Article

China

An irrevocable letter of credit was issued by a Chinese bank for USD 70,000.00 in favour of Edward Trading LLC for the account of a Chinese company with a draft to be drawn at sight on the issuing bank. The L/C covered shipment of 5,000 yards of Solid Light Pink Silk Crepe de Chine Fabric at USD 7.00/YD Suitable for Blouses & Lining 100% Silk 46" Wide Hand Wash Cold or Dry Clean, and 5,000 yards of Solid Orange Silk Crepe de Chine Fabric at USD 7.00/YD Suitable for Blouses & Lining 100% Silk 45" Wide Hand Wash Cold or Dry Clean CIF Chinese Port. Shipment was from Hong Kong to Chinese Ports. Partial shipments were allowed. Some 5% more or less was allowed for the quantity and the credit amount. Shipment was to be made not later than 15 January 2011, and the credit expired on 31 January 2011 in the US. The credit was accompanied by the following documents:

1. a signed invoice in duplicate indicating the details of the descriptions of goods as per the L/C;

2. forwarders bills of lading made out to the order of shipper and blank endorsed notifying applicant with the full address marked freight prepaid;

3. inspection certificate in duplicate;

4. packing list in duplicate; and

5. an insurance certificate in duplicate for 110% of the invoice value covering all risks, including inland waterway transportation with a claim payable, if any, at destination in the currency of the draft.

The first shipment was made on 15 December 2010 for USD 35,700.00 covering 5,100 yards of Solid Light Pink Silk Crepe de Chine Fabric at USD 7.00/YD, and documents were presented to the issuing bank through the negotiating bank as per the terms and conditions of letter of credit. Payment was made.

The second shipment was made on 20 December 2010 for USD 39,200.00 covering 5,600 yards of Solid Orange Silk Crepe de Chine Fabric at USD 7.00/YD, and documents were presented to the issuing bank for payment on an approval basis for the quantity over-shipped and the L/C overdrawn.

Both the applicant and the issuing bank accepted the documents, and payment was made in late December 2010.

After the second payment, the issuing bank issued an amendment to the above L/C by increasing the L/C amount for USD 35,000 to cover an additional shipment of 5,000 yards of Solid Light Pink Silk Crepe de Chine Fabric at USD 7.00/YD Suitable for Blouses & Lining 100% Silk 46" Wide Hand Wash Cold or Dry Clean. The shipment was made on 10 January 2011 for USD 35,700 covering shipment of 5,100 yards of the aforesaid goods.

The documents were presented on 20 January 2011 to the issuing bank through the negotiating bank as per the terms and conditions of the L/C. The issuing bank rejected the documents for the reason "L/C overdrawn". The issuing bank detailed the three L/C drawing amounts added together for USD 110,600 vs USD 110,250 (being the L/C amount and an increased amount of plus 5%).

Although UCP 600 does not mention how to calculate the L/C drawing amount under the above mentioned circumstances, it is evident that the increase in the L/C amount was solely due to an additional shipment. The previous two shipments were completed with the L/C amount fully utilized. In our view, the original L/C amount should not have been the basis for calculating the L/C amount that was increased for an additional shipment.

After three weeks of negotiation, the applicant finally accepted the documents and payment was made. However, this case raised serious questions concerning the issuing bank's knowledge of how to examine documents.

Simon Jian Chairman, Edward Trading LLC
E-mail: simonjian@edwardtrading.com

Russian Federation

Question No. 27 in ICC's ICC Global Trade Finance Survey 2011 reads: "Do other regulatory constraints, such as more stringent ‘know your customer' principles, negatively affect your trade finance business?"

For many banking professionals in charge of documentary operations, the answer would probably be "no". How can banking intuitions supported by a modern IT database be negative in issuing or dealing with L/Cs or guarantee undertakings - except for the need to verify sources of information and deal with reporting paperwork?

However, certain compliance measures may raise questions concerning reasonable limits of restrictive actions as well as the necessary educational level of the staff concerned.

Recently, a Russian bank (not the biggest one, but one well-known for its international activities) issued a documentary credit in favour of a European industrial exporter. Having had no direct relationship with the beneficiary's bank, the issuing bank transmitted the credit to its European correspondent, Bank A, with a request to advise it through the bank of the beneficiary, one of the agencies of the international bank (Bank B).

Bank A and Bank B were in the same country and maintained permanent correspondent relations. The issuing bank made the credit available by payment with Bank B. Neither Bank B nor Bank A was requested to add its confirmation to the credit.

Having received the advice of Bank A, Bank B sent the following message to Bank A: "Kindly note that as per our compliance authority, we are not in position to advise this DC to the beneficiary. Please advise issuing bank accordingly [emphasis added]." Bank A was surprised and tried to explain to Bank B that the issuing bank's actions corresponded to sub-article 9 (c) of UCP 600 and that transmission of such a refusal might cause a reputational risk for Bank B. Bank B, however, insisted on its refusal to advise, having indicated that the credit was available at its counters and, as it was not in a relationship with the issuing bank, it was not in a position to advise the credit to the beneficiary.

Bank B's position was transmitted by Bank A to the issuing bank and subsequently to the applicant and the beneficiary. It is better not to quote the reaction of the beneficiary to the refusal of its "home bank".

Finally, in order to save the commercial contract, the instructions of the issuing bank were modified, Bank A agreed to deal with an "exceptional client" and not only advised the credit, but acted as a nominated bank. Conforming documents were presented, and Bank A honoured them, having paid to the account of the beneficiary with the same Bank B.

In our view, the following questions are raised by this particular case:

1. If an authorization to honour does not impose any obligation on a nominated bank to honour (sub-article 12 (a) UCP 600), can the unwillingness of the second advising bank to act as a nominated bank be considered a sound reason to refuse to advise a credit to the beneficiary according to sub-article 9 (e) of UCP 600?

2. It is evident that no bank can maintain correspondent relationships with all banks of potential beneficiaries in whose favour it may be instructed to issue documentary credits. Is the absence of a direct relationship with the issuing bank (representing a FATF country with available public information as to its credit standing, etc.) a sufficient pretext to allow a second advising bank to avoid its involvement in a transaction, having in mind that:

- the apparent authenticity of the credit was signaled by the first advising bank; and
- the bank's refusal to advise the credit could provoke a rupture with an underlying commercial contract?

I would welcome comments from DCInsight readers.

G. Kobakhidze
Directeur, VTB Bank (France) SA.
E-mail: kobakhidze@vtb-bank-france.fr