Bills of Lading showing third foriegn banks (not the Issuing

[RamiN]

I appreciate your views and feedback on the following situation:
The Applicant (in Dubai) applies to the Issuing Bank (in Dubai) to open a documentary credit in favor of the Beneficiary (in Egypt). The Credit is available by acceptance (at 90 days from the Bill of Lading Date) with Bank X (in Egypt). The shipments are to be made from a port (in Egypt) to two different ports (in Morocco & Tunisia). Of the required documents, among others, are 10 full sets of Marine On Board Ocean Bills of Lading + 3 non negotiable copies for each set. The 10 sets of Bills of Lading are stipulated to show the following:
- SHIPPER: The Beneficiary C/O The Applicant.
- CONSIGNED TO : Banks A, B, C, D…etc, (A different bank for each set and all in Morocco except one in Tunisia).
- NOTIFY PARTY : Companies F, G, H, I…etc (A different company for each set and all in Morocco except one in Tunisia).

From the Issuing Bank’s point of view, what are the operational and legal risks associated with this credit? And how can risks be avoided?
Your comments are appreciated.

[DimitriScoufaridis]

RamiN,

It is my opinion that before you start talking about the operational & legal risks, you need to concentrate on your credit risks:

1. Do your LC lines allow imports into countries other than UAE, i.e. third country imports? Are contracts located outside the issuing bank’s country covered by the bank’s credit policy?
2. This is a clean transaction, i.e. as an issuing bank you’ve got no control over the merchandise.

On the operational risks, you need to answer the question: Why have straight BL’s? For more details on the issue of straight BL’s, please refer to Alistairo’s posting of 20/11.

Dimitri

[RamiN]

Dear Dimitri,
Thanks for your response and sorry for the delay in my feedback.
1- in exceptional cases and for certain customers, our credit policies may allow third country imports and outside contracts.
2- The issuing bank, I agree, does not have control over the merchandise and therefore any priority over the goods which the issuing bank may have (at least under certain laws like ours) is only theoretical.
3- Thanks for leading me to the Straight Bills of Lading postings (especially that I am still new to this site) and it was very useful indeed. However, from what I read, I believe that the bills of lading involved in our case are not Straight Bills of Lading but rather bills consigned TO THE ORDER of third banks in an overseas country (i.e. not the issuing bank). I was wondering, given that I am in the legal profession in the banking industry not a technical documentary credit specialist, how often does this situation happen and what precautions should the issuing bank be taking to overcome any possible unwanted consequences.
Rami

[AbdulkaderBazara]

In addition to Dimitri's comments you need to visualize how the documents will be released to the various notify parties in the third country(ies). Here, I assume that these parties will take delivery of the goods on behalf of the applicant.

You must also find answers to the following questions & incorporate some of them, as they seem to be appropriate, in the credit terms and conditions:

What is the role of the consignee banks?
Has the issuing bank or the beneficiary bank taken the approval of the various consignee banks to consign the goods in their names? Who will authorize the consignee banks to release documents to the notify parties (assuming that documents will be sent to them)? Does the issue bank get copies of the documents to decide whether it should pay on maturity or not? Does the consignee banks get copy of the LC to know their roles or is there a separate arrangement between the issuing bank or maybe the beneficiary bank as well outside the the LC terms and conditions? Who will pay the service charges of these banks? Who will be responsible if these consignee banks do not follow the instructions given to them? etc.

Another risk is the import regulation of the importing countries. The applicant should know or depend on other parties in complying with the import regulation of the two countries where the goods will be discharged. The issuing bank has to consider this risk when approving such transactions.

regards

[edited 12/14/02 10:50:16 AM]

[DimitriScoufaridis]

Rami,

In your original message you had mentioned that the BL’s are CONSIGNED TO, which indicated a requirement of straight BL’s. However, in your subsequent message you stated that they are rather CONSIGNED TO THE ORDER, i.e. they are negotiable doc’s.

To answer your questions:
Similar situations do arise, i.e. third country imports but not in the form described in your posting. As we do not have the full details of your LC structure it would be difficult to comment on all operational risks. In fact, I’m not sure whether your current structure is appropriate and since you work for your legal dept, you’ve got to make sure that your Trade specialists are on board. Certainly, the role of the Moroccan & Tunisian banks is vague and the doc’s required to be presented to bank X in Egypt, e.g. original BL’s (?) could create complexities in the clearance of goods.

Dimitri

[larryBacon]

Some M. East & N. African countries impose certain restrictions on the international movement of hard currencies. Would the fact that the Bs/L indicate shipper as bene c/o applicant cause problems ? In other words, it could be argued that the applicant was using this as a possible illegal means of moving hard currency out of the country.

Laurence

[RamiN]

Dimitri: - the bills are consigned TO THE ORDER rather than Straight Bills. I may have misled you.
Dimitri & Abdulkader: - our trade specialists are indeed involved and they believe, but are not sure, that the scenario may be as follows: the Applicant in our case is also the beneficiary of a back-to-back L/C issued by the Consignee Banks on behalf of their customers (who are as well the relevant Notify Parties under the Bills of Lading). This would mean that documents received under the Documentary Credit would be ultimately and eventually routed to the Consignee Banks as issuing banks of the back-to-back L/C.
This, if correct, could clarify the role of the Consignee banks and explain how this L/C would work. However, if this scenario proves to be right, one would question whether
the Consignee Banks would have any rights whatsoever against the Issuing Bank if, for instance, the Applicant defaults with the Issuing Bank and the latter decides to hold the L/C documents in its possession. Would the Consignee Banks be entitled to request the Issuing Bank to release the documents to them in their capacity as Consignee Banks and/or issuing banks of the back-to-back credit.
Laurence:- I think your comment regarding the hard currency restrictions is worth the attention. You may want to explain more on how the scenario may go.

Rami

[larryBacon]

Rami,

I am not sufficiently au fait with the regulations in your country to make definitive statements, but let us suppose that movements of hard currency from UAE to other countries was only permitted based on contracts for the supply of goods & services subject to approval by the relevant government authorities.
If there was collusion between bene & applicant, it would be possible to arrange a DC payment for non-existent goods, as a method of circumventing such regulations. The fact that the "goods" in question are documented as not intended to reach UAE means that the obvious means of verification at import is lost. The fact that the B/L shows shipper as bene c/o applicant may suggest such collusion.

Laurence

[AbdulkaderBazara]

Rami,

I believe the Consignee Banks will only have interest in the Bills of Lading if one or more of the following happens:

1)The documents presented to them under the back-to-back LC’s comply with LC’s terms and conditions and they have to effect payment in accordance with LC terms.
2)They have issued shipping guarantees to release the goods in favour of their clients i.e. released the goods to their customers by issuing indemnity letters to the shipping company(ies).
3)They have made advanced payment (or sort of financing) to the beneficiary of the back-to-back LC’s and want to secure their advance payments, if required, by exercising there rights in the transport documents i.e. that is by taking title of the goods.
4)They are directly or indirectly required to release the goods for whatsoever reason. Example, they could somehow have interest in the underlying contract or legally bound to release the goods.
5)As consignee of the goods, they have received claims from the shipping company(ies) or any other party for whatsoever reasons. Example in some rare cases they could be bound to pay freight charges, demurrage charges or have to pay for any maintenance or rescue work done to the vessel while carrying the goods in the high seas if such charges are not forthcoming from the Carrier, Agent or Owner of the vessels etc.

There could also be other reasons - this list may not be exhaustive. However, in this case, the above five situations do not seem to likely happen. I'm just thinking of the extremes - in business unthinkable things could happen. Point one could possibly be eliminated out rightly since the title documents will remain in the hands of the Issuing Bank; therefore, complying documents would not be presented to Consignee Banks. On the other four, there could possibly be legal issues if the Issuing Bank wants to retain the title documents.

On the other hand, if the Issuing Bank has problems with the applicant and wants to take title of the goods, in all situations, it has to obtain endorsement / agreement from the Consignee Banks.

The banks that issue a letter of credit in the manner mentioned in your query usual assess these or similar risks and takes business decisions to do so.

regards
Abdulkader
[edited 12/25/02 8:54:48 AM]

[DimitriScoufaridis]

Rami,

As I had mentioned in my initial posting, the issuing bank in this case has no control over the merchandise. The applicant’s default under an acceptance DC would become known to the issuing bank only on maturity (unless other credit problems surface earlier). By that time the complying shipping / title documents (original BL’s (?) consigned to the order of the Moroccan & Tunisian banks) would have already been release to him (the applicant), so I don’t see how would the issuing bank be still holding such documents in its possession? It would be holding instead an accepted but unpaid draft.

If your trade specialists are still not sure about the actual deal and are making assumptions, I would highly recommend that they get more details from your customer.

Dimitri