ICC Digital Library

Documentary Credit World

Documentary Credit World (DCW) - March 2024 Vol. 28 No. 3 section - Updates

A Matter of Conversion

In a bankers’ discussion session this month, the following scenario and related questions were addressed concerning the advising of a UCP600 commercial LC with the following payment terms and key dates:

By negotiation
Drafts at: 60 days from shipment date
Period for presentation in days: 21
Latest shipment date: 12/15/2023
Expiry date: January 05, 2024
Place of expiry: United States

Documents were presented discrepant by the client on January 12, 2024 with a maturity date that would fall on January 29.

Documents were the forwarded to the issuing bank with the following instructions: “At the request of the beneficiary, we are forwarding documents as presented without our exam. Please deliver documents only upon applicant’s acceptance.”

Documents were received by the issuing bank on January 29 and refused on February 1 with valid discrepancies noted.  The applicant and beneficiary then communicated directly via email discussing the discrepancies and payment.

On March 4, presenting bank received an email chain from its client with the applicant stating: “The issuing bank has communicated that documents were received after the LC expiry. They request your bank send a SWIFT message to “Convert L/C  payment into Collection basis” to process payment.”

What possible reasons could there be that the issuing bank needs this converted to a collection to remit payment?

The attendees agreed that there could be many reasons why the presentation of documents could be switched from under a documentary credit, to a documentary collection.

Francisco Rodriguez, CDCS – GLS, offered further analysis to share with DCW readers:  “I had seen some of these presentations before where the change has been warranted due to exchange control regulations, or foreign exchange arrangements as discussed offline with another banker. The LC ceases to exist, under which the applicant might have secured a forward foreign currency contract. The applicant (and possibly the issuer) now might need to justify the purchase of foreign currency and the closest instrument to an LC is a collection to facilitate payment.”

As the presenting bank, would you send a message like the above request changing this LC draw to a collection?

Since the role of the presenter is exhausted under the LC terms, and while the SWIFT request would more naturally be initiated by the issuing bank, the presenting bank could send the message to the issuer without any responsibility on its part; substantiated by the instructions from the beneficiary, as a result of the latter ’s communication with the applicant.

Would you be required to send a new draft and updated cover letter if you agreed to convert this to a collection?

As mentioned above in answering question 2, if the SWIFT request is sent by the issuer, at its option, and as the payment settlement becomes more cumbersome and costlier, it could request a fresh draft and cover letter; depending on its local regulations.

A final observation on the presenting bank’s cover letter wording, which reads, in part: “Please deliver documents only upon applicant’s acceptance.” The presenter had determined the draft maturity date, and considering the transit time, its instructions could have been more straightforward, requesting the issuer to secure waiver of discrepancies and to effect payment at sight.

Have a different view? Let Francisco (paquitorodriguez@msn.com) and DCW (info@iiblp.org) know.