied by a respective growth of foreign currency liabilities. Without doubt, this recommendation affects foreign trade settlements and, in particular, letter of credit operations, given that Russian commercial banks are obliged to include these operations in their open currency position (OCP), the issuing bank may have to pay and not get reimbursed from the applicant

Frequently, Russian issuing banks request that local applicants/importers provide foreign currency collateral at the time the credit is issued (this practice is widely used in internal L/C settlements in Russia). But applicants may be concerned about the deterioration of the issuing bank's financial position during the period of the L/C's validity, which could result in temporary administration by the authorities or even a revocation of the bank's licence. This, in turn, would impede the issuing bank from meeting its obligations under an L/C. Some applicants even insist on the immediate transfer of such foreign currency collateral to the nominated/confirming bank by the issuing bank at the beginning of the operation.

The situation is more complicated under documentary credits available by deferred payment or acceptance. Under these credits, Russian issuing banks usually require the applicant to provide funds equal to the amount of the forthcoming payment (or reimbursement) some days before the maturity date. For the applicant, the non-fulfilment of the L/C undertaking by the issuing bank at maturity signifies a non-fulfilment of its own payment obligations under the underlying contract. However, since most credits issued by Russian banks are available with foreign banks (exporters' banks), this becomes more a question of relationships between an "honest" applicant and a nominated bank.

A related problem concerns the post-ponement of payments granted to applicants under those letters of credit for which Russians issuing banks have received "post-financing" by means of refinancing arrangements with a nominated/ confirming bank. In an ICC workshop in October 2008, this was termed a "sight letter of credit with a deferred reimbursement". In these cases, if the issuing bank is in difficulty, some applicants and nominated/confirming banks attempt to design a complicated assignment arrangement permitting the applicant/ importer to effect payment directly in favour of the nominated/confirming bank - and simultaneously for the nominated/ confirming bank to release the issuing bank from its L/C obligations. In theory, these actions can allow the applicant to avoid replenishing its current account with an issuing bank in financial difficulty.

There is another problem for Russian applicants. Russian monetary regulations require the applicant to open a "passport of import transaction" with the issuing bank. All settlements under related transactions must also be effected through the same bank. Any transfer of the "passport" to another bank during the validity of the credit is nearly impossible. As a result, the Russian applicant has a continuing obligation to reimburse the Russian issuing bank, even if it is evident that the issuing bank will not be able to meet its obligations under the letter of credit.

G. Kobakhidzé
Directeur, VTB Bank (France) SA, Paris


A deep economic crisis is now on a world tour and has also visited my country, Spain. Here, as in many other countries, one of the possible solutions seen by for small- and medium-sized companies is to sell abroad when consumption in their internal market is slumping. Many of these companies, without much previous experience, now dare to become exporters.

In their first attempt to sell abroad, as is logical and natural, often the parties do not trust each other. So they look for both certainty and security in their means of effecting payments. This would seem to bode well for documentary credits.

But many of these exporting newcomers have no experience. Consequently, many inexperienced companies that are beneficiaries in documentary credits normally go to their banks for help. Quite frequently, banking officials transform themselves into advisers having to answer very basic questions, as teachers do with children in school. But children, in their innocence, often pose questions which teachers have difficulty answering.

Something like this happened recently to a colleague of mine, who explained it to me this way. A small company received a warning that it appeared as beneficiary in a documentary credit which had special conditions. One of these was the expression "Red Clause 10%". The company had no idea what that meant and went to its bank's offices looking for clarification.

My colleague knew the matter quite well and told the company that the clause meant that it was part of an advanced payment to the beneficiary, probably negotiated between the parties. Nevertheless, my colleague faced some uncomfortable questions: Who has the obligation to anticipate this payment? Our customer, the applicant? The issuing bank? The negotiating bank? And the disturbing questions from the company did not stop there. What happens with this money if we do not send any goods? Must we sign any sort of promise to reimburse? What kind of receipt should we sign? In what currency should we obtain the advanced payment?

Finally, the last question, seemingly easy to answer, but also the most annoying one for all of us: Where are there the rules and regulations covering such a situation?

The company explained that before coming to the bank it tried to acquire some knowledge. In doing so, it followed advice to read the Uniform Customs and Practice for Documentary Credits and a sort of guide known as the ISBP. Once both publications were in its hands, it read them through and was surprised not to see any trace of that clause nor one concerning this kind of operation.

My colleague, the banker, confessed to me that it was then that he felt he was in a difficult position. He tried to make the company see that this sort of advanced payment could be considered an issue that was outside of the credit and the rules. But the company was not easily convinced. It answered that negotiation could also be considered to be outside the credit and, even with that, it was recognized in the rules.

I don't know how this story ended. My friend, the banker, went on holiday immediately afterward. But I have been left with a nagging worry. I fear someone will come in and ask me what a revolving credit is. I hope they don't.

Xavier Fornt
Professor at the Escuela Superior de Comercio
Internacional - Barcelona