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Understanding the intricacies of examining trade documents presented under letters of credit (LCs)

Published on April 17, 2023 by Malla Reddy Myla

An LC is a trade finance instrument used in global trade to secure payment of the underlying trade transaction. A bank would typically provide the seller an irrevocable undertaking of payment on behalf of the buyer. It would do this by issuing an LC in a manner that requires the seller to fulfil the buyer’s requirements in terms of shipment timelines, documentation, and document content to obtain payment from the bank that issued the LC.

The bank that issues the LC has to ensure that the LC reflects the buyer’s requirements; it then has to validate all those requirements in the trade documents when they are presented by the seller. Examining documents presented under an LC is a crucial task for the bank since payment should be released to the seller only on presentation of documents that meet all the LC’s terms and conditions.

Impact of discrepant documents presented under an LC

Trade documents play a significant role in the trade cycle. Particularly under an LC, they ensure smooth settlement between the buyer and seller and delivery of underlying goods or services. In other words, trade documents decide the fate of the payment to the seller while indicating to the buyer what underlying goods are being delivered, well before the buyer takes possession of the goods. Hence, examination of trade documents is a crucial task, enabling a bank to assess whether the said documents furnished by the seller meet the buyer’s requirements outlined in the LC.

Examination of trade documents

Examination of documents presented under an LC is a complex process that requires a range of skills and expertise. It requires keen attention to detail. The examiner must carefully review each document presented to ensure it is accurate, complete and free of errors. The process includes verifying the data in the documents against the terms and conditions of the LC and International Chamber of Commerce (ICC) rules, and ensuring there is no conflict in the data across the documents.

Role of ICC rules in the examination of trade documents

The ICC sets standards and provides guidelines for examining trade documents used in international trade. Its Uniform Customs and Practice for Documentary Credits (UCP600) provide a standardised framework for examining trade documents, ensuring all parties involved in the transaction are in agreement. The rules specify the content, form and timing of the documents that must be presented by the exporter to the importer and the banks involved in the transaction. These rules are widely accepted and followed by banks, traders and other intermediaries involved in international trade transactions.

In-depth knowledge of UCP600 and ISBP745 (another publication of the ICC that explains standard banking practices and the right application and use of UCP600) is crucial for anyone examining documents presented under an LC. This includes understanding the various types of LCs, the role of the banks involved and the extent of the information or data that needs to be stated in the documents to satisfy the functionality of given documents. Without the right application of these rules, the examination process becomes merely a task of proofreading and does not produce the desired results for all the parties involved.

Supremacy of LC terms over ICC rules

UCP600 Article 1: The Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication no. 600 ("UCP") are rules that apply to any documentary credit ("credit") (including, to the extent to which they may be applicable, any standby letter of credit) when the text of the credit expressly indicates that it is subject to these rules. They are binding on all parties thereto unless expressly modified or excluded by the credit.

The very first article of UCP600 provides flexibility in using these rules to the extent they are required for or applicable to the underlying transaction, provided the LC has clearly excluded or modified those articles or sub-articles of UCP600. The UCP600 may not be applicable to every LC in its entirety. Hence, it is important for the document’s examiner to thoroughly read and understand the terms and conditions of the LC before commencing examination, to ensure the entire checking process is more accurate and effective.

Significance of time management in the examination process

The document examination process is time-sensitive for the buyer, seller and banks involved. It is linked to the payment settlement process in international trade. Therefore, any delay in the document examination process could delay payment to the seller, with significant financial implications for buyer and seller. On the other hand, particularly for sea shipments, the buyer needs transport documents to clear the goods when they arrive at the destination. Hence, the buyer may end up paying additional charges if there is a delay in the document examination process and in the delivery of documents to the buyer by the bank. The UCP600 rules also set a specific time frame – a maximum of five banking days – for a bank to examine documents and advise the presenter on discrepancies therein. Failure to do so would require the bank that issued the LC to pay the seller, irrespective of discrepancies in the documents. The buyer would not need to repay the bank, given the bank’s failure to notify the discrepancies within the specified time frame. Document examination, therefore, requires banks to prioritise tasks and manage time effectively.

The document examiner must also maintain a neutral and objective approach to the examination process and ensure all decisions are made based on the facts presented in the documents. The examiner must be able to communicate effectively with both the buyer and the seller and clarify issues or discrepancies that may arise. This includes providing a clear and concise explanation of issues and working with the parties to resolve disputes.

How Acuity Knowledge Partners can help

We provide secured systems and have designated workplaces to ensure we mitigate risk and work is handled with the outmost confidentiality.

Our employees are equipped with end-to-end product knowledge and are experienced in examining and screening digital documents. We ensure minimal handling of physical documents, reducing the potential for data breaches and document-handling costs.

Our subject-matter experts help standardise and streamline legacy processes and bridge process and knowledge gaps.

We provide all types of data services, including data analysis and reports across the trade finance data spectrum.

Our support enables clients to focus more on front- and middle-office services, the development of business strategies for expansion and technological adoption, without disrupting their day-to-day business.

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About the Author

A seasoned professional with over 13 years of experience in the field of trade finance, worked with reputable financial institutions, gained valuable experience in various aspects of trade finance and have successfully managed a diverse range of trade transactions, including letters of credit, demand guarantees, documentary collections, supply chain finance with a deep understanding of trade finance operations, has successfully led and executed multiple trade finance project migrations.

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