Recently, one of the large Israeli importers complained to the bank which had opened a transferable L/C for it. Its complaint was very serious; the bank had caused a failure of the transaction and it had damaged the international reputation of the company.

The event involved an importer who had requested the bank to open a transferable L/C in favour of a middleman situated in Hong Kong. The first beneficiary did not want the importer to have details of the second beneficiary. The middleman therefore informed the importer that he would not instruct his bank to transfer the L/C to the second beneficiary if the clause requiring details of the second beneficiary was not deleted. The issuing bank refused to delete the clause.

Regulations and requirements

In accordance with AML/CFT regulations and local requirements, banks are required to know who are the parties (including the final exporter) to the transaction Accordingly, one of the clauses in the L/C required that the bank transferring the L/C to the second beneficiary inform the issuing bank of details of the second beneficiary, and that these details be given to it on the instructions of the first beneficiary and prior to transferring the L/C.

The issuing bank was familiar with the meaning of a transferable L/C and knew that one of its key elements was to safeguard the status of the middleman as against the final purchaser. From the point of view of the exporter, on the other hand, the L/C clearly stated that the name and address of the second beneficiary would be kept secret by the bank and not disclosed to the party requesting the L/C.

When the middleman received the text of the L/C, he refused to supply the required goods to the applicant unless the opening bank would cancel its request.

The complaint

The customer's complaint against the bank contended that the bank did not understand the task of the transferable L/C and that it had placed an obstacle in the transaction that was contrary to common and routine practices customary in international trade.

Was this really the case?

This case raised a number of issues:

1. Local regulations and orders forbidding money laundering and financing of terrorist activities sometimes "neutralize" financing solutions and payment instruments that have been used in international trade for years and have fulfilled their tasks.

2. There was a lack of understanding on the part of the parties to the trade transaction. The importers, exporters and middlemen failed to recognize that the world is changing, that standards which were customary ten years ago are no longer applicable and that banks are required to exercise more control. On this occasion, the lack of understanding by the middleman was the cause of its stubbornness in refusing to supply the goods to the importer. Furthermore, the middleman did not pay attention to the significance of the issuing bank in the text of the L/C, namely that the information received relating to the second beneficiary was only for internal use, remained protected and should not be transferred by the bank to the importer requesting the L/C.

3. There is an absence of solutions supported by standard international rules able to provide security to the parties, on the one hand, but that take into account the limitations imposed under local regulations on the other.

Seminars and publications

International organizations such as ICC and BAFT-IFSA, in conjunction with commercial banks and export institutions in each country, should unite to instruct traders concerning the new regulatory environment.

Several means of communication could be used. First, it would be useful to hold more seminars and webinars for importers, exporters, middlemen, lawyers and carriers, to include lectures and case studies relating both to common international practices and to local regulatory issues in the countries where the seminars are held.

Where seminars have already been held on AML/CFT issues, most have been directed to the banking community which is subject to, and responsible on a personal basis to act in accordance with, the provisions of local law and the practices of the central banks. But an important audience also consists of those who actually deal in imports and exports and whose knowledge is only partially acquired, if at all

We would also profit by seeing more articles published instructing traders how to execute transactions whilst preserving the rights of the parties to transactions. These articles should be distributed widely to the international trade community.


UCP 600, like the rest of the uniform rules published by ICC, does not deal with AML/CFT issues. This is due to a decision taken by the ICC Banking Commission during discussions on the UCP 500 revision. But in my view, the revision of ISBP 681, which the Commission decided to update with a broader content, should contain a specific clause relating to these issues. The reference should be general but with a specific guidance concerning accepted practice with regard to transferable L/Cs.

Specifically, within the framework of the ISBP it should be possible to provide that, in cases in which the opening bank requires in the L/C that it receive the name of the second beneficiary, this information should remain protected unless:

- the notifying bank confirms to the issuing bank in the name of the first beneficiary that it is possible to disclose this information to the person requesting the L/C, or

- when one of the documents presented with the L/C by the second beneficiary discloses its details.

I have no doubt that reference to AML/ CFTF in the ISBP, which is the principal reference book containing interpretations of the UCP, would provide maximum comfort to all parties involved in these sensitive transactions.


The tightened regulatory requirements do not appear to have been taken on board by many importers and exporters. For some time, many of our meetings with clients have included lectures on this subject, but this does not appear to be sufficient. ICC, working through its national committees, needs to initiate educational activities to spread the message.

There was not a good ending to our story. The importer failed to receive the goods that were to be sold to him at a special attractive price, but this same importer accepted that the bank had acted professionally and correctly. Its transactions using that bank have actually increased.

Sarah Younger
Head of International Trade and Payments
Bank Leumi Le-Israe