Scenario:
A transferable credit is issued by bank (IB) and Transferred and Confirmed by Bank (TCB) without informing the IB that a transfer has been made. The second beneficiary submits conforming documents to the TCB, by that time the first beneficiary got paid (the whole value of the credit) by the IB as he had presented conforming documents to it direct. Later the TCB claimed reimbursement from the IB for value of second beneficiary's docs.
Query about Controls:
What do you think is the most wise control to avoid such a scenario?
To add a condition in the credit that if the credit is being transferred, the TCB should so inform the IB (to be on the alert)?
or:
Upon receipt of docs direct from the first beneficiary, the IB should investigate if the credit has been transferred? and if the answer is yes what should it do with first beneficiary's docs. in its hand?
or
....
[edited 8/30/01 12:41:35 PM: spelling]
Double Exposure - Transferable DC
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larryBacon
- Posts: 689
- Joined: Fri Apr 05, 2019 5:26 pm
Double Exposure - Transferable DC
Since transferable credits should specifically say so when opened, (Article 49 b) your description sounds closer to a back-to-back credit to me. If it was opened as a transferable credit, there is no issue with the IB. If it was not, then it is not a transferable credit and the actions of any bank in treating it as such are flawed.
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hatemshehab
- Posts: 220
- Joined: Fri Apr 05, 2019 5:19 pm
Double Exposure - Transferable DC
If the original L/C did not stipulate that it is transferable in part or in full then there should be no worry for the IB bank. TCB bank has performed this action on it sole judgement and discretion without any prior authorization from IB through the letter of credit. This should be the worry of the TCB control or risk management department not IB.
Could we say that in case we issue an L/C, which is not to be confirmed by the nominated bank “if you intend to confirm the L/C you should notify us” why should we? We as an issuing bank have enough worries to look at.
Could we say that in case we issue an L/C, which is not to be confirmed by the nominated bank “if you intend to confirm the L/C you should notify us” why should we? We as an issuing bank have enough worries to look at.
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AbdulkaderBazara
- Posts: 256
- Joined: Fri Apr 05, 2019 5:15 pm
Double Exposure - Transferable DC
I believe this is a hypothetical query. It seems that both banks (the issuing bank and the transferring bank) are at fault and liable. When a bank transfers a credit, it would, usually, either retain the original credit or mark on it the portion that it has transferred to discourage any fraud by the first beneficiary or any other sort of mishap. Since, usually, the beneficiary requests a confirmed credit because the beneficiary wants an additional protection, a prudent issuing bank would usually question the reason the first beneficiary has changed its mind and presented the documents directly to it. Secondly, since, again usually, the advising bank and the confirming bank charges are on the first beneficiary’s account, the issuing bank would also like to check whether such charges have already been paid by the first beneficiary otherwise it would be the issuing bank’s obligation to pay the charges. If above steps and controls are followed, it’s not likely that the banks fall in this type of folly.
To answer the second part of the query, I would comment as follows: Although it is not necessary that the transferring bank should advise the issuing bank that it has transferred the credit to a second beneficiary, many banks would put it as a condition in the credit requiring the transferring bank to advise the name of the second beneficiary to the issuing bank and obtain its approval prior to transferring the credit. The reason behind it is to verify that the second beneficiary is not involved in any sort of crime like money laundering, drug dealing etc. The name of the second beneficiary will not be disclosed to the applicant. It is just for the records of the issuing bank. Other banks would just request a copy of the transferred credit for their record. Thus it depends upon the internal policy of the credit-issuing bank.
To answer the second part of the query, I would comment as follows: Although it is not necessary that the transferring bank should advise the issuing bank that it has transferred the credit to a second beneficiary, many banks would put it as a condition in the credit requiring the transferring bank to advise the name of the second beneficiary to the issuing bank and obtain its approval prior to transferring the credit. The reason behind it is to verify that the second beneficiary is not involved in any sort of crime like money laundering, drug dealing etc. The name of the second beneficiary will not be disclosed to the applicant. It is just for the records of the issuing bank. Other banks would just request a copy of the transferred credit for their record. Thus it depends upon the internal policy of the credit-issuing bank.
Double Exposure - Transferable DC
1 The enquiry clearly states “transferable credit” and so the issuing bank intends it to be transferred.
2 The nominated /confirming bank should have retained the original DC as “hostage” to ensure that the first beneficiary cannot make any presentation behind its back. The first beneficiary can work with a copy.
3 This query may be real as anything may happen, taught by our many years’ of consultancy experience, particularly that banks do not have enough training budget these days.
We are from www.tolee.com
[edited 8/31/01 6:38:50 PM]
2 The nominated /confirming bank should have retained the original DC as “hostage” to ensure that the first beneficiary cannot make any presentation behind its back. The first beneficiary can work with a copy.
3 This query may be real as anything may happen, taught by our many years’ of consultancy experience, particularly that banks do not have enough training budget these days.
We are from www.tolee.com
[edited 8/31/01 6:38:50 PM]
Double Exposure - Transferable DC
I appreciate the above responses. I think that in order to avoid blaming the nominated bank for the consequences, the issuing bank should include the operational controls required from the nominated bank, in the instrument as additional conditions.
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Moreover the issuing bank should know that the first beneficiary may wish to perform partially under the credit, and transfer part to a second beneficiary. In which case the original paper instrument cannot be given to both the beneficiaries. A copy could be made and stamped with the amount available to the first beneficiary (the untransferred portion).
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In a paperless world there would be no paper original. What could be the possible consequences impacting the issuing bank's exposure?
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Moreover the issuing bank should know that the first beneficiary may wish to perform partially under the credit, and transfer part to a second beneficiary. In which case the original paper instrument cannot be given to both the beneficiaries. A copy could be made and stamped with the amount available to the first beneficiary (the untransferred portion).
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In a paperless world there would be no paper original. What could be the possible consequences impacting the issuing bank's exposure?
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AbdulkaderBazara
- Posts: 256
- Joined: Fri Apr 05, 2019 5:15 pm
Double Exposure - Transferable DC
Following are my comments:
1) Usually, when a prudent bank makes a partial transfers, it issues its own original document for the second beneficiary and would not pass a copy of the master LC with a notation on it to the second beneficiary for, among other things, the following reasons:
a) The second beneficiary would in most case like to receive an original LC instrument.
b) The first beneficiary would not like the second beneficiary to know who the ultimate buyer is.
c) The first beneficiary would not like the second beneficiary to know about the rest of the deal.
2) The paperless environment will have its own merits and restrictions. It would be difficult for me to comment on it since there are a lot of issues related to paperless environment that have not yet been resolved. The legality of such process is not yet been legalized in many jurisdictions. The problem of digital signature remains open. The eUCP has not yet been finalized. We don't know whether there would be something called freely negotiable LC's, negotiable bill of lading, bankers acceptance etc. We don't even know whether LC's would eventually be necessary.
1) Usually, when a prudent bank makes a partial transfers, it issues its own original document for the second beneficiary and would not pass a copy of the master LC with a notation on it to the second beneficiary for, among other things, the following reasons:
a) The second beneficiary would in most case like to receive an original LC instrument.
b) The first beneficiary would not like the second beneficiary to know who the ultimate buyer is.
c) The first beneficiary would not like the second beneficiary to know about the rest of the deal.
2) The paperless environment will have its own merits and restrictions. It would be difficult for me to comment on it since there are a lot of issues related to paperless environment that have not yet been resolved. The legality of such process is not yet been legalized in many jurisdictions. The problem of digital signature remains open. The eUCP has not yet been finalized. We don't know whether there would be something called freely negotiable LC's, negotiable bill of lading, bankers acceptance etc. We don't even know whether LC's would eventually be necessary.