ICC Digital Library Forum

Why are issuing banks charge this fee? Isn't it their job to check documents? Aren't they been compensated for this exercise by the applicant/beneficiary who pays the lc openning charges? Do you believe that ICC should raise this in the next review of UCP for DC, just to protect the rights of beneficiaries?

[edited 9/27/00 7:58:02 PM by Ron Katz (Moderator): none]

Sir, I refer you to an article below, which appeared in Documentary Credits Insight concerning discrepancy charges. If you use the Search function on DC PRO Focus, it is easy to find articles on the subject you wish. The article follows:

Abdul Latiff Abdul Rahim takes issue with discrepancy fees and the way banks impose them

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Abdul Latiff Abdul Rahim
Volume 3 No 4 Autumn 1997

Abdul Latiff Abdul Rahim, author of a number of articles and a book on documentary credits, is a consultant in his firm, Nalco Associates, based in Malaysia. His e-mail address is latiff@jaring.my.

In documentary credit operations, banks charge an opening commission, amendment commissions, advising commissions, confirmation fees (if the credit is confirmed), acceptance commissions, a documents examination fee (for examining the documents before negotiation) and reimbursing bank charges .

But other charges / fees have been levied by banks in recent years. One is the " discrepancy fee". This involves a condition in the credit stipulating that a fee will be deducted from payment(s) made under the credit if there is/are any discrepancies in the documents. There is no standard wording or clause indicating that these fees will be charged, but the following are examples taken from credits issued by banks in different countries:

(1) "A handling charge of US$60.00 will be deducted from the proceeds of each set of documents hereunder which contains discrepancies and which we elect to honor"; (2) "All presentations containing discrepancies will attract a discrepancy fee of GBP35 plus telex costs, if any, for account of the beneficiary. This charge will be levied whether or not we elect to consult the applicant for a waiver in accordance with UCP 500 Article 14" (3)"A discrepancy fee of a minimum of USD60.00 or its equivalent plus cost of cable and other applicable charges , if any, shall be deducted from the proceeds of each presentation of discrepant documents under this credit."

As I recall, it all began sometime in the mid-1980s, when banks in US began charging a discrepancy fee - usually about US$25. Over the last decade, this practice spread through the documentary credit world so much that now practically most banks, including some large international banks, engage in this practice. A senior trade finance department manager says: "Now more than 60% of the credits impose discrepancy fees and these credits come from all over the world."

Range of charges

There is no rule or regulation on this fee, and this has led to many banks charging differently - from US$25 to ¼ of one percent of the amount negotiated. This latter could represent a large sum; if, for example, a credit is issued for US$1 million and if a discrepancy is found, the issuing bank could charge as much as US$2,500.

I cannot remember reading any material about discrepancy fees in any of the ICC Publications, not even in DCI. But the issue is a serious one. The aim of this article is to draw the attention of the documentary credit community to the practice and to suggest that the ICC look into the implications, with a view perhaps to suggesting some form of standarization.

The majority of documents presented under documentary credits contain discrepancies on first presentation. Discrepancies in the documents are pointed out by banks to beneficiaries so that the latter can rectify them. Most of the discrepancies are corrected and the documents are then re-presented to the banks, Of course, some discrepancies cannot be rectified, and, at other times, discrepancies are overlooked by banks.

The issues

Let's look at the issues. Is it right for the issuing bank to charge a discrepancy fee? Under what authority does it have the right to do so? The issuing bank issues the credit at the request and on the instructions of the applicant for the credit. This being the case, does the issuing bank have the right to make this fee/charge a condition of the credit and claim from the beneficiary?

Recently, a dispute arose between an applicant and an issuing bank. The applicant argues that under the UCP, the issuing bank has the duty to examine the documents for compliance with the terms and conditions of the credit. If it finds discrepancies, the issuing bank will refer to the applicant for a waiver of the discrepancies. If the applicant does not waive them, the issuing bank will refuse the documents and notify the remitting bank in accordance with the provisions of Article 14. In this situation, the issuing bank does not charge discrepancy fee. If, however, the applicant waives the discrepancies in the documents, the issuing bank may levy discrepancy fees. The applicant is arguing that this practice is unfair, claiming that even if the issuing bank charges discrepancy fees, then this fee should go to the applicant and not to the issuing bank

In a similar dispute, probably of similar origin, a credit stated: "If the applicant waives any discrepancies in the documents presented, a fee of US$30 will be deducted from the payment under this credit. This is in addition to the discrepancy fee of US$50 levied by the issuing bank."

By stipulating a discrepancy fee, is the issuing bank indicating that it waives its right to refuse the documents if discrepancies are found? The answer is "no", because banks in this position still refuse documents for discrepancies. Question: given that the issuing bank maintains that it has the right to refuse the documents despite a discrepancy fee stipulated in the credit, can the negotiating bank then argue that by stipulating a fee for discrepancies, the issuing bank has waived its right to refuse the documents?

Bank-to-bank

The discrepancy fee also has some relevance to the ICC's Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits (URR 525). The responsibility of the reimbursing bank is to reimburse a claiming bank the amount that has been authorized by the issuing bank.

If a negotiating bank notices discrepancies in the documents and finds that they cannot be rectified by the beneficiary, the bank may then decide to negotiate the documents by taking an indemnity from the beneficiary. The bank then deducts the discrepancy fee (stipulated by the issuing bank) and claims the balance from the reimbursing bank.

On the other hand, if the negotiating bank had not noticed any discrepancies, it may negotiate the documents and pay the beneficiary. It will not deduct any discrepancy fee but claim the full amount of the drawing from the reimbursing bank and forward the documents to the issuing bank.

When the issuing bank receives these documents and detects discrepancies, it would likely refer them to the applicant for a waiver. If the discrepancies are waived by the applicant, the issuing bank can only recover the discrepancy fee from the negotiating bank by making a separate claim. Sometimes, this claim is ignored and not even acknowledged by the negotiating bank. The issuing bank will then send reminders, and, if no response is received from the negotiating bank, the matter will probably be left there. Says one prominent banker "We will send one or two reminders, and if no reply is received, we will ignore the matter. But in some cases, we do get paid these discrepancy fees."

To overcome the problem, some issuing banks are changing their method of providing reimbursement instructions. Banks which were previously nominating a reimbursing bank - and authorizing that bank to make payment under their credits - are now providing reimbursement instructions stating that payment will be made upon receipt of documents in conformity with the terms and conditions of the credit. This is to enable the issuing bank to deduct the discrepancy fee from the amount of the drawings when it makes payment. This also benefits the applicant in that he saves the interest from the date of negotiation to the date of payment by the issuing bank.

Reactions from bankers when asked about discrepancy fees are mixed. One said: : "There is good income, why miss it?". Said another "The objective is mainly to discourage discrepancies in documents. If the beneficiaries fails to be careful, they deserve to pay a fee for it." ." One banker not in favour of the fee said: : "When we refuse the documents, there is no discrepancy fee but when the applicant waives the discrepancies, there is a discrepancy fee. This is unfair." What are your views?

*originally posted by Naeem Jan

Different regions have different practices.

But one thing is common that that the discrepancies are not being handled by the banks in accordance with Article 14. Its a 4 step process:

1) decide on the basis of documents alone whether there are discrepancies;
2) approach applicant for the waiver;
3) if accepted, fulfill obligation under Article 9
4) if not accepted, refuse the documents.

Now the thing is for a bank receiving 100 sets of documents per day the discrepancies fee on 75 documents @ US$:100 comes upto US$:7500. who would miss this sort of income. Secondly, refusing documents always give another chance to the issuing bank to review client's financial position. All this is happening only due to protect bank's own interests. Step 2 is actually being taken at the last. But again sorry to say negotiating bank's do not bother to see whether the BEFORE refusing the documents discrepancies has actually beeen referred to the applicant?

I worked for a bank where no discrepancies fee clause was added to any LC but discrepancies fee of US$:100 was always deducted from the proceeds. I strongly objected against this practice but response of seniors was very simple:"if someone comes back for refund, just return the funds" To my extreme surprise no one ever came back.

So in general negotiating banks are not interested in this small deduction and to beneficiary they always show "Misc deduction" and even beneficiary is not aware of it.

dragon@fsd.comsats.net.pk

I think that banks are justified in taking discrepancies handling fee. It is far economical for banks to handle documents without discrepancies than with discrepancies because the time spent on such documents are much less than those with discrepancies.If all the doocuments presented under documentary credits in the world suddenly start containing no discrepancies and maintain that standard for ever, I can bet that trade finance departments all over the world could be managed with far less staff. Somebody has to be pay the banks for hiring staff to handle the additional work created by discrepant documents. Who but the person responsible for it - the beneficiary? A presentation without discrepancy usually gets paid within an hour. One with discrepancy may float in the bank for several days. It is simply not fair to expect banks to treat clean as well as discrepant documents on equal footing for purpose of calculating its service fee.

Issuing Bank has right & also justified to incorporate discrepancy fee clause in Letters of credit because they are trying to discipline the beneficiary so as to avoid unnecessary cost/time. I believe that discrepancy in the documents can be avoided in most of the cases if beneficiary takes it seriously.

What I have noticed from my experience in L/C's operations that collecting
a nominal charge as dicrepancy fees does not affect the
number of discrepant documents presented to the banks nor the nature
of those discrepancies.

It seems that Beneficiaries are only intersted in receiving the payment under
their L/C's, they don't mind paying that small
charge and let the banks do what they are supposed to do!!
[edited 12/26/00 4:14:12 PM]

you simply have to look at it in this way:
1- the banks are providing a service and their time and effort is being waisted in pointing out discrepancies and maintaining files/corresponding for the discrepant documents ( as in a normal case there should not be any discrepancies and the transaction should go through it's nateural course)

2- banking practices change as time changes. there is no hard and fast rule in banking and there will always be new practices adopted (such as discrepancy charges).

3- the charge is to keep the beneficiary and his bank vigilant in terms of making sure that the documents are confirming to the credit terms and a nominal fixed fee per discrepant presentation (not per each discrepancy) is reasnable.

4- i do not agree to the practice of having discrepant fees as a % (i.e. 0.25 % of invoice value) as it is unethical. however just a fixed fee like usd 25.00 or gbp 15.00 ...etc per discrepant presentation is quite allright and not unfare for any party in the L/C transaction.

I must declare that I am an independent consultant to avoid someone to suspect that my views are biased (if they assume that I am a banker).

To be fair, we did not see any bank charging for discrepancy fees during the good times of UCP 290 or UCP 400. Then why should they start this new "practice" in UCP 500? So extra work to approach the applicant for a waiver, involving added costs is not a good excuse at all, as defended by some bankers I know.

On the other hand, we must also sympathize that the LC business is one of the most unprofitable operation in a bank. With salary, rents, inflation, and other operation costs on the high side, a bank cannot raise its price due to keen competition neck to neck globally, a bank must find somewhere to get more income to cover these ever increasing costs. Discrepancy fees is one. Another is the less obvious "Commission in lieu of exchange". What is it on its face? Few traders know exactly. In the past, some banks in Hong Kong charged this commission twice, both for the importer and the exporter, in local LC for example. Since a couple of years, the Hong Kong Banking Association had written into its guide book to stop banks charging both sides.

So I would suggest the banks to charge for this fee, not because of discrepancy itself, but for covering their ever increasing LC operation costs, by re-naming this charge as "document handling commission". Then even if there is no discrepancy, the bank can still charge the parties.

I have heard some bankers explain: One of the reasons to charge discrepancy fees is to reduce discrepancies. This is of course untrue. Why? some discrepancies are actually manufactured by the applicants themselves to avoid payment! And if you look at some LC from certain countries (sorry I cannot name them here), the terms and conditions are written for the sole purpose of producing discrepancies. For example,ICC Decision Paper on Original documents, ICC Document No. 470/871 Rev. dated 29 July 1999 does not apply. Another example, certificate of inspection issued and presented by the applicant.

Fortune 500 sellers have already startred to ask the LC consultants to draft the LC application forms for the buyers and put them into their sales contracts so that unless the buyers apply the LC in exactly the same as the drafts (which may even form an integral part of the sales contracts) or there is no deal. This is a very effective way to avoid discrepancies.

I am from www.tolee.com


[edited 5/22/01 3:10:15 PM]
[edited 10/26/01 3:50:52 AM]