Straight DC

[jamaliahAbdMalik]

Under what circumstances a beneficiary would want an applicant to issue a straight DC?

What is the risk face by a bank who which to negotiate a straight DC?

[larryBacon]

It is not clear what you mean by a "Straight DC".
If you mean a DC in which the transport document is straight consigned directly to the applicant, there are circumstances why this should happen. An example is goods sent by air where there is no document of title. There are numerous other circumstances, but please confirm what you mean by "Straight DC".

[T.O.Lee]

STRAIGHT LC A TERM DERIVED FROM STRAIGHT BILL OF LADING?

Thanks for Mr. AbdulkaderB for quoting the definition of "straight LC".

We think this term is inspired by the term "straight Bill of Lading" in which the goods are consigned straight to the consignee. Such BL is hence not a negotiable instrument and cannot be endorsed from one party to another.

We are from www.tolee.com

[edited 7/13/01 2:30:40 AM]

[jamaliahAbdMalik]

What I meant by 'straight' credit or DC is where the issuing bank engages directly with the beneficiary. The DC is adviced through an advising bank The nominated bank is the issuing bank. Your views, please.

[T.O.Lee]

RISK/DRAWBACK FOR THE BENEFICIARY

Payment would be delayed for an LC not available locally for sight payment.

If the LC is from USA, the beneficiary may face the risk of political sanctions resulting payment being frozen by the OFAC (Office of Foreign Assets Control) of the US government.

RISK FOR THE UNAUTHORISED NEGOTIATING BANK

This sanctions risk is also a risk for the negotiating bank. Another risk for the negotiating bank is that since the LC is only available with the issuing bank, it should not allow negotiation (whether restricted or open) and such negotiation without authorisation (may we call it "silent negotiation") is not protected by the UCP 500.

Reimbursement claims may be a problem because there should not be any reimbursement arrangement or undertaking (engagement clause) in the LC.

If no drafts are involved, and frauds are discovered prior to the maturity date for deferred payment, the undesirable outcome similar to the Santander case of UK may affect the unauthorised discounting bank.

We are from http://www.tolee.com

[edited 7/2/02 9:35:06 PM]

[larryBacon]

Your definition of a "Straight DC" is equivalent to any DC, whereby under Article 9a, the DC "constitutes a definite undertaking of the issuing bank, provided that the stipulated documents are presented to the nominated bank or to the issuing bank...."

Therefore, I fail to see the reason for distinguishing a DC presented by the beneficiary to the issuing bank instead of the (separate) nominated bank. In opening a DC, the issuing bank commits itself to this undertaking.

[JudithAutié]

The UCP implicitly accepts what you call a "straight" DC if you consider Article 2 sections ii and iii are preceded by "or". In other words it is not a necessity to authorize a second bank to effect payment, acceptance or negociation. Also Art 7 says a credit MAY be advised ...through another bank -- not MUST .

However, the beneficiary must have some way of checking the authenticity of the credit. This could simply be by having his own bank verify the signatures or check the the issuing bank directly. Many banks would do this as a non-paying customer service, but without any responsibility nor engagement on their part.

There could be a delay in presenting the documents by the beneficiary directly to the issuing bank, if great distances are involved, but in these days of rapid courier services, this should not present an unsurmountable problem. However, in case of having to correct any documents, it would be more difficult, and one would have to keep in mind the period for presentation stipulated in the credit or the UCP rules maximum of 21 days, absent such stipulation.

Nevertheless, I would advise beneficiaries to accept a "straight" letter of credit only from well known banks and only if they have a good track record with their buyers. In case of dispute on the documents, it's always nice to have your own bankers on your side!!

[AbdulkaderBazara]

The definition of Irrevocable Straight Documentary Credit is provided in ICC Guide to Documentary Credit Operations for UCP 500 ICC Publication No. 515 (E).
On page 37 the following is given:
"Definition
Under the irrevocable Straight Documentary Credit, the obligation of the Issuing Bank is extended only to the Beneficiary in honouring Draft(s) / document(s) and usually expires at the counters of the Issuing Bank. This kind of Documentary Credit conveys no commitment or obligations on the part of the Issuing Bank to persons other than the named Beneficiary."

Usually banks issue such type of letters of credit when they want to have the beneficiary present documents directly to them. Most of the time the beneficiary and the issuing bank are in the same city / country and in many cases the beneficiary might maintain an account with the issuing bank.

If a bank negotiates a document (meaning giving value without recourse) under this type of letters of credit, the bank takes the risk of loss of documents in transit since the expiry place of the LC is at the counters of the issuing bank. In addition, the negotiating bank does not have absolute control of the proceeds of the documents because it does not have the engagement of the issuing bank for payment and only has the right to present the document on behalf of the Beneficiary.

Other circumstances under which such letters of credit will be issued is when an issuing bank issues a standby letter of credit in favour of another bank to provide credit facilities to its customer or issue another instruments such as guarantees on behalf of its customer. Such SBLC’s will usually provide the beneficiary (bank) to present the required documents by authenticated teletransmission. Usually such teletransmission (telex or swift) would state that the issuing bank’s customer has defaulted in meeting specific arrangement and in case of issuance of guarantee that the beneficiary (bank) has received a claim under the guarantee that it has issued.



[edited 7/12/01 12:26:24 PM]
[edited 7/12/01 1:21:40 PM]

[PavelA]

The “Straight DC” is well established banking term which is very well understood worldwide. The “straight” in this circumstance has nothing to do with “consigned transport documents directly to applicant” or “L/C advised directly to the beneficiary by issuing bank or so. The straight DC is L/C where the issuing bank is engaged through its undertaking directly to the beneficiary only, on the contrary with “freely negotiable” LC the issuing is also directly engaged with all bona fide holders of negotiated drafts and/or documents. The "Straight DC" will not involve a nominated or confirming bank.

Pavel Andrle

[vobrien]

I myself do not use the term ‘Straight DC’ as this term can lead to different interpretations being gleaned from the term. However, in the course of LC business over many years I have only encountered the phrase ‘Straight DC’ in the context of a Credit issued by an Issuing Bank and made available with the Issuing Bank only.