Credit available by DP with us which we have been asked to confirm. It requires copy documents with one exception. The IB has included the following in the credit:
IT IS A CONDITION OF THIS L/C THAT IF OUR BANK [i.e. the IB] DECIDE TO INCUR
DEFERRED PAYMENT UNDERTAKING UPON RECEIVING APPLICANT S
INSTRUCTION BEFORE THE PRESENTATION OF DOCUMENTS TO
THE ADVISING/NOMINATED/CONFIRMING BANK AND/OR ISSUING BANK,
THE DEFERED [sic] PAYMENT UNDERTAKING AMOUNT WILL BE AUTOMATICALLY
REDUCED FROM THE AVAILABLE AMOUNT UNDER THIS L/C WITHOUT NEED
FOR ANY AMENDMENT OR FURTHER COMMUNICATION. IN CASE
ADVISING/NOMINATED/CONFIRMING BANK RECEIVE THE RELEVANT
DOCUMENTS IN FUTURE THEY WILL SIMPLY SEND DOCUMENTS
TO THE ISSUING BANK.
EARLY PAYMENT AND/OR PARTIAL PAYMENT IS ALLOWED BEFORE
THE MATURITY DATE AS PER APPLICANT S INSTRUCTION WITHOUT
GETTING ANY APPROVAL FROM THE PRESENTING BANK/BENEFICIARY.
I struggle to see how a bank can act as nominated bank under such conditions, particularly the first, but if you think differently I’d love to hear from you.
Anyway, has anyone come across anything similar and know the reason for such conditions? Grateful if you will kindly let me know if you do.
Thanks & regards
Any idea what is going on?
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AsifMahmoodButt
- Posts: 89
- Joined: Fri Apr 05, 2019 5:21 pm
Any idea what is going on?
Jeremy,
I also struggle to understand how an IB can create a DP before presentation of documents. I certainly have no idea what is going on.
Regards
Khalid
I also struggle to understand how an IB can create a DP before presentation of documents. I certainly have no idea what is going on.
Regards
Khalid
Any idea what is going on?
It is not a documentary credit, it is an open account transaction guaranteed by a bank.
However, you may confirm such transaction provided the IB & IB country risk are acceptable to your bank.
A special study by your anti-money laundry officer to such transaction should be considered.
However, you may confirm such transaction provided the IB & IB country risk are acceptable to your bank.
A special study by your anti-money laundry officer to such transaction should be considered.
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AsifMahmoodButt
- Posts: 89
- Joined: Fri Apr 05, 2019 5:21 pm
Any idea what is going on?
Open account under a commercial letter of credit is a first for me.
Regards
Khalid
Regards
Khalid
Any idea what is going on?
Thanks for your comments Khalid & Heshmat.
I have to admit to being a little puzzled at the idea the intention is to secure an open a/c transaction, as I would expect a standby LC available by sight payment, with far fewer documentary requirements, to be used in such circumstances. Furthermore, even if that is the intention, I am still unclear as to why the applicant would seek to bypass the credit’s documentary requirements, which presumably reflect the underlying contract’s payment terms, or make payment sooner than contractually agreed, when it is a simple matter for the beneficiary to present documents to obtain payment on the contractually agreed date.
Operationally, I would be concerned –among other things- that the issuing bank may claim to have incurred a DPU before documents were presented but not have provided any notice to the nominated bank of this –or the notice have been transmitted before documents are presented but be received after documents have been presented- and the nominated bank have incurred and prepaid a DPU. (There is nothing in the condition about providing notice to the nominated bank and when the notice is effective.)
I have to admit to being a little puzzled at the idea the intention is to secure an open a/c transaction, as I would expect a standby LC available by sight payment, with far fewer documentary requirements, to be used in such circumstances. Furthermore, even if that is the intention, I am still unclear as to why the applicant would seek to bypass the credit’s documentary requirements, which presumably reflect the underlying contract’s payment terms, or make payment sooner than contractually agreed, when it is a simple matter for the beneficiary to present documents to obtain payment on the contractually agreed date.
Operationally, I would be concerned –among other things- that the issuing bank may claim to have incurred a DPU before documents were presented but not have provided any notice to the nominated bank of this –or the notice have been transmitted before documents are presented but be received after documents have been presented- and the nominated bank have incurred and prepaid a DPU. (There is nothing in the condition about providing notice to the nominated bank and when the notice is effective.)
Any idea what is going on?
Hi Jeremy,
Re the first clause: I saw some credits where we received funds in advance of a presentation with statement that the goods have already been received, the funds may be forwarded to beneficiary, and the beneficiary is requested to present documents which the presenting bank is requested to pass without checking and responsibility.
I know it is not exactly what you received (there was no mention in the credit itself, all occurred later). But maybe the reasons are similar.
I would not be reluctant to add my confirmation but I would inform beneficiary that my confirmation only applies to complying presentation. If the issuing bank wishes to incur its deferred payment obligation (well, if you confirm, they should incur their reimbursement obligation, but never mind), my confirmation does not cover such situation and I will use my own discretion to decide whether I add my own guarantee to that.
Re the second clause: We sometimes use it because we are sometimes approached by our clients wishing to pay in advance of maturity date (they want to clear their outstanding liabilities in order to be able to issue a fresh L/C or maybe just agreed with the supplier on earlier payment). In my understanding, I should not pay before maturity of my undertaking without the creditor's express consent. In order to avoid hassle in having to contact the presenter (who must then contact the beneficiary) for consent, we sometimes (scarcely and only upon applicant's instruction in the L/C application) enclose similar clause in our credits. I do not believe that it may make any problem to you as a confirming bank (unless you finance and early repayment creates a booking problem or something like that) but it is of course up to you whether you accept such term or not.
Radek
Re the first clause: I saw some credits where we received funds in advance of a presentation with statement that the goods have already been received, the funds may be forwarded to beneficiary, and the beneficiary is requested to present documents which the presenting bank is requested to pass without checking and responsibility.
I know it is not exactly what you received (there was no mention in the credit itself, all occurred later). But maybe the reasons are similar.
I would not be reluctant to add my confirmation but I would inform beneficiary that my confirmation only applies to complying presentation. If the issuing bank wishes to incur its deferred payment obligation (well, if you confirm, they should incur their reimbursement obligation, but never mind), my confirmation does not cover such situation and I will use my own discretion to decide whether I add my own guarantee to that.
Re the second clause: We sometimes use it because we are sometimes approached by our clients wishing to pay in advance of maturity date (they want to clear their outstanding liabilities in order to be able to issue a fresh L/C or maybe just agreed with the supplier on earlier payment). In my understanding, I should not pay before maturity of my undertaking without the creditor's express consent. In order to avoid hassle in having to contact the presenter (who must then contact the beneficiary) for consent, we sometimes (scarcely and only upon applicant's instruction in the L/C application) enclose similar clause in our credits. I do not believe that it may make any problem to you as a confirming bank (unless you finance and early repayment creates a booking problem or something like that) but it is of course up to you whether you accept such term or not.
Radek